Occupy Distressed Debt: Can We Save The World With Loan Forgiveness?

Moneybox
A blog about business and economics.
Nov. 9 2012 11:27 AM

Occupy Distressed Debt: Can We Save The World With Loan Forgiveness?

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Now here's an interesting idea coming out of the Occupy Wall Street community—a Rolling Jubilee executed by buying up distressed debt and then writing it off.

How does that work? Well, all kinds of debt gets "securitized" these days. Instead of a bank just lending money and collecting interest, it sells the rights to that income stream as an Asset Backed Security. By buying up a diverse array of ABS you can end up with less exposure to idiosyncratic risk than if you're just lending. But what happens when securitized loans go bad? Well they become "distressed debt" that can be purchased for pennies on the dollar. So in theory you can find a loan with a face value of $100 and buy it for just $15. That's supposed to be a kind of risky investment—a bet that the loan will actually pay off in the end. But the Rolling Jubilee concept is to turn it into a random act of kindness. Just write off the loan!

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Any problems with this? Well, it's a pretty great idea but I'll quibble a little anyway.

The question you have to ask yourself here is "why is this a better idea than just giving money to poor people"? And I think it's hard to answer the question. Given two struggling families, one of which is indebted and one of which isn't, it's not clear why you'd think that the family that's borrowed heavily in the past is more worthy of assistance. And similarly, for any particular indebted family it's not obvious that on a dollar-per-dollar basis debt forgiveness is more helpful than just handing over some cash.

That said, almost all charitable undertakings are organized around some kind of gimmick or other that serves as a focal point and helps get people interested. If the peculiarity of the distressed debt situation and the concept of a jubilee happens to inspire people and motivate them to be more generous with their time and money than would otherwise be the case, this is a perfectly good idea.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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