Skidelsky is in a muddle on debt forgiveness.

Skidelsky says the system is gummed up with bad debts (particularly in the case of banks), so debt forgiveness is needed.

Wrong. Forgiving debts just encourages irresponsible lending and borrowing in the future (as if we haven’t had enough of that already in recent years). Moreover, why should the average citizen make sacrifices to rescue incompetents – in many cases, RICH incompetents? Of course there is the point that the larger banks have wheedled their way into a position where they are too big to fail (TBTF). So those particular creditors have been helped, and may need more help. But the TBTF problem should never be allowed to arise: we need to cut TBTF banks down to size, and/or structure them so they can be put through bankruptcy and administration in an orderly way. Anyway, the quickest way out of a recession is just to give citizens money to spend (and/or raise public spending). As long as the stimulatory effect of that is enough to counteract the deflationary effect of letting incompetent lenders and borrowers go bust, then the problem is solved. There is no need for special taxpayer subsidised “debt forgiveness” programs.

General stimulus combined with letting incompetent creditors go the wall could easily result in an economy based less on lending and borrowing than is currently the case, but what of it? In the UK, the size of the banking industry relative to GDP has increased a WHAPPING TENFOLD relative to GDP over the last forty years (see p.3 here). Anyone know what we’ve gained from this? Is economic growth any better than forty years ago? Nope.

Skidelsky needs to study Modern Monetary Theory and Mosler’s law. The latter is in yellow at the top of Warren Mosler’s site.

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