Debt: The Forgiveness Fix

For overburdened countries and consumers alike, erasing unpayable debt is a necessary step toward renewed growth

In America’s unenlightened past, men who couldn’t pay their debts were imprisoned. Languishing behind bars deprived them of any chance to repay their creditors, so the practice was stupid as well as cruel. During college, I came upon a trove of heartrending petitions to the Connecticut General Assembly from women seeking to have their debtor husbands released from jail. The petitions were, by and large, rejected.

Society has come a long way since, but not far enough. There is still a presumption that blood can be squeezed from a stone. That’s true in the U.S. housing market, where banks continue to insist that they will be able to collect full repayment of wacky mortgage loans that they never should have made in the first place. And it’s true in Europe, where creditor nations and banks are dragging their heels on writing down the sovereign debt of Greece, Ireland, and Portugal.

Why does this matter? Because debt—public and private, foreign and domestic—is the No. 1 issue of 2011. The perceived danger posed by debt dominates the political conversation in Washington and is the reason for the British government’s austerity program. In the absence of strong economic growth, debt burdens around the developed world will remain onerous for years to come—and yet while countries are single-mindedly focused on paying down their debts, it will remain harder for them to implement pro-growth policies. Getting the global economy moving again means accepting that some debts will never be repaid—and the sooner they’re forgiven, the better. “This will be the story going forward,” says Daniel Alpert, managing partner of Westwood Capital, a New York investment bank.

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