Financial fraud is everywhere

Jun 4, JDN 2457909
When most people think of “crime”, they probably imagine petty thieves, pickpockets, drug dealers, street thugs. In short, we think of crime as something poor people do. And certainly, that kind of crime is more visible, and typically easier to investigate and prosecute. It may be more traumatic to be victimized by it (though I’ll get back to that in a moment).

The statistics on this matter are some of the fuzziest I’ve ever come across, so estimates could be off by as much as an order of magnitude. But there is some reason to believe that, within most highly-developed countries, financial fraud may actually be more common than any other type of crime. It is definitely among the most common, and the only serious contenders for exceeding it are other forms of property crime such as petty theft and robbery.

It also appears that financial fraud is the one type of crime that isn’t falling over time. Violent crime and property crime are both at record lows; the average American’s probability of being victimized by a thief or a robber in any given year has fallen from 35% to 11% in the last 25 years. But the rate of financial fraud appears to be roughly constant, and the rate of high-tech fraud in particular is definitely rising. (This isn’t too surprising, given that the technology required is becoming cheaper and more widely available.)

In the UK, the rate of credit card fraud rose during the Great Recession, fell a little during the recovery, and has been holding steady since 2010; it is estimated that about 5% of people in the UK suffer credit card fraud in any given year.

About 1% of US car loans are estimated to contain fraudulent information (such as overestimated income or assets). As there are over $1 trillion in outstanding US car loans, that amounts to about $5 billion in fraud losses every year.

Using DOJ data, Statistic Brain found that over 12 million Americans suffer credit card fraud any given year; based on the UK data, this is probably an underestimate. They also found that higher household income had only a slight effect of increasing the probability of suffering such fraud.

The Office for Victims of Crime estimates that total US losses due to financial fraud are between $40 billion and $50 billion per year—which is to say, the GDP of Honduras or the military budget of Japan. The National Center for Victims of Crime estimated that over 10% of Americans suffer some form of financial fraud in any given year.

Why is fraud so common? Well, first of all, it’s profitable. Indeed, it appears to be the only type of crime that is. Most drug dealers live near the poverty line. Most bank robberies make off with less than $10,000.

But Bernie Madoff made over $50 billion before he was caught. Of course he was an exceptional case; the median Ponzi scheme only makes off with… $2.1 million. That’s over 200 times the median bank robbery.

Second, I think financial fraud allows the perpetrator a certain psychological distance from their victims. Just as it’s much easier to push a button telling a drone to launch a missile than to stab someone to death, it’s much easier to move some numbers between accounts than to point a gun at someone’s head and demand their wallet. Construal level theory is all about how making something seem psychologically more “distant” can change our attitudes toward it; toward things we perceive as “distant”, we think more abstractly, we accept more risks, and we are more willing to engage in violence to advance a cause. (It also makes us care less about outcomes, which may be a contributing factor in the collective apathy toward climate change.)

Perhaps related to this psychological distance, we also generally have a sense that fraud is not as bad as violent crime. Even judges and juries often act as though white-collar criminals aren’t real criminals. Often the argument seems to be that the behavior involved in committing financial fraud is not so different, after all, from the behavior of for-profit business in general; are we not all out to make an easy buck?

But no, it is not the same. (And if it were, this would be more an indictment of capitalism than it is a justification for fraud. So this sort of argument makes a lot more sense coming from socialists than it does from capitalists.)

One of the central justifications for free markets lies in the assumption that all parties involved are free, autonomous individuals acting under conditions of informed consent. Under those conditions, it is indeed hard to see why we have a right to interfere, as long as no one else is being harmed. Even if I am acting entirely out of my own self-interest, as long as I represent myself honestly, it is hard to see what I could be doing that is morally wrong. But take that away, as fraud does, and the edifice collapses; there is no such thing as a “right to be deceived”. (Indeed, it is quite common for Libertarians to say they allow any activity “except by force or fraud”, never quite seeming to realize that without the force of government we would all be surrounded by unending and unstoppable fraud.)

Indeed, I would like to present to you for consideration the possibility that large-scale financial fraud is worse than most other forms of crime, that someone like Bernie Madoff should be viewed as on a par with a rapist or a murderer. (To its credit, our justice system agrees—Madoff was given the maximum sentence of 150 years in maximum security prison.)

Suppose you were given the following terrible choice: Either you will be physically assaulted and beaten until several bones are broken and you fall unconscious—or you will lose your home and all the money you put into it. If the choice were between death and losing your home, obviously, you’d lose your home. But when it is a question of injury, that decision isn’t so obvious to me. If there is a risk of being permanently disabled in some fashion—particularly mentally disabled, as I find that especially terrifying—then perhaps I accept losing my home. But if it’s just going to hurt a lot and I’ll eventually recover, I think I prefer the beating. (Of course, if you don’t have health insurance, recovering from a concussion and several broken bones might also mean losing your home—so in that case, the dilemma is a no-brainer.) So when someone commits financial fraud on the scale of hundreds of thousands of dollars, we should consider them as having done something morally comparable to beating someone until they have broken bones.

But now let’s scale things up. What if terrorist attacks, or acts of war by a foreign power, had destroyed over one million homes, killed tens of thousands of Americans by one way or another, and cut the wealth of the median American family in half? Would we not count that as one of the greatest acts of violence in our nation’s history? Would we not feel compelled to take some overwhelming response—even be tempted toward acts of brutal vengeance? Yet that is the scale of the damage done by the Great Recession—much, if not all, preventable if our regulatory agencies had not been asleep at the wheel, lulled into a false sense of security by the unending refrain of laissez-faire. Most of the harm was done by actions that weren’t illegal, yes; but some of actually was illegal (20% of direct losses are attributable to fraud), and most of the rest should have been illegal but wasn’t. The repackaging and selling of worthless toxic assets as AAA bonds may not legally have been “fraud”, but morally I don’t see how it was different. With this in mind, the actions of our largest banks are not even comparable to murder—they are comparable to invasion or terrorism. No mere individual shooting here; this is mass murder.

I plan to make this a bit of a continuing series. I hope that by now I’ve at least convinced you that the problem of financial fraud is a large and important one; in later posts I’ll go into more detail about how it is done, who is doing it, and what perhaps can be done to stop them.

Student debt crisis? What student debt crisis?

Dec 18, JDN 2457741
As of this writing, I have over $99,000 in student loans. This is a good thing. It means that I was able to pay for my four years of college, and two years of a master’s program, in order to be able to start this coming five years of a PhD. When I have concluded these eleven years of postgraduate education and incurred six times the world per-capita income in debt, what then will become of me? Will I be left to live on the streets, destitute and overwhelmed by debt?

No. I’ll have a PhD. The average lifetime income of individuals with PhDs in the United States is $3.4 million. Indeed, the median annual income for economists in the US is almost exactly what I currently owe in debt—so if I save well, I could very well pay it off in just a few years. With an advanced degree in economics like mine, or similarly high-paying fields such as physics, medicine, and law one can expect the higher end of that scale, $4 million or more; with a degree in a less-lucrative field such as art, literature, history, or philosophy, one would have to settle for “only” say $3 million. The average lifetime income in the US for someone without any college education is only $1.2 million. So even in literature or history, a PhD is worth about $2 million in future income.

On average, an additional year of college results in a gain in lifetime future earnings of about 15% to 20%. Even when you adjust for interest rates and temporal discounting, this is a rate of return that would make any stock trader envious.

Fitting the law of diminishing returns, the rates of return on education in poor countries are even larger, often mind-bogglingly huge; the increase in lifetime income from a year of college education in Botswana was estimated at 38%. This implies that someone who graduates from college in Botswana earns four times as much money as someone who only finished high school.

We who pay $100,000 to receive an additional $2 to $3 million can hardly be called unfortunate.

Indeed, we are mind-bogglingly fortunate; we have been given an opportunity to better ourselves and the society we live in that is all but unprecedented in human history granted only to a privileged few even today. Right now, only about half of adults in the most educated countries in the world (Canada, Russia, Israel, Japan, Luxembourg, South Korea, and the United States) ever go to college. Only 30% of Americans ever earn a bachelor’s degree, and as recently as 1975 that figure was only 20%. Worldwide, the majority of people never graduate from high school. The average length of schooling in developing countries today is six yearsthat is, sixth grade—and this is an enormous improvement from the two years of average schooling found in developing countries in 1950.

If we look a bit further back in history, the improvements in education are even more staggering. In the United States in 1910, only 13.5% of people graduated high school, and only 2.7% completed a bachelor’s degree. There was no student debt crisis then, to be sure—because there were no college students.

Indeed, I have been underestimating the benefits of education thus far, because education is both a public and private good. The figures I’ve just given have been only the private financial return on education—the additional income received by an individual because they went to college. But there is also a non-financial return, such as the benefits of working in a more appealing or exciting career and the benefits of learning for its own sake. The reason so many people do go into history and literature instead of economics and physics very likely has to do with valuing these other aspects of education as highly as or even more highly than financial income, and it is entirely rational for people to do so. (An interesting survey question I’ve alas never seen asked: “How much money would we have to give you right now to convince you to quit working in philosophy for the rest of your life?”)

Yet even more important is the public return on education, the increased productivity and prosperity of our society as a result of greater education—and these returns are enormous. For every $1 spent on education in the US, the economy grows by an estimated $1.50. Public returns on college education worldwide are on the order of 10%-20% per year of education. This is over and above the 15-20% return already being made by the individuals going to school. This means that raising the average level of education in a country by just one year raises that country’s income by between 25% and 40%.

Indeed, perhaps the simplest way to understand the enormous social benefits of education is to note the strong correlation between education level and income level. This graph comes from the UN Human Development Report Data Explorer; it plots the HDI education index (which ranges from 0, least educated, to 1, most educated) and the per-capita GDP at purchasing power parity (on a log scale, so that each increment corresponds to a proportional increase in GDP); as you can see, educated countries tend to be rich countries, and vice-versa.

hdi_education_income_labeled

Of course, income drives education just as education drives income. But more detailed econometric studies generally (though not without some controversy) show the same basic result: The more educated a country’s people become, the richer that country becomes.

And indeed, the United States is a spectacularly rich country. The figure of “$1 trillion in college debt” sounds alarming (and has been used to such effect in many a news article, ranging from the New York Daily News, Slate, and POLITICO to USA Today and CNN all the way to Bloomberg, MarketWatch, and Business Insider, and even getting support from the Consumer Financial Protection Bureau and The Federal Reserve Bank of New York).

But the United States has a total GDP of over $18.6 trillion, and total net wealth somewhere around $84 trillion. Is it really so alarming that our nation’s most important investment would result in debt of less than two percent of our total nation’s wealth? Democracy Now asks who is getting rich off of $1.3 trillion in student debt? All of us—the students especially.

In fact, the probability of defaulting on student loans is inversely proportional to the amount of loans a student has. Students with over $100,000 in student debt default only 18% of the time, while students with less than $5,000 in student debt default 34% of the time. This should be shocking to those who think that we have a crisis of too much student debt; if student debt were an excess burden that is imposed upon us for little gain, default rates should rise as borrowing amounts increase, as we observe, for example, with credit cards: there is a positive correlation between carrying higher balances and being more likely to default. (This also raises doubts about the argument that higher debt loads should carry higher interest rates—why, if the default rate doesn’t go up?) But it makes perfect sense if you realize that college is an investment—indeed, almost certainly both the most profitable and the most socially responsible investment most people will ever have the opportunity to make. More debt means you had access to more credit to make a larger investment—and therefore your payoff was greater and you were more likely to be able to repay the debt.

Yes, job prospects were bad for college graduates right after the Great Recession—because it was right after the Great Recession, and job prospects were bad for everyone. Indeed, the unemployment rate for people with college degrees was substantially lower than for those without college degrees, all the way through the Second Depression. The New York Times has a nice little gadget where you can estimate the unemployment rate for college graduates; my hint for you is that I just said it’s lower, and I still guessed too high. There was variation across fields, of course; unsurprisingly computer science majors did extremely well and humanities majors did rather poorly. Underemployment was a big problem, but again, clearly because of the recession, not because going to college was a mistake. In fact, unemployment for college graduates (about 9%) has always been so much lower than unemployment for high school dropouts that the maximum unemployment rate for young college graduates is less than the minimum unemployment rate for young high school graduates (10%) over the entire period since the year 2000. Young high school dropouts have fared even worse; their minimum unemployment rate since 2000 was 18%, while their maximum was a terrifying Great Depression-level of 32%. Education isn’t just a good investment—it’s an astonishingly good investment.

There are a lot of things worth panicking about, now that Trump has been elected President. But student debt isn’t one of them. This is a very smart investment, made with a reasonable portion of our nation’s wealth. If you have student debt like I do, make sure you have enough—or otherwise you might not be able to pay it back.

The high cost of frictional unemployment

Sep 3, JDN 2457635

I had wanted to open this post with an estimate of the number of people in the world, or at least in the US, who are currently between jobs. It turns out that such estimates are essentially nonexistent. The Bureau of Labor Statistics maintains a detailed database of US unemployment; they don’t estimate this number. We have this concept in macroeconomics of frictional unemployment, the unemployment that results from people switching jobs; but nobody seems to have any idea how common it is.

I often hear a ballpark figure of about 4-5%, which is related to a notion that “full employment” should really be about 4-5% unemployment because otherwise we’ll trigger horrible inflation or something. There is almost no evidence for this. In fact, the US unemployment rate has gotten as low as 2.5%, and before that was stable around 3%. This was during the 1950s, the era of the highest income tax rates ever imposed in the United States, a top marginal rate of 92%. Coincidence? Maybe. Obviously there were a lot of other things going on at the time. But it sure does hurt the argument that high income taxes “kill jobs”, don’t you think?

Indeed, it may well be that the rate of frictional unemployment varies all the time, depending on all sorts of different factors. But here’s what we do know: Frictional unemployment is a serious problem, and yet most macroeconomists basically ignore it.

Talk to most macroeconomists about “unemployment”, and they will assume you mean either cyclical unemployment (the unemployment that results from recessions and bad fiscal and monetary policy responses to them), or structural unemployment (the unemployment that results from systematic mismatches between worker skills and business needs). If you specifically mention frictional unemployment, the response is usually that it’s no big deal and there’s nothing we can do about it anyway.

Yet at least when we aren’t in a recession, frictional employment very likely accounts for the majority of unemployment, and thus probably the majority of misery created by unemployment. (Not necessarily, since it probably doesn’t account for much long-term unemployment, which is by far the worst.) And it is quite clear to me that there are things we can do about it—they just might be difficult and/or expensive.

Most of you have probably changed jobs at least once. Many of you have, like me, moved far away to a new place for school or work. Think about how difficult that was. There is the monetary cost, first of all; you need to pay for the travel of course, and then usually leases and paychecks don’t line up properly for a month or two (for some baffling and aggravating reason, UCI won’t actually pay me my paychecks until November, despite demanding rent starting the last week of July!). But even beyond that, you are torn from your social network and forced to build a new one. You have to adapt to living in a new place which may have differences in culture and climate. Bureaucracy often makes it difficult to change over documentation of such as your ID and your driver’s license.

And that’s assuming that you already found a job before you moved, which isn’t always an option. Many people move to new places and start searching for jobs when they arrive, which adds an extra layer of risk and difficulty above and beyond the transition itself.

With all this in mind, the wonder is that anyone is willing to move at all! And this is probably a large part of why people are so averse to losing their jobs even when it is clearly necessary; the frictional unemployment carries enormous real costs. (That and loss aversion, of course.)

What could we do, as a matter of policy, to make such transitions easier?

Well, one thing we could do is expand unemployment insurance, which reduces the cost of losing your job (which, despite the best efforts of Republicans in Congress, we ultimately did do in the Second Depression). We could expand unemployment insurance to cover voluntary quits. Right now, quitting voluntarily makes you forgo all unemployment benefits, which employers pay for in the form of insurance premiums; so an employer is much better off making your life miserable until you quit than they are laying you off. They could also fire you for cause, if they can find a cause (and usually there’s something they could trump up enough to get rid of you, especially if you’re not prepared for the protracted legal battle of a wrongful termination lawsuit). The reasoning of our current system appears to be something like this: Only lazy people ever quit jobs, and why should we protect lazy people? This is utter nonsense and it needs to go. Many states already have no-fault divorce and no-fault auto collision insurance; it’s time for no-fault employment termination.

We could establish a basic income of course; then when you lose your job your income would go down, but to a higher floor where you know you can meet certain basic needs. We could provide subsidized personal loans, similar to the current student loan system, that allow people to bear income gaps without losing their homes or paying exorbitant interest rates on credit cards.

We could use active labor market programs to match people with jobs, or train them with the skills needed for emerging job markets. Denmark has extensive active labor market programs (they call it “flexicurity”), and Denmark’s unemployment rate was 2.4% before the Great Recession, hit a peak of 6.2%, and has now recovered to 4.2%. What Denmark calls a bad year, the US calls a good year—and Greece fantasizes about as something they hope one day to achieve. #ScandinaviaIsBetter once again, and Norway fits this pattern also, though to be fair Sweden’s unemployment rate is basically comparable to the US or even slightly worse (though it’s still nothing like Greece).

Maybe it’s actually all right that we don’t have estimates of the frictional unemployment rate, because the goal really isn’t to reduce the number of people who are unemployed; it’s to reduce the harm caused by unemployment. Most of these interventions would very likely increase the rate frictional unemployment, as people who always wanted to try to find better jobs but could never afford to would now be able to—but they would dramatically reduce the harm caused by that unemployment.

This is a more general principle, actually; it’s why we should basically stop taking seriously this argument that social welfare benefits destroy work incentives. That may well be true; so what? Maximizing work incentives was never supposed to be a goal of public policy, as far as I can tell. Maximizing human welfare is the goal, and the only way a welfare program could reduce work incentives is by making life better for people who aren’t currently working, and thereby reducing the utility gap between working and not working. If your claim is that the social welfare program (and its associated funding mechanism, i.e. taxes, debt, or inflation) would make life sufficiently worse for everyone else that it’s not worth it, then say that (and for some programs that might actually be true). But in and of itself, making life better for people who don’t work is a benefit to society. Your supposed downside is in fact an upside. If there’s a downside, it must be found elsewhere.

Indeed, I think it’s worth pointing out that slavery maximizes work incentives. If you beat or kill people who don’t work, sure enough, everyone works! But that is not even an efficient economy, much less a just society. To be clear, I don’t think most people who say they want to maximize work incentives would actually support slavery, but that is the logical extent of the assertion. (Also, many Libertarians, often the first to make such arguments, do have a really bizarre attitude toward slavery; taxation is slavery, regulation is slavery, conscription is slavery—the last not quite as ridiculous—but actual forced labor… well, that really isn’t so bad, especially if the contract is “voluntary”. Fortunately some Libertarians are not so foolish.) If your primary goal is to make people work as much as possible, slavery would be a highly effective way to achieve that goal. And that really is the direction you’re heading when you say we shouldn’t do anything to help starving children lest their mothers have insufficient incentive to work.

More people not working could have a downside, if it resulted in less overall production of goods. But even in the US, one of the most efficient labor markets in the world, the system of job matching is still so ludicrously inefficient that people have to send out dozens if not hundreds of applications to jobs they barely even want, and there are still 1.4 times as many job seekers as there are openings (at the trough of the Great Recession, the ratio was 6.6 to 1). There’s clearly a lot of space here to improve the matching efficiency, and simply giving people more time to search could make a big difference there. Total output might decrease for a little while during the first set of transitions, but afterward people would be doing jobs they want, jobs they care about, jobs they’re good at—and people are vastly more productive under those circumstances. It’s quite likely that total employment would decrease, but productivity would increase so much that total output increased.

Above all, people would be happier, and that should have been our goal all along.

Selling debt goes against everything the free market stands for

JDN 2457555

I don’t think most people—or even most economists—have any concept of just how fundamentally perverse and destructive our financial system has become, and a large chunk of it ultimately boils down to one thing: Selling debt.

Certainly collateralized debt obligations (CDOs), and their meta-form, CDO2s (pronounced “see-dee-oh squareds”), are nothing more than selling debt, and along with credit default swaps (CDS; they are basically insurance, but without those pesky regulations against things like fraud and conflicts of interest) they were directly responsible for the 2008 financial crisis and the ensuing Great Recession and Second Depression.

But selling debt continues in a more insidious way, underpinning the entire debt collection industry which raises tens of billions of dollars per year by harassment, intimidation and extortion, especially of the poor and helpless. Frankly, I think what’s most shocking is how little money they make, given the huge number of people they harass and intimidate.

John Oliver did a great segment on debt collections (with a very nice surprise at the end):

But perhaps most baffling to me is the number of people who defend the selling of debt on the grounds that it is a “free market” activity which must be protected from government “interference in personal liberty”. To show this is not a strawman, here’s the American Enterprise Institute saying exactly that.

So let me say this in no uncertain terms: Selling debt goes against everything the free market stands for.

One of the most basic principles of free markets, one of the founding precepts of capitalism laid down by no less than Adam Smith (and before him by great political philosophers like John Locke), is the freedom of contract. This is the good part of capitalism, the part that makes sense, the reason we shouldn’t tear it all down but should instead try to reform it around the edges.

Indeed, the freedom of contract is so fundamental to human liberty that laws can only be considered legitimate insofar as they do not infringe upon it without a compelling public interest. Freedom of contract is right up there with freedom of speech, freedom of the press, freedom of religion, and the right of due process.

The freedom of contract is the right to make agreements, including financial agreements, with anyone you please, and under conditions that you freely and rationally impose in a state of good faith and transparent discussion. Conversely, it is the right not to make agreements with those you choose not to, and to not be forced into agreements under conditions of fraud, intimidation, or impaired judgment.

Freedom of contract is the basis of my right to take on debt, provided that I am honest about my circumstances and I can find a lender who is willing to lend to me. So taking on debt is a fundamental part of freedom of contract.

But selling debt is something else entirely. Far from exercising the freedom of contract, it violates it. When I take out a loan from bank A, and then they turn around and sell that loan to bank B, I suddenly owe money to bank B, but I never agreed to do that. I had nothing to do with their decision to work with bank B as opposed to keeping the loan or selling it to bank C.

Current regulations prohibit banks from “changing the terms of the loan”, but in practice they change them all the time—they can’t change the principal balance, the loan term, or the interest rate, but they can change the late fees, the payment schedule, and lots of subtler things about the loan that can still make a very big difference. Indeed, as far as I’m concerned they have changed the terms of the loan—one of the terms of the loan was that I was to pay X amount to bank A, not that I was to pay X amount to bank B. I may or may not have good reasons not to want to pay bank B—they might be far less trustworthy than bank A, for instance, or have a far worse social responsibility record—and in any case it doesn’t matter; it is my choice whether or not I want anything to do with bank B, whatever my reasons might be.

I take this matter quite personally, for it is by the selling of debt that, in moral (albeit not legal) terms, a British bank stole my parents’ house. Indeed, not just any British bank; it was none other than HSBC, the money launderers for terrorists.

When they first obtained their mortgage, my parents did not actually know that HSBC was quite so evil as to literally launder money for terrorists, but they did already know that they were involved in a great many shady dealings, and even specifically told their lender that they did not want the loan sold, and if it was to be sold, it was absolutely never to be sold to HSBC in particular. Their mistake (which was rather like the “mistake” of someone who leaves their car unlocked and has it stolen, or forgets to arm the home alarm system and suffers a burglary) was not to get this written into the formal contract, rather than simply made as a verbal agreement with the bankers. Such verbal contracts are enforceable under the law, at least in theory; but that would require proof of the verbal contract (and what proof could we provide?), and also probably have cost as much as the house in litigation fees.

Oh, by the way, they were given a subprime interest rate of 8% despite being middle-class professionals with good credit, no doubt to maximize the broker’s closing commission. Most banks reserved such behavior for racial minorities, but apparently this one was equal-opportunity in the worst way.Perhaps my parents were naive to trust bankers any further than they could throw them.

As a result, I think you know what happened next: They sold the loan to HSBC.

Now, had it ended there, with my parents unwittingly forced into supporting a bank that launders money for terrorists, that would have been bad enough. But it assuredly did not.

By a series of subtle and manipulative practices that poked through one loophole after another, HSBC proceeded to raise my parents’ payments higher and higher. One particularly insidious tactic they used was to sit on the checks until just after the due date passed, so they could charge late fees on the payments, then they recapitalized the late fees. My parents caught on to this particular trick after a few months, and started mailing the checks certified so they would be date-stamped; and lo and behold, all the payments were suddenly on time! By several other similarly devious tactics, all of which were technically legal or at least not provable, they managed to raise my parents’ monthly mortgage payments by over 50%.

Note that it was a fixed-rate, fixed-term mortgage. The initial payments—what should have been always the payments, that’s the point of a fixed-rate fixed-term mortgage—were under $2000 per month. By the end they were paying over $3000 per month. HSBC forced my parents to overpay on a mortgage an amount equal to the US individual poverty line, or the per-capita GDP of Peru.

They tried to make the payments, but after being wildly over budget and hit by other unexpected expenses (including defects in the house’s foundation that they had to pay to fix, but because of the “small” amount at stake and the overwhelming legal might of the construction company, no lawyer was willing to sue over), they simply couldn’t do it anymore, and gave up. They gave the house to the bank with a deed in lieu of foreclosure.

And that is the story of how a bank that my parents never agreed to work with, never would have agreed to work with, indeed specifically said they would not work with, still ended up claiming their house—our house, the house I grew up in from the age of 12. Legally, I cannot prove they did anything against the law. (I mean, other than laundered money for terrorists.) But morally, how is this any less than theft? Would we not be victimized less had a burglar broken into our home, vandalized the walls and stolen our furniture?

Indeed, that would probably be covered under our insurance! Where can I buy insurance against the corrupt and predatory financial system? Where are my credit default swaps to pay me when everything goes wrong?

And all of this could have been prevented, if banks simply weren’t allowed to violate our freedom of contract by selling their loans to other banks.

Indeed, the Second Depression could probably have been likewise prevented. Without selling debt, there is no securitization. Without securitization, there is far less leverage. Without leverage, there are not bank failures. Without bank failures, there is no depression. A decade of global economic growth was lost because we allowed banks to sell debt whenever they please.

I have heard the counter-arguments many times:

“But what if banks need the liquidity?” Easy. They can take out their own loans with those other banks. If bank A finds they need more cashflow, they should absolutely feel free to take out a loan from bank B. They can even point to their projected revenues from the mortgage payments we owe them, as a means of repaying that loan. But they should not be able to involve us in that transaction. If you want to trust HSBC, that’s your business (you’re an idiot, but it’s a free country). But you have no right to force me to trust HSBC.

“But banks might not be willing to make those loans, if they knew they couldn’t sell or securitize them!” THAT’S THE POINT. Banks wouldn’t take on all these ridiculous risks in their lending practices that they did (“NINJA loans” and mortgages with payments larger than their buyers’ annual incomes), if they knew they couldn’t just foist the debt off on some Greater Fool later on. They would only make loans they actually expect to be repaid. Obviously any loan carries some risk, but banks would only take on risks they thought they could bear, as opposed to risks they thought they could convince someone else to bear—which is the definition of moral hazard.

“Homes would be unaffordable if people couldn’t take out large loans!” First of all, I’m not against mortgages—I’m against securitization of mortgages. Yes, of course, people need to be able to take out loans. But they shouldn’t be forced to pay those loans to whoever their bank sees fit. If indeed the loss of subprime securitized mortgages made it harder for people to get homes, that’s a problem; but the solution to that problem was never to make it easier for people to get loans they can’t afford—it is clearly either to reduce the price of homes or increase the incomes of buyers. Subsidized housing construction, public housing, changes in zoning regulation, a basic income, lower property taxes, an expanded earned-income tax credit—these are the sort of policies that one implements to make housing more affordable, not “go ahead and let banks exploit people however they want”.

Remember, a regulation against selling debt would protect the freedom of contract. It would remove a way for private individuals and corporations to violate that freedom, like regulations against fraud, intimidation, and coercion. It should be uncontroversial that no one has any right to force you to do business with someone you would not voluntarily do business with, certainly not in a private transaction between for-profit corporations. Maybe that sort of mandate makes sense in rare circumstances by the government, but even then it should really be implemented as a tax, not a mandate to do business with a particular entity. The right to buy what you choose is the foundation of a free market—and implicit in it is the right not to buy what you do not choose.

There are many regulations on debt that do impose upon freedom of contract: As horrific as payday loans are, if someone really honestly knowingly wants to take on short-term debt at 400% APR I’m not sure it’s my business to stop them. And some people may really be in such dire circumstances that they need money that urgently and no one else will lend to them. Insofar as I want payday loans regulated, it is to ensure that they are really lending in good faith—as many surely are not—and ultimately I want to outcompete them by providing desperate people with more reasonable loan terms. But a ban on securitization is like a ban on fraud; it is the sort of law that protects our rights.