Occupy has plans to buy bad debts, then forgive them, under the banner of Strike Debt. I wrote about this earlier this week, praising them for a pretty good idea. Time’s Christopher Matthews has a different opinion:
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.
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.
I will say I shared his concern that this could drive up the prices of defaults. I still feel this is a pretty good idea. They can buy a whole lot of bad debts, especially medical debts, and do some real good.