I am in debt. Hundreds of thousands of dollars in debt, to be a touch more specific about it. Four years ago, I took out a home equity loan, signed on the dotted line, and agreed to pay it off over the span of three decades. So far, Ive been able to make my payments without much trouble, provided I dont fire off a tweet down the line saying Hitler had some good ideas and thus sabotage my earning potential forever and ever. I am paying down my debt and enjoying my renovated home, just as the system intended.
But the system does not work this way for everyone. Hardly. Just as there is a massive income gap in America today, there is also a massive debt gap. There are people whose lives have been destroyed by student loans and who have been forced to serve out their existences in de facto peonage to those loans. And then you have rich fuckers like Jared Kushner and his father-in-law, taking on millions upon millions in debt (and thats just the debt we know of) while still sitting pretty (at least for now). I'm in the middlejust a chump who doesnt understand a single thing about the physics of debt beyond the standard bank loan my wife and I have currently taken out.View more
The catch is that Im not REALLY in the middle. The system works for me as intended, but only because I make a nice amount of money. For people of lesser means, the system suffocates them instead of working the way it's supposed to, as it currently is for me. For people with obscene wealth, debt appears to be a cute little toy to play with. A luxury. For the poor, it can be an unbearable burden. So what I wanted to figure out was why this is. Beyond the obvious effects of income disparity, why are millions of Americans getting obliterated by relatively small debts while the rich can over-leverage themselves into infinity, seemingly without consequence if they fail?
To figure this all out, I took a crash course in econ basics from two people, which is two more people than I usually ask about such matters. The first is a close friend of mine, whom I will refer to as Jeremy here. Jeremy works in finance and asked me to keep his real name and his company anonymous so he doesnt get fired. The second is associate economics professor Damon Jones, of the University of Chicago Harris School of Public Policy. Together, these two gentlemen explained to me why this system is the way it is, and why all debtors are not created equal. But before we can sort out how all this works, we have to go back in time a bit [Waynes World KOOKALOO KOOKALOO sound effect] to understand how our current loaning system came to be.
I think a key question is: Why should society penalize people taking a risk and failing? Jeremy said to me. Yep, that was what I wanted to know. To show me, Jeremy started to talk feudalism. This is a very dramatic example, but I think it's useful. There was a time before the United States was formed where, if you were to borrow money from, like, the feudal lords and failed, they had things called debtors prisons. If you couldn't pay back the money, by hook or by crook, the feudal lord was going to extract from you one way or another. That had a very chilling effect on people's appetite to take risk. (Old) Europe was a much more hidebound society. There was a culture of being punished for failure. So I think that if you think of it in those terms, it explains how we got to where we are.
Its true. Debtors prisons lasted well past the feudal era, but were eventually outlawed in the U.S. nearly two centuries ago. And yet it still took until 1983 for the Supreme Court to rule that debtors couldnt be jailed merely for being in hock. Im sure that President Trumps Supreme Court lapdogs will flush that ruling down the toilet days from now, but our present system was basically intended to democratize debt.
But this is a system devised and overseen by humans, and humans have a tendency to create monsters out of their own inventions. In fact, according to the ACLU, going to jail for debt is happening to Americans all over again. Companies and the politicians they control are pioneering ways of taking advantage of the debt system, and of the people trying to partake in it.
The American Dream involves buying a single-family home, Professor Jones told me. One way to help facilitate that is to subsidize and make homeowner loans available to as many people as possible.
That sounds good! Houses for everybody! BUT WAIT
These companies are going to compensate for that by raising the raising interest rate, and so that can backfire, Jones continues. They may drive interest rates so high that you price out a lot of people from the ability to afford a home. And avoiding home ownership may be the SMART move, because as Jones notes, Very low income people tend to have subprime borrowing, so interest rates potentially are more likely to be predatory.
That subprime usury was the impetus for the economy cratering in 2008, and the Trump administration has feverishly chipped away at the protections that were established in the wake of that crash, laying the groundwork for predatory lenders to swoop in once more.
Indeed, if you have a super high credit score, the average interest rate on a personal loan falls between 10-13 percent. If you have a shitty credit score, that average interest rate triples. If taking out a loan is renting money, as Jeremy put it, your rent is too damn high if youre struggling and too damn low if you are not.
But wait! Were not done tilting the playing field. Professor Jones says that, At a higher income level, there are ways to disperse that burden (of debt) a little bit more. In other words, you can have other people borrow money for you. Perhaps youve heard of leveraged buyouts, a nasty and ought-to-be-banned practice in which a company can take out a debt to buy another company and then offload that debt ONTO the new company, inflating the value of their own portfolio while the asset is then stripped and left to rot from within.
Thats not a personal loan. You can engineer this sort of disaster and still come out of it with a squeaky clean credit rating. According to Jones, If you are borrowing and then the company that goes bankrupt, it may not reflect on your record as it would if you had individual debt. When some airline goes bankrupt, the CEO isnt going to have trouble finding getting a loan at the bank. Reputationally you take a hit, but people are able to rebound at that level peacefully.
That's a key difference. You have a lot more freedom when the financial risks you take are ones made with other peoples money, and you can do so if you're a wealthy fella. You also have access to various tools to help strategize your debts and manage them. You have lawyers who know bankruptcy laws well or can negotiate debts down to smaller amounts. You have friends and colleagues and perhaps a rich uncle willing to lend you money at a decent rate or go in on a promising investment with you. You can spot investment ventures that will easily outpace your interest rate (like, say, the Chicago Cubs), so that your loan pays for itself and then some. You likely have a better education and can therefore more easily discern if youre being scammed by a lender or by the investment venture in question. Hell, you're probably too white to be targeted by predatory lenders at all.
The freedom doesn't end there. Jeremy notes that you can form an LLC to borrow money, in which case your business becomes its own collateral, just like a home youve taken out a mortgage on. The bank then comes and takes all your car washes if you fail, but they dont take YOU. And they dont clean out the rest of your personal assets. At that level, debt becomes elastic, and there are multitudes of soft, downy cushions to catch you if you fall.
Jeremy says, Debt allows you to do more than you could with just your own resources. This is very much a good thing, but it is far more applicable to the Warren Buffets of the world than to the masses. As such, people at large are encouraged to pursue the kind of debt elasticity they can't really afford, and thus they have bigger eyes for debt than their bank accounts can withstand. When the President himself cries out that he loves debt, hes encouraging you to follow his muse. Predatory lending practices are more than happy to sell you on the FREEDOM of debt in order to imprison you.
I asked Jeremy, does the current system entice people to over-leverage themselves more than they ought to, particularly student debt?
For those same masses, debt becomes less an opportunity than a need. You need a place to live? Debt. You need a car? Debt. You need to go to school so you can get a decent job? Debt. You sick? Hoo shit, you got debt coming your way. A lot of people have debt for health care, Jones told me. And so you have to borrow in order to live. That is less of an investment approach and more about survival.
It will not shock you to learn that lower income people tend to have more medical debt, not just because they lack the capital, but also because their maladies cripple their ability to pay off whatever theyve borrowed to treat it in the first place. It's not just the debt that is hurting you, Jones says, but the event that led to the need for that debt.
Free time is also key to debt. If you're wealthy, you not only have access to all these tools for better managing your debt, but you can make that management part of your vocation, if not all of it. And it's a respectable vocation, arguably the most lucrative one in America today. Jeremy illustrates an example where some hedge fund dude can essentially spend all day overseeing his debts and investments, whereas a hairdresser trying to earn a living has to, you know, cut hair, and therefore doesnt have as much time or energy to go scouting out potentially lucrative real estate deals. I gotta use my hands, he says of our hypothetical beautician. There is a kind of a ceiling on what's reasonable that I can actually do.
That is a true and generally acceptable aspect of the system at work. As Jeremy notes, we shouldnt be a country that dramatically penalizes people for taking risks. And for the wealthy, we dont. Ah, but for people who took the almost mandatory gamble on a college loan only to find themselves perennially in the red, and for Pennsylvania parents who were threatened to have their kids ripped from them (what is it with this countrys fetish for family separation?) because they couldnt pay off a fucking student lunch debt, and for Florida felons who are now denied suffrage if they're delinquent in paying fines, those dramatic punishments are creeping back into the framework. And the punishment is far harsher for those taking on debt as a matter of need than those taking on debt to realize some grand business vision. America is heading back toward the Feudalistic system of debt punishment. I cant believe Im making sincere warnings about Feudalism the way wingnuts do when Bernie Sanders talks about free health care, but here we are.
And that is where my lesson in economics comes to an abrupt end. Everyone should be free to take risks, and everyone should be held equally accountable should those risks backfire, especially if they are not risks that our society has essentially made obligatory. I would say one way to level the system is to make all the obligatory expenses that currently goad you into debthousing, education, health carecost-free by raising taxes on the rich who love debt so. Only someone above my pay gradeand above Jeremys, and above Professor Jonescan make that happen. But, as it stands now, that someone is a man reluctant to change a system that, as far as he can see, offers him endless financial possibilities thanks to the miracle of freewheeling loans.