Photo: Edward Conde

People doing time, banks doing fine

  • January 15, 2015

Capitalism & Crisis

While banks have been saved by the state, the economic crisis has pushed many citizens into debt and as a result debtors’ prison is on the rise.

In the West, citizens are not only paying the economic cost of a crisis they did not cause — remember the tax-financed bail-outs of banks and the budget cuts in public spending to pay for these bail-outs. They are also going to jail for it, as many end up in debtors’ prison because the crisis rendered them unable to repay their debts. It’s the brutal irony of our time, which only escapes those with very short memories.

Debtors’ prison — jail time for debtors who are not fulfilling their debt obligations — is a common phenomenon in many Western countries.

In the Netherlands, where I’m from, it’s common practice for the state’s collection agency CJIB to imprison citizens temporarily for not paying their fines. Many cases involve no serious crime but unpaid traffic tickets and similar unpaid fines. It’s a pressure tactic, theoretically only used as a measure of last resort against defaulters. In 2013, however, the CJIB imposed a total of 18.392 jail sentences, their official website shows.

Earlier this year, the Dutch newspaper AD discussed the case of a woman, Gisèle Somer, with three unpaid traffic tickets. She had been jailed three times for a total of 18 days. Only two-and-a-half weeks, some might think, but the psychological impact was significant and long lasting. “It was so humiliating, so intense”, Somer said.

Why didn’t Somer pay the tickets? There’s the simple answer: she is broke. And there’s the more complicated answer: the restaurant she owned went bankrupt due to an economic crisis, she got involved in all kinds of bankruptcy lawsuits, and she ended up broke.

Officially, the CJIB has to determine whether debtors are unwilling or unable to pay. If they’re unable, the CJIB should look for an arrangement, like letting the debtor pay it off in installments. But the CJIB is often unwilling to negotiate, a Dutch lawyers association told the AD.

So Dutch debtors like Gisèle Somer are sent to jail not just because of their unpaid traffic tickets, but because an economic crisis bankrupted them and the state’s collection agency is unwilling to consider this wider socio-economic context.

Similar things are happening elsewhere. Take the United States. “Although debtors’ prisons are illegal across the country, it’s becoming increasingly common for people to serve jail time as a result of their debt”, NPR public radio noted in 2011. A short documentary on the topic earlier this year was titled To Prison for Poverty. Sadly, that’s exactly the right diagnosis.

Poverty and debt problems, of course, increased because of an economic crisis raging through the West in recent years. But how did this economic crisis start?

There’s no single explanation for the crisis, but it involved some banks making a lot of profitable but risky investments. Like when they were gambling on a housing bubble, for instance.

But the risk was largely ours, not theirs. It’s called moral hazard. When big banks know they’re considered ‘too big to fail’ by governments, they know they will be saved in case of collapse. So big banks make way-too-risky investments, because these are the most profitable, and bankers know that eventually someone else — the state — will pay for the losses when their investments go wrong.

This is called privatizing profits, socializing losses. Banks profit from legalized gambling, states pay off their debts in case of a wrong bet.

This is exactly what happened. In the years after the credit crisis of 2008, governments in the West were rescuing bankrupt banks with billions of euros and dollars. In Europe, states granted €56 billion to Royal Bank of Scotland, €52 billion to Hippo Real Estate, €28 billion to Northern Rock, etcetera. The US government spent $700 billion to save “reckless, wildly mismanaged banks”, in the words of Moira Herbst in the Guardian.

Just to emphasize the irony of our time, let us sum up the chain of events:

  1. Big banks (‘too big to fail’) know they will be rescued by states in case of collapse
  2. Banks make profitable but too risky investments, gambling on bubbles
  3. A bubble collapses, a financial crisis ensues
  4. Liquidity shots from states to save banks, as expected
  5. An economic crisis ensues, worsened by cuts in public spending
  6. Unemployment, bankruptcies, poverty and debt problems among households increase
  7. Jail terms for bankrupt citizens for not paying their debts

This is ironic in more than one way.

Firstly, big banks received bail-outs when they were on the verge of collapse, which has cost us, normal citizens, a lot of money; more than the government likes you to believe, Herbst notes. Many in the media — The Guardian, The Economist, The New York Times, Bloomberg — have since then rightly wondered; why have so few bankers gone to jail? When normal citizens go bankrupt, many are criminalized and imprisoned for their unpaid debts by the state’s collection agencies and courts.

This is nothing new, it seems. As the anthropologist David Graeber observes in his study of the history of debt:

Debts between the very wealthy or between governments can always be renegotiated and always have been throughout world history. They’re not anything set in stone. It’s, generally speaking, when you have debts owed by the poor to the rich that suddenly debts become a sacred obligation, more important than anything else. The idea of renegotiating them becomes unthinkable.

There’s another irony in the chain of events: many citizens may have been jailed for their unpaid debts because states generally save big banks from theirs. Big banks knew they would be saved from bankruptcy by the state on behalf of the people (bullet-point 1). As a results, there’s a financial and economic crisis which bankrupted many people and landed them in prison for their unpaid debts (bulletpoint 7).

Once again, normal citizens are held accountable for the ruins left by big banks, without having any real influence over their behavior.

Alexander Beunder

Alexander Beunder is an independent journalist with a Master’s degree in Economics from Utrecht University and a background in student movements. He blogs on politics and economics for Economielinks.

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