Rolling Jubilee: can a crowdsourced bailout of personal debt work?

A new spin-off of Occupy Wall Street wants to cancel debt. Can it?

This is an interesting thing. The Rolling Jubilee:

A bailout of the people by the people.

We buy debt for pennies on the dollar, but instead of collecting it, we abolish it. We cannot buy specific individuals' debt - instead, we help liberate debtors at random through a campaign of mutual support, good will, and collective refusal.

So how does this work? Distressed debt – debt which is in default – is frequently more trouble than it is worth for banks. Those institutions specialise in making money from money they hold, not recovering money they are owed. So if they have too much trouble getting that debt repaid, they sell it on. Someone pays less than the full value of the debt, and hopes to profit by recovering it and pocketing the difference

For really troublesome debt, sometimes that value can shrink to pennies in the pound – hence the Rolling Jubilee's plan, to buy $16,000 of debt for every $500 they raise (that is, $32 for $1).

That's how it works. But will it work? Maybe.

The legal mechanics of what they are doing are pretty clearly in their favour. Debt collectors really can cancel the debt if they want.

The problem is that if you try to actually do that, you may find very quickly that people stop selling you debt.

A similar idea was proposed a while back by an organisation called American Homeowner Preservation. It also deals with distressed debt, but focuses exclusively on mortgages, buying up pools of bad loans, and restructuring them to make it easier for the homeowners to pay them off.

But the original plan was simpler still. Felix Salmon explains:

Investors would buy a house in a short sale at the market price, and then lease the home back to the homeowner until the homeowner had the ability to get a mortgage and buy it back at a pre-set price.

The idea might have been elegant, but it didn’t work in practice, because the banks wouldn’t play ball: they (and Freddie Mac) simply hated the idea of a homeowner being able to stay in their house after a short sale, and often asked for an affidavit from the buyer saying that the former owner would certainly be kicked out.

There's not really any cold hard economics at play here. The banks have no reason to care what happens to a house after they've sold the mortgage for it, but they do. The best explanation for their stubbornness is that they fear that organisations like American Homeowner Preservation are creating a sort of moral hazard by reducing the penalties for defaulting on mortgages.

Will the debtholders be similarly reluctant when it comes to playing along with Rolling Jubilee? We'll see, but I don't have high hopes for a change in tactics any time soon.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The Tories have missed a chance to show that they care about student debt

After condemning Jeremy Corbyn for his "betrayal", the government has still raised the top student interest rate to 6.1 per cent. 

For weeks, the Conservatives have assailed Jeremy Corbyn for his alleged betrayal over student debt. The Labour leader told NME during the campaign that he would "deal with" the issue. But he later clarified that this did not amount to a "commitment" to wipe out student debt (which would cost around £100bn) and that he had been "unaware of the size of it at the time". For this, the Tories have accused him of Clegg-style hypocrisy. 

There is little sign, however, that the attack has proved effective. Labour’s manifesto said nothing on the subject of student debt and Corbyn's language in the NME interview was ambiguous. "I’m looking at ways that we could reduce that [student debt], ameliorate that, lengthen the period of paying it off," he said. There is no comparison with the Liberal Democrats, who explicitly vowed not to raise tuition fees before trebling them to £9,000 as part of the coalition. Young voters still credit Corbyn for his vow to abolish tuition fees (were he to break this promise in power, it would be a different matter). 

A further problem for the Tories is that they have spotlighted a problem - student debt - without offering any solution. At present, graduates pay a marginal tax rate of 41 per cent on earnings over £21,000 (20 per cent income tax, 12 per cent national insurance and 9 per cent student loan repayment). This, combined with the average debt (£50,800), leaves them struggling to save for a home deposit, or even to pay the rent. The Conservatives, unsurprisingly, are unable to sell capitalism to voters with no capital. 

Yet rather than remedying this problem, the government has compounded it. The Department of Education has ruled out reducing the top interest rate on student loans from 6.1 per cent, meaning the average student will accrue £5,800 in interest charges even before they graduate.

By maintaining the status quo, the Tories have missed a chance to demonstrate that they have learned from their electoral humbling. Had they reduced student debt, or cut tuition fees, they could have declared that while Corbyn talks, they act. Instead, they have merely confirmed that for graduates who want change, Corbyn remains their best hope. 

George Eaton is political editor of the New Statesman.