I even think the US did that in the 80ies, with the savings and loans crash. But I know less about that.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

Bankruptcy means unable to pay one's bills, and writing down loans (assets) in most cases also means writing down liabilities (the loans banks themselves take out from others to leverage their own capital while making loans to others).  So profitability would be reduced and in many cases losses would also be experienced by shareholders of banks, but bankruptcy would only occur in some cases.  Even in those cases, however, as the US TARP program showed, it is both easy and relatively costless to prevent those banks from failing if they are deemed too large to be allowed to do so.  Central banks, as lenders of last resort, can just print money, for free, and lend it to banks for the purpose of just keeping capital high enough on balance sheets to stay in business while the bank raises its own capital through retained earnings and other investments.  As long as the money isn't lent, it cannot produce inflation, so it is essentially just a waiver from the government which allows banks to continue operating outside of normal regulatory or best practice standards.

Why do things seem to work differently for banks than for other businesses? Because banks aren't in the business of making any real things, just arranging social commitments between people.  They are in the same business that government is -- organizing people to do things in common projects.  Just like in government, it really doesn't matter if banks run profits or deficits if their stakeholders are willing to let it pass -- willing to let some of their own commitments be relaxed and worked out later.

Debt is a distributional issue. It nets down to zero as for each debtor there must be a creditor.

That's the NCE view.  

Looking at it Dynamically, debt has Opportunity Cost(s) for the debtor since they have to make the interest payments.  This reduces the amount of money they could spend on other things.  Compound interest really socks it to the debtor as the stream-of-payments amounts to as much as 300% of the initial borrowing.  

It wouldn't be so bad if this was recycled and circulated in the micro-economy.  What happens is the lender takes the payments and loans it out again, creating compounding on compounding, creating a parasite/host predatory economic environmental relationship.  

If the predation is not restricted the economy wanders to the right side of this:

graph and Things Fall Apart.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

So Debt Deflation can't happen?

George Monbiot Seminar | Steve Keen's Debtwatch

I tried to point out that since the rate of change of debt contributes to aggregate demand (for both newly produced goods & services, and existing assets), then the change in debt matters, but I made no headway at all with the argument.

What happened is Greenspan asserted that banks were self regulating and proceeded to let them perform the regulation. This policy was reinforced by appointing anti-regulators to other regulatory bodies. With the repeal of Glass-Steagall higher risk/higher return opportunities were available and the Fed was there when things went wrong, with the Greenspan Put.

Investment banks, such as Goldman's, wanted more and more mortgages to package and sell on and didn't care about the quality. There was a rush to oblige this interest and the price of real estate in large markets soared beyond the conceivable ability of the economy to sustain over time. So we got, say, $10 trillion in mortgages packaged into MBSs that, at current real estate prices, are only worth, say, $5 trillion, and that is only if the banks do not try to sell the non-performing loans. If they did the property underlying the mortgages would be found to be worth substantially less. So, everyone is just holding the bad mortgages on their books and are being allowed to pretend they are still worth face value - extend and pretend.

Worse, the depression that has resulted is making even prime mortgages worth only half or less of face value, as mortgagees lose jobs and become unable to pay. The same dynamic has played out in other areas and other countries. Recently Cyprus has emerged as a new Euro-zone problem with a massive title fraud problem.

ALL of these problems have to be resolved and the unsustainable debt has to be written down in order for a new cycle to begin, regardless of what may change in that new cycle. But those who issued and those who hold the bad MBSs, etc. are politically powerful and refuse to allow THEIR assets to be appropriately written down. The lawbreakers are in control. As any healthy economy relies on rule of law, we have another reason why the current system must change before recovery is possible.

Properly and lawfully resolving these problems, including prosecuting lawbreakers, would both eliminate unpayable debt and restore the rule of law. Otherwise it will be worse than Groundhog day, as the whole situation will just keep repeating, but each iteration will get worse.  

"It is not necessary to have hope in order to persevere."

Debt is a distributional issue. It nets down to zero as for each debtor there must be a creditor.

Yes and no.

Debt also allows you to invest more than you save, or to save more than you invest (in real terms).

When you work for me, and I pay you in an IOU rather than in the products of your labour, then I have invested your labour, but you have not accumulated any real stuff - only a claim on me. If you exercise that claim, then I have to give you money whether or not you intend to invest it in real stuff.

Debt therefore means that you can have periods in which everybody wants to save more than they want to invest in real stuff, which is what creates mass unemployment. It also means that you can have periods where people want to invest more than they want to save, which is a precondition for the growth rates we have come to associate with industrial society.

- Jake

Friends come and go. Enemies accumulate.

By necessaries I understand, not only the commodities which are indispensibly necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England. The poorest creditable person, of either sex, would be ashamed to appear in public without them. In Scotland, custom has rendered them a necessary of life to the lowest order of men; but not to the same order of women, who may, without any discredit, walk about barefooted. In France, they are necessaries neither to men nor to women; the lowest rank of both sexes appearing there publicly, without any discredit, sometimes in wooden shoes, and sometimes barefooted. Under necessaries, therefore, I comprehend, not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people. All other things I call luxuries, without meaning, by this appellation, to throw the smallest degree of reproach upon the temperate use of them. Beer and ale, for example, in Great Britain, and wine, even in the wine countries, I call luxuries. A man of any rank may, without any reproach, abstain totally from tasting such liquors. Nature does not render them necessary for the support of life; and custom nowhere renders it indecent to live without them.