LARB Business and Finance Section Editor Timothy Spangler interviewed Andrew Ross about his new book, Creditocracy and the Case for Debt Refusal, out now from O/R Books.
Timothy Spangler: Do you have a credit card?
Andrew Ross: Yes, I have two.
Do you have a mortgage?
Yes, I have two. [Laughs]
How did your own participation in the “credit market” influence you as you were developing your arguments about credit and its impact on our lives?
The primary factor that drew me to this issue was my relationship to my students, and that continues to be the case. After all, I teach at New York University, an institution that is a national leader in the accumulation of student debt. NYU students graduate on average with a debt burden that’s 40 percent above the national average.
And yet, your own personal livelihood is very much bound to the economics of the university where you work.
Exactly. This is in my backyard. On a daily basis, I feel the impact of their debt when I walk into the classroom. That recognition drove me to become involved in the debt resistance movement, during the early days of Occupy. Many of the concerns that were circulating around Occupy in these early months had to do with the household debt burden, especially education debt.
I remember that there was quite a lot of talk about linking the question of student debt to the overall question of Wall Street and the financial system, but I want to get to that a little later. First off, the title of your book is Creditocracy. What is a “creditocracy”?
It is the kind of society we live in today. The majority of us are in deep debt that can never be repaid. Nor is it supposed to be repaid, because creditors depend on us performing a lifelong duty of debt service. Their goal is to keep us on the hook for as long as they can. I think of a creditocracy as an advanced kind of market civilization. In a market civilization, every social good can be transformed into a commodity. In a creditocracy, the cost of these social goods has to be financed by private debt. Whether this means we are talking about a new phase of monopoly capitalism, where the elite’s income and accumulation are primarily derived from economic rents, is a matter of debate.
If you asked people walking down the street about personal debt in America, I think most of them would say that debt is mostly a middle class problem. Home debt, household debt, school loan debt — those are all things that involve primarily members of the middle class. Do you agree that debt in America is mostly a middle class issue?
No, not at all. The segments of the population that are most familiar with the debt burden are the working poor. There is a long legacy of permanent indebtedness among the working poor that really goes back to indentured servitude and slavery. The successor institutions were sharecropping, company scrip, loan sharking — and today if you go into low-income neighborhoods, you see poverty banks everywhere on Loan Alley, which is the sub-prime landscape of fringe finance. That’s where we see the payday lenders and the check cashers thriving. The difference in the last couple of decades is that this condition of permanent indebtedness has worked its way up far into the middle class and now affects at least two generations of the college-educated. So, the predicament is widespread now, but it has long been familiar to the working poor, and it still disproportionately affects low income and minority populations.
Is materialism driving indebtedness? People want things: the debt is incurred to accumulate them. Or is it the reverse? Do we have this boom in the last few decades of so-called “easy credit” and was this availability of “easy credit” pushing people into consumerist consumption? Which is the cart and which is the horse?
That is a good question. I think the most significant factor has to do with household income. Since the mid- to late 1970s, average household income has either been stagnant, or, according to some metrics, falling. When you are in that kind of situation, credit-fueled spending is really the only way of sustaining a certain quality of life. Increasingly, households are in the position of having to seek out fresh credit simply to perform existing debt service. People aren’t borrowing to make material improvements in their quality of life, but to meet the basic requirements of life, which to my mind includes access to vital social goods like health care and education and public infrastructure.
Do you feel that debt — the loaning of money — is moral?
Morality is a big part of how we talk about this issue, of course, because pay-back morality is the most effective instrument that the finance industry has at its disposal.
Can we agree, though, that credit has a legitimate and positive role to play in society?
Very much so. The alternative economies being discussed now are geared towards creditors of the socially productive kind, whereas our current money economy is largely fueled by predatory credit. Lending, in and of itself, is absolutely necessary to any economic system. It’s just a question of whether it’s going to be socially productive or whether it’s being done purely or primarily on an extractive basis, to generate income for the creditor class.
So you would go through the borrowings that occur in a community or in a country, and separate those that are predatory lending and those that are borrowings for a legitimate purpose?
Yes. I think it’s a very important distinction to make. I believe that there are legitimate debts that should be honored and that there are illegitimate debts that should probably not be repaid. This is a distinction that the Jubilee South movement has successfully made, for example, by calling for the cancellation of third world debt.
What do you think would be the hallmarks of “good debt”?
Good debt comes from loans that have socially productive outcomes, that are beneficial to the debtor, to their communities, and to the environment that hosts them. The Jubilee South movement, for example, has questioned whether IMF loans to developing nations actually constitute loans. In the case of sovereign debt, the officials who negotiated the loans have themselves come under scrutiny. Some of these debts were categorized as odious according to international legal doctrine because they enriched the officials and produced nothing of lasting value or prosperity for the country whatsoever. These are fairly clear-cut cases, but there are other criteria for measuring the legitimacy of the debts: Were the loans really needed? How were they negotiated? Did they cause environmental or social harms? Haven’t the creditors already been rewarded enough? I argue in the book that we need to develop similar criteria now for dealing with household debts in the global North, because this condition has migrated from the South.
You make the point that the creeping of indebtedness to the North is damaging the political processes as well. You have a paragraph in your book that is particularly resonant; you say that debt is keeping people from envisioning and creating an alternate society. But you also note a few pages on that household debt was effectively zero in the early 1950s. Are you saying that it was easier to envision alternate societies when household debt was low in the 1950s or it is easier to envision alternate societies now?
One of the major concerns of the book is the impact of the debt burden on democracy — on the legitimacy of representative democracy in particular. We’ve seen so many countries — again this is a condition that’s migrated from the South — in which elected officials simply have no alternative but to please foreign creditors. They have to prioritize the rights of foreign creditors over their responsibilities to the citizenry. This is a policy I would call “No Bondholder Left Behind.” And it’s a huge problem — as a result, we now have failed democracies all over the world.
But in the US, did we have a better democracy in the 1950s when we had almost no household debt in the aggregate, or now? When did we turn the corner? When was the better world for us from a political participation standpoint?
I try to answer that in the book by delving into the history of the run-up in mortgage debt and educational debt. It’s not simply an economic burden in either instance, each of these has a political underpinning because of their respective impacts on the capacity of the citizenry to exercise their political imagination. In regards to education debt, one point of origin was Ronald Reagan’s crusade against Berkeley protestors when he was running for the governorship. His solution was to start hiking fees at the University of California, in the hope that a growing education debt burden on students would make them less likely to protest. And indeed, protesting is no longer a rite of passage on campuses nationally. And one of the reasons is that students have this crushing debt burden. They also have to view their education as a transaction, and have no alternative but to look for a return on investment. All of these things effectively limit our ability to actually produce a freethinking, educated citizenry that is capable of altering society for the better.
One of the interesting things that you note in your book is that, “Every dollar that goes to a banker for debt service is one fewer dollar spent in the real economy.” I want to unpack this. When that dollar of interest gets paid to the banker, he doesn’t burn it. He doesn’t bury it in his back garden. That dollar recirculates, either out in other loans or, if it’s taken as profit, it is used to buy automobiles, foodstuffs, houses. It still circulates in the economy. Is what you are saying that there is something inherently unproductive about the payment of interest or are you just making a broader political point?
I think it’s a broader moral point. This distinction between the real economy and the financial economy is one that consumes a lot of debate among economists, of course. But it has particular relevance when we are looking at the current underemployment, when we are looking at shrinking services, when we are looking at austerity policies, all of which are having a deleveraging effect.
The US bankruptcy code is renowned around the world for being one of the most pro-debtor, pro-bankrupt out there, as far as the ability to file bankruptcy, the simplicity of the process of filing bankruptcy with one or two exemptions. American courts treat bankrupts and therefore debtors, better than many, many, many other OECD and other countries around the world. How did that impact your analysis?
One huge exception, of course, is that student debtors cannot discharge their debts through bankruptcy. When the federal loan system was reorganized in 2010, the non-dischargeability principle was retained wholesale. Federal loans originate now with the government and aren’t issued by private banks, but all of the powers that are stacked high on the side of the creditor, in the case of student debt, were preserved. It seems particularly unjust and almost unconstitutional to discriminate in this way against a particular class of debtor.
In the book, you explain how incredibly profitable the student loan industry is for the federal government.
It’s simply astonishing. Last year, the CBI issued an estimate of how much profit the federal government would be extracting from its loan program — it was $51 billion. For a lot of people, that was a very difficult fact to get their heads around — not only how the government would be actually profiting from its student loan program, but also that the profit was not being ploughed back into education. Most of it was being used to pay down the federal deficit. That was one of the “a-ha” moments on the student debt landscape that had people really shaking their heads.
Back to bankruptcy. Interestingly, we’ve had a great history since the first European foot falls on this continent as being a place for bankrupts and debtors. Who of our early founding fathers did not have some personal financial transgression of pretty high magnitude? Bankruptcy is the ultimate act of debt refusal and it’s been a feature of Western law and American law for hundreds and hundreds of years. Everyone ultimately has a big red button that they can push, setting aside student loans for a minute; anyone can just unilaterally refuse their debt by filing bankruptcy. Isn’t bankruptcy enough? Why does there need to be something more than just filing personal bankruptcy?
Good question. I think when it comes to individuals, the door is always open to renegotiate, consolidate or recalibrate your debt with a creditor, but this is only allowed on an individual basis. The programs for debt refusal that I write about in my book involve collective acts of refusal. They are expressive deeds of democracy that are aimed really at striking the predatory debt economy. Renegotiating your debts on an individual basis brings people relief but is not going to change the predatory debt economy. In most cases, it simply perpetuates it.
Can you give me an example?
The Occupy Student Debt campaign that I was involved in a few years ago was a hastily devised effort to channel some of Occupy’s viral energy to convince 1 million student debtors to refuse their debts. For all sorts of reasons, we got nowhere near these numbers, but the fact is, over the course of that year, one million student debtors did actually default.
On an individual basis?
Yes, so it had absolutely no political impact whatsoever. If they had defaulted collectively, we would be having a different conversation right now.
I want to move on to home ownership. It’s a philosophical, political, economic question that Americans, Britons, and people around the world have been wrestling with for the last century. There are, however, underlying questions that people aren’t comfortable discussing openly. Simply put, who should own and who should rent? As a society, what type of home ownership should we be encouraging and what type of home ownership should we be discouraging?
I would go back to the historical origins of the promotion of home ownership in the 1920s under the Hoover administration. For elites, the threat of socialism loomed large in this country, and homeownership was seen as part of the solution. This rhetoric continued throughout the cold war period and became more explicitly anti-Communist. William Levitt, the master builder of Levittown, said, “no man can be a homeowner and be a communist.”
Do you agree with that?
I understand where he was coming from. That kind of rhetoric is no longer so familiar to us because the “threat” of socialism and Communism is more remote now. I think the more relevant public narrative in the last 30 or 40 years or so has been how the US has withdrawn from its commitment to the right to housing, which was an important part of FDR’s 1944 economic bill of rights. Internationally, the right to housing is still recognized, but the US government has progressively withdrawn from the right to housing and replaced it with the right to access housing loans.
A bipartisan movement?
Yes, absolutely. The same has happened in education. The right to education has been supplanted by the right to access educational loans. That’s a very simple but telling development.
I want to take it up a level now — sovereign debt. In your book, you say that democracies are better for lenders, although elsewhere you seem to say that autocracies are better for lenders. Which one is it? Which one do you feel is more pro-lender? Or are both pro-lender in their own unique way?
It’s a very tricky question. Historically, the big lenders, international lenders, welcomed the emergence of democracies because real sovereigns — kings and queens — sometimes welched on repayments. The idea was that a government of duly elected officials was more likely to be able to guarantee that taxpaying citizenry would pay back their loans. But there are many circumstances where undemocratic regimes — autocrats, dictators — proved to be very good debtors from the point of view of the creditor and would promise repayment without any popular legitimacy to do so. It’s those situations that are regarded as odious debts — when a successor government is under no responsibility to repay. But I think what we’ve seen in the last few years or so, certainly in the Eurozone in the wake of the financial crash, is the international creditor class making unsustainable demands on elected governments. When elected officials balk at putting the rights of foreign creditors above the rights of their citizenry, then they are simply replaced by technocrats. This happened in Greece and Italy. Lucas Papademos was appointed in Greece and Mario Monti was appointed in Italy to be the adults in the room, to ensure that the bondholders would be made whole, because the politicians could not be trusted to do so.
In the book, you describe Argentina’s 2002 default very favorably. Do you feel now, 12 years down the line, that that default has benefited Argentina and the Argentines?
I think if you ask Argentineans, they would say yes, for the most part. Economically and morally, it’s been a successful move. Likewise, in Iceland. Personally, the example I like best is Ecuador. In 2007, Ecuador appointed a Debt Audit Commission to do a citizens debt audit. This is one of the instruments that the Jubilee South movement has pioneered. The commission did an audit of the country’s external debts and recommended to the president which debts they thought were legitimate and which were illegitimate, which should be honored and which should be repudiated. The president then took action accordingly. I think it was a very good example of how this sort of thing can be adjudicated. I argue in the book that citizen’s debt audits should be done in our country too — for municipal debts, public transit authorities, and for institutions like universities.
How about at the federal level?
The federal debt in the US is a strange beast. It certainly is not like the sovereign debts of Eurozone nations.
Why not? Why would you distinguish between the US federal debt and debt of other sovereign nations?
Well, we have a fiat currency system, as do the UK and Japan, where central banks can create money at will. In addition, of course, the dollar is the world’s reserve currency, so US federal debt is in a less vulnerable position.
So, you wouldn’t recommend that we default on our national debt?
I think a lot of the debate about the federal deficit is a fabricated debate.
But the debt is real. I mean we owe $17 trillion dollars. A significant amount of that is held by overseas institutions — the largest one being China. That’s real debt, isn’t it? Or is your argument that it is not real debt?
It is real debt if we can say that debts are real, but it’s not as important a debt as the sovereign debts of Eurozone countries. Household debt, to my mind, is a much greater threat. We’ve seen a deleveraging of our aggregate household debt since 2008, but the decline seems to have reached the bottom in the second quarter of last year.
If I understand you correctly, you are saying that the debt of every other country in the world is a priority, which should be examined and significant amounts of it should be written off. However, you are very, very relaxed about the debt situation, the federal debt situation, in the US. You don’t see a contradiction?
The factors that are responsible for the accumulation of federal debt should be subjected to greater moral scrutiny. We are talking really about the consequences, of the Wall Street bailout and about the costs of two very expensive wars in the last 12 years or so. These are some of the primary factors in the accumulation of federal debt, and people have very strong feelings about that. The way that the federal deficit is manipulated in the political sphere seems to be entirely manufactured to justify austerity policies in this country, in much the same way as they have been in the Eurozone. But in the case of our federal debt, the palpable threat of default is just less meaningful.
It strikes me as a little bit off-key though that there is not a link, in your view, between austerity and debt refusal. Isn’t the whole point of legitimate debt and incurring debt in a structured positive, constructive way inherently linked to austerity?
Absolutely. I think it is.
Except in America?
No, even in America, and this gives debt refusal a lot of the moral legitimacy. If you look at municipal budgets, such as Detroit, for example, which is ground-zero in this regard, a citizens debt audit in Detroit would really have called into question, well before the point of bankruptcy proceedings, the degree to which a crisis has been manufactured around the municipal economy. It would have fully questioned the legitimacy of the Wall Street debts. But not just in Detroit. In New York, for example, the metropolitan transportation authority’s finances have also been gamed by Wall Street. A large percentage of every subway ticket goes in debt service paid to bondholders. Increasingly, creditors are wrapping debt around every aspect of our public infrastructure.
What about household debt?
The household debt crisis is the one that I focus on most in the book, because that’s the one that is generated by having to borrow in order to access vital, social goods. We are seeing those figures begin to rise again. In the last two quarters of 2013, mortgage debt began to go up again, auto loans are up — education debt never missed a beat, of course, approaching 1.2 trillion dollars now. Economists seemed to have decided that the so-called debt overhang from 2008 has been resolved, so now it is safe to start borrowing again. In fact, it’s necessary to do so if we are to get back to GDP-driven growth that is respectable.
Don’t we call that “economic recovery”?
Unfortunately, the evidence suggests that GDP-driven growth is a recipe for ecological collapse. This is something that I also go into in the book. There is a whole chapter about climate debt, which is a form of debt that usually isn’t discussed yet in the same breath as household debt and sovereign debt, but is increasingly a very real issue that has to be resolved.
Do you think if we were able, on either the international multilateral level or on the domestic level, to actually effectuate debt forgiveness, that effort would be sufficient, or is it too essential to human nature — this desire to borrow and spend more than we have — that, in reality, it would never be “one and done”?
The historical record is suggestive. Societies that could not check the power of a creditor class very quickly moved down the path of debt bondage and slavery. There’s a lot of talk about that now, just as there has been a revival of interest in debt jubilees. Jubilees were a way for rulers in the ancient world to restore the balance of power in their favor from the creditor class. They did this by abolishing existing debts and freeing slaves and restoring land to its original owners. That’s a kind of one-off corrective, if you like, but it doesn’t necessarily change the debt economy, it only clears the slate. Jubilee debt relief has to be accompanied by a real effort to construct an alternative economy and that’s one of the things I talk about in the book — how you actually go about creating an economy that’s based on mutual aid, that’s based on socially productive credit as an alternative to what we have right now, which is unsustainable. Not just economically but also environmentally.
What do you think the chances are of a widespread debt refusal occurring in the US in the next five or ten years?
I think it’s very difficult to predict what a large-scale act of debt refusal would look like. It would require a debtor’s movement to come into being, and one of the things we’ve discovered in the last few years is how difficult it is actually to organize around debt. It’s very different from organizing around wages, which isn’t exactly easy either. Organizing around debt is particularly difficult, because of the unique nature of people’s debts. They are like fingerprints. It’s not easy to persuade people that it’s in their common interest to organize around particular debts unless they are of the same kind and owed to the same creditor. That said, I and many others think it’s a necessary act if we are going to salvage popular democracy. This is why I see the debt struggle really as the frontline conflict of our century, just as the struggle around wages was the frontline conflict of the industrial 20th century. In fact, organizing around debt is really an extension of the labor movement, because every debt is the wages of the future to which creditors have laid claim in advance.
One final question, do you know your credit score?