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The Debt Game

Jan 23, 2012 Editorial

The American economy is crumbling beneath a crippling level of debt – and therein lies a lesson for us in Guyana. They arrived at that sorry state by following a path that we would do well to stay clear of.
While most of the analyses on the US debt crisis have focused on their sub-prime mortgage debacle and their national debt, the problem of consumer credit debt which has reached over $3 trillion dollars is comparatively ignored.
But it is this personal debt that has affected most Americans, including the quarter million Guyanese immigrants that keep our economy afloat with their remittances.
When they cannot pay off their credit cards, student loans or medical bills they are not only plunged into personal crisis; they might also sever our lifeline. The “Occupy” movement is growing because the US government has ignored the very real personal crisis of the average American.
What is behind the massive consumer debt crisis is ironically a debt buying market which was created to solve the problem of the US saving and loans crisis in the 1980’s. America’s Federal Deposit Insurance Corporation (FDIC) needed to find a way to deal with the high rate of bank closures and their assets.
The debt market was created so that these assets could be sold to institutions, organizations and private investors to recoup some of the losses and take over both the performing and non-performing (delinquent) accounts.
But what has happened is that this has turned into an “easy out” for lenders who want to recoup losses without the hassle of collecting money on delinquent debts.
Lenders write the debt off as a loss and package all of the debts into bundles called “portfolios” which are then put into this market for a fraction of their worth from seven cents on the dollar down to just fractions of a penny. Once the debt is purchased by a “debt buyer” it is then either sold or given on consignment to debt collection agencies.
This is a system which gives very little incentive for lenders to work with borrowers who are in trouble or temporarily unable to make their payments and puts all the power to decide people’s financial future into the hands of the collections industry which is notorious for its corruption and abuses.
Once a debt has been purchased it no longer has any relationship to the original lender and there is no accountability or recourse for the consumer. While laws were also enacted to regulate the collection agencies a new paradigm of “debt” had been created – as a ‘financial product” – that changed the picture radically.
In this new world, the original lenders have received their remuneration and no longer have any connection to these debts. Despite this, the debt itself is not forgiven. And this is where the situation begins to get murky.
If their debt has turned into a product then they are essentially not paying back what they “owe” but rather paying to have their debt taken off of their credit score (as this is the only tangible benefit from debt repayment).
The lifecycle of a debt is dramatically different than any other product. Like other products its value goes down but unlike other products, its price continues to rise (through interest and fees).
The fact that nobody buys at the rising price doesn’t seem to be a deterrent to those who are holding the debt because in their business model, the few that do pay full price make up for all of the ones who don’t pay at all.
It is obvious that this debt market and how it functions must be revisited. How can people get out of debt it there is a market place which incentivizes risky loans and dis-incentivizing lenders to negotiate or make payment plans?
Having the debt market in the hands of the collection industry essentially prevents the recovery of the citizenry and therefore the country as a whole.
Debt was a device to tide us over; not as a method of profiteering when people go under.

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