Many types of debt, from mortgages to unpaid gas bills, can be bought and sold second-hand on the markets. For example, British Gas might sell my unpaid gas bill to a debt collection company, who then has the legal right to pursue me for the original amount.
Debt traded in this way is often sold for less than its face value, most commonly because the holder of the debt considers it difficult to collect or unlikely to be paid back. In this example, the debt collection company might have paid British Gas only £90 to be able to chase me for the full £100 of debt.
Rolling Jubilee buys up this so-called ‘distressed debt’ from the markets, but rather than sending round a couple of heavies with a baseball bat to collect it, it simply cancels it. The project suggests a typical market to face value ratio of 1:20, meaning a $100 donation can cancel $2000 worth of debt. Certainly, it’s an interesting idea. But is it a good idea? And can it work?
The success of the scheme depends on two things: firstly, being able to continue to buy up cheap debt, and secondly, for donors to feel like they are genuinely making a difference.
Alex Hern from the New Statesmen points out that a similar idea was attempted by an organisation called American Homeowner Preservation (AHP), which focused exclusively on mortgage debt. The scheme failed because the banks holding the debt stopped selling it to AHP – Alex suggests this is because the banks were wary of “creating a sort of moral hazard by reducing the penalties for defaulting on mortgages”. One possible way around this problem is to crowdsource the purchase of debt from the markets, a technique which Rolling Jubilee would be well-placed to develop.
For the campaign to really take off, donors need to feel like they are really making a difference – and that means personal stories of people who have benefited. To find these stories, however, could be tricky. Much of the debt bought and sold on the second-hand markets is packaged up, so that rather than getting one person’s entire mortgage, you get a slice of hundreds.
A debt is a two-way contract, something we increasingly seem to be losing sight of. If a creditor has issued an unpayable debt, then the debtor should be able to negotiate a reduction – why should we have to resort to crowdsourced debt-purchasing? This was the line of argument of nef fellow Ann Pettifor in a recent Twitter conversation. As @OccupyMCR points out, there is utility in the scheme for as long as government won’t or can’t support the rights of debtors. But certainly, governments are able to intervene – the Icelandic government instructed Icelandic banks to forgive loans equalling 13% of GDP, which has eased the debt burden for more than 25% of Iceland’s population. Perhaps it’s time we called on governments to cancel these debts?
More importantly, buying second-hand debt can also be criticised on the basis that it is supporting something fundamentally unpleasant. Should a second hand market for debt exist at all? Should we be buying into a system that encourages banks and other financial institutions to issue dodgy loans, or be calling for reform of the system altogether?
Finally, we mustn’t lose sight of how and why debt is generated in the economy in the first place. As nef’s Where Does Money Come From? explains bank-issued debt is the source of most of the money in our economy(see also Positive Money’s excellent new short video). Without the continuous issuance of new debt, the economy faces potentially devastating deflationary episodes, where too little money chases too many goods.
The Rolling Jubilee is an interesting idea, with the potential to be of real benefit to people struggling with odious debt. Really, though, it should be governments stepping in to cancel the debt, not citizens (with the unfortunate consequence of propping up second-hand debt markets). If the Jubilee forces a serious conversation on government-led debt forgiveness and monetary reform, then we’ll really have something to celebrate.