The Debt Crisis

International Debt, the debts that nations, often quite poor, owe to other nations and banks, is leading to disaster.  There is something like 200 trillion dollars worth of such debt, and 24 nations in crisis because they can’t pay off their debts.  The burden of debt falls on the poor and disenfranchised, as debtor nations impose taxes and cut back benefits.  We’re talking massive human tragedy unfolding around the world.

Debt seems a very useful institution, and if usurious practices are under control, basically just.  You have a debtor, who borrows money and promises to repay it with interest.  You have a creditor, who loans the money, and expects to get repaid with interest.  As long as everyone is a reasonably rational agent — no children or crazy people involved — it seems a straightforward, fair, and extremely useful human institution.  It allowed me to buy a house; it allows students from backwards countries like America to get a college education.

But this model doesn’t scale up to cases in which nations and other institutions are the lenders and borrowers.  The model assumes that the same agent takes out the loan and then later has to repay it or incur the consequences.   That’s a key part of the fairness of the institution of debt∂.  But that’s not what happens when countries take out loans.

These debts can last for a long time.  One group of leaders may negotiate the loan, and use the money to make themselves popular, by using the money to provide benefits to their constituents. Another group is faced with paying it off, years or even generations later, by taxing and reducing benefits for another group of constituents.

 We can call the nation “agent” doesn’t change the facts.  Loans are negotiated by people, and it’s people that have make the painful decision to repay them or not. That’s where the real agency lies, whatever we call “the agent.  And there is a difference between expecting to repay a loan yourself, and expecting someone down the line, who happens to be a part of the same institution or nation as you are, to pay it. 

When people make decisions to lend or borrow on behalf of institutions, you get two sets of costs and benefits — on both sides of the deal.  A bank’s agent may get short term benefits for being the one who negotiates the loan, independently of whether in the longer term the loan gets paid off.

The model of a just loan agreement will work if everyone acts rationally relative to the costs and benefits to the whole group to institution represents, rather than their own.  But that doesn’t always happen.  It didn’t happen on Wall Street.  Big banks made it advantageous to their broker to make risky gambles, which then came back to haunt the banks — at least until we taxpayers bailed them out.

So we need a new model of just loans for nations. That’s above my paygrade to figure out. But listen to the show this week, and maybe Ken and I and our guest, UMass economist Julie Nelson, will come up with a solution.

Photo by Timothy Eberly on Unsplash