Wednesday, November 27, 2013

A Robin Hood for the Debt Crisis?

Per the New Yorker:

 November 27, 2013

In the final paragraphs of “Debt: The First 5,000 Years,” the anarchist and anthropologist David Graeber drops his academic detachment to offer a solution to the financial impasse whose historical background he has just laid out in hundreds of pages. “It seems to me that we are long overdue for some kind of Biblical-style Jubilee: one that would affect both international debt and consumer debt,” he writes.
“Jubilee,” a word derived from the Hebrew yovel, was translated in early Greek Bibles as “a trumpet blast of liberty.” In the Old Testament, a Jubilee was to occur every half century, at which time slaves were to be freed and debts forgiven. In ancient Babylon, King Hammurabi inaugurated his reign by cancelling agrarian debts. This eliminated a potential source of revolutionary discontent among the peasantry, and it acknowledged what the economist Michael Hudson has called a basic mathematical and political principle: debts that can’t be paid won’t be paid.
Household debt in the United States now equates to more than eighty per cent of G.D.P., a proportion that has risen steadily since the nineteen-fifties. Companies that are owed money—from credit-card issuers to hospitals and doctors—regularly sell uncollected bills to outside debt buyers, who pay a fraction of the claim’s face value in exchange for information on the debtor and the right to attempt to collect payment in full. A vast secondary market exists in which financial institutions buy and sell such debt, often several times over, until the debtor finally pays, or the debt holder gives up. Debt buyers have little incentive to advertise who they are, or how they got your bills. The homepage of Sherman Financial Group, a large consumer-debt collector, features a large photo of puppies and little else. And debt collection can be an unsavory business: the Federal Trade Commission has said that it receives more consumer complaints about debt collectors than about any other industry.
In response to such complaints, the F.T.C. conducted a wide-ranging study of debt collectors and debt buyers in 2009. “Debt buying can reduce the losses that creditors incur in providing credit, thereby allowing creditors to provide more credit at lower prices,” the report said. “Debt buying, however, also may raise significant consumer protection concerns.” The report includes information gleaned from debt buyers working with almost ninety million consumer accounts over a three-year period. One striking finding: the country’s largest debt buyers paid an average of four cents for every dollar of debt.
In the wake of Occupy Wall Street, a movement called Strike Debt revived the idea of a grand debt cancellation. They called it the Rolling Jubilee and drummed up donations to purchase medical claims in bulk, with the help of a debt buyer sympathetic to the cause, for pennies on the dollar. Over the past twelve months, the group raised more than six hundred thousand dollars. It used four hundred thousand to buy a bundle of medical bills worth almost fifteen million dollars. This year, nearly twenty-seven hundred debtors across the country received an unusual letter from the group, indicating the amount of their debt and informing them that they “are no longer under any obligation to settle this account with the original creditor, the bill collector, or anyone else.”
The project turned out to be one of the few Occupy offshoots that has had a tangible effect on people’s lives. The group made three separate purchases, buying hundreds of delinquent hospital bills each time, without knowing the identity of any individual debtor beforehand. It then contracted with a mailing group to send letters to those debtors without violating their privacy, according to Thomas Gokey, a Strike Debt organizer. The Rolling Jubilee learns about the beneficiaries of its charity only if a debtor chooses to make contact.
Terry Lavalle was homeless and uninsured when he slipped on a patch of ice near Framingham, Massachusetts, and got a concussion. That left him with a thirty-one-hundred-dollar bill he couldn’t pay. Four years later, he opened a letter from the Rolling Jubilee. “I was stupefied,” Lavalle told me. “I didn’t know if it was legitimate or not.” He took the letter to the bank, which looked up the Rolling Jubilee online and told him it seemed valid. Lavalle called the hospital in Framingham and was told the bill had been paid.
The amount of debt erased by the Rolling Jubilee has been tiny compared to the over-all level of medical debt in the United States, Andrew Ross, a professor at New York University and a Strike Debt organizer, told me. The purchases are largely symbolic. But what would happen if Rolling Jubilee-style programs became more widespread?
If the Rolling Jubilee started spending hundreds of millions of dollars buying debt it had no plans to collect, the increased demand could send the price of that debt higher. Why sell your bad loans to a debt collector for four cents on the dollar, when you can sell to the Rolling Jubilee, which doesn’t care about making a profit, for ten cents? A price increase on the secondary market would have echoes in the primary market: lenders, assured of a decent recovery for their defaulted loans, might have more incentive to issue debt to risky borrowers—the antithesis of Strike Debt’s goals.
The Rolling Jubilee’s most powerful tool is thus its most controversial. It’s a bit like the N.Y.P.D.’s Cash for Guns Program, which, by paying people a hundred dollars for guns they turn in, helps get guns off the streets and, potentially, reduce the violence that comes with them, but does nothing to limit the market for guns, or to prevent participants from buying another one. Similarly, each purchase the Rolling Jubilee makes helps prop up the system it critiques. It also directly helps relatively few people who might not even realize what’s been done for them.
“It’s wonderful that they’re thinking about how to deal with debt, but I don’t think it’s a substitute for meaningful thought about how to fix the underlying problem,” Mary Spector, a consumer-law specialist at Southern Methodist University, said. “I think it’s an expression of the most charitable, progressive sort, but perhaps they could work with lawmakers on how to reduce debt at the front end, instead of at the back end.”

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