The Unz Review: An Alternative Media Selection
A Collection of Interesting, Important, and Controversial Perspectives Largely Excluded from the American Mainstream Media
 BlogviewMichael Hudson Archive
“Moral Hazard” vs Mutual Aid
How the Bronze Age saved itself from debt serfdom
🔊 Listen RSS
Email This Page to Someone

 Remember My Information


Bookmark Toggle AllToCAdd to LibraryRemove from Library • BShow CommentNext New CommentNext New ReplyRead More
ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
These buttons register your public Agreement, Disagreement, Thanks, LOL, or Troll with the selected comment. They are ONLY available to recent, frequent commenters who have saved their Name+Email using the 'Remember My Information' checkbox, and may also ONLY be used three times during any eight hour period.
Ignore Commenter Follow Commenter
Search Text Case Sensitive  Exact Words  Include Comments
List of Bookmarks

There has been an explosion of discussion about whether to cancel student debts. Critics of the idea point out that wealthy people would be the main gainers, posing moral hazard. The debate has has quickly slipped into a discussion of modern economies and whether it was moral to cancel the debts of people who are in arrears, when some people have struggled to keep current on their payments.”

Bankers and bondholders love this argument, because it says, “Don’t cancel debts. Make everyone pay, or someone will get a free ride.”

Suppose Solon would have thought this in Athens in 594 BC. No banning of debt bondage. No Greek takeoff. More oligarchy Draco-style.

Suppose Hammurabi, the Sumerians and other Near Eastern rulers would have thought this. Most of the population would have fallen into bondage and remained there instead of being liberated and had their self-support land restored. The Dark Age would have come two thousand years earlier.

My book “And forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year (available on Amazon) is about the origins of economic organization ad enterprise in the Bronze Age, and how it shaped the Bible. It’s not about modern economies. But the problem is – as the reviewer mentioned – that the Bronze Age and early Western civilization was shaped so differently from what we think of as logical and normal, that one almost has to rewire one’s brain to see how differently the archaic view of economic survival and enterprise was.

Credit economies existed long before money and coinage. These economies were agricultural. Grain was the main means of payment – but it was only paid once a year, at harvest time. You can imagine how awkward it would be to carry around grain in your pocket and measure it out every time you had a beer.

We know how Sumerians and Babylonians paid for their beer (which they drank through straws, and which was cleaner than the local water). The ale-woman marked it up on the tab she kept. The tab had to be paid at harvest time, on the threshing floor, when the grain was nice and fresh. The ale-woman then paid the palace or temple for its advance of wholesale beer for her to retail during the year.

If the crops failed, or if there was a flood or drought, or a military battle, the cultivators couldn’t pay. So what was the ruler to do? If he said, “You owe the tax collector, and can’t pay. Now you have to become his slave and let him foreclose on your land.”

Suddenly, you would have had a slave society. The cultivators couldn’t serve in the army, and couldn’t perform their corvée duties to build local infrastructure.

To avoid this, the ruler simply cancelled the debts (most of which were owed ultimately to the palace and its collectors). The cultivators didn’t have to pay the ale-women. And the ale women didn’t have to pay the palace.

All this was spelled out in the Clean Slate proclamations by rulers of Hammurabi’s dynasty in Babylonia (2000-1600 BC), and neighboring Near Eastern realms. They recognized that there was a cycle of buildup of debt, reaching an unpayably high overhead, followed by a cancellation to restore the status quo ante in balance.

This concept is very hard for Westerners to understand. Yet it was at the center of the Old and New Testaments, in the form of the Jubilee Year – taken out of the hands of kings and placed at the center of Judaic religion. My book documents how this occurred.

When debts were cancelled in Babylonia and other Bronze Age Near Eastern realms, it would have been against their way of thinking to complain that some debtors were benefiting from being freed from debts that other people had paid. In the first place, all cultivators became debtors during the growing season, with payments for everything from agricultural inputs to beer at the local ale-house to be paid on the threshing floor at harvest time. So annulling such debts benefited the population at large.

With regard to individuals who had borrowed out of need, it was recognized that if some could not keep up, it was because they were poor or unable to do so. Mutual aid became the principle of helping people who were sick, widows who lost their husbands or other factors that obliged them to run up debts. Not to have helped such people would have deprived the community of their productive labor.

Conspicuously absent from ancient moral values is the modern “moral hazard” theory to play solvent individuals against debtors. The point of reference was what would happen if people were not forgiven their debts. How would this have affected the community as a whole?

The answer is that debtors unable to pay would have fallen into bondage to their creditor, working on his land, and ultimately have lost their own land. They therefore would not be available to work on their own land to grow crops to pay taxes and other obligations to the palace, or to provide corvée labor on public works, or serve in the military. Clean Slate proclamations were part of the community’s self-preservation.


At the same time, the moral opprobrium was felt toward creditors. They were blamed for impoverishing society at large by their selfishness. The Greeks called his hubris, money-love and wealth addiction. And rulers saw an independent creditor class turning its wealth into large landholdings of creating a rival power to the palace. In addition to cancelling debts owed to the palace, rulers thus restored widespread independence from large wealthy families whose economic interest lay in resisting royal Clean Slates. Large fortunes thus seem to have disappeared in Larsa and Babylonia around the 18th and 17th centuries BC. They didn’t have any President Obama to defend them from the “mob with pitchforks.” Hammurabi said that he was serving Shamash, the sun-god of justice. And Nanshe was a prototype for Greek Nemesis, punishing hubris and abusive wealth, protecting the poor and needy (already in 3rd-millennium Sumer).

The context for today’s debt overhead is one in which most debts are owed to private-sector banks, bondholders and other creditors. Also, not everyone is in debt – and society is rich enough to afford imposing a loss of status and self-reliance on large classes of debtors. Still, there is a logic in forgiving debts owed by the needy (but not by the wealthy).

Creditors argue, for instance, that if you forgive debts for a class of debtors – say, student loans – that there will be some “free riders.” Students freed from debt will benefit, while students who were able to carry and pay off their debts had to “meet their obligations.” It is further argued that if student debts are forgiven (or “junk mortgage” loans written down to fair real estate valuations), people will expect to have bad loans written off. This is called a “moral hazard,” as if debt writedowns are a hazard to the economy, and hence, immoral.

This is a typical example of Orwellian doublespeak engineered by public relations factotums for bondholders and banks. The real hazard to every economy is the tendency for debts to grow beyond the ability of debtors to pay. If large numbers of students remain liable to pay student loans without having obtained well enough jobs to pay, this will prevent them from being able to qualify for mortgage to buy a home and start a family. Many students today are obliged to keep living with their parents, and are unable to marry. The result is deepening economic austerity as a result of the debt overhead.

Meanwhile, defaults on student loans to for-profit colleges are projected as rising toward 40%. Is it worth it to say that to prevent giving these impecunious students a “free lunch,” it is worth keeping a large swath of the population poor and unmarried?

The first defaulters are victims of junk mortgages and student debtors, but by far the largest victims are countries borrowing from the IMF in currency “stabilization” (that is economic destabilization) programs.

It is moral for creditors to have to bear the risk (“hazard”) of making bad loans, defined as those that the debtor cannot pay without losing property, status or becoming insolvent. A bad international loan to a government is one that the government cannot pay except by imposing austerity on the economy to a degree that output falls, labor is obliged to emigrate to find employment, capital investment declines, and governments are forced to pay creditors by privatizing and selling off the public domain to monopolists.

The analogy in Bronze Age Babylonia was a flight of debtors from the land. Today from Greece to Ukraine, it is a flight of skilled labor and young labor to find work abroad.

No debtor – whether a class of debtors such as students or victims of predatory junk mortgages, or an entire government and national economy – should be obliged to go on the road to and economic suicide and self-destruction in order to pay creditors. The definition of statehood – and hence, international law – should be to put one’s national solvency and self-determination above foreign financial attacks. Ceding financial control should be viewed as a form of warfare, which countries have a legal right to resist as “odious debt” under moral international law.

The basic moral financial principal should be that creditors should bear the hazard for making bad loans that the debtor couldn’t pay — like the IMF loans to Argentina and Greece. The moral hazard is their putting creditor demands over the economy’s survival.

I wrote “And forgive them their debts” as Volume One of an economic history of how societies have handled debt and finance through the ages, and what the logic was behind the Bronze Age and early Iron Age structuring of economies.

• Category: Economics • Tags: Consumer Debt, Debt 
Hide 34 CommentsLeave a Comment
Commenters to FollowEndorsed Only
Trim Comments?
  1. Jubilee says: • Website

    How about the moral hazard of declaring some banks too big to fail? Capitalism for the poor, welfare for the rich!

    How about the moral hazard of letting some people create money out of thin air (fractional reserve banking)? The practice of which completely overturns the tradition justification for charging interest, which was payment for the mobilization and risk to your capital.

    Payment on the INTEREST of the national debt is about to become the single largest line item on the federal budget. How can this be justified?

    The federal government itself needs a Jubilee. Think about it… The federal government can literally create its own money supply! Why would it borrow? It is nothing less than a huge scam to funnel our national wealth to the rich.

    • Agree: niceland, Mike P
  2. anonymous[340] • Disclaimer says:

    Mr. Hudson, you may not have seen my questions (#6) under Mr. Siman’s review of your book:

    Isn’t it at least arguable that bankruptcy laws have supplanted and serve objectives of Clean Slate amnesty?

    Is that adressed in the book?

    Thank you.

    • Replies: @Per/Norway
  3. Economics is common sense made difficult, it is sometimes said.
    I’m quite old, retired economist, but looking back my idea is that there is very little common sense.

    ‘Cancel debts’, sounds great, I must admit.
    Anyone, with debt or not, loves to get money for free, this is what canceling debt means.
    The other side of the coin is the opposite, the same amount is stolen from the person or organisation that provided the loan.
    Who in the USA provides student loans, no idea, but canceling the debts means that the other side is losing the same amount.

    This is one saspect of the loan and interest issue.

    The other side is a bit more complicated, why has there always, in any society, been interest ?
    Even present day Islamic banks charge interest, but under another name.
    The Islamic lender is not allowed to charge interest, in order to get his interest he uses a trick.
    Quite simple, there ia a penalty to be paid when the loan is repaid later than the agreed date of repayment, agreed in advance is that the loan will be repaid too late.

    Now the most abstract part, why is there interest ?
    The answer is quite simple: goods or services received now have a higher value than the same goods or services in the future.
    Interest thus is no more than a compensation for the lower value.

  4. peterAUS says:
    @jilles dykstra

    Good comment, IMHO.
    Especially the last paragraph.

  5. Tusk says:
    @jilles dykstra

    Jilles, how can it by moral or the right thing to do to enforce illegally or deceptivelly obtained debts? The amount of money owed to banks in 08 was largely obtained by cheating the system and lending to people who should not have received the money in the first place.

    I can’t loan money to a child and then expect them to begin to pay it back, with interest, when they do not have the capcity to pay it back. That analogy reflects the fact that banks were lending money to people who clearly had no capacity to ever pay back the amount that they recevied – you cannot blame people with no idea for being taken advantage of.

    Instead of supporting the people when the market crashed, as Michael has explained many times, the government backed the banks and enabled them to collect on the deceptive debts they had. Where did the government get the bailout money? Why from the citizens! So not only are people on the hook for bad loans that were fraudently legitimised, but now the public debt in the US is sky high (still accruing interest) while the public has to both pay that off and pay off the original loan.

    The point being that instead of supporting the banks who were in the wrong the government could have chosen to support the people and erase their debts instead of refunding the banks. A decade later and the same issues are presenting themselves again, society has not progressed because the effort people have used has only been for paying off existing debt and not furthering themselves or society. Government should have let the banks burn for what they did, scamming someone does not entitle you to their money regardless of one’s perception of it.

    • Replies: @LOLAtThis
  6. @anonymous

    no. Think trough that properly, and the answer is quite clear.

    • Replies: @anonymous
  7. anonymous[340] • Disclaimer says:

    If you’ve read the book, please let me know whether Mr. Hudson addressed this. Thank you.

  8. Jubilee says: • Website
    @jilles dykstra

    You say canceling debt means someone is losing money. Not true. In fractional reserve banking they never had the money in the first place. The credit was created to supply the demand of the loan. The bank has pennies in money for the dollars they give out as loans.

    Think about this slowly and carefully… The money never existed. They are not loaning out money they had. They are creating new money from scratch.

    This is additionally why a high debt load economy is sluggish and prone to recession. High debt load destroys demand. No one can take out loans when they are already in debt. But loans ARE the money supply. I.e. the money supply is mainly a credit supply.

    So… Remove the debt load and demand skyrockets! In short, real economic growth demands a Jubilee.

  9. We know how Sumerians and Babylonians paid for their beer (which they drank through straws, and which was cleaner than the local water). The ale-woman marked it up on the tab she kept. The tab had to be paid at harvest time, on the threshing floor, when the grain was nice and fresh. The ale-woman then paid the palace or temple for its advance of wholesale beer for her to retail during the year.

    I wonder how the farmers who raised animals rather than grain fit into this equation? Surely they were not part of the once a year payment plan.

  10. dvorak says:

    Meanwhile, defaults on student loans to for-profit colleges are projected as rising toward 40%. Is it worth it to say that to prevent giving these impecunious students a “free lunch,” it is worth keeping a large swath of the population poor and unmarried?

    Now that you mention it, this would be a eugenic policy. Anyone stupid/ignorant enough to attend a for-profit college –> “three generations of imbeciles are enough.”

  11. Michael what is happening is not more to blame to moral issues?

  12. Dutch Boy says:

    Don’t cancel the debt – cancel the interest on the debt (what loan sharks used to call the vigorish).

  13. Dutch Boy says:

    Quite correct. They are creating money rather than loaning it (which is a state function). The solution is to create government banks or banks licensed by the government to issue interest-free loans with only a fee for service and insurance above the amount of the loan. For example: a loan of $100,000 would involve (say) a $2,000 fee to service the loan and another $2000 for default insurance for a total of $104,000, rather than the compound interest that can easily inflate the total debt to $200,000. That extra $100,000 goes to the owners of the bank, who are typically richer than the borrowers, so you have a system that transfers wealth upward.

  14. Papa says:

    The concern about someone getting away with something undeservedly while sacrificing the whole is the fruit of extreme pharisaical moralising. Jesus dispenses with this mentality in the parable of the weeds where he tells his concerned workers to leave the weeds alone. Judgement is God’s at His way and time not ours. When planting grass one nourishes the grass. The growing strong grass will take care of the weeds. When raising kids one nourishes the virtues while keeping an eye on the weeds. An atomised, moralistic, hypocritical society focuses on the weeds. What kind of children this produces is another subject.

    Paul, in tune with semitic and greek thinking, understood the nature of money as the root of all evil (If we did not love it, it would not exist). Money is a system of values that comes from the vanity of mans’ imagination. It is mans’ objectification of the world in order to subjugate and possess it. It is not merely a means of exchange. It replaces the ‘value’ god has given to His creation.

    Whereas relationships are normal. Money perverts human relations. It is a fake or mask over human relations. It is totalitarian in that it attempts to subjugate the world to a number, to one interpretation. Thus it is cataphatic. It does not matter whether the price/value of something is determined by a politburo (communism) or the masses at large (‘free market’). Jesus did not come to tune up our otherwise fine civilisations. He came to overthrow/transform them.

    As a sickness and a perversion of human relations ‘fallen’ man understood the necessity of periodic cleansing from the debts quantified and measured in units of money. Paul clarifies that we all have a debt of love toward each other. This debt is the basis for an unending virtuous cycle of self offering not objectifiable and quantifiable. This debt of love is perverted by money and all that money presupposes as mentioned above. Furthermore, money implies an evaluation of each persons offering with fallen criteria and then an attempt to objectify that offering and, thereby, more ‘justly’ distribute the ‘value’ of the said offering. But human justice is just a redistribution of violence. And money is nothing more than a perpetuation of this violence because it rests on the disintegration of life, a life whose unity we are called to at every level of existence – political, economic, spiritual, etc.

  15. I read the reactions.
    The following book was removed in 1963, government orders, from the list of obligatory literature for economists, at my university, because it was ‘too difficult’.
    ⦁ Lionel Robbins, ‘An Essay on the Nature and Significance of Economic Science’, Oxford 1932
    I belonged to those who were lucky enough to still have to read it.
    It is a very fundamental book, it explains that economics is not about moral behaviour, it explains why value is such a fundamental, but difficult concept, and how values can, and do, change overnight.
    It is not a book that can be explained in a few words.
    I very much regret(ted) that it was no longer obligatory.

    Varoufakis is of the opinion that since 1970 macro economics has not been taught anywhere.
    My idea is that the deterioration of the study of economics since the late sixties is the root cause of much misery and problems these days, for example the derivatives.
    If those, who built the models that showed that a packet of loans, a derivative is no more than a packet of loans, has an absolute minimum value, had read the mentioned book they might have known that there is no such thing as absolute value, or absolute minimum value.

    An economist is not interested in the moral aspects of interest.
    An economist understands that goods or services now have a higher value than the same goods or values in the future.

    Thus, when I lend someone money, I lose value.
    This value normal people want compensated, that is all there is about interest.
    What religious people think about the ideal world has nothing to do with economic reality.

    One thing about the mentioned book, it demonstrates how economic principles exist in any society.

  16. @Jubilee

    This here is not the first time I try, or tried, to explain what money is, how it functions, things one can find in any textbook monetary theory.
    But I’ve given up, it seems that many simply are unable to understand.
    Recent experiences on another forum, where money even was explained out of the subconcious, made me stop my efforts.
    It of course is many decades since I read textbooks, once one has knowledge one does not read textbooks any more, so there may be far better books than what I mention now, the book written by Samuelson around 1960.
    I can recommend it to anyone interested in economic problems, it is not in my list, but if I remember correctly the title is simply ‘Economics’.

    • Replies: @obwandiyag
  17. anon[398] • Disclaimer says:

    Hey, bankruptcy is widely seen as an efficient way to deal with insolvency. No one is against it, although people argue details.

    An example of moral hazard is cheap, subsidized flood insurance which creates incentive to build on Swampland or costal property. Unless you think the current development in Florida and Houston is socially beneficial enough for the rest of the country to pay for it.

    Mostly bankruptcy is well understood and not that controversial. Forgiveness, not so much. Although in some instances, they amount to the same thing.

    • Replies: @anonymous
  18. ” Hey, bankruptcy is widely seen as an efficient way to deal with insolvency. ”
    Being bankrupt is just being insolvent, one’s debts are higher in monetary value than one’s possessions.
    There is no ‘dealing’, those who do not get paid have lost their money.
    It depends on national legislation who in the end is the victim, in the Netherlands in a personal bankruptcy one’s debts remain until one’s death.
    In practice this is avoided, bankrupt people start new business through some puppet, often simply their wives.
    Nevertheless, that goods or bank accounts will be seized, can happen during one’s whole life.
    USA mortgage banruptcies are quite different, from what I understand: leave the house, give the key to the bank, that’s it.
    In economics there are no free rides, banks of course charge a relatively higher interest in the USA on mortgages.

  19. anonymous[340] • Disclaimer says:

    I wish Mr. Hudson would take a minute to address this, as I’ve asked upthread.

    Trying to better understand where he’s coming from has so far been addressed with an invitation from another commenter — who may not have read the book, either — to figure it out myself.

    “Ah, grasshopper …”

    • Agree: Bill
  20. Franz says:

    Think about this slowly and carefully… The money never existed. They are not loaning out money they had. They are creating new money from scratch.

    Actually they’re creating IOUs, debts.

    It’s not actually “out of nothing”, budgets are submitted and bonds are drawn up on maps of future spending. When submitted, the money is issued, and the money is issued on the amount needed for work. I did budget and disbursement work in the service, and every year we had to draw up painfully detailed budgets, submitted far in advance, so when they create this money they have a really excellent idea how much the loan is going to net them.

    But the bankers then issue the notes for only the loan.

    Not the amount needed for interest on using the “money”.

    So debt is unpayable because the IOU money is created, but not the money needed to cover the whole of the payment. That’s why the Jekyl Island Gang said “Those who understand it will make a fortune” because those who don’t will always end up with the short end of the stick.

    Current national debts are unpayable, everyone knows it, and being a Bronze Age buff going back many years I plan to give Hudson’s book a careful read. The Egyptian system under the Middle Kingdom kings was a work of art… damn we could use a pharaoh now!

    • Replies: @anon
  21. anon[406] • Disclaimer says:

    But how does Fed create money ? Does it?

  22. anon[228] • Disclaimer says:

    Can you give an example like say 100,ooo dollars are needed – break it down how its get created , how it makes to local bank and how it makes to salaries and how that money comes back to treasury .

    • Replies: @Franz
  23. I think that I can help to answer your question.

    But you must understand, going in, that virtually all nominal economic and financial discussions of the issue are fatally flawed because they are attempting to explain credit-reinsurance-in-fact as if it were the same thing as money-lending. (Professor Hudson included, with utmost respect).

    The following excerpt (from a work-in-progress) explains the distinction:



    The mother-of-all-false-premises is that banking is money-lending.

    Banking is not money-lending – it is credit-reinsurance.

    Banking is an equity extraction business passed-off as an equity investment business.

    Modern banks do not advance credit to nominal debtors – they obtain credit from nominal debtors, and then insure or reinsure or nominally guarantee that credit in favour of the vendor / seller of the real-estate or other property being sold and purchased with the credit.

    The credit / money, per se, does not even exist unless and until the nominal debtor underwrites it by agreeing that they owe it (i.e., by assuming / underwriting / accepting the liability). In about 98% of all nominal credit transactions, what we are conditioned to describe and label as borrowers or debtors are in fact / substance (equity) the lead-underwriters and creditors-in-fact / equity.

    More precisely, however, in the vast majority of cases – also about 98% of them – the bank is a credit reinsurer. The nominal debtor creates the credit / money by underwriting the liability, and insures or secures that (their) credit with a pledge / attachment of physical security (e.g., real estate or automobile or whatever) and hypothecation of their future income (normally from labour) to service it.

    Normally, then, the bank receives insured / secured credit from the lead-underwriter, and then homogenizes or reinsures it (while stripping off the nominal security as a reinsurance premium for itself) in favour of the vendor / seller of the property being acquired with the credit.

    In some cases, such as nominally unsecured credit-card debt, the bank is more precisely a direct (and / but only nominal) credit insurer, but normally they function as (nominal) reinsurers. But, with that clarification and understanding, I will refer to the general function as credit reinsurance (and with further clarification where appropriate).

    The nominal bankers arrive at any given nominal credit transaction with metaphoric empty pockets and do not contribute anything that they do not obtain from the other two parties. The banker arrives with nothing, yet walks away with the legal title to the property from the seller / vendor in one hand, and a promissory note (immediate undertaking and underwriting of liability) and mortgage from the nominal debtor in the other.

    Mainstream criticism is virtually non-existent, and almost all non-mainstream criticism of the private nominal banking system focuses on the many and varied frauds against the nominal / pretended debtor and issuer of the financial security.

    But there is a concurrent equity-fraud against the seller / vendor, and corresponding (additional) independent unjust / unearned enrichment of the bank.

    Assume the most simple configuration of three parties – a vendor, a purchaser, and the bank as purported middleman, and that the vendor is the clear-title owner of the property being sold.

    The purchaser issues a note-and-mortgage-secured-liability (underwriting credit) equal to the purchase price to the bank, and which the bank receives and recognises as a commensurate increase in its cash-equivalent money assets. The bank now owns the nominal security, or what the Criminal Code defines as a “valuable security” equal to the amount of debt that it evidences.

    The bank then agrees that it owes the purchaser the amount of the purchase price via a deposit-account-liability in the amount of the purchase price, but which did not cost the bank anything material to create (in equity), and more so (in law) because it is unsecured.

    The purchaser then assigns the bank’s deposit-liability-to-the-purchaser, via cheque, to the vendor. Now the bank agrees that it owes the vendor the purchase price.

    When the transactional-dust-settles, the vendor has exchanged their clear-title-interest in the property, for an unsecured deposit-liability of the bank, while the purchaser has exchanged their future income stream for the bank’s agreement to accept the purchaser’s agreement that they owe the bank the purchase price (plus interest). Is that clear?

    Every such transaction is a double-cross-leveraged socioeconomic fraud where the alleged middleman is systemically robbing or defrauding both of the other parties, while making it appear that they are merely reallocating assets and liabilities between the two parties.

    From the nominal bankers’ perspective there is only one material reality, and that is that real equity assets go in, and only unsecured liabilities go out.

    The acid test is the bank’s balance sheet. If the bank were making an equity investment, then its cash-equivalent / money assets would decline by an equal amount with the making of an equity investment or loan. And there would be no change in its liabilities. An equity lender does not incur any liability to anyone by making a loan.

    But if it is acting as a credit-reinsurance provider, then its liabilities will increase by the amount of credit that it has received and re-issued / re-insured, and its assets will also increase by the amount of the de facto premium that it has received (legal title to the property, plus the note and mortgage) for its assumption of that liability to the vendor through the nominal debtor.

    That is why virtually all such so-called financial institutions (de facto asset harvesters) have assets or assets under management (AUM) that consistently (year-after-year) increase at a rate that is roughly (or rather at least) ten times greater than can be accounted for by their declared income. It is systematized unearned and unjust enrichment and fraud.

    Money-lending versus credit-reinsurance

    In terms of the difference in fact / equity, there is a material difference between banking and insurance / reinsurance, and that difference has been (at least selectively) recognised and acted upon for hundreds of years. It is not just academic, but the nexus of the global financial system in practice. More specifically we are addressing true investment banking (money-lending) on the banking side, and credit-insurance / reinsurance on the insurance side.

    Banking, per se, means the loaning / investment of money as equity, per se, and not the otherwise unfunded (or rather negative-funded) assumption of risk or liability. A good way to recognise and appreciate the monumental difference is via the business of bottomry (The bottom in bottomry refers to the hull or bottom of a ship; also involving pledging the ship and / or its cargo as security but that is not necessary for this simple / general process example).

    Assume that you are a wealthy 18th century man or woman in London, and that you are offered the chance to participate financially (in whole or in part) in a planned commercial venture.

    It will cost £100,000 (paid up front) to charter and provision a ship and crew to sail to India (and return) and another £100,000 to purchase a full cargo of peppercorns and other spices in India to bring back to London where they can be readily sold to wholesalers for £500,000. The potential profit is therefore a net £300,000 on a £200,000 investment.

    But there is also a carefully-monitored-and-estimated one-in-three chance that the ship will sink in a storm during the year-long voyage, and so the expected (calculated average) loss is £66,667. The risk insurer also needs to make an average profit to be induced into the risk underwriting, and so we will assume a total premium of £100,000. Now the required investment is a total £300,000, and the potential profit is reduced to £200,000.

    But the investors gain an advantage because with the risk insurance there is a 2/3 chance that the business venture will be successful (and yield a 60% gain), and a 1/3 chance that they will merely recover their investment.

    At this point the nominal investor or player would choose to participate in either the business investment venture, or in the insurance or risk underwriting of the business venture / voyage.

    The critical difference is that if they chose to participate / invest in the business venture, then that requires a net outflow / investment of their existing investment money. But if they chose instead to participate in the risk insurance underwriting, then they would receive a net inflow of premium money up front in exchange for their legal and financial assumption of the risk(s) of the voyage.

    The insurance function is a negative or contra-investment (an extraction of equity) because the assumption-of-risk premiums (£100,000) have to be paid up front to the risk underwriters from the funds / equity (total £300,000) contributed by the business venture investors.

    Virtually everything that a modern nominal bank does is under the insurance / reinsurance function (taking money / equity out now in exchange for the issuance of risk / liability) and not the business investment function (putting money / equity in now). With the exception of nominal cash advances under nominal credit / charge-card accounts (which are actually cash loans), most everything else results in the nominal bank taking net money (equity) out of the system via the reinsurance (premium for liability-assumption) function, and almost never putting it back in under the equity investment (money-lending) function.

    The (legitimate) business of banking is the (cash / equity-out loaning / investment of money) financing of the commercial ventures. Banking results in the commensurate reduction / depletion of a bank’s existing assets with the making of a loan, and not the acquisition of a new liability. If a true bank (or any true equity lender) has $1 million in cash (loanable) assets, and makes $1 million in loan investments, then that bank will have run out of assets to loan. It may have a means by which to acquire more assets to loan, but its original stock is gone, and it has no outstanding liabilities with respect to those loans. Its $1 million in cash / equity is gone / invested (and at risk of default) but the bank does not incur any liability to anyone by making a loan or investment.

    A credit-reinsurance provider, however, recognises and records a commensurate increase in its liabilities as a consequence of its credit-reinsurance function, plus a corresponding increase in its assets equal to the credit-reinsurance-premium taken / received at the time of the transaction.

    Also, the financial institution cannot account for the fact of the asset without relying on the liability.

    In most simple terms and / or the most simple (and objective) test:

    When a lender makes a loan, then its assets decline by a commensurate amount, and there is no change in its liabilities.

    When a credit reinsurer reinsures credit, then its assets increase by a commensurate amount, and so do its liabilities.

    A money-lender purchases its assets with and through the investment of existing (equity) assets.

    A credit reinsurer purchases its assets with the issuance of new and costless-to-produce (legal-debt) liabilities.

    The most salient reality, however, is that all broadly-defined creditors are either one or the other.

    There is nothing else out there.

    Hope it helps. Tim.

  24. Franz says:

    Can you give an example like say 100,ooo dollars are needed

    I can only go that far, I was in Naval Disbursement many years ago, and the last assignment I had on leaving was working with the pre-commissioning team for the USS Nimitz. I know it dates the hell out of me since the Nimitz is now one of the oldest carriers in the fleet.

    Newport News shipyards had lots of different contractors – electrical, plumbing, weapons – most were civilian, some military. One civilian outfit might have the 1ooK contract you mention, let’s run with it.

    I would draw up a Naval Purchase Order for the crew, which would be submitted to the DOD, which would be bundled with all military orders and submitted to the Fed along with millions of other things from the various agencies, states, foreign embassies, the whole shot.

    Nobody “creates” this money, the amount exists as a large claim on Fed dollars, not the treasury. When the Fed takes the claim and turns it into dollars, Treasury puts it on the books as Federal Debt. The 100K our shipyard contractors get is part of that, so is grant money that pays for classics like Piss Christ. Since we have to pay to use ALL that money…

    See the problem? The productive people, the military, all get their pay from the same IOU that pays for the slugs.

    The general problem is that the system is contaminated by having a private corporation, outside any chain of command, skewing the funds. It allows for fiddling and crooks to sluice money what amounts to a laundry operation. At the same time if you break the system the productive members will not be paid.

    This problem was correctly nailed by the French Anarchists who considered civilization itself to be a hazard if it is too big and anonymous to keep track of who does what. As always with those Anarchists, they saw the problem clearly but I disagree with their solution which often was to destroy civilization itself – which will happen if the system goes too far out of plumb anyway.

    Hence the longing for Bronze Age kings who operated on a potlatch system, where the Sovereign would appoint labor to dig canals, which would then deputize farmers to feed them, bricklayers to house them, and so on. All done sometimes without money at all, the only trick being to keep the productive wheel going. But how sophisticated the system must of been when it ran smooth, employing a giant labor force on trust alone!

    The only problem with potlatch is that the wheel must break down sometimes. Crops fail, floodwaters break canals, shit happens. In order to keep ourselves flush against all this chaos is a debt jubilee when too many slips of the wheel throw productive people in peril.

    The creating of the Federal Reserve created IOU machine with no “off” button. But also no discrimination: The downsized worker whose health fails, house is repossessed and so on, will be treated the same as the career moocher who gets “benefits” from a wheel of production he is not in.

    The ancient kings just had a better system.

  25. @jilles dykstra

    Didn’t even read the article. Hudson is so much smarter than you. I can’t stop puking long enough to tell you how much.

  26. Bill H says: • Website

    Sure, forgive the debts of anyone who cannot pay. Sounds good. How long then before no one is making loans any more? If I’m in the business of lending money, as soon as the government starts telling people they don’t have to pay me back, I quit lending money. I don’t think it takes a rocket scientist to make that decision.

    Maybe that outcome would be desirable. Maybe we would be better off if everyone had to operate on a cash basis. I know builders and the auto industries would crash, and a lot of jobs would be lost in the process, but all those people could take up selling hamburgers. That’s a cash business, right?

  27. LOLAtThis says:

    Tusk, I hope those people you’re referring to as unable to pay will lose some civil rights such as signing contracts or voting since it’s quite clear they’re too dumb for both.

  28. LOLAtThis says:

    Jubilee, you don’t know how fractional reserve banking works. The central bank issues high powered money and banks can issue a multiple of that kind of money. When you take money out of the bank, their high powered money reserves go down and they need to borrow some of it(not the kind of money they create). This is why they charge you a fee for withdrawing physical cash when you take a loan – all losses and profits are in the form of high powered money.

    It’s a lot more technical than this. If you’re interested in how this system actually works, don’t watch youtube ‘documentaries’. lol

    • Replies: @james charles
  29. PJ London says:

    As someone who scrimped and saved and always repaid every cent ever borrowed, always ensured that staff and creditors were paid every cent due, when it would have been so easy to stash the loot and declare bankruptcy, my comment is ‘screw you’.
    Ethics and morality have no place in this world and I for one am sick of it.
    Why not just get rid of all laws and promote thievery, robbery and fraud?
    What a perversion.
    Just dishonestly apply for tax money to be given you and then do nothing for 4 years knowing that you will never be required to repay the money.
    How far we have fallen.
    If you want to remove the debt, then give every individual, say $30,000, with those who have debts to the government deduct the debt from the payment.
    If you don’t want to collapse the economy then give it as a credit on future tax and allow this amount to be deducted from future tax bills for those who do not owe the taxpayer for student debt.
    At least you would demonstrate a modicum of fairness.
    “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending money alone. It is spending the sweat of its labourers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.” —
    Dwight D. Eisenhower

    You can add to Ike’s list, ‘student loans’.

  30. @LOLAtThis

    “The reality of how money is created today differs from the description found in some economics textbooks:
    • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

  31. anon[175] • Disclaimer says:

    Being bankrupt is just being insolvent, one’s debts are higher in monetary value than one’s possessions.
    There is no ‘dealing’, those who do not get paid have lost their money.

    Not at all. Bankruptcy is a process. In some cases, there are no assets and not much income, and debt is discharged.

    In others, there is a well defined process to prioritize debt, divide assets, and then reorganize or liquidate.

    Bankruptcy is precisely addressed at reducing moral hazard. The largest student debts are held by graduate/professional students who have a low default rate.

    Lower income dropouts typically owe less and there is little value in pursuing these claims.

    The bad loans are owned by private parties (institutions/individuals) but guaranteed by the federal government.

  32. When Solon and Hammurabi and other such leaders practiced jubilee, their economies took off. In Babylon, self-sufficient farmers continued self-sufficient. And in Greece, democracy flourished–and it could only have flourished with the help of jubilee. Those of you who don’t get this yet, who think that debt forgiveness is stealing, had better just talk amongst yourself, because the opinions of dumb people are more or less equivalent to flipping a coin.

  33. Anonymous [AKA "Bruce Considine"] says: • Website

    The Bible. Debt cancellation is NOT a moral hazard.
    7-year debt limits (no indefinite student debt, no 15 or 30-year mortgages etc…) 50-year return of lands to the individuals or families that lost them. Harsh condemnations against usury. Extremely harsh condemnations against heaping wealth (eternal lake of fire.) The LORD Jesus Christ Almighty warned Israel and Judah against their idolatry, bribery, and predation of the weak and poor. When they didn’t listen he destroyed Israel with Assyria and Judah with Babylon and gave the land to the destitute (the poor with nothing.) Our era of Bribery, Injustice, and Debt Bondage is the moral hazard.

Current Commenter

Leave a Reply - Comments on articles more than two weeks old will be judged much more strictly on quality and tone

 Remember My InformationWhy?
 Email Replies to my Comment
Submitted comments have been licensed to The Unz Review and may be republished elsewhere at the sole discretion of the latter
Subscribe to This Comment Thread via RSS Subscribe to All Michael Hudson Comments via RSS