Debt Jubilee as Stimulus

An article over at TNR touts as new an explanation for the continuing slowness in the economy that appears to me to have been prevailing wisdom since Richard Koo began calling this a “balance sheet recession”. Here’s the beginning of the concluding paragraph of the article:

I wonder what would happen if the financial wizards whose innovations helped crater the world economy turned their attention to devising a plan for reducing household debt to healthier levels without destabilizing systemically important lenders.

Perhaps it’s more than coincidence bit a little quick googling revealed a flurry of discussion of something I haven’t seen for nearly two years: a “debt jubilee”. If you’re not familiar with the term, this should give you the general idea (it’s from Luke 16:1-13):

1 And he was also saying toward his disciples: There was a certain rich man who had a steward, and he was charged to him as squandering his possessions. 2 And he summoned him and said to him: What is this I hear concerning you? Give back a word of your stewardship, for you can no longer be steward. 3 But the steward said within himself: What shall I do, since my lord is taking the stewardship away from me? I am not strong enough to dig; I am too ashamed to beg. 4 I know what I will do, so that when I am removed from the stewardship they might accept me into their houses. 5 And he called to himself each one of the debtors of his lord and said to the first: How much do you owe my lord? 6 And he said: A hundred baths of oil. And he said to him: Take your letter of debt and sit down quickly and write fifty. 7 Then he said to another: And you, how much do you owe? And he said: A hundred cors of wheat. He says to him: Take your letter of debt and write eighty. 8 And the lord praised the steward of injustice that he had done shrewdly, since the sons of this age are more shrewd to their own generation than the sons of light. 9 And I say to you, make friends for yourselves from the mammon of injustice, so that when it gives way they might receive you into the eternal tents. 10 He who is faithful in very little is also faithful in much, and the one who is unjust in very little is also unjust in much. 11 If, therefore, you have not been faithful in the unjust mammon, who will entrust the true to you? 12 And, if you have not been faithful in that which belongs to another, who will give you that which is yours? 13 No houseservant can serve two lords; for either he will hate the one and love the other or he will be loyal to the one and despise the other. You cannot serve God and mammon.

Now that’s radical. As you can see it consists of a one time forgiveness of all or part of a debt. Sounds like enough to strike fear into the hearts of creditors everywhere.

Since I think that the “systemically important lenders” should have been broken up a decade ago, I’m not as concerned about them as William Galston, author of the TNR article is but I’ve got to admit that the moral hazard of this concerns me. And then there’s the little matter of the Takings Clause of the Fifth Amendment to the Constitution.