The People’s Bailout: Occupy Wall Street Wants to Forgive Your Debt

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Bathroom walls are stripped of copper plumbing in a condemned house in Warren, Ohio, Oct. 28, 2012. Warren, located in northeast Ohio, was hit especially hard by the recession and the home foreclosure crisis.

During the height of the financial crisis, the federal government pulled out all the stops to ensure the survival of the nation’s largest financial institutions. Along the way, shareholders and creditors of big Wall Street firms were bailed out as well, saved from losses they deserved for making poor investment decisions.

Since that time, much of America has been clamoring for the same attention to be paid to the over-indebted citizens of the country as well. While total household debt has come down since the recession, the poor economy has left many Americans in a position where they are unable to repay their loans.

(PHOTOSThe Recession in Pictures: America Copes with a Stagnant Economy)

So an offshoot group of Occupy Wall Street called Strike Debt has begun raising money to buy defaulted and distressed debt from brokers, so that they can forgive the loans outright. Because this debt has been in default for so long, it can be bought for very cheap, sometimes for as little as a few pennies on the dollar. According to a statement, the group has already “spent $466 and successfully bought and abolished $14,000 of medical debt.” The group will be holding a fundraiser in New York City on November 15 featuring celebrities like comedian Janeane Garofalo to raise further funds for the project, with the goal of raising $50,000 to abolish $1,000,000 worth of debt.

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The project is interesting for several reasons. There has been much resistance to any government facilitation of debt forgiveness from the political right, which sees such action as an immoral bailout that distorts the incentives of a properly functioning free market. Furthermore, it’s another example of members of the Occupy movement working within the financial system to bring about change, much like the Occupy the SEC group, which has eloquently petitioned financial regulators to help ensure that Dodd-Frank reforms are implemented in a way that keeps the pressure on big banks.

But it’s difficult to know how much relief this sort of action will bring families. Debt can only be bought at such low valuations when creditors have pretty much given up on the idea that they’ll ever recover their principal or interest payments. That’s because for things like medical or credit-card debt, bankruptcy law provides a way for borrowers to get out from under the burden of the debt. Bankruptcy, along with foreclosure, is one of the main reasons why total household debt has decreased since the recession.

The real debt problem in this country, however, is mortgage and student debt. A program like this will do nothing to foment principal reduction on mortgages – a strategy many experts believe is a win-win-win for mortgage investors, homeowners, and the broader economy because it will help avoid foreclosure, keep people in their homes, and stimulate the economy and housing market in the process. Private banks have begun to implement principal reduction, but political opposition has kept it from being used on loans owned by government-backed Fannie Mae and Freddie Mac.

(MORE: Occupy the SEC: Moving From the Campsite to the Weeds of Regulatory Reform)

And student loan debt cannot be expunged in bankruptcy. This is one of the fastest growing segments of household-sector debt, and the burden it will place on recent graduates and current students is immeasurable. But because this debt cannot be forgiven through bankruptcy, it’s unlikely that much of it will be able to be purchased very cheaply by Strike Debt.

So while this debt relief will provide help for families, and perhaps save some from the indignity and hardship of bankruptcy, it’s unlikely that such an effort will do much to ease the household debt problem significantly. Nor will such a program reform the injustices in the bankruptcy code. For that to happen, OWS and other groups will have to engage the American public and promote reforms through the lawmaking process itself.

12 comments
big_sarge
big_sarge

OWS might want to look into the tax implications for people when they forgive debt...

walstir
walstir

“student loan debt cannot be expunged in bankruptcy”The reason should be pretty well self-evident. What college graduate has any assets even roughly comparable to the debt that he will incur in getting a degree? If bankruptcy was allowed; then almost every one of those graduates would declare bankruptcy the day that they graduated.

Christopher_Matthews
Christopher_Matthews moderator

@walstir until 1978, student loans were dischargable just like any other type of unsecured debt. Between 1978 and 1990, student loans could be discharged through bankruptcy after 5 years. Between 1990 and 1998, they could be discharged after 7 years. Before 1998 we didn't see almost every graduate discharge their student loans in bankruptcy. Sure, student loans need to be treated differently than other types of unsecured debt, but there's no reason that the bankruptcy laws need to be so stringent.

walstir
walstir

@Christopher_Matthews @walstir 

In other words, everyone taking out a student loan after 1998 took that loan out on the condition that they would be unable to declare bankruptcy to avoid repayment. Seemingly, between 1978 and 1998, the lenders found it necessary to successively tighten the conditions under which student loans could be discharged. Also, the massive Federal Government insurance program for lenders making student loans is an indication of the absence of assets backing student loans.

BFromT
BFromT

@Christopher_Matthews Unfortunately, initially the college price inflation occurred due to the Federal Government's involvement in the subsidization of tuition around the country.  The higher amount of borrowing to attend school lead people to be less likely to be able to pay the total amount after school.  This lead lenders to petition for the changes in law to decrease eligibility for bankruptcy.  All this did was ensure that the lenders would be more likely to comply with the Federal Government's mandate that "every student should go to college", but it just changed to "every student should go into debt to go to college."  The colleges, with a higher enrollment had higher expenses and this compounded with the newly raised competitiveness of the enrollment process and allowed colleges to increased prices.  The lenders had to spend more to get everyone in, the Federal Government subsequently had to guarantee more dollars and here we go. Vicious cycle.  Get the government out of the school business and a lot of this issue goes away. 

Christopher_Matthews
Christopher_Matthews moderator

@walstir @Christopher_Matthews If lenders thought that issuing student loans was too risky, then they could have increased the interest rates they charged to compensate for that risk. The successive changing of the bankruptcy law is simply evidence of lenders influence over lawmakers in Washington. They didn't want to take any risk by issuing these loans, so they had the law changed so they didn't have to.

ColbertFan2008
ColbertFan2008

Hmm, fascinating program. I'll consider donating to it. I'm a supporter of Occupy Wall Street, but I hadn't looked into this offshoot yet. This program is a small solution with a strong idea. Once it spreads the word and gets more support, the concept might spread. It's interesting that an offshoot of a protest group cares more about borrowers than bankers and politicians. It's a really good thing that regular people are getting involved in these loans, instead of having all the control given to profit-hungry bankers.

Thank you, Mr. Matthews, for fairly reporting on Occupy and its offshoots. Please keep it up. So many people still don't take Occupy seriously because they have outdated descriptions of OWS. They don't know that Occupy actually has the support of some lawyers and financial experts. As a supporter, I appreciate you talking to members, analyzing its impact, and describing the bigger picture. 

alive
alive like.author.displayName like.author.displayName 2 Like

According to the FED, there are $1 Trillion US dollars in circulation. http://www.federalreserve.gov/faqs/currency_12773.htm

Yet there are $57 Trillion US dollars owed as  debt. http://www.usdebtclock.org/

The forgiveness of all debt was built into economic systems that used credit money throughout history, precisely because of the impossibly of paying off all debt.

If anyone can explain how debt does not HAVE to grow exponentially under the current credit money system we use, I'm all ears. However, I'm looking at a system that REQUIRES more and more debt to pay old debt.

Rather than calling people stupid for going into debt, which seems popular now, why not look at the system we use and ask some very simple questions... Is it even possible not to go into debt? If it were, wouldn't there be more money than debt?How can all debt be paid off if there's $1 Trillion dollars and $57 Trillion debt? How do you pay 57 with 1? Ah, you borrow 56! But now your in debt about over 120 due to interest.

The system is rigged. Let's just be honest about it and abolish debt that can never be paid back. Then we can work together to start over and build a system built on fairness and sustainability. 

citizenreader
citizenreader

Mr. Matthews, please educate yourself and your readers when you use the term "bailout."  Banks were "bailed out" by being given loans with interest and at the same time taking warrants on their stock.   So they had to pay principal, interest and equity in the bailout.  The vast majority of banks have repaid this and the funds following back in currently exceed the funds that flowed out already.  This is what the US Treasury says.

AIG and Ally (GMAC -yes, General Motors) remain the big unpaid TARPers.  ALLY is GMAC trying to rebrand, really the AUTO bailout where creditors were stiffed.  So chalk that one up where it belongs.  

Are you suggesting that we bailout student loan holders by giving them more loans with interest and taking an equity interest in their future?  Or do you have another "bailout" in mind? 

You might want to look at the underlying cause of rising student loan debt, college inflation.  However, that might not square with your reporting and headlines.

I am not rep or dem.  I am interested in factual reporting and am sad that Time seems to have lost its way and decided that it needs to take left or right nowadays.  Maybe that is just what your publisher has determined is needed to survive. 

I remember when I could pick up Time and read it as a trusted source that had researched and weighed the facts. 

Christopher_Matthews
Christopher_Matthews moderator like.author.displayName like.author.displayName like.author.displayName 3 Like

@citizenreader Bailouts did indeed come in the form of loans, much of which have been paid back. What critics of TARP will say is that the federal government should have been properly compensated for the risk it took on when giving out those loans, and that shareholders and creditors of large financial institutions should have been forced to take losses when the firms they invested in failed. In addition, the only reason that TARP passed Congress was because assurances were given that some of the TARP funds would be used to provide relief for homeowners from the effects of the housing bubble bursting. Administration efforts to do this have fallen way, way short. So, what you have is a situation where reckless lenders (the shareholders of bailed-out banks) had their investments protected by the federal government, while reckless borrowers were thrown to the wolves. The burden of the effects of the housing bubble should have been more evenly shared between lenders and borrowers. As far as student loans, I do not advocate a bail out per se. I do think we need to take a serious look at bankruptcy laws for student loans to give borrowers in default a light at the end of the tunnel. Sure, this will increase rates at which students can borrow to attend school, but there are far saner ways to increase access to higher education than to make loaning money to students a riskless proposition.

abelinone
abelinone like.author.displayName like.author.displayName 2 Like

So anyone care to explain to me why I should bear any further fiscal burden paying off the loans of people that were too stupid to do consumer math in the 1st place?  I busted my a** to pay off my loans.  Why should I have to shoulder ANY weight of the clowns that can't do grade school arithmetic?

alive
alive like.author.displayName like.author.displayName 2 Like

@abelinone Nobody said you should do anything. This is an initiative based totally on donation. What's more interesting to me is why the idea of some people's debts being forgiven angers you so much? If I had to guess, I would say because you believe in the standard narrative that people just need to work hard to get ahead in America. 

I used to believe that too. But I simply don't buy it anymore, precisely because the system appears to be rigged. There is at least 560% more debt than money. It is not only impossible for all people to pay off all debt, but debt MUST continue to rise exponentially in order to pay old debt. 

So I understand why it might piss you off thinking that being lazy can allow people to get ahead. That's just not the case. The system is rigged, that's why virtually everyone IS in debt. RIght now, it couldn't be otherwise. We can however renegotiate how the system works and come up with something fairer.