The current safety net programs being offered by the Federal Reserve Bank are widespread. They include the Paycheck Protection Program (“PPP”) safety net of 8 weeks of payroll subsidy for companies that have existing Small Business Administration loans. They also include Fed purchases of a wide swath of debt instruments including collateralized loan obligations, mortgage backed securities, high yield bonds, and short term debt supporting repo markets.
For the first time in my memory the Fed is also buying original issuances of state and municipal debt, presumably from issuers who cannot raise capital right now to keep states and cities functioning.
The Fed is also backstopping money market funds and providing liquidity to debt and equity capital markets. As a result of this unprecedented debt creation, the Fed’s balance sheet is projected to grow to as much as $10 Trillion, but this is a moving target and I think it will be dramatically more.
This time, however, the program is already different than the playbook in 2008. PPP is set up as a forgivable loan from a bank to a borrower funded by The Fed. This is not a repayable loan from the Fed to a troubled bank like TARP or the Fed’s direct investments in 2009 in the equity of GM or AIG Insurance. This is free money to keep small business employers writing payroll checks and keeping their labor forces in tact for the “Huge” Resumption.
But the PPP program also allows 25% of the forgivable PPP loan to be used for non payroll expenses like rent and health insurance. In addition, when the loan is forgiven there is no “forgiveness of indebtedness” income to the employer which would be the normal tax treatment.
So, the PPP program is a true debt jubilee for small business.
To my knowledge the PPP businesses are the first beneficiaries of what may become a more widespread Debt Jubilee.
Is This the First Time There Has Been a Jubilee?
I am unaware of any other time in American economic history where the government abrogated a private contractual monetary relationship with the exception of 1933 when President Roosevelt proposed to eliminate the so called “gold clause”, under the terms of which a holder of U.S. Treasury Bonds could elect to receive gold in lieu of paper money as payment at maturity of the bond. FDR’s elimination of the gold payment was challenged by creditors who wanted gold, not paper dollars. Three disputes ended up in the Supreme Court after two lower courts declared the gold clause enforceable.
Fearing repudiation, FDR threatened to ignore the findings of the Supreme Court and even suggested changing the composition of the Supreme Court by adding 5-8 new justices. This may sound familiar because it is exactly what opponents of Neil Gorsuch and Brett Kavanaugh suggested after their nominations.
The Supreme Court in 1933 was saved when the justices voted 5-4 to permit FDR’s cancellation of the gold clause contracts. That legislation was rescinded 4 years later.
The only other time the US made a similar reversal was 1971 when President Nixon abandoned the gold standard by eliminating the backing of US dollars by a 25% gold deposit in the US Treasury. The creation of US debt was constrained by requiring at least 25% of each new dollar of debt have a corresponding gold bullion deposit. There was also a promise to foreign creditors to pay off their debts for gold.
This resulted in more than 50% of America’s gold reserves being exported to foreign creditors. Going off the gold standard set up the printing press of debt and set off a long recession in the United States where there was no confidence in the US dollar. It got so bad “Carter bonds”, where repayment was denominated in Swiss Francs, were the only way the US could raise capital in the mid 1970s.
The World Has Experienced Jubilees Before
My research on debt jubilees does not convince me they were widespread, but The Washington Post sure thinks they were and also thinks we need one today.
In an article by Michael Hudson on March 21, 2020 The Post chronicled the debt jubilee history:
“The word “Jubilee” comes from the Hebrew word for “trumpet” — yobel. In Mosaic Law, it was blown every 50 years to signal the Year of the Lord, in which personal debts were to be canceled. The alternative, the prophet Isaiah warned, was for smallholders to forfeit their lands to creditors: “Woe to you who add house to house and join field to field till no space is left and you live alone in the land.” When Jesus delivered his first sermon, the Gospel of Luke describes him as unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of the Lord, the Jubilee Year.
Until recently, historians doubted that a debt jubilee would have been possible in practice, or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.
It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis), and communities would have been prone to attack from without.“
The Post article also points to 1948 Germany when Reichmarks were exchanged for Deutchmarks and 90% of German debts, including war reparations, were forgiven. Here the US created a Jubilee by forgiving a foreign power’s debt in the name of national security.
The Jubilee May Be The Only Way To Preserve Social Order
The long debt cycle beginning in 1986 has smiled on people and institutions who have had access to credit, especially as the cost of debt capital has fallen from 15% in 1986 to 0% in 2020. It has also smiled on those who have used that credit irresponsibly, by giving them “do-overs” in 2000 and 2008.
Meanwhile, a large swath of the population has been shut out of debt-based Disneyland. In fact, the Big Recession punished relatively responsible home buyers by enslaving them to unpayable mortgages while it provided bailouts to Wall Street and irresponsible banks that had profited from those toxic products.
This Time Has to Be Different
The right thing to preserve social order is sound the trumpets and forgive certain loans, and other unpayable obligations, but only for those people who are now eligible for all or a portion of the $1200 “helicopter money” being issued under The Cares Act. If you don’t qualify for any portion of the $1200 checks (joint income with spouse above $200,000), and you have been too irresponsible to save from the largesse of cheap capital over the last 20 years, you should not be saved now.
In any event the new round of Fed tools will continue to include outright debt jubilees as well as “helicopter money” and other experimental programs spawned by modern monetary theory.
Buckle your seat belt and keep your fingers crossed.
