Which countries have canceled the household indebtedness?
Corona crisis: Is it now easy to cancel private debts?
We do not want to leave the virologists alone to interpret the situation. That is why we ask in theSeries "What Are You Thinking About?" leading researchers in the humanities and social sciences, what they have to consider in the crisis and what they are now worrying about. Elisabeth von Thadden asks the questions. The lawyer Katharina Pistor, 56, teaches as a professor at Columbia University in New York. Her last book "The Code of Capital" (2019) was published.
TIME ONLINE: What are you thinking about right now, Katharina Pistor?
Catherine Pistor: I'm thinking about how indebted households and families should find their way out of the Covid crisis and how they will look after the pandemic. Many have relatively high debts in relation to the income they bring home. And hardly any savings: in the US, around 40 percent of households don't have $ 400 in their accounts. It looks better in Germany because salaries are higher and basic social security is more solid. But the problem of the debt burden on private households also arises in the affluent European welfare states. Until now, we as citizens assumed that we would be able to repay the debts we took on in the past in the future. But one can no longer rely on a future in which that would be possible.
TIME ONLINE: As a result, in some states servicing mortgages and paying rent have been suspended. Is not that enough?
Pistor: Barely. The private debts do not disappear, they just pile up in mountains of debt. But the day of repayment will come and then most of them will have less income and less chance of servicing their debts on the job market. It is not enough to postpone it until the future, we have to think fundamentally about how to restructure debt and how to get out of dependence on it.
TIME ONLINE: How does that work? Our economies have so far relied on debt-fueling. Most people are kind of hooked on credit.
Pistor: When the future becomes more uncertain, when it can no longer credibly promise to be better than the past was, then we have to find a way out of debt. In times of climate change and pandemics, everything indicates that the shocks we will have to deal with in the future will increase. A secure future is not in sight.
TIME ONLINE: Does the solvency of private households really matter in economic terms, aren't they too marginal? In the financial crisis of 2008, the focus was essentially on securing banks and companies.
Pistor: The economy depends on household demand. And this demand has simply collapsed due to Corona. In the financial crisis of 2008 that the financial sector inflicted on itself, we were only faced with a liquidity crisis. There weren't enough funds to reschedule. But now it is about mass bankruptcy at all levels. People go bankrupt. But we cannot manage millions of simultaneous bankruptcy proceedings in court alone.
TIME ONLINE: What would it mean then to restructure household debt?
Pistor: In the acute situation it is important to radically reduce private debts, if not to waive them completely, to lower interest rates, to extend the terms. The world has changed. The conditions under which the debt was incurred no longer applies. In addition, however, we must fundamentally consider how we can reduce the incentives that have led us into debt addiction. For example, the incentives in tax laws to finance yourself through debt. Such incentives lead to the abyss. Instead, equity, for example, should play a stronger role.
TIME ONLINE: Even in affluent societies this is more unevenly distributed today than ever before.
Pistor: The basic requirements for a dignified life must be created by the states. In times of crisis, those who have unencumbered property are best able to survive. The public sector could help poor households in particular to build up equity and property. For example, through money that the state gives to newborns or through vouchers for education. But when we talk about them, a lot comes together at the moment: The countries of the European Community are financially very differently well equipped to discharge and support private households. And they cannot simply print their own money in the monetary union in order to be up to the task. That is why everything now depends on whether the EU as a community wants to go through thick and thin together.
Series: What are you thinking about right now?
Limits: "Western vaccination card holders will be privileged travelers again"
Eckart von Hirschhausen: "We are not the random victims of a nasty virus"
Gertrude Lübbe-Wolff: "We need social solidarity"All texts in the series
TIME ONLINE: The state relief for indebted households can easily be abused by the winners of the crisis. How can this be avoided if the legal capacity for bankruptcy proceedings is insufficient to examine the individual case?
Pistor: The problem of abuse is always there, it cannot be gotten out of the way. It seems more important to me to ask how the state can even reach its poorest citizens. And above all, it should now be very clear to us that in a society it means great damage for everyone if we do not close ranks with the weakest. Empirical data show that the burden of debt has shifted downwards to the poor, while prosperity has shifted upwards. In economic terms, this means that indebted private households are excluded from consumption. In terms of health policy, it means that precisely those who are most threatened by the virus due to their jobs and living conditions are suffocating from their debts through no fault of their own. Politically, it means the unavoidable danger that these people will turn their backs on democracy. All of this speaks in favor of canceling private debts quickly.
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