Step I: Determine whether the debt was incurred for a productive or non-productive purpose.
There are two kinds of credit. There is "good credit" — credit extended for investment in capital projects that generate their own repayment — and there is "bad credit": credit extended for consumption, speculation, or government spending.
Step II: Determine whether the credit was extended out of existing accumulations of savings, or was created by means of the loan.
You can loan out money that you've saved, or you can loan money by creating it in exchange for a lien on someone's existing assets or the present value of future assets. If you make a loan out of savings and the loan is for a productive project, you are due interest as a right of property. If the loan out of existing accumulations of savings is for a non-productive project, you are not due interest, because "interest" is a share of profits, and a non-productive project does not generate profits.
If you make a loan by creating money, whether for a productive or non-productive project, you are not due interest as you had no property right before the loan created the money. In all cases, however, you are due the principal of the loan, that is, the amount you lent.
Step III: Categorize the Debts
Category 1: Into this category go all debts on which the borrower has the ability to make the payments, including interest, if due in justice. These debts should not be forgiven, and all principal and interest payments should be made as agreed.
Category 2: Into this category go debts on which the borrower cannot pay everything, but can pay something. These debts must be judged on a case-by-case basis.
• If the loan was made out of past savings for a productive purpose and the project is profitable, but not profitable enough to pay the principal and all the interest, the interest rate should be adjusted to reflect the lender's and borrower's just degree of risk sharing. All principal payments should be made.Category 3: Into this category go debts on which the borrower cannot make payments of any kind. These are written off in their entirety.
• If the loan was made out of past savings for a productive purpose that did not make a profit, no interest should be paid, but the principal is still due.
• If the loan was made out of past savings for a productive purpose that made a loss, no interest should be paid, and only a pro rata portion of the principal should be repaid.
• If the loan was made out of newly-created money for a productive purpose, all previous interest payments above a service fee and a fair risk premium should be applied to the principal. If the lender has received anything above the total amount of the principal, a just service fee, and a fair risk premium, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.
• If the loan was made out of newly-created money for a non-productive purpose, all interest payments above a just service fee should be applied to the principal. If the lender has received anything above the total amount of the principal, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.
Step IV: Restructure the Financial System to Institute a More Just Distribution of Ownership Opportunities
This is the most difficult, but the most important step of all: making as certain as humanly possible that such a situation does not recur. This can best be done by implementing Capital Homesteading on a global basis at the earliest possible date. This does not have to wait until the debt crisis is solved. In fact, it is far better if Capital Homesteading is put in place immediately, and then the debt crisis can be dealt with without getting into a panic mode. In and of itself Capital Homesteading may empower people with the ability to service currently unpayable debt.
Thus, the program should be:
• Implement Capital Homesteading and place a moratorium on all currently unserviceable debt.These suggestions will doubtless need refinement, but they appear to be a reasonable way of handling the debt crisis from the perspective of the Just Third Way.
• Once Capital Homesteading is in place, categorize all unserviceable debt in accordance with the guidelines in Step III above, taking projected income from Capital Homesteading into account.
• Restructure and reschedule debt when possible, forgive debt when necessary.
• Increase credit voucher amounts to anyone whose property rights were harmed by debt forgiveness, permitting them to be made whole. This amount should not be so great that it materially diminishes the credit voucher amounts going to everyone else. When it is a corporate person who has suffered harm, the tax deduction for bad debt write-off should be changed to a tax credit, as long as the full amount of the tax credit claimed each year is paid out to the shareholders in the form of tax-deductible dividends. In both cases (additional credit and tax credit), the amount should be subject to an annual maximum until the harm has been repaired.