I recently heard of an initiative by an “Occupy Wall Street” offshoot to help forgive the debts of debt ridden families. The organization is called “Strike Debt” and their purpose is to help remove the burden of debt from families and people. You can find more information on another site of theirs: “Rolling Jubilee“.
How do they do this? By purchasing debts from banks at pennies on the dollar and essentially forgiving them. The reasoning is that debt collection agencies often purchase this debt for pennies on the dollar and then go after these people to get a higher or full repayment. Certainly, this is a worthy goal… or is it?
Here is their official blurb:
“What is Strike Debt?
Strike Debt is an offshoot of Occupy Wall Street. First started in New York City, but inspired by movements around the globe, Strike Debt now has affiliates across the country. We believe people should not go into debt for basic necessities like education, healthcare and housing. Strike Debt initiatives like the Debt Resistors’ Operations Manual offer advice to all kinds of debtors about how to escape debt and how to join a growing collective resistance to the debt system. Our network has the goal of building a broad movement, with more effective ways of resisting debt, and with the ultimate goal of creating an alternative economy that benefits us all and not just the 1%.”
The method:
“How Does Rolling Jubilee Work?
Banks sell debt for pennies on the dollar on a shadowy speculative market of debt buyers who then turn around and try to collect the full amount from debtors. The Rolling Jubilee intervenes by buying debt, keeping it out of the hands of collectors, and then abolishing it. We’re going into this market not to make a profit but to help each other out and highlight how the predatory debt system affects our families and communities. Think of it as a bailout of the 99% by the 99%.”
This is great in that it helps heavily indebted people carry on with their lives. However, in a scenario where the movement gains momentum and grows larger what are some of the possible negative aspects of this well intentioned program? From what I can see and taking it at face value, this program in the end, will be a bonus for the banks.
How so? Here are five points that come to mind:
1) Liquidity, 2) Pricing support, 3) Moral Hazard, 4) Fees and commissions, and 5) Possible corruption (for lack of better word)
#1) Liquidity:
If the banks have quite a bit of bad debt on hand to sell to debt collectors, why aren’t the debt collectors gobbling them up en mass? Perhaps, a) this debt is so toxic that nobody wants to touch it with a 10 foot pole, or b) these entities can only focus on a few clients at a time. This essentially means that the banks have too much on hand and not enough buyers. StrikeDebt could eventually provide greater liquidity to the bank who is trying to shovel out these debts and really they don’t care who buys and profits from the sales. Every time the debts are bought up, it frees up the hands of the banks to lend out more and/or increase their capitalization ratios.
#2) Pricing support:
With a motivated seller and few buyers available, the price is mostly dictated by the buyers’ willingness to purchase the debt. In a sense, this is a buyers’ market. What could happen is a floor for the price will develop for the debt as the new charitable demand coming in from StrikeDebt starts soaking up supply and tighten up the bids. (Realistically, I have no idea how big the outstanding debt is that StrikeDebt would target. So, unless taking a scenario of massive uptake of this movement, their current $400K of donations probably would not budge the needle much.)
#3) Moral Hazard:
This goes both ways, but let’s assume the best and the borrowers were just victims of the market and did not NINJA borrow or even worse they were not trying to blindly speculate. Any ways, this gives banks a way out and so they can continue with the way they always operated. Irresponsible borrowers might not learn their lesson and blindly borrow again.
#4) Fees and commissions:
Let’s not kid ourselves… any time you trade with the bank there will be commissions involved. Either the commission is a fee or mixed into the price. The banks will get something out of this. Also, depending on how the StrikeDebt movement is purchasing the debt, they could be paying a fee to their own broker for every bit of debt they purchase to forgive.
#5) Possible Corruption (or Collusion, for lack of a better word):
I’m not too sure how the market for these debts work, but if it is anything like … say… the book Liar’s Poker, then the purchase that is made is between two dealers on the phone. One representing the bank trying to unload whatever way possible and trying to get the highest price possible and the other side representing StrikeDebt… ostensibly to get the lowest price possible. These deals could be fairly opaque and who knows what possible back room deals they can make together to scratch someone’s back to get a higher price from donated money (aka free money). So, refer back to #2) Pricing Support, this could actually help to jack up the price with a bidding war between the more limited resources of Strike Debt and those of debt collection agencies.
In the end, is StrikeDebt worth it or is this just some “pie in the sky” kumbaya idea? If the intentions remain pure; the leadership and message remain intact; and if the non-profit motive does not splinter as more groups try to get in on this – then yes it is definitely worth it. If you think about the possible net societal benefit of forgiving this debt and releasing people from debt slavery and fear of debt collectors then yes… despite my above possible points it is worth it. However, any sustainable change needs to come with changes to the entire system and attitudes of consumers and borrowers. Otherwise, this becomes just another way to bail out the banks and perpetuate the cycle, but this time the bailout is from well meaning donations of people who might not realize what they are doing… even though their tax dollars are already at work bailing out the banks.
The StrikeDebt website has much more information and there is a pretty detailed “The Debt Resistors’ Operations Manual” which defines what they are fighting against.
Well, good luck, hopefully the movement fulfils it goals and promises while maintaining it’s core beliefs.
theamateurmojoinvestor 
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