The Real Debt Deal

We need leadership to say that this world will not be a lowest common denominator fight over satisfying old debts that cannot be satisfied, with no environmental, labor, or consumer protections.
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"So that goes back to a much bigger issue which is we have a whole host of contracts, that were entered into during better times that unfortunately have to be rewritten." ~ Mohamed El-Erian, CEO of PIMCO, a trillion dollar money management firm.

Forgiving debt is fundamental to American history. So is redefining property rights. We fought a Civil War over the idea that human beings could be property, and repudiated the debt of the Confederacy in the Constitution itself. Bankruptcy -- which is the destruction of debt -- is in the Constitution, while a central bank like the Federal Reserve is not.

And this is because debt is a contractual promise, it is not sacred. The problem we have now, as El-Erian told me in our podcast, is there are too many obligations promised to too many interest groups, and not enough resources to honor them all. So what's happening is that the creditors are fighting with each other to bleed as much from a stone as possible. China wants to be paid on its Treasury bonds, so does Goldman Sachs, and so do Social Security recipients. The same is true for mortgage-backed securities, Greek debt, and every IOU in the American financial system.

But now, because there isn't enough to go around, the accounting for and attempted collection of this debt is driving the welfare of our society. Rather than saying how we can build a productive culture and thereby create more wealth to award to everyone, creditors are trying to divide what exists now. The real waste, of course, are the tens of millions of unemployed and underemployed workers. We will never know what businesses weren't started, what ideas weren't turned into products, and what innovation didn't happen because these people are lying fallow. But the loss is vast. This is the consequence of letting the accounting drive the culture.

There's a lot of discussion over how to properly regulate the banking system, and if you want to hear from one of the best minds, listen to my podcast with Mohamed El-Erian. He analogized our system to a highway; importantly though, it's not just that we need clear rules of the road. We shouldn't be driving just to drive, just as the financial system should be a means to an end. Talking about debt in the abstract is like talking about driving without having a destination in mind. What kind of society do we want to build with our banks and resources? That's the question to start with, not percentages of GDP or spending cuts or tax increases or ratings agency downgrades

In 1862, Lincoln offered to compensate the South for slaves with Treasury bonds, rather than fighting an expensive and deadly war. A few years later, a series of amendments to the Constitution specifically argued that the obligations and property of the South, both debt and slave holdings, were not valid. In 1989, Treasury Secretary Nicholas Brady organized what was essentially a debtor's cartel of Latin American companies that had defaulted on their debt to American banks. The Brady Bond plan worked for everyone.

In 1944, America had probably its finest moment, when it convened the Bretton Woods summit to organize the finances of the post-war world. The post-WW I reparations deal looked much like what we are pursuing now, a "blood from the stone" philosophy of stripping as much from German as possible, while America got as much back from England and France as possible. We know where that led, to depression, then global tensions, then a trade war, then a real war. The post-WW II deal was organized around turning Western Europe into a productive society, to pursue the goal of peace. And it worked! The Marshall Plan, Bretton Woods, the IMF, and the World Bank turned Western Europe into a rich trading partner, and the idea of war between Germany and France is now laughable. This was clearly worth debt forgiveness!

We need a new global restructuring of our obligations, a new Bretton Woods or Brady Bonds solution. Greece should not be descending into poverty, it has an educated workforce and wonderful traditions. American homeowners shouldn't be under siege by creditor predator banks, and millions of us shouldn't be unemployed as debt-holders forced into a Survivor-like fight with each other over scraps. We cannot allow giant creditors to turn fights over debt into currency wars, and then into real wars.

We need leadership to say that this world will not be a lowest common denominator fight over satisfying old debts that cannot be satisfied, with no environmental, labor, or consumer protections. We need leadership to move us towards a high-trust, global productive society that can solve our collective problems. This is doable. We've done it before. We can do it again.

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