Forum Post: Debt Repudiation

http://www.nakedcapitalism.com/2010/04/guest-post-is-debt-repudiation-a-good-thing-or-a-bad-thing.html

SATURDAY, APRIL 10, 2010 Guest Post: Is Debt Repudiation a Good Thing or a Bad Thing? → Washington’s Blog

Preface: I hesitated in posting on this subject, as I thought it might be too “radical”.

But after reading what economists Steve Keen, Michael Hudson and Murray Rothbard said about debt repudiation, I decided to post it.

This essay rounds up arguments for debt repudiation, because that side is rarely heard. But feel free to post comments on why debt should not be repudiated – the issue is still an open question in my mind.

As I noted in November:

Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this.

Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that – if the bank can’t produce the mortgage papers – then the homeowner can stay in the house.

Portfolio manager and investment advisor Marshall Auerback argues that a debtor’s revolt would be a good thing.

And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.

Walking away from home mortgages has actually become mainstream, being trumpeted by:

CBS CNBC The New York Times (and New York Times Magazine) The Wall Street Journal MSN NPR The Arizona Republic Many others In addition, as I pointed out in February:

There is an established legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people.

Odious Debt

by Washington's Blog

www.informationclearinghouse.info/, February 12, 2010

There is an established legal principle that people should not have to repay their government's debt to the extent that it is incurred to launch aggressive wars or to oppress the people... xxx http://www.thirdworldtraveler.com/Third_World/Odious_Debt.html These "odious debts" are considered to be the personal debts of the tyrants who incurred them, rather than the country's debt.

Wikipedia gives a good overview of the principle:

In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack, a Russian émigré legal theorist, based upon 19th Century precedents including Mexico's repudiation of debts incurred by Emperor Maximilian's regime, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime. According to Sack:

When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders' knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation - when it succeeds in overthrowing the government that contracted...