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Author Kuttner contends that our overall perspectives on debt have now become impediments to economic revival. The alleged benefits of fiscal discipline to business confidence will not materialize because businesses will hesitate to invest in the resulting depressed economy. Moral claims keep getting conflated with practical economic questions, and our debates focus obsessively on the wrong debts - public, instead of private (student debt, underwater mortgages). Further, he points out that rising public deficits did not cause the recent financial collapse, rather the collapse caused the higher deficits. Reality - private debt caused the crash and prolongs its aftermath. Our children's prospects depend on whether the economy can product better job opportunities and less private debt in the immediate future, not on eg. projected finances for Social Security a decade from now.

Kuttner also sees double standards in our attitudes towards debt relief - corporations are allowed to shed pension plans, bankers get bailed out in their role as debtors while protected as creditors, and bankers usually are also in line ahead of pensioners in a bankruptcy. After 9/11 we increased military spending by over $3 trillion in the space of a decade - that was OK, but not spending a similar amount reviving our infrastructure. Meanwhile, today's retirees can't get decent returns on their savings because central banks have cut interest rates to historic lows to prevent the crisis from deepening. (Banks want cheap money for themselves, draconian terms for everyone else.)

The last great financial collapse was ended not by belt-tightening but rather by public investments post WWII like the GI Bill and the Marshall Plan, coupled with pent-up demand caused by rationing. Banks were well-regulated, and parasitic profits from financial manipulation was insignificant. Some exotic financial devices hadn't been invented yet, and most that had been devised were prohibited by New Deal reforms. Salaries in finance were relatively modest, except in investment banking where partners put their own capital at risk and did not expect to be bailed out. Chastened by the catastrophe of reparations extracted from Germany after WWI, nearly all Nazi-Germany debt was written off. The U.S. debt ratio rose between 2001 and 2008 because of two wars and gratuitous tax cuts for the wealthy, not an excess of social generosity. The deficit then spiked mainly because of a falloff in government revenues as a result of the recession. At the same time, declining real wages and inflated asset prices led the middle class to use debt as a substitute for income.

Prior to the Great Depression, 'Finance Capitalism' was predominant in an era characterized by small government, little regulation of banking and finance, and growing income and wealth inequalities. The consequence - an economy much more financially unstable that recorded numerous and prolonged economic contractions.

Beginning in the 1980s, the IMF and World Bank promoted what has become known as the Washington Consensus - developing nations needed to have tight fiscal policies, keep their exchange rates and labor costs competitive, privatize state ventures, reduce or eliminate subsidies, and open their financial markets to foreign capital flows. Two decades of intermittent crises brought the IMF to admit that this one-size-fits-all guidance often worsened recessions. Simultaneously, several major developing nations (Japan, South Korea, Brazil, China) attained very high levels of growth by rejecting key tenets of the Washington Consensus. They incubated and protected their industries, relied on government-business cartels, limited speculative money flows, and negotiated advantageous terms on which foreign suppliers and investors could participate. Taiwan built its dominance in microelectronics exports with a government industrial policy and subsidies. Beijing manipulates its currency to keep it undervalued to promote exports, and the U.S.-China Trade Commission estimates that half of China's industry is still owned by the state, directly or indirectly, and most of the rest is subject to mercantilist rules favoring Chinese-owned companies.

Washington promotes free-market capitalism through the IMF, WTO, OECD, and its own diplomacy, but indulges China's lapses. Why? You don't mess with your largest creditor - China held $1.16 trillion in U.S. Treasuries as of 6/2012, and almost half our foreign debt is owed China. Borrowing from abroad allowed the U.S. to outspend its national income between 2000 and 2008 by $4.3 trillion - most financed chronic trade deficits. Our chronic trade deficits are a mark of our falling economic performance and will eventually translate into reduced living standards, especially when interest rates rise to more normal levels.

'Countries don't go out of business' observed Citibank chairman Walter Wriston in 1982. But they frequently default - at least 250 times since 1800 according to one compilation. Often these were caused by adherence to the Washington Consensus, then those losing money in such loans bailed out by the Federal Reserve.
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on August 24, 2013
This is a very hopeful book. It rightly points out that we were able to recover quickly from WWII. By we I mean everybody. Germany, for God's sake, recovered nicely in the 50's. Who would have thought? So if we can recover from the great depression/ WWII, the future is not hopeless. Here's a quote from the book that boils it all down:

Sooner or later (later unless we drastically revise prevailing assumptions and policies), recovery will occur. And at that point, the Fed will indeed allow rates to rise. Investors locked into low-rate long-term bonds of the Bernanke era will share the same fate as their counterparts in the 1950s and 1960s: they will have negative real rates of return. But there are worse things than a period of negative real interest rates. One is a prolonged depression. A key question today is whether gradual liquidation of government debt using the several strategies of repressing finance is better than the alternative of prolonged economic suffering. Though the rentier class paid a hidden tax in the decades after World War II, the real economy thrived: and, on balance, the rising tide soon lifted even the yachts.

I find this outlook very refreshing. We cannot forget that just 60 years ago we solved the economic/debt mess left by the depression/WWII. If we could handle that, we surely can emulate what happened in the late 40's, 50's and early 60's (the heydays of equitable prosperity) and take actions to bring wide-spread prosperity to the twenty-first century.
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on September 4, 2013
Debtors' Prison is a perfect metaphor for morally righteous financial policy that imposes punitive fiscal actions. This is a courageous book from an economist who is able to explain causes and results of the recent US and European fiscal crises. It is divided into three major parts: the US economic crises that developed in 2007, the current European euro crisis, and a history of US fiscal policy from the Revolutionary War to the present day.

Modern day individuals, financial institutions, and governments are generally united in recognizing the futility of debtors' prisons as a means of forcing persons without access to employment to repay their debts. This book's comparison of the harsh reparation terms imposed after World War I which led to the rise of the Nazi party with the benevolence of the Marshall plan after World War II which led to European renewal is ample evidence that assistance in recovery trumps vengeance. But the US and Europe are both currently choosing morally righteous fiscal policies that are impeding economic recovery.

Kuttner is an economist in the Keyesianism tradition who does not hesitate to identify those he considers the villains. He lauds the FHA and FNMA established during the Great Depression for creating the long-term, fixed rate, self-amortizing mortgage system we now take for granted. But in 1968 FNMA (Federal National Mortgage Association) was privatized as the for-profit Fannie Mae and we all know how that turned out. It began a series of legal actions benefiting speculators over consumers. In his words, "What killed a highly effective home loan systems was a combination of random circumstance, bad economic theory, shifts in the distribution of political power, and financial innovations from hell."

This is the clearest, most straightforward description of our government's past and present failure to create and regulate a secure and fair national financial system. It is definitely a must read.
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on May 15, 2013
Kuttner hits the nail on the head by putting the context on the myth of what constitutes "national" debt. He clarifies how budgets can be manipulated for political, not national gain, and how recent debates about closing the debt and debt limits are really beside the point and that the average citizen is not only not getting his/her money's worth from their taxes - fed and local, but have little say in how the budgets are made. Austerity - the current economic approach of the US and EU is shown to be a bad approach. Kuttner provides clearly thought out solutions and suggestions and should be a primer for every congressman in our government. A must read in all civics and college poly sci classes as well as by every thinking - and open minded citizen.
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on June 28, 2013
Debtor's Prison is a must read. Robert Kuttner does an effective job of fighting the myths that are ruining Europe's economy--and to a lesser degree America's. He opposes the current obsession of what economist Paul Krugman calls Very Serious People with the national debt. As Kuttner sees it (correctly) the crisises facing the world economy are an overleveraged, reckless banking sector and a lack of demand, not government debt. Austerity--cutting government spending and raising raxes--in Portugal, Greece, Ireland,etc.. have shrunk their GDP's and actually made their situation worse.

There are many other good points Kuttner makes--e.g. he destroys the bogus contention that the government's push to affordable housing contributed to the financial collapse. Importantly, he urges Americans not to believe debt hawks like David Walker and Pete Peterson who claim their position is nonideological. They are pushing policies that would endanger Social Security and Medicare--which is certainly an ideological position. I also suggest Mark Blyth's book Austerity on the same subject.
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on March 26, 2014
The book starts with the example of Defoe as a debtor and 17th century debt policies being self defeating for the British economy. Extrapolating that to promotion of more public spending in the twenty first century is ridiculous. His case is made mainly by knocking down bad straw man arguments.

He says while focus is on public debt, the real problem is private debt, overlooking that private debt is voluntary while public debt is government coercion. Much private debt has been fueled by government spending particularly in the name of the great American dream of home ownership. Consumerism continues to be encouraged by the current administration.

I agree with his take on the utility of Keynesian spending to alleviate recession. If he thinks that is what's happening now, he's delusional. We need look no further than the current debt expansion during a recovery, exactly opposite to what Keynes advocated. During the over long recession stimulus money went primarily to wall street exacerbating income inequality. There is suspicion that resulting hollowing of the middle class is in accord with administration intent. It continues unabated in the midst of an economic recovery. Later Kuttner refers to the Keynesian welfare state. There is no such thing. In addition to Keynes, Kuttner cites support of his ideas from modern economists Krugman, Stiglitz and Stowell. Krugman, of course, endorses any and all spending, like Kuttner, the more the better. Stiglitz, though liberal, limits spending recommendations to where appropriate. Stiglitz's endorsement on the book cover shows a clever disagreement. Stowell advocates common sense in economics, totally foreign to Kuttner's position.

There's some good financial history with the occasional error. Kuttner says Hamilton paid off war debt at 1c/dollar. It was exactly opposite as Hamilton was largely responsible for putting the new nation's credit on a sound basis by insisting on full payment.

His struggle between rich and poor is actually a struggle between tax payers and tax consumers with consumers winning. He says U.S. austerity requirement is conventional wisdom. I wish it were so. Our liberal administration and Congress is advocating spending supported by a large segment of the population. He cites the populist fantasy that extremes of inequality are due to a capitalist economy. When capitalism was in vogue, income distribution was unsatisfactory. The last sixty years distribution has been worsened by the hammer blows our socialist economy has dealt to capitalism.

FDR's deficit didn't eliminate joblessness until more spending. Indeed it took a war. He says that WWII bond purchases were followed by recovery. That's while
the bond holders lost their patriotic investment to inflation. In 1968 FNMA was privatized leading to the scam that crashed the economy. They were provided with an unlimited supply of federal dollars. Bretton Woods was destined to change. A truly international monetary system could have endured longer. Not after the gold flow of the LBJ era.

Inflation of the 70's a convergence of price pressures. That sounds like a pretty feeble whitewash of the LBJ era social and war spending. The years 1984-95 saw a widening widening wealth gap. There is great disagreement about which policies were most responsible. He says financial enterprises ruined the mortgage system.
It was the easy money flow in the name of the great American dream of home ownership.

He says debt rose during 2001-2008 due to two wars and tax cuts. What's his excuse now? The cause of the 2001 and 2008 downturns was the flood of easy money flowing in the name of the great American dream of home ownership. As pointed out by David Stockman in 'The Great Deformation', Washington destroyed the honest brokers in favor of crony capitalism with money flow to the GSEs. Bank excesses, another effect, helped spread the contagion to the rest of the world. Pointing out the worst excesses of crony capitalism doesn't make the case either for or against austerity.

He says we have a choice of austerity or recovery. It's a myopic view of black and white. To say that by 2011 it is clear that austerity has worsened conditions is reverse logic. It's the stimulus that failed. Complexity conceals corruption. He applies it to corporations while ignoring government.

On his solution page, Kuttner recommends regular increases to budget now and forever with no consideration of economic conditions. In looking for places to cut, every relief legislation is loaded with pork. Cutbacks could start with misguided energy subsidies, starting with ethanol. With senators swimming naked in the Dead Sea and Michelle and daughters visiting China at public expense, anti-austerity looks ridiculous. Unfortunately, every waste has a strong constituency so that across the board sequestration is probably the only thing that works.

The USA has become a slow growth economy. Does that mean austerity? It's a case of stimulus not working so we must do more, a general policy of US administrations for the last half century. In the USA “austerity” means a very small cutback in out of control spending. The whole austerity discussion is somewhat moot, especially in the US. Government stimulus is here to stay for the foreseeable future, as the money flows to Wall Street. Also non ending is government largess under the morality of equality even if results are the opposite of that intended. Kuttner tends to dwell on the obvious like we can't cut our way to growth, devaluation leads to inflation, low growth leads to more debt and austerity won't reduce debt accrued. (Neither will spending.) He doesn't make his case by comparison to the corruption of government induced consumerism funded by government debt.

Kuttner ends by saying that we should restore democratic politics. I don't think he means it. Who would join him in voting for government expansion at the cost of our 16 trillion debt?
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on October 5, 2013
Great perspective on the situation most of us are (were?) in. Good thing I started to dig myself out back in 2004 because of my dad's advice!!!!
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on January 31, 2014
to read Robert Kuttner. One of my old college roommates told me to read Kuttner. Was he ever right. He s not only right about now, but his "right" will persist. I'm proud to have had the opportunity to, intellectually, meet this man.
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on July 24, 2013
This book is up to the usual high Kuttner standard. I would recommend it to other readers who are interested in the current debate on austerity.
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on October 8, 2013
Kuttner's worldview can be summed up by his ignorant statement "Markets are, by definition, hardly reliable."

In Kuttner, there is no need to marshal empirical evidence or provide a well developed theory to claim that markets are unreliable. No. To Kuttner, markets are "by definition" unreliable. A market is quite simply two people reaching a mutually agreeable trade. To Kuttner, this BY DEFINITION is "unreliable". Apparently, two people are just too stupid to stupid to reliably value their own assets and reliably make decisions based on their own preferences. Somehow, Kuttner who knows almost no body in the world understands how to value everyone else's labor and goods, as well as understands everyone else's preferences well enough, to reliably determine what trades are good and which ones are not. Please disregard the fact that value is subjective to each individual. For example, my grandfather's military ID bracelet is nearly priceless to me, but has almost no value to nearly everyone else. Another example, I am unimpressed with BMW and am unwilling to spend $50,000 on the new BMW 335i. In fact, I have never spent more than $13,000 on ANY car because cars, to me, just aren't worth that much. This is not true for a lot of people. There is NOTHING unreliable in these preferences at all. To claim that differing preferences amounts to unreliability takes egomaniacal narcissism to think that that your set of preferences represent the one true set of preferences.

Kuttner seems to think that people cannot reliably know themselves, but somehow a third party, like him, can. Be wary of anyone who pontificates on anything economics who has so little understanding of something so basic as to what a market is and what definitions actually are. His bias is blatant and it shows throughout.
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