Occupy Wall Street activists buy $15m of Americans' personal debt
theguardian.com
theguardian.com
For example: I owe a credit card company $20k, but I have defaulted on the loan. The credit card company is about to sell this debt to a collector for $1k, who will proceed to make my life miserable. If there were such a law, the credit card company would first have to offer the debt to me for $1k. In this scenario, I could indeed buy my own debt and we all could go on our merry way (except the debt collector).
Crazy?
So, if the debtor can afford 5% but no more, the CC company achieves their goal of clearing the bad debt for the same price they would by selling to an agency.
Why not hold out for more? The debtor has already shown an unwillingness to pay under the current terms, and time has run out for holding the bad debt.
Why would the debtor be willing/able to pay 5% but not the current terms? For a CC, it's probably the interest rate and interest balance. In this situation the CC company is usually charging 19% - 25% interest and including accumulated unpaid interest in the balance. If the debtor makes a payment, the terms say that the payment is applied to interest first, so the debtor's principal is not reduced at all until ALL of the interest is paid. That can be lifetime indenture to the CC company. A 5% payoff is a renegotiation of the terms which will terminate the account and prevent any further interest charges. That's worth scraping together the money needed for the payoff.
That said, lobbyists pay politicians and the media to help them believe that the people who are in a position to benefit most from moral hazard are also immune to it - something which has shown to be not the case.
Citation needed.
> Limiting moral hazard is what keeps our insurance/finance/debt system churnin
I kind of agree with that but I think you meant 'Trust' instead of 'Limiting moral hazard' in that sentence.
Creditors asses your potential for default and base the rate of lending on that risk. In your scenario the rate of default would always be high therefore the rate that you borrow at would be extremely high, think loan shark high. Or you would find that no one is willing to lend money and this would cripple an important part of the financial system. Think student loans never existing.
Doesn't valuing your credit counteract that incentive? You'd only get one shot at this before you lose it. Also, this has long been an option with credit cards.
So what? All poor credit means is that it will be more expensive for me to borrow in the future. If I know I can buy back my debt for pennies on the dollar, who cares how expensive it is for me to borrow?
What this would do is make credit an essentially all or nothing proposition. One screw up and any future car loan, student loan, mortgage or other debt I want is out. I would rather have the opportunity to make up for my mistake by borrowing more expensivly than never being allowed to borrow again.
Statically, yes. However I'm having a harder time mentally analyzing what this would do dynamically, which is a much more interesting problem, since the real world is not static.
My first approximation is that because "everyone" would know this is something they can do with their debt, that lending would consequently become much more rare, and lenders would be much more careful about securing their loans. The initial impact on the economy would probably be sharply negative; what happens after that is probably a "your guess is as good as mine" situation, even amongst economists. Attitudes about debt have varied widely throughout time and space. Some will say tightened lending will wreck the economy longterm, others would suggest that loose lending has already wrecked the economy and the initial shock would simply be paying down damage already done, after which the economy would be much healthier. Which side you fall down on probably has more to do with ideology than education; given how much trouble economists have explaining even our current economy I'm not willing to give even experts much credence for explaining how such a different one would work.
Changes beget other changes and so on. Finding the steady state level of change would be challenging yet interesting to model.
One reason why many of the the "crazy" ideas posted on HN don't make it to policy, is that there are people trained in economics who are able to see the flaws in such policies.
EDIT: and in case you were curious, this wouldn't generally be considered a dynamic problem in economics. Once the policy was announced, interest rates would immediately change to a new equilibrium, which accounted for people's higher tendency to default. So the problem is simply to calculate the new static equilibrium.
Anyway it seems like messing with debt contracts is a bad way to change the interest rate, if that's all you want to do, since that is precisely the lever that the Federal Reserve controls anyway.
You mean free tuition for all like we used to have?
Also, if you are Scottish and attending a Scottish university tuition fees are still paid by the taxpayer as they did in the old days. (NB I am a Scot and I've never understood how this can be justified).
I'd see loans more as band aid for broken social structure: "People would not be able to pay for their important medical bills in case of crises." - If the US had a proper medical care system nobody would have to pay for important treatment personally, "Without student loans only the rich would be able to go to university" - If good education was free (at least until your first master degree) even more people from poor families would dare to get advanced degrees, and so on.
There are a lot of countries in which a debt free life is the norm and not the exception. The only parts of society where loans are necessary seems to be for startups and generally for corporate investments.
A creditor needs only say 5% a year return and will be willing to lend. I may need money now to buy a new computer or repair my car which has value greater to me than the 5% my creditor values if my car/computer allows me to work effectively or even work in the first place.
Countries without broken social structure such as Sweden and Norway also high debt to income ratios. Debt is not about having to pay for things that we think the state should pay, its strictly about our consumption patterns. And some of us debt finance high value items such as education and some of us debt finance lifestyle increases. http://www.norges-bank.no/pages/93708/Staff_memo_2013_05_eng...
Life style improvements - such as getting a better car, or going on holidays, or bigger tv etc, do are not improvements to your cashflow, and should never be financed by debt.
Then, when they are 18, they'd have a much more mature mentality, and won't go out to get drunk and cause problems for themselves. They'd be able to get a job, or try start their own business, etc. When time comes for them to have their own kids, they'd have enough to take their kids to disneyland.
They can and do make direct discounted offers to the debtor; but these are completely different offers than sales to debt collectors; it is not in their interest to match the offers.
The problem is that people just go to collections without trying to collect the debt.
Alternatively, I could agree to pay myself back the full 20k at current interest rates so as to not create a tax singularity.
What that means is that they sat there with $20K in unpaid credit card bills, they got hassled by collection agencies, now the money they didn't have is unpaid taxes, which means the IRS will hunt them down, garnish their wages, take their property, and if necessary put them in jail.
The correct thing to do from a disruptive/#occupy perspective is to buy the debt and then give the debtor new terms. They could make the terms require repayment, and forgiven on death. Then it is still a 'debt' (so so tax hit) but you don't have to pay it back (so no worry and debt collectors hounding you), If you die the IRS can try to get their pound of flesh out of your presumably destitute estate.
Wesley Snipes - failure to pay
Nicolas Cage - threatened
Willy Nelson - threatened ( I think he got probation )
Generally the pattern is very similar, taxes don't get paid, there is some reasoning on the part of the taxpayer why they didn't pay their tax, they are charged with evasion and work from there. This is because typically people who owe taxes they don't have the money to pay, don't file a tax return, which is the minimum definition of "evasion" according to my CPA friends. I am much less familiar with people who file a tax return, indicate they owe more than has been withheld, and then just let it go at that. I don't doubt they are out there but I just haven't seen the details of any cases like that (would be interested though if they are out there, searching the web hasn't turned up much, the IRS suggests you talk to them [1], they don't go into 'you talked to us and still won't pay')
[1] http://www.irs.gov/uac/Failure-to-File-or-Pay-Penalties:-Eig...
http://edition.cnn.com/2013/10/04/showbiz/lauryn-hill-releas...
Not filing your taxes is a step beyond not paying your taxes.
It also explains why getting a loan is not considered income, because it will be paid back. The interest you pay is income for the entity issuing the loan.
If that entity now "forgives" the debt, it now becomes income for the borrower. They could presumably file a "loss" for the interest they will now not be getting.
Did I get that right?
This would also mean this kind of open a possibility of tax fraud. Companies issuing "loans" to employees, instead of paying salaries. I am sure IRS has something against that as well.
I experienced it when I got some restricted stock (not an option but you can't sell it right way) when my company was acquired in the dot.com boom. I also got a "loan" to pay the taxes. The idea was that when the stock was available to sell, you could sell enough to pay tax on the loan forgiveness and keep the rest. (yes it was kind of convoluted but such were the times). Long story short, stock that was worth $35 in 1999 was worth $0.66 in 2001. Kinda bites big time. And yes you can take the loss, but only up to $3,000 and carry the rest forward to the next year. I believe that last year was the first year I didn't have any dot.com losses I could claim any more on my taxes :-).
Just send them a message like:
"Hey we're a non-profit founded by Occupy Wallstreeters that bought your debt dirt cheap for X dollars directly from the last debt collection agency to hold your debt. You don't need to do anything now, we'll hold onto it forever if need be. However, if it turns out you need to "check back into the credit economy", we'll sell it to you at cost. Be aware, that doing so will create "income" for you in the eyes of the IRS, so only choose to buy this back if you can also afford to pay them as well in the same fiscal year. You can visit this link and put in your current income to calculate approximately how much you would owe the IRS if we were to opt for us to forgive this debt. Again, you don't have to do anything and we're never going to call you and pester at work like credit collections do."
Random example with arbitrary concrete numbers: let's say you owe $100,000 and you could afford to buy the debt for $1,000. However, that's also $1,000 available to pay toward your debt. If the creditor can be assured of getting that $1,000, then the debt is worth at least that much. And unless you're completely destitute with no prospects of ever earning any money ever again, it's worth more, because you'll have income with which to pay more in the future.
So in theory, if you can pay $1,000 to buy your own debt, somebody else should be willing to bid at least $1,001.
There's a lot that complicates this (expense and uncertainty of collecting assets through the legal system and such) but it's a thought.
What I don't get is why, if the lender is going to sell the debt for less that the debt its self, the lender cant offer to settle with the debtor for that amount.
The problem is a social one and motivation to settle in full.
They very frequently do. Usually for 1/2 the original amount.
If they do it too often people will deliberately not pay their bills in the hopes of getting an offer.
Perhaps not, if it resulted in a credit ding.
You can only report past due payments, and outstanding debt. But if you take the offer the debt is not past due. And most non-credit agencies (i.e. those without a regular payment schedule) never report past due in the first place (only unpaid).
In fact, elsewhere on this thread, I suggested that perhaps the size of the ding would be proportional to the size of the debt reduction. This gives the debtor more incentive to pay as much as possible.
The price is mostly determined by information asymmetry - you don't know which debtors will be 'dry' and which will pay, but you can buy/sell a bundle of them and assume some average rate. If the sale was burdened with the right of first refusal (on a loan-per-loan basis) to a debtor who has much better knowledge on how much he can pay, then the deal is broken - collectors would be stuck with all the value-below-price loans while the value-above-price loans would get away for the listed price.
Also, it changes the value of your loan pre-sale - if my policies, in effect, tell you "well, you'll have a chance to get away with paying x% of the loan" then you won't pay more than x%, ever. If my policies tell you "I'll sell your loan for x%, but in that case you'll get screwed and pay 2*x% to the collector", then I have a reasonable chance to get more money than x% out of you before the sale.
It's quite likely that a policy "pay $1500 or I'll sell your loan to someone for $1000 who'll harass you until you pay much more than $1500" is rational and economically effective even though theoretically you're leaving $500 on the table; since it affects your decisions on when/if/how much to pay.
I am also not sure how debt is currently priced. But, it would seem that current credit score and other metrics might go into the pricing, such that there is more of an actuarial approach. In this case, the price wouldn't be driven as much by information assymetry.
So, combine a lender who is more informed about how much debtors can pay with debtors who have incentive to pay as much as possible to protect their credit, then add the fact that you're throwing out the middlemen (debt collectors). It might be a win-win for the creditor/debtor, with only the debt buyers losing.
If you're still just delaying and are willing to pay near-100% of the principal - then you might get some deal where "protect your credit" is a factor, but these aren't the sort of pennies-on-dollar deals the original article talks about.
Simple example: 100 people overall, each having a 100000 dollar debt; 20 of them will not be able to pay back anything, 20 are able to pay back 1 ct per dollar, 20 are able to pay back 2 ct per dollar, 40 are able to pay back 3.5 ct per dollar. Those 40 on top will now, too, only pay back 2 ct per dollar and the bank loses 1.5 ct per dollar on them, resulting in 100000 * 40 * 1.5ct = 60000 dollar losses.
Personally I'd like that solution anyway, because it would help to even out the unfair distribution of wealth.
- Lender "A" is owed $20,000 by each of 2 people.
- Debt buyer "B" offers to buy them for $1,000 each.
- Debtor "C" realises that getting out of her own debt for 5c in the $ is a good outcome, and take up the opportunity to buy the debt herself. "A" gets their $1000
- Debtor "D" realises the same thing, but he has no way to pay even $1000 for the debt, so passes up the opportunity to buy the debt.
- "B" ends up buying D's debt for $1000, even though it's now obvious that D has little change of ever paying it back.
B ends up with debt that they can never recover - not even the purchase cost. This leads to B offering less money for this style of debt next time.
The only reason B was willing to pay 5c in the $ on the original debt is because that aligns with their odds of getting the debt repayed.
Once you create a system which filters out the debts of anyone who has the ability to pay back a chunk of their debt, the debts that end up selling to the agencies are the real rubbish loans that will never get paid back.
On the other end, no one wants to deal with debt collectors, so it seems that they do provide a disincentive to defaulting. Still, the primary stick they have is the threat of a credit ding, which is there even without the debt collectors. And, with enough such dings, the borrower would no longer be able to obtain credit and perpetually abuse the system/drive debt prices down.
So, in this scenario, the market value for debt would seem more a function of the quality of the borrower in the first place. I generally don't think most people want to default and get dinged for it.
So, it seems that the biggest consequence is debt buyers going out of business. I don't know. I'm starting to have trouble seeing the real downside here!
Also, this thread was originally prompted by the idea that it would be good for borrowers if they could get a right of first refusal on any resale of their debt. There's a question of whether more selective lending is in the best interests of such borrowers.
As much as being in debt sucks, many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place. Moreover, this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.
It's kind of odd to question whether it's in the best interest of borrowers. I mean, we're talking about the people who clearly cannot pay their debt and thus need it reduced. So, more selective lending would disqualify them and prevent them from getting in over their heads again.
>many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place.
Again, that's odd. We're not just talking about being OK with debt. We're talking about being so far in debt that they cannot pay. Why should they continue to have easy access to borrowed money? Their preferences aside, that doesn't really work for anyone under any system (including the current).
>this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.
That's purely hypothetical.
Before: I owe $20k, the bank sells my loan to a debt collector for $1k. He expects to collect 10%, ends up extracting $2k from you. $1k for the bank, $1k for the loan collector, -$2k for you.
After: I owe $20k, the bank wants to get rid of my loan for $1k. I buy it (because my grandma just died and I had the cash) . Bank and I are better off, loan collector gets nothing.
OR bank tries to get rid of the loan, trues to sell it to me for $1k, if that doesn't work they go to the loan collectors. Loan collector buys it, and works out a more fluid payment scheme to try and get back $2k very slowly from me.
If the loan collector can't offer a better service, I don't see their value to society anyways. Apart from subsidizing loans for people by being willing to be the guy who psychologically tortures people in bad situations (who most likely don't know about debt collection laws in place to stop this). In the end we kill off a disgusting system.
Not at all true. Suppose I have, for instance, a debt dischargeable in bankruptcy, which has a current balance of $10,000, and $1,000 in assets. I might be able to pay $1,000 to purchase and settle the debt, but I'd have very little reason to pay $1,000 on the debt without it being a full settlement, and there's pretty much no reason for any third party to be willing to pay $1,001 (or any value not substantially less than $1,000) to purchase the debt.
Sure, if you have a legal system that has zero cost, zero risk of not getting the outcome you expect, takes zero time to operate, doesn't include bankruptcy or other avenues of discharging debt, and debtors never have multiple competing claims on their assets that are not part of the same package being sold... if all that is true, then the amount a third-party purchaser should be willing to pay for debt should generally be the lesser of the face value or the total of the debtor's assets.
However, those assumptions bear basically no resemblance to any set of conditions that applies in the real world, so its all meaningless.
There are many situations where a person may not have any seizable assets, but still have the ability to raise cash to cover a firm offer to settle a debt.
If I had this huge debt, I might be willing to borrow a little from friends to get rid of it, so I might only have $800 (+$200 from friend). The creditor realises I can pay $1000, so tries to sell it for $1500. Suddenly I'm stuck again.
Also, it could turn out that I could pay $1000, but I won't. There's also a collection cost (hire a guy at minimum wage to stand outside the guy's house for a day costs something).So the $1000 might end up not being worth anything at all.
While others are correct to point out that such a law would create perverse incentives, it's worth noting that debtors can already effectively buy their debt for a fraction of the price though settlements.
I'm not seeing it, and nor would anyone else who relies on good credit to, e.g. buy a car anywhere other than one of those weekly payment or your car won't start places.
So, anyone who disagrees with you fails to see the value of good credit?
The problem with your argument is that we're talking about people who've already harmed their own credit, probably for reasons out of their control. It turns out that people screw up their credit for all sorts of reasons, even though they presumably understand that it's harmful.
Incentive is only perverse if it would induce an otherwise non-defaulting debtor to default to get his debt to be sold at a discount.
But then let's say you could big on for the right to collect your own debt along with the other debt collectors. That would just bring the price up to whatever you're willing to pay plus a premium, or the whole debt in itself.
Since you could pay $1,000 for a $20,000 debt, the collector could offer $1,500 to collect that debt, knowing they could already get $1,000 from you towards it. That would continue until either you have shown that you could pay back the debt yourself, or you'd be outbid by one pissed off collector that would make your life more hellish.
That and in bankruptcy all your remaining assets would be distributed to pay your creditors.
So paperwork is the reason no to go bankrupt?
That and in bankruptcy all your remaining assets would be distributed to pay your creditors.
If you have remaining assets then presumably some other creditor will offer more money to take on the debt. The only difference now is that you get first refusal.
Even if you could buy your debt from your lender via the first right of refusal that might bring up fraud charges against you, since you fraudulently deprived the lender of money rightfully owing.
If this was a law, everyone would run up a bunch of debt and settle it for pennies on the dollar (nearly free money). How could a credit system survive if there is little consequence for being a dead beat?
Why don't I just borrow a million dollars, buy gold with it and bury most of it in a field. When they come for it, I'll just give them $1000 and then go dig up the gold and retire.
Of course if you file bankruptcy, this all changes.
IMO people should have to pay back money they have borrowed no matter how long it takes. I have known too many people who rack up a bunch of debt with the "I want it now and I will pay for it later" attitude. It is easy to have this attitude when these people can just declare bankruptcy if they get in too deep (as many people I have known have done). With no strong deterrent, of course people are going to be lackadaisical about this.
I'm guessing you're probably a smart person who thinks ahead and makes smart choices - you have to understand that not everyone in the world is like that. Punishing people who are not like that is unlikely to change them. You can't punch someone in the face to make them smart. You can punch someone in the face to make them obey you, but in this context that would mean singling out all irresponsible people and then punishing them before they take out a loan, not after. If you were able to identify irresponsible people then you might as well just not lend them any money.
Which brings me to the real benefit of bankruptcy. That is, if you really want to stop irresponsible borrowing, then it makes a lot of sense to also discourage irresponsible lending. Banks and credit unions are far more rational than the general population. If individuals are allowed to go bankrupt, there is a clear incentive not to lend money to people who don't have the means to pay off the debt. By providing that incentive, it then becomes the problem of the lender to identify whether or not an individual is likely to be able to pay of a loan. The lender is has a lot of information and resources through which they can make such a determination.
Now, different people have different ideas about the morality of this situation. Some would say that it's wrong for banks to take advantage of the irrational people, so it makes sense to provide incentives for responsible lending. Others would say that if individuals are irrational, then they get what they deserve, and banks should only be required to behave rationally. Personally, I don't think stupidity is morally wrong (otherwise dogs would be pure evil), and it's often quite self serving to argue otherwise.
The point I'm making is that there have to be limits to a debtor's liability. The question is where the limits are. You can't just say all debts must be repaid.
Because the arguments against limited liability for individuals in the form of bankruptcy laws seem to be pretty compelling arguments against corporate limited liability through incorporation.
Except, of course, that corporations are saintly entrepreneurial wealth creators while individuals are irresponsible scum.
Garnishment and levies? In practice these are pretty rare and costly for the kinds of debt here. You see this more for taxes and child support, not unsecured consumer debt.
Instead, credit dings (chargeoffs, etc.) are the most common result, and that wouldn't have to change under the proposed system. So, there's your deterrent. Those "deadbeats" you mentioned would then not be able to obtain credit. In fact, credit requirements may become more stringent if lenders really perceive risk from "deadbeats" under the new system.
>...the "I want it now and I will pay for it later" attitude.
If anyone needs deterrent, it's the reckless lenders. Marketing works and for years, the mesage from creditors and retail outlets has been "you can have it now and pay later". In fact, some "retail" outfits were nothing but credit providers using (often cheap) products as a vehicle to sell credit. Think Rooms To Go.
And some people are just not as sophisticated as others. So, when selling easy credit in abundance, you are more likely to attract and empower those who are least able to afford it. OTOH, we have an entire industry set up to determine creditworthiness and businesses that sell credit are far more sophisticated than the average consumer, yet somehow it's the consumer who gets in over his head who is the morally bankrupt deadbeat. The creditor is merely a victim, though they still manage to make a profit. And, oh yeah, if the largest of these do get into trouble, because the outsized risk they took for outsized profits finally backfired, then we bail them out and restore their saintly CEOs' compensation to its rightful place in the stratosphere.
On balance, the current system smells an awful lot like a racket.
-Your credit rating could make it impossible for you to get a loan
- The bank isn't obligated to give you a million dollar loan
- If you buy a house with it, they could repossess the house
I don't see why we should consider banks with bad decision making in this.
A bank would be likely unwilling to engage in such a practice, because by doing so they would gain a reputation for being "soft". In particular, anyone who borrows from the bank knows that they can "default" on the loan and pay much less than they originally borrowed.
Your sympathy for people who owe money is misplaced. We already have tax and welfare that transfers money from the rich to the poor. Conditional on a given income, owing money to a bank is a poor measure of your true wealth. Furthermore, it sets up perverse incentives compared to the current taxation system. That is it encourages people to consume now and go into debt, since they know that debt will be (partially) forgiven.
EDIT: The last sentence is wrong: once this proposed measure is introduced, interest rates will adjust. People who choose to (cheaply) default we be subsidized at the expense of people who do not. However, the poster imagined that people who owe money would benefit, and so my point still applies to the impact they imagined this measure would have.
Your sympathies for the banks and the rich are misplaced. We already have corporate welfare and a financial system that guarantees outsized profits combined with no-matter-what CEO compensation on the upside, and stop-losses insured by taxpayers on the downside.
I am saying that we should not be transferring money from people who choose to default over those who do not. We should be transferring money from people who are wealthy to people who are not. Which is what taxation and welfare does.
Try to focus on what I am saying rather than the bad guys that you falsely assume I represent.
My apologies. I did mis-read the link that you were drawing between people who owe money and the poor; or rather, that your very point was that there is not necessarily a link.
I don't agree with your conclusion, however, as there is a large and growing swath of people who may not be "poor" enough to receive welfare per se, but who struggle financially and are in over their heads. That may well be largely who we are talking about here. So, my confusion came in because I hadn't linked what you were de-linking in the first place. That is, I don't see this as a scheme to bring equity to poor people who are already served by welfare and other transfers under the tax code.
So, let me rephrase. Why is it that we use value-judgment loaded phrases like "misplaced sympathy" to describe people who owe money? And, why do we emphasize fears of market distortion and moral hazard produced by debt-forgiveness so much more than for bailouts, corporate welfare, outsized CEO pay, etc.?
My problem is with equating debt, as opposed to poverty in general, with being owed support by others. Hence the "misplaced sympathy". We do need to encourage responsibility while at the same time looking after people no matter what situation they find themselves in.
On your final point, there is no "we". On bailouts, there was no other option (from the point of view of the people making the decision). I already pointed to tax and welfare as another option for helping poor people. On corporate welfare and CEO pay these are not really anything to do with moral hazard so I don't know what your point was.
Again, "owed support" seems to carry some sort of moral judgment. What does it mean? Perhaps you can qualify that. I mean, are you trying to say that poor people are "owed support" because poverty is more systemic and cyclical, while debt is viewed as more of a choice? Because, I would argue that the latter is not nearly as clean as that.
But, kudos that you seem to realize this to some extent and are now allowing (or clarifying) that perhaps some indebted people are deserving of help vs. lumping them all into the "unworthy of sympathy" bucket.
>On corporate welfare and CEO pay these are not really anything to do with moral hazard so I don't know what your point was.
That's why I wrote "market distortion and moral hazard". These would be examples of the former. Outsized CEO pay does not exactly suggest a meritocracy in our labor market (especially when the CEO has driven his company over a cliff). Likewise, corporate welfare isn't exactly free-market activity.
The overarching point is that we seem to be hell-bent on accountability, personal responsibility, protecting the markets, etc. when it comes to individuals to the point where it rises to the level of morality judgments. But, we allow corporate welfare, bailouts, outlandish CEO pay etc. with barely a peep.
For instance, people are taught that walking away from a mortgage on a home whose value has plummeted is dishonest and basically evil. But, deliberately creating and selling bad debt and leveraging it ad infinitum to enormous profits not only slides by with merely a few grumbles, but the perpetrators are handsomely rewarded and are the very people to whom the debtors are supposedly morally accountable. It's a crazy double-standard.
So, when someone comes along and proposes to help individuals as the OP did, we start pontificating about the perils of distorting the market (which is already grossly distorted), and we try to carefully parse out who is "deserving", etc.
It's ridiculous, really. And I am suggesting that when people toe this party line, they are supporting this inequity, even when it is not their intent.
In many countries (UK for example), there are a long range of legal protections that can be used in such situations too.
In the UK, generally you'd write to each creditor and inform them of your situation, and ask that they freeze interests, and then either offer a reduced lump sump, or more commonly offer all your creditors a weekly or monthly amount that you are actually able to pay.
If creditors refuse this, there are options such as what is called an "individual voluntary arrangement" where you can arrange to settle with the creditors as a group, and where a 75% approval of the creditors binds your remaining creditors with support of the Insolvency Act, and so there's little benefit for creditors to be unreasonable.
The key thing to addressing debt is generally to address it as early as possible - the earlier you are honest with a creditor about payment difficulties, the more amenable they tend to be about flexible arrangements.
So it's not such a crazy notion - the main thing it would achieve would be to give you visibility into what is happening to your debt before it happens.
There is of course the risk that it would create an incentive for some people to try to trigger a situation where the debt is offered for sale.
Basically they take someone with a ton of debt who already has destroyed credit, and have them pay into a trust every month instead of paying their credit card bills. Every so often the company calls up a card issuer and tries to negotiate along the lines of "I have these N people with $10,000 in debt each, will you take $1,000 cash from each of them today?"
The super sneaky part is that after they have settled all your debt, your credit is totally hosed. However you've made good on 36 or so monthly payments to them, so they know you can continue to pay them and you are now free of other debts, and will issue you credit based on this insider knowledge (which you accept because they are the only ones willing to extend you credit at this point).
The thing about your system is that under it, paying debts in full doesn't make any sense. You could just hold out for a settlement, pay far less than what you'd borrowed at that time, and leave the creditor holding the bag for the rest. When paying in full doesn't make any sense, lending doesn't make any sense either. When lending doesn't make any sense, then a system of money based on debt is doomed to collapse.
One possible way to mitigate this is to set it up so that the debtor earns the legal right to first refusal when, over the lifetime of the debt to date, an amount of money equal to the original principal (or maybe the principal plus some multiple of the APR) has been paid into it. That would prevent the worst abuses of first refusal, because you don't get it until the lender has at least recouped its initial investment. But it doesn't completely solve the problem.
The issue of moral hazard comes into play.
It woudl lead to increased costs for everyone applying for credit the lender woudl have to make more on good debtors to make it worth while to lend to anyone.
A more cynical way to look at it? When you get (really) sick, the price for care is everything you have, whatever that happens to be.
As an aside, is there not some elasticity to medical care? People demand more health care for small problems when the price is lower.
We need a payment conduit/tax structure for the elastic portion and something that actually behaves like insurance for the inelastic. The system we have now does neither well at all.
And the left says: "Health care is a human right." And they're right.
BUT! this is important. Less serious medical conditions are much more elastic. If the price is $15, maybe you'll go to the doctor for a hurt collar bone. If the price is $750, you wouldn't. I didn't.
And the right says: "we can't provide unlimited health care to everyone, it's too expensive." And they're right.
But we don't _need_ to provide unlimited health care for everyone.
Care in a life-threatening situation (cancer, stroke, heart attack) should be considered a human right and subsidized by society. Care in any other situation should be considered "elective" and be subject to market conditions.
What do you think?
-- Edit: there IS an upper bound to how much someone can pay for health care, obviously. But it's high.
I live in New Zealand, and I have Ulcerative Colitis. We have a public/private system somewhere along the lines you propose (although a little more forgiving), and are really quite lucky:
* There's a strong tendency for doctors to work both publicly and privately. They'll put in time at the public facilities, but those facilities are generally pretty highly loaded -- turnarounds can be slow. If you've got the money, you can see most privately (that's generally not overly expensive).
* Thanks to a Government agency known as Pharmac, we bulk buy all our drugs -- so, I pay $5/prescription (prescriptions can last up to 3 months), instead of $120+/prescription. For someone with a chronic condition like myself, this is fantastic. It also works out cheaper for the Government too: we have the market power to negotiate much better deals from pharma companies.
* If you do get into a critical state, the public system will provide care. Alternatively, if you've got insurance, you can go private (but private care for critical stuff -- where surgery/non-Pharmac drugs are required -- is generally prohibitively expensive).
* Elective/preventative care is also available publicly. This means you're in a queue ("we'll get around to it sometime in the next year"), but does mean you're able to maintain a higher quality of life.
Medicine is hard: reconciling care with expenses is a moral quagmire. There are absolutely inefficiencies in the NZ system, but I've come to really respect it.
Health care can not be considered a fundamental right for a couple of reasons.
1. It requires taking more basic rights away from others. 2. If it is a fundamental right, then we would necessarily spend all of our money to preserve it. At no point could we decide to stop paying for care with no chance of success.
Additionally, you create perverse incentives to avoid preventive care which is probably orders of magnitude less money long term.
We can easily afford to heal collar bones, cataracts, flu, hernias, and a whole bunch of nonlethal issues for everyone regardless of ability to pay - wherever there are common, simple procedures that are done once to cure the problem permanently.
We can't afford to do top of line cancer or heart treatments to everyone all the time - because often a successful treatment will simply mean that you'll need another, more complex treatment in a year or five; and again, and again, until you have a society where 100% of people work in medicine.
> And the left says: "Health care is a human right." And they're right.
Probably they are, but what people don't pay enough attention to, IMO, is that there are different kinds of human rights. There are positive rights, and negative rights. The left wants for human rights to be considered positive rights, in that the state (or others) are obligated to provide them for you. The libertarians want more rights to be considered negative rights, which is to say that that state should be disallowed from intervening in your pursuit of them.
The Constitution establishes that the right to keep and bear arms is a human right, but nobody on the left (and probably nobody on the right) would suggest that the state is now obligated to provide firearms to those who want them. Similarly enumerated is the fourth amendment right to privacy, but nobody on either side seems to be jumping to ensure that the state provides that for us.
Why then is healthcare the exemption? Why is it the right that the state must provide to us?
I don't know if we should or shouldn't have it, or what systems are workable, and what systems aren't, so ignoring all other political arguments that apply here, I only take issue with the idea that even if it as a human right, that should obligate somebody to ensure that we have it, especially as it's only a small leap away from getting everybody to agree that the internet is a human right, access to a computer is a human right, etc., etc. And it's not so far-fetched, as there are already those suggesting it.
For what it's worth, I don't disagree with the premise that it is.
Your comment was salient though, and thoughtful, and definitely got my upvote.
Off the top of my head, public education and voting are two. Public safety comes to mind, as does disaster relief. Children have a great variety of positive rights where the state backstops parental providers. Those accused of crimes have the right to a fair trial. You could argue that a lot of regulatory activity comes from rights. E.g. a right to clean air, or a right to access a fair and free marketplace.
And that's just in the US. the UN Declaration of Human Rights includes "food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control." I expect that many European governments see those as rights as well.
Voting is, at least the way I'm thinking of it, not necessarily one though. The state's job on voting rights is simply to ensure that it and nobody else interferes with your exercise of that right.
Your other points stand as stated.
The way I see voting as a positive right is that it's a lot of work to implement. Keeping people from interfering with your right to vote is definitely part of that, but a small part. The actual holding of elections, which takes a lot of time and money, is something the state does because people have a right to it.
Geez, their human rights declaration is pretty broad. "you have a right to security in the event something outside your control happens."
But it's the UN...not really accountable to anyone.
Many Americans believe that all human rights should be equally available to everyone. (Entitlement, I suppose). Education reform leads to "common core" in an attempt to give everyone the same education. Which is why many people would take issue with what you're saying. Health care isn't equally available to everyone.
(though I'm not sure giving everyone the same education, or health care is a good idea at all)
Thanks for your thoughts.
To put it bluntly, perhaps this is a problem. There's all sorts of articles you can find about "how doctors die". They spend neither their last penny nor their last six months dying slowly in hospital beds. Forgo treatment, die with dignity, and pass a little something on to your grand kids. (Such heartless ROI calculations are probably best reserved for old people. Cancer treatments for the young are likely more popular.) Anyway, it's an idea to think about, not a concrete suggestion.
It's true that if we see the purpose of life as arriving slowly at death, we'll do some really wacky stuff. Like spend every last dollar trying to grasp for anything that will keep us alive.
That's a worldview issue though and a big one.
1) It doesn't matter how we allocate it, there are going to be losers. The moral thing to do would seem to be to diffuse the loss onto the greatest number of people, not let it break the unlucky randomly: "we're all in this together". Sidebar: Anyone who says that they can provide healthcare for all is lying.
2) We're actually ridiculously bad at providing healthcare. We spend most of our time (and political might) trying to find some sucker class to pay for it without trying to take the more rational step of trying to make it cheaper. This is because the latter is freaking hard.
The only thing that will finally put this thing to bed is to figure out a way to care for ourselves that is within our means and then agree on a political system that will distribute it (if not fairly) evenly. Hard?
"We choose to ... do these things not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win."
Someone needs to have a financial incentive in minimizing cost. For example by paying them based on the number of people in their area, and on good outcomes, rather than by the number of procedures etc. carried out.
GPs in the UK are paid this way - the practices are almost all private, but all practices that takes NHS patients (the vast majority) are paid mainly by a formula that makes it really bad business for to shirk on preventative care.
And since the NHS is not paid by the procedure as a whole either, they put massive resources into running ad campaigns to get people to recognize symptoms of various problems earlier and go see their doctor, rather than wait until things leads to expensive hospital visits.
NHS hospital trusts are given budgets based on demographics, and will find themselves placed in special measures and have their top management fired if they compare too unfavourably with other trusts or keep running over budget, so they too have incentives to minimize cost of providing health care in the areas they serve.
Meanwhile, in the US, for large parts of your health care system there is no benefit at all to reducing health care costs.
Your incentives are all wrong.
The NHS costs each UK tax payer on average less than the US government spends on health care, never mind private insurers....
Trivially true if you define 'medical care' to include cosmetic procedures, which then gets you into case-by-case debates on whether this or that orthodontic or dermatological procedure is 'cosmetic' or required to live a normal life. Which then gets into debates about what pressures society places on people to have a certain look, and just how much social damage is done to someone who has a visible port wine stain, for example.
There's also a certain elasticity of demand for preventative care and palliative care as well. For example, flu shots and pseudoephedrine: Most of us here are not going to die of the flu, and most of us aren't around people who can die of the flu and cannot get vaccinated. Similarly, most of us here can get through a cold without taking symptomatic treatment for it. So there's a certain elasticity there, depending on the person.
But giving flu shots to everyone is likely a lot less expensive than losing even a single person to a serious flu infection. A similar case can be made regarding cheap pseudoephedrine versus losing some productivity to feeling like crap without the pills.
Wait, what?
So in principle flu shots like mine are "worth it" if it has a greater than 15 in 10 million chance of saving a life -- either mine or someone I might infect.
So, yes, for the price of a single life we could immunize about 600 thousand people. That's probably enough for herd immunity in an entire population for some region (like an entire state). Such a measure is bound to save more than one life.
If you're paying someone minimum wage, and they're a profit center for the company, their productivity over the week a flu would take them down is worth a lot more to you than a single flu shot. Extrapolate that to a whole department, which is likely to be lost because the flu is so contagious, and you're looking at a potential loss which is a lot more expensive than a department's worth of flu shots.
Still seems preferable to dying.
Inheritable, too, what with all the old people dying with medical debts their whole estate can't cover.
(The way it works now is this: When someone dies, their estate is responsible for paying their debts. Once their estate is gone, however, that's it. The creditors can try to convince the heirs to pay the debts, but they have no legal leverage to force them to. Lying about having such leverage is apparently fair game, however.)
You can't. Once the estate's gone, the creditors can pound sand because the person they contracted with is gone and all their assets are gone, too. They can't come after anyone else.
> Luckily she was able to somehow get her name off of the inheritance after the fact.
I seriously doubt this is possible even in theory.
so why couldn't they just transfer all assets from their estate prior to dying? meaning, if you were about to die, there is never any need to pay down any debt, despite having the assets to cover it - it is better to give it away to charity or children/relatives imho.
While, in the sense of being part of the ACA this is part of "ObamaCare", its not part of the regulations and mandate for private insurance that most discussion of ObamaCare focusses on.
Compared to 1913 this situation is fantastic. All you have but you get to live.
Compared to what we should aspire to for 2113, I agree that it is barbaric.
For 2013, in every single developed country bar one the situation would be called barbaric.
That is not good enough.
Not to mention politically motives to encourage debt, by incentivising things like mortgages, or creating educational debt systems, etc.
The very dollar itself is an instrument of debt, and it is self-perpetuating -- there has to be a way to pay off the interest on that debt that was the genesis block for that dollar, of course that's done by "printing" money (adding a zero on a digital ledger), which creates inflation, which encourages people into debt, which requires more money to be printed, which requires interest to be paid off on that dollar, which...
The market doesn't price such things in, though. That would be up to the government. How much was spent on the bailouts, and how much would that translate to per mortgage?
Ultimately we as humans coin many words for real experiences. In my experiences, I exchange my services, in exchange for a representation of value, and in turn purchase my necessities with this representation of value (and in this modern era purchase wants as well).
Personally if you want to stick with idealism, I would coin Capitalism as "... an economic system based on private ownership of the means of production and capital goods, and the production of goods and services for profit in a market economy."
We don't have that 100%. That's for sure. The government has a large part of of modern means of production. And the true public also has co-operatives, syndicates, mafias, gangs, and non-profits.
We definitely have a market economy though. So I definitely agree with your point. I just think Capitalism is nothing more than an ideal.
Because I enjoy this topic so much, my system classifications are as follows: The West: "Inverted Totalitarianism", EU: "Pre Natal Neo-Feudalism", China: "Party Monarchism". As far as I'm concerned, ideologies are great for discussions, but horrible at describing real things.
It means the wage-labor model of business.
[0]there are different styles of this, on the conservative end there are those who tend to value the individual accrual of assets; on the liberal end you might find nationalistic types who measure the greatness of society by how much in assets it accrues or trades (indirectly, by measuring GDP).
It would have cost the government $2 trillion to buy every sub-prime mortgage and retire it.
But that's Communism
Instead, the government (by way of the private bank known as "The Fed") gave $16 trillion - free and with no strings attached - to Wall Street, the very people who engineered the destruction of the American economy in 2008.
That's known as Capitalism
http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-...
It all gets paid back with interest, though. None of this is anything new.
To make it even more obviously a gift, a good bit of it was used to buy treasuries. If I loan you $100 at 0% interest, and you loan it back to me for $5 a day, aren't I just giving you $5 a day?
"Lucullus now turned his attention to the cities in Asia, in order that, while he was at leisure from military enterprises, he might do something for the furtherance of justice and law. Through long lack of these, unspeakable and incredible misfortunes were rife in the province. Its people were plundered and reduced to slavery by the tax-gatherers and money-lenders. Families were forced to sell their comely sons and virgin daughters, and cities their votive offerings, pictures, and sacred statues. At last men had to surrender to their creditors and serve them as slaves, but what preceded this was far worse, — tortures of rope, barrier, and horse; standing under the open sky in the blazing sun of summer, and in winter, being thrust into mud or ice. Slavery seemed, by comparison, to be disburdenment and peace. Such were the evils which Lucullus found in the cities, and in a short time he freed the oppressed from all of them."
"In the first place, he ordered that the monthly rate of interest should be reckoned at one per cent., and no more; in the second place, he cut off all interest that exceeded the principal; third, and most important of all, he ordained that the lender should receive not more than the fourth part of his debtor's income, and any lender who added interest to principal was deprived of the whole. Thus, in less than four years' time, the debts were all paid, and the properties restored to their owners unencumbered. This public debt had its origin in the twenty thousand talents which Sulla had laid upon Asia as a contribution, and twice this amount had been paid back to the money-lenders. Yet now, by reckoning usurious interest, they had brought the total debt up to a hundred and twenty thousand talents. These men, accordingly, considered themselves outraged, and raised a clamour against Lucullus at Rome. They also bribed some of the tribunes to proceed against him, being men of great influence, who had got many of the active politicians into their debt. Lucullus, however, was not only beloved by the peoples whom he had benefited, nay, other provinces also longed to have him set over them, and felicitated those whose good fortune it was to have such a governor."
http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Plutarch/L...
1. Pay 10 cents on the dollar. This covers their family's
debt and they pay it forward for two other families.
2. Pay 5 cents on the dollar. This covers them and they pay
it forward to one other family.
3. Pay nothing. Their debt is forgiven thanks to another
family having paid it forward.
In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance.
As much as people would like this to refute capitalism and standard economic models, it really just confirms that the models are incomplete and can be updated with continuing research in to human behavior.
1) What are the specific claims of capitalism that actually could be refuted by evidence?
2) Is there any evidence that does seem to refute those claims in any way?
3) Where would we most likely find evidence that the claims were innacurate?
I think the main thing that confuses me is that, from a layman's perspective, we just seem to adapt our picture of what capitalism includes every time something new comes along.
Model refinement is great in principle, but where is the proof that the basic theory is actually correct? There are such a terrifying number of confounding variables...
To use an example from my own field: when ocean models get to a high enough resolution you start seeing a lot of mesoscale eddies. It turns out they are really important in all sorts of processes, and their effects can feed back to larger scales.
For us it's not too bad; running models at sufficient resolution is expensive, but we can use higher-resolution runs to parameterise lower-resolution ones (and better comprehend our ignorance when that doesn't work). My point is that without a pretty good understanding of those fine-scale dynamics you can miss important things in the bigger picture, and I suggest that the economy-society coupled system has many more horrible to understand feedbacks than the ocean-atmosphere system.
Thanks in advance to you, or anyone else who takes the time to answer.
Specifically you could refute the efficiency of a free market reaching an equilibrium price (one that maximizes total surplus for buyers and sellers). However the experimental data suggests precisely the opposite, even in monopoly markets (double auction, perfect information) when tested in laboratory experiments.
Many issues people think they have with capitalism are actually the result of a system that definitely does NOT inherently take in to account all hidden costs. This is often used by government officials to make policy decisions that add costs or incentives to a market to correctly account for all factors (environmental, public good preservation, etc.).
Hope this is helpful!
Isn't that the rub?
Which definition of capitalism is this? I believe the core of capitalism is private ownership of means of production, not merely ownership of goods? Communism doesn't eschew all private ownership (this is a common misconception). Communal/worker ownership of factories, farms and housing are core tenets -- but not necessarily communal ownership of all goods (eg: clothing, computers, tvs and radios etc).
1) Is my interpretation correct?
2) How significant are the effects of the hidden costs on the (pricing) predictions of the basic theory? (see Note A)
3) How significant are the impacts of the hidden costs (beyond pricing failures)? (see Note B)
My particular concern is that the basic ideas are 'obviously true', and are used to justify all sorts of policies that have real impacts on people's lives, such as unemployment. Personally, and from an ethical point of view, I would rather trade higher efficiency for a 'smoother' economy that minimises unpredictable downturns in individuals' economic fortunes.
I'm also still struggling to see how informative the basic theory really is - I can only see that to understand any novel situation you need to do a whole load of research into all the potential confounding factors.
Thanks for replying!
Note A: If the basic theory provides the first order signal for enough real-world situations, then we could, again to first order, ignore the impacts of the hidden costs. If that is not the case then it seems to me that the basic theory must be incomplete, because to understand the real signal you need to understand the hidden costs.
Note B: If the impacts are generally small, then again we could probably largely ignore hidden costs, but if they are large (which they definitely are in some cases, for example the Deepwater Horizon spill) then surely understanding the hidden costs becomes crucial, which in turn lessens the value of the basic theory.
2) It 100% depends on the good. When you consider species of fish that were driven to extinction by overfishing, there was a significant societal cost that was paid since we completely eliminated that species.
3) Same as point two, the costs and impacts are inseparably linked, since a perfect system would perfectly build in the "cost" of the "impact."
Is this what you are asking?
Would you agree that, by virtue of the answers you have given, market theory is almost useless? It seems to suffer from two fatal flaws:
1) You might require a very complete understanding of a particular economic system for market theory to make any useful predictions about it.
2) You can never be sure that you have characterised enough of a given system to make a useful prediction about it (unless you characterise the whole thing, which in practical terms is impossible).
Of course we can make (very) educated analyses of any particular situation, and end up with good confidence, but the theory itself doesn't tell us that we are right. So we can never be sure that we aren't just being misled; we can't use the theory to cheaply verify someone's suggestions, we have to go through all of their work to make sure they aren't trying to pull a fast one.
Thanks for your time, even if you don't reply to this one, and good luck with your classes!
How can I purchase my own debt? Rather than have someone else buy my debt at a reduced rate and abolish it, how about I buy my own?
If you have the means to purchase your own debt at its face value, its probably selling at very close to its face value.
But the market value of your debt should be approximately (the amount the pricing algorithms expect you to be able to pay) minus (the amount the pricing algorithms expect to be expended in extracting payment from you).
So, IOW, for the average debtor (assuming that the algorithms involved are correct on average), the market price of their debt should be significantly less than they are able to pay.
If the market price of consumer debt was, on average, lower than its face value, nobody would make loans to consumers.
So the time sequence here is:
time 0 = Creditor A thinks that lending $10,000 to debtor B will create an asset worth $20,000
time 1 = Horrible things happen.
time 2 = Creditor A thinks that the asset thought to be worth $20,000 at time 0 is now worth only $100.
It is possible -- though perhaps not likely -- for it to be the case that the average value of all loans made at time 0 to be worth less than their face value at time 0, now that we are at time 2. That doesn't mean that consumer lending at time 2 would become impossible -- it means that lenders would set rates and choose debtors such that they think that new loans have values exceeding their costs.
I stopped paying my mortgage and walked away from the property. 2 years later, I called Bank Of America and negotiated to pay $2K to settle the debt. They accepted and my credit report is as if I never owned the home and walked away.
You can indeed buy your own debt at a steep discount. Its up to you to convince the debtor at how hard it will be to collect.
Disclaimer: I live in a judicial foreclosure state; it costs a substantial amount to perform foreclosures in my state, and also costs the bank to maintain the property between foreclosure and sale. Also, all of my assets were in retirement accounts, effectively judgement-proof.
I was essentially fucked. I threw my hands up and said I quit. Worked out for the best.
Of course, living in a non-recourse state is probably the best move, as you can't be held liable (your real estate secures your mortgage).
[1] http://finance.zacks.com/retirement-account-judgment-proof-5...
Somewhat offtopic: This is why I always recommend people use a Roth IRA as a savings vehicle vs a savings account. Not only can you withdraw the contributions at any time, but its shielded from creditors. Your ability to use a Roth IRA is, of course, subject to income limitations.
It'll absolutely kill your credit score, but its an option.
For example, a $500k home loan at 3% over 30 years costs $258,887.26 or more than 50% of the original loan amount!
I've known a couple folks with poor credit scores who bought cars that would cost them almost double the purchase price over 5 years because the interest on their debt was so high.
http://www.bankrate.com/calculators/managing-debt/annual-per...
Pay off early! or dont accrue debt.
http://www.inflation.eu/inflation-rates/united-states/histor...
And also probably much less than returns of a balance portfolio of stocks/bonds over a 30 year horizon.
If your debt is at the rate of inflation it's basically free debt so it basically just becomes a time-value of money exercise. It's cheaper to pay off your debt now then in the future.
How is it better off to pay your debt if it is 'free debt'? Wouldn't it be better to keep/invest the money elsewhere and pay the bare minimum?
This assumes elsewhere provides returns that beat inflation. I hear a lot about >3% return opportunities in index funds etc.
They'll also tack on every fee and penalty they can, so that when it does proceed to collections, the amount owed is much more than the prior balance. So if I had the cash to buy my own debt, I'd probably just make minimum payments with that money and look for opportunities to consolidate debt to get the lowest APR.
He said that he sent a 3rd party into a bank and they sold an 18 million dollar loan he was defaulting on to them for 3.2 million. The bank didn't know about the relationship Siegel had with the 3rd party.
So I get the sense that if you know what you're doing and know the right people you can pull it off.
You could probably achieve the same result if the creditor has to "mark to market."
Ross says,
Our purpose in doing this, aside from helping some people along the way – there's certainly many, many people who are very thankful that their debts are abolished – our primary purpose was to spread information about the workings of this secondary debt market.
Could also be used for buying up grossly underwater properties and issuing new loans to help people? Just a thought.
[1] RollingJubilee pays mainly medical debts.
The more money you raise for that purpose, the more you'll increase the market value of the targetted kinds of debt. Succeed enough, and you'll create a credit bubble that pops when the influx of money runs out.
http://strikedebt.org/The-Debt-Resistors-Operations-Manual.p...
A quick search yielded me these statements:
http://my.firedoglake.com/phoenix/2012/11/18/will-ows-rollin...
There's undoubtedly a scam to be had, but without running debt/credit simulations, I would wager you couldn't make it very far before your resultant credit made you ineligible for any credit whatsoever.