Friday, September 30, 2011

The Israeli-Palestinian Question

One issue that few people seem to discuss is how should future generations be affected by the actions of past generations on their environment. Not surprisingly this issue is at the forefront in any Israeli/Palestinian peace negotiation, but not considered at the forefront by the players. Past sins largely involve whether or not to allow for the formation of an independent Arab Palestinian state. The popular sentiment appears to be to allow for such a decision, but is this the correct course of action?

The first important element in this question is understanding the events that drove the creation of Israel vs. an Arab state. The original Mandate for Palestine, which encompassed the area now known as Israel and Jordan, was created in 1920 and agreed to unanimously by the League of Nations in 1922 establishing the British as a magistrate for the region. In the Mandate the British had included an objective for the establishment of a Jewish National Homeland in accordance to the Balfour Declaration in 1917. Also further support of the British commitment at the time to create a Jewish National Home was demonstrated by making the national home for the Jewish people an article of the Law of Nations, by incorporating the wording of the Balfour Declaration. However, the British had a problem in while the Balfour Declaration could be interpreted that the British intended to turn the area of Palestine into a Jewish National Homeland, two years prior they also had promised the Arabs independence in certain areas of the Ottoman Empire in exchange for revolting against the Ottomans, an arrangement stipulated in the McMahon–Hussein Correspondence.

The McMahon-Hussein Correspondence was the first of many problems for the British in the Palestine region regarding the question of a Jewish National Homeland largely due to its lack of explicit terms. The initial rationality behind the correspondence was British concern that Arabs in territories under their control in the Middle East would side with the Ottoman Empire during WWI. Therefore, as a means to avoid the complications of such a shift in allegiance, McMahon promised Hussein bin Ali control of Arab lands with the exception of ‘portions of Syria lying to the west of the districts of Damascus, Homs, Hama and Aleppo’ if they would rebel against the Ottoman as well as refrain from rebelling in British territories. Palestine lies to the Southwest of these areas and was not explicitly mentioned. Unfortunately it is difficult to know what Hussein was thinking because he never explicitly asked about Palestine at the time either, one can only assume that he assumed that Palestine would have an opportunity for independence.

Soon before approval of the British Mandate for Palestine by the League of Nations (July 24, 1922), the Churchill White Paper was released (June 3, 1922). The Churchill White Paper is important because it stated that it was not the intent of the British government to covert Palestine as a whole into a Jewish National Home, but that such a Home should be founded “in Palestine.” However, it also stated that the British had included Palestine (more specifically the vilayet of Beirut and Sanjak of Jerusalem) in the McMahon-Hussein exception, thus Palestine should not have expected any guarantees to its independence.

One rationality for the White Paper could be not only clarification in an attempt to end all of the various interpretations and contradictions in the previous seven years of agreements and treaties (especially the troublesome Sykes-Picot agreement), but also a means to explain to the Jews the formation of Transjordan east of the Jordan River. One could argue that this initial split in territory, which resulted in Transjordan receiving 77% of the land in question (Palestine) was adequate compromise to satisfy both promises. Side Note: in September 1922, the British officially communicated with the League of Nations that Transjordan would be excluded from any discussions regarding a Jewish National Homeland. Unfortunately this White Paper did not appear to make any claims regarding how much of the land west of the Jordan River would be made available to a Jewish National Home. Due to the lack of clarity on this point, not surprisingly most Jews believed that area west of the Jordan river to the Mediterranean sea was still ‘promised’ for a Jewish National Homeland, that the formation of Transjordan signified the part of Palestine that they were not receiving regarding the White Paper statement that not all of Palestine would become part of the Home. Some actually cried foul to the formation of Transjordan believing the Jewish people should receive all of Palestine.

On a side note some argue that Lord Curzon’s statements in a Eastern Committee of the Cabinet meeting stating that “… Palestine was included in the areas as to which Great Britain pledged itself that they should be Arab and independent in the future…” is of relevance, but these comments were made on December 5, 1918 and can be regarded as only his opinion, Lord Curzon was not Secretary of State for Foreign Affairs yet. Secondary note: for the purposes of this blog post the area of Palestine west of the Jordan river will now be referred to as Palestine, excluding Transjordan.

In the beginning (through the 1920s) the level of Jewish migration to Palestine was sparse largely due to difficult conditions in the region, little foreign aid to foster development and British driven Jewish immigration quotas initiated by Arab resistance to Jewish immigration. These quotas were typically tied to the perceived economic capacity of Palestine to absorb immigrants without damaging the local economy, thus the quotas only applied to poor Jews as rich Jews (assets of 500 pounds or more) were allowed to enter without counting against the quota. Also some levels of strife in the early 1920s was reported by High Commissioner, Herbert Samuel while he attempted to establish self-governing institutions in Palestine as Arab leadership refused to cooperate with any institution that involved Jewish participation.

However, migration rates changed significantly in the 1930s largely attributed to the rise of Adolf Hitler and with him a dramatic increase in anti-Semitism in Europe. Not willing to accept the migration of these Jewish individuals, a bout of Arab nationalism lead to the Arab riots of 1936-1939. Other elements which contributed to the Arab riots could have been the Jewish economic sector in Palestine surpassing the Arab sector in total productivity and the death of Sheikh Izz ad-Din al-Qassam, at British and Jewish hands, founder of the Black Hand an anti-Zionist and anti-British militant organization.

Due to the riots the British Peel Commission was formed in 1937. As a means to appease the surrounding Arab countries while still affirming the Balfour declaration the Peel Commission proposed to further divide the land west of the Jordan River creating independent Jewish and Arab states. Arab leadership both in Palestine and in the neighboring countries rejected this proposal. What is interesting about this rejection is that under the Peel Plan Arabs would have received approximately 83% of the land, with 15% going to the Jewish state and 2% would have fallen under international administration.

After the rejection of the Peel Plan British support for the potential Jewish National Homeland underwent a significant shift exemplified in the following staff memo: “No solution of the Palestine problem should be proposed which would alienate the Arab states. If one of the two communities had to be antagonised, it was preferable, from the purely military angle, that a solution should be found which did not involve the continuing hostility of the Arabs; for in the that event our difficulties would not be confined to Palestine, but would extend throughout the whole of the Middle East”. This belief was predicated on the belief that Jewish support was either guaranteed or unimportant if Britain had to go to war with Hitler, but Arab support was not thought to be guaranteed, thus must be bolstered.

The lack of foresight provided by the British through this entire incident would be comical if so many people were not so negatively affected by it. In some context one could regard the situation as an interesting aspect of bait-and-switch against the Jewish people. Propose a homeland and then later do almost everything one can short of direct military intervention to deny that homeland or mitigate its significance and size as much as possible. Side note: in February 1939 the British staged the St. James Conference as a last-ditch effort to negotiate an agreement between the Jews and Arabs, but the Arab delegation is reported to have refused to meet with the Jews, to recognize their authority or even use the same entrances to the main conference hall. Not surprisingly the conference failed.

The release of the 1939 White Paper (MacDonald White Paper) officially confirmed the change in British attitude regarding Jews in Palestine and the British commitment to suppressing a Jewish National Homeland largely by heavily restricting Jewish immigration to Palestine and land ownership/land transfers in Palestine. Per Jewish immigration a total limit of 75,000 was set for the five-year period of 1940-1944 (this quota was broken down into a yearly quota of 10,000 with a supplemental quota of 25,000 to cover ‘emergencies’). The quota was enforced through an official certificate system. The creation of the White Paper of 1939 is interesting because the British had, for all intensive purposes, already lost support of the Arabs in Palestine and the anti-Jewish position of the paper lost support of the Jews, so now everybody in Palestine was dissatisfied with the British.

The Jewish regarded the 1939 White Paper as a betrayal and their response was two-fold. First, they began planning strategies to circumvent the quotas through a program of illegal immigration called Aliyah Bet. The British countered this program by cracking down both in raids and blockading entrances to Palestine both on land and sea. Captured Jews were held in Cyprus and stripped of their citizenship, thus they had no official standing for exchange or release. Interestingly enough so many Jews were captured that British officials eventually started releasing them for fear of a violent uprising in Cyprus.

Second, the Jewish Lehi (Fighters for the Freedom of Israel) began staging violent actions against British targets in Palestine. The most famous action taken against the British was the assassination of Lord Moyne in Cairo in 1944. The violent action taken against the British was not condoned by the ‘mainstream’ Jewish leadership which continued to try to negotiate more favorable conditions from the British. Interestingly enough some believe that the formation of the Jewish Lehi bolstered the combat readiness of the Jews to the point where if these immigration quotas had not existed the future of Israel may have been much shorter.

Meanwhile after the League of Nations fell apart, the end of WWII created a greater level of sympathy for the Jewish people leading to the United Nations reconfirmed the original mandate with U.N. Charter’s Article 80 which was later supported by the International Court of Justice. Despite this inclusion the problem of co-existence between the growing Jewish population and the existing Arab population still remained. In 1946 the Grady-Morrison Committee tried to argue that the demand for a Jewish State went beyond the obligations of both the Balfour Declaration and the original British Mandate for Palestine. However, this abandonment of a Jewish state was rejected and the decision to address the division between Jews and Arabs culminated in U.N. Resolution 181, known also as the U.N. 1947 Partition Resolution. Side note: in 1945 at the behest of the British the Arab League was formed to manage and coordinate policy between the Arab states in the Middle East.

Anyone looking at the territory distribution between the proposed Arab state and the Israeli state under U.N. Resolution 181 can only laugh at its discontinuity. While the intentions of the plan seem to make sense, due to the lack of large amounts of paperwork pertaining to private land ownership complicated by Ottoman restrictions on land ownership, it was thought best to divide the land into existing settlement majorities. Of course based on the requisite demand for farmland and other resources this distribution of territory did not stand much of a chance for success even if the Jewish Agency (the representatives for the Jewish in Palestine), the Palestinian Arabs (through the Arab Higher Committee) and the Arab League approved it. One could theorize that perhaps the Arab states may have accepted U.N. Resolution 181 if the distribution were more continuous, but based on existing attitudes at the time that theory does not appear to have a high probability of validity.

While not happy about how the land was distributed the Jewish Agency agreed to the partition, some believing that agreement was necessary to further legitimacy of the Jewish National Homeland. All of the neighboring Arab powers (Iraq, Iran, Egypt, Lebenon, Syria) rejected the partition plan and voted against U.N. Resolution 181 in the General Assembly. There were rumors, which were later confirmed, that if it had a vote Transjordan would have accepted the partition, but under the intention of later annexing the West Bank portion of the new Arab state (only because Abdullah realized he could not annex all of Palestine). The Arab rejection could be argued to exist in two parts: intransigence due to the desire not to have any Jewish state in Palestine and disagreement with how fair the overall agreement was pertaining to the land divisions as a whole and the resources distribution.

The chief complaint of fairness was that 56% of the land was being given to the Jewish state despite only approximately (by the best estimates of the time) 33% of the population being Jewish. In addition the current demographics of the Jewish state would have a 55% Jewish majority and a 45% Arab minority, thus many Arabs would have to consider migration as a Jewish majority governorship was thought not to appeal to most Arabs. Incidentally this Jewish over Arab or Arab over Jewish ‘dominance’ is the rationality the Grady-Morrison Committee used to suggest that there be no Jewish or Arab state in Palestine. Overall these population numbers changed slightly because of the initial inclusion of members of the Bedouins which would have made Arabs the majority in the Jewish state, thus revisions were made which assigned Beersheba to the proposed Arab state and further parts of the Judean Desert to the Jewish state to avoid this population problem.

The interesting thing about the partition plan is that both sides, Jewish and Arab, heavily complained that the other side was getting unfair favorable treatment. The funny thing about the Arab citation of only receiving 42% of the land versus what would become Israel receiving 56% and the remaining 2% being under U.N. administration) is that a majority of the land received by Israel included the Negev and Judean Deserts, so Arabs claim they were concerned that the Jewish state was getting a lot of desert which could not effectively be cultivated at the time. The unfairness of the partition is an interesting issue because under the partition plan the Jewish state ending up losing 87% of the land that they originally be should have been given to them under the Balfour Declaration.

Another note is that one could only guess what the Jewish population in Palestine would have been had the British not been placing severe immigration quotas on Jewish entry, especially from 1940-1944 during the Holocaust. In fact the 1939 White Paper basically stated that the intent of the immigration restriction policy was to ensure a Jewish population in Palestine of only 33%, which is what it was when U.N. Resolution 181 was proposed in 1947.

The Arab rejection due to unfairness loses significant credibility when thinking back to the rejection of the Peel Plan as well as the frequent claims made by the neighboring Arab powers that the Jewish state should not exist. In fact during a group of meetings in November and December 1947, the Arab League adopted a series of resolutions aimed at a military solution to the Palestinian question. Also on the day of their invasion of Israel in 1948 the Arab League issued a statement documenting their motivations for the invasion: “the only solution of the Palestine problem is the establishment of a unitary Palestinian State, in accordance with democratic principles, whereby its inhabitants will enjoy complete equality before the law, [and whereby] minorities will be assured of all the guarantees recognised in democratic constitutional countries…”; basically proclaiming a United State of Palestine for Arabs instead of the two-state solution proposed by the U.N. Thus it is difficult to take seriously a ‘lack of fairness due to land partitioning’ as the primary motive for Arab rejection of U.N. Resolution 181 unless one argues that any land given to the Jews was viewed as unacceptable/unfair.

This mindset was further illustrated by Azzam Pasha, the General Secretary of the Arab League, who was thought to have said, although whether or not true is debated, “This will be a war of extermination and a momentous massacre which will be spoken of like the Mongolian massacres and the Crusades.” Six days later Azzam then also stated (no one questions this statement), “We are fighting for an Arab Palestine. Whatever the outcome the Arabs will stick to their offer of equal citizenship for Jews in Arab Palestine and let them be as Jewish as they like. In areas where they predominate they will have complete autonomy.”

The interesting thing is that the second part of that statement about complete autonomy is basically what the partition plan tried to accomplish. So was Azzam suggesting a form of ‘Don’t ask, don’t tell’ for the Jewish state? In areas where you Jews are the majority you can govern yourselves like an official state, just don’t tell anyone because we don’t want you to be recognized as an official state. Realistically this attitude interpretation may be generous because other communications from Arabs in this time period give the impression of ‘we don’t care if there are Jews in Palestine as long as they do not have any power or an independent state.’

Despite the Palestinian Arab and Arab League rejection of U.N. Resolution 181it passed the General Assembly on November 29, 1947; on May 14, 1948 the temporary legislature of Israel declared statehood one day before the British Mandate over Palestine officially lapsed. That night and during the next morning Egypt, Iraq, Lebanon and Syria invaded Israel starting the Arab-Israeli War of 1948. It should be noted that Lebanon involvement in the war was ‘token’ due to an arrangement reached earlier by the Jewish Agency and the Lebanese government. Transjordan originally planned not to participate in the attack based on a previously reached non-aggression agreement with Jewish leaders in exchange for the ability to annex areas of the West Bank, but other Arab leaders basically shamed Abdullah into violating that agreement.

During the 1948 War, the British also continued their support for the neighboring Arab nations. Basically this mindset in some respects coalesced with the Arab mindset that Israel needed to be destroyed because the Arabs had clearly demonstrated that the very existence of Israel alienated them. This goal was especially prevalent in the diplomatic region with the British continuously arguing after each cease-fire that the areas controlled by the Arabs should belong to the respective Arab occupier.

After numerous cease-fires, which were commonly violated by the Arab powers, violations supported by the British, the war concluded in the early-mid 1949 when Israel signed four separate armistices, Egypt on February 24, Lebanon on March 23, Jordan on April 3 and Syria on July 20. After the conclusion of the war Jordan claimed the West Bank and East Jerusalem, Egypt claimed the Gaza Strip and Israel claimed all of the original land it thought it received after the 1922 redistribution decision outside of the aforementioned areas. Side note: the 1956 war is of little relevance to the above issue so it will not be discussed.

The realities of the 1967 war are controversial. In general it is not disputed that Israel commenced the primary attacks against Egypt; however, the circumstances that lead to the attack are important. In mid May 1967 Nasser began massing troops in the Sinai Peninsula on Israel’s border, expelled the United Nations Emergency Force (UNEF) from Gaza and Sinai and mobilized at Sharm el-Sheikh overlooking Straits of Tiran. Despite Israeli declarations that closing the Straits of Tiran would be akin to declaring war on Israel, Nasser declared the Straits closed to Israeli vessels on May 22. On June 1, 1967 Iraq began deploying troops and armored vehicles into Jordan. So from an Israeli perspective when Nasser closed the Straits he in essence declared war on Israel. Future actions by Egypt and the other Arab neighbors (Jordan, Syria and Iraq) along with the history between Israel and their Arab neighbors did nothing to dissuade Israeli concerns of multiple attacks on multiple fronts. Based on these conditions it is understandable why Israel launched a pre-emptive strike against the strongest Arab prospective participant, Egypt.

With respect to attacks against Syria and Jordan both initiated action against Israel; Jordan did so despite communication from Israel for a non-aggression pact. Some would argue that the defense pact Jordan signed with Egypt was the motivating factor for the attack by Jordan. The potential problem with that statement is that Jordan commenced operations against Israel on the morning of June 5 which was similar to when Israel commenced operations against Egypt. Therefore, Jordan had only hours to respond to the Israeli aggression amid confusion on the battlefront where both sides (Israel and Egypt) reported being attacked and Egypt reported to Jordan that they were actively bombing Israel (which was not true as most of Egypt’s air force was wiped out in the very early stages of the war).

From a logical perspective if the Arab countries, especially Egypt, took actions leading Israel to be concerned for its imminent safety the initial strike can be understood and the blame can even be attributed to those Arab countries because it is illogical to presume that Israel should only fight a defensive war when its existence is at stake. However, one credible issue may be that while it was appropriate for Israel to attack Egypt in a pre-emptive way progressing the action from destroying the Arab threat to invading and taking Arab territory cannot be justified. The problem with this contention is that Israel should not be expected to engage in a mobius strip based defense/pre-emptive attack strategy. Basically suppose Israel neutralizes the Arab forces in 1967, but does not take any territory to create an additional militarized buffer region between Tel Aviv, West Jerusalem and other key Israeli cities. It stands to reason that Israel without existing peace agreements (which did not exist between the surrounding Arab countries and Israel at the time) Israel would simply have to neutralize Arab forces again with the same threat level over and over again. With no intention of ‘exterminating’ the surrounding Arab countries creating militarized boundary regions would actually reduce the probability of future wars.

Based on the information above it would be appropriate for Israel to return the ‘seized’ territory if a peace agreement was signed with the corresponding country with appropriate conditions for its violation. Such a circumstance did occur with the peace agreement between Israel and Egypt at Camp David in 1979 resulting in the return of the Sinai Peninsula affirming the ‘land for peace’ scheme.

Proponents for an Arab Palestinian state consistently discuss elements of fairness and justice when talking about the development of that state. The problem with this mindset is there is nothing concrete that can be attributed to those characteristics. Most argue that the justification for that state comes from U.N. Resolution 181. However, the neighboring Arab powers and Palestinian Arabs rejected U.N. Resolution 181 at the time. Instead of accepting a Jewish and Arab state, their decision was to destroy the Jewish state. By taking this action the ‘fair’ result should be invalidation of U.N. Resolution 181.

For example Person A and Person B are interested in merging their widget companies and put forth a proposals to do so. However, before agreeing to the deal Person B attempts industrial sabotage in order to destroy Person A’s company so Person B’s company can then have a stronger hold on the widget market by itself. Unfortunately for Person B this attempt backfires and actually weakens their own company instead of damaging Person A’s company. How is it fair that Person B should then be allowed to accepting the originally negotiated deal and demand a merger with Person A’s company? Those who suggest that Israel should be bound by U.N. Resolution 181 in an manner are also suggesting that Person A be forced to accept the original merger agreement with Person B despite Person B rejecting it in favor of destroying Person A’s company. If a merger is to occur between these two companies, the original agreement is now null and void and a new agreement must be negotiated. On a side note the current request for statehood made by Abbas to the U.N. is akin to Person B simply asking the general business community to approve the merger of Person A’s and Person B’s companies without an official merger agreement.

The above logic problem is the chief concern which should have invalidated the 1988 Declaration of Statehood by the Palestine Liberation Organization (PLO). Ironically the PLO used U.N. Resolution 181 as the basis for the declaration despite not adhering to the territorial divisions created by the partition. For example under U.N. Resolution 181 the entire city of Jerusalem would not be governed by either the Jewish state or the Arab state, yet the PLO regard East Jerusalem has the de facto capital for the Arab state in Palestine. So the PLO is using U.N. Resolution 181 has a basis for declaring their statehood, but it is not adhering to the ‘less pleasant’ elements of U.N. Resolution 181. Of course these are elements missed by the General Assembly when accepting the declaration.

Also one of the chief issues which strips credibility from those who support the Arab Palestinian state is ignoring the culpability of Egypt and Jordan in the ‘Palestinian’ plight. If Egypt and Jordan had accepted U.N. Resolution 181, the rest of the Arab League would have and those referred to as Palestinians would have had their independent state. Instead most of these supporters choose to look at the immediate simple present instead of looking at the past and how it has shaped the present to determine whom to blame for the current problems in the Palestine region.

One could argue that based on the results of the 1948 war and the 1967 war that Egypt could have a claim to the Gaza Strip and Jordan could have a claim to both the West Bank and East Jerusalem. However, the argument of Egypt and Jordan ownership can get complicated because both claims made on the ‘disputed’ land by Israel and the respective Arab counterpart are due to the spoils of war. Note that these claims would now apply to the PLO as both Egypt and Jordan have given authority of their claims to the PLO.

For example in the 1948 war it could be argued that Egypt and Jordan occupied Israeli land if one were arguing from the perspective that the land west of the Jordan River was to comprise the Jewish National Homeland and that land was the ‘price’ for the 1949 armistice. If that argument were made then what is the difference between Israel taking that land after the 1967 war under the same ‘price for peace’ principle? The logical problem seems to be if one accepts the claim to these pieces of land by Egypt and Jordan how can one not accept Israeli claim to those lands under similar circumstances? This potential contradiction could have relevance in the application of U.N. Security Council Resolution (UNSCR) 242, which is frequently cited by proponents of an Arab Palestinian state. The thing is that the U.N. appeared to operate under a form of amnesty in recognizing the boarders after 1948, but not recognizing the boarders after 1967. However, again what makes one recognition superior to the other if both circumstances were similar when UNSCR 242 clearly states for the “inadmissibility of the acquisition of territory by war”.

Another potential logic hole with referencing UNSCR 242 in the Israel-Palestinian question is that fact the newly formed PLO rejected UNSC 242 when it was proposed in 1967 on the grounds that they would have to recognize the right of Israel exist if they did support UNSC 242. So once again, similar to Resolution 181, after failing to destroy Israel and ‘liberate’ Palestine, the Arab Palestinians come back to the table with the intentions of accepting the original deal that they walked away from decades earlier and expect everyone else to let them accept that deal without consequence. Of course sadly enough the acknowledged controversy surrounding UNSC 242 is in the language which may not force Israel to withdraw completely from the disputed territories, all depending on one’s interpretation, which unfortunately is frequently determined by who one supports.

Outside of the apparent illegitimacy of the global community to redistribute certain pieces of Israeli land to a group that has no claim over it, the other chief element that is commonly cited for the importance of maintaining the post-1967 boarders is Israeli security. Proponents of the post-1967 boarder arrangement believe that returning to the pre-1967 boarder arrangement would severely compromise Israeli security by taking away buffer territory which now shelter important Israeli infrastructure including the capital Tel Aviv and West Jerusalem. Proponents of the pre-1967 boarder arrangement believe that this argument is not applicable any longer because modern weaponry can reach all parts of Israel; also Israel has a significant military advantage over its Arab neighbors which can be used to protect itself. In addition instead of creating a buffer zone which will foster anger and distrust, some believe that giving up the land creates an environment of cooperation and higher probability of peace.

The problems with the arguments made by the pre-1967 boarder proponents is that while modern long-ranger missiles can reach all of Israel, withdrawal to pre-1967 boarders would also put all of Israel (now significantly smaller) in range of short-range rockets and mortars which is the preferred weapon of Hamas. The advanced military argument is a meaningless one because why should Israel be forced to bear the burden of once again having to maintain such military preparedness over such a small terrain. The argument that a demilitarized Palestine should allay those fears or that giving up the land will significantly improve relationships is difficult to accept because of the sheer dissatisfaction that most Arabs still have with the every existence of Israel. In this vein note that Fatah, the PLO and Hamas have all stated in the past that a principle goal is the liberation of Palestine and the destruction of Israel. Those three groups play significant roles in a prospective government, so peaceful relationships appear questionable. In addition both Israel and the Palestinian Authority have demonstrated an inability to prevent Hamas and other terrorist groups from smuggling in these small arms weapons on a consistent basis, despite quality effort, thus there is little reason to suspect anything to change within a new independent state.

The potential political structure should also cause pause. For example the possibility that the West Bank under the new regime of an independent state could, if current democratic trends continue, be controlled by Hamas would be heavily concerning for Israel. How diligent would Hamas be at maintaining the demilitarized zone? What would be the consequences applied by the global community if they did not? Also assuaging concerns by ‘forcing’ Hamas to recognize the right of Israel to exist as a condition of a peace agreement is illogical because Hamas can simply lie. In fact no rational person would expect Hamas to change their beliefs regarding Israel, which are heavily tied to tradition and religion, in such an abrupt and absolute manner.

Finally some argue that the reason for the formation of the pre-1967 boarders would be to create a level of sovereign consistency for the new Arab Palestinian state because without this adjustment ‘Palestinians’ would have to travel through Israel to move from the West Bank to the Gaza Strip or visa-versa. However, a problem with this line of thought is the morality of taking land from Israel to achieve this process. Another problem is that a number of proposed ‘land swap’ deals foster heterogeneity in an environment that has not effectively managed such a reality on such a consistent and large-scale.

One issue that will not be addressed in this blog post is the question of whether or not ‘Palestinians’ are being mistreated within the boarders of Israel. This issue is very complicated as it involves citizenships and residencies within the Israeli state among other things; however, there is reason to believe that some level of abuse is occurring. Unfortunately a number of individuals tie sympathy to ‘Palestinians’ as a reason for taking Israeli held land and turning it into a Arab Palestinian state which is inappropriate. The appropriate response would be to address the causes of those alleged abuses in Israel and eliminate the rationality behind them.

The final issue regarding fairness is the question, should modern day ‘Palestinians’ be held accountable for the mistakes of their forbearers? Under most circumstances the obvious answer should be no. Unfortunately if such an answer is given and one favors the establishment of an Arab Palestine state how can one reconcile such a decision with respect to fairness to the Jews? Israel has to give up land that it has gained not through offensive action, but defensive action because it is surrounded by a homogenous group of individuals that want to destroy it. The sad state of affairs is that someone has to deal with an unfair situation and the reality is that Israel have had to deal with far more from the Arabs than the Arabs have had to deal with from Israel. To give ‘Palestinians’ an independent state against Israeli wishes sends a message that in the end Arabs can violate any agreement with Israel they want and still get the original deal.

If establishing an independent Arab Palestinian state is not appropriate what is an appropriate response to strife among the ‘Palestinians’ and Israelis? One option would be to offer ‘Palestinians’ a fast path to Israeli citizenship so they would have an opportunity to participate in Israeli government. One could argue that such a proposal would not be well received by ‘Palestinians’ because of the ongoing relationship between Arabs and Jews, especially related to Arab pride. However, if the idea of their own state was no longer in the cards, ‘Palestinians’ may be more inclined to accept Israeli citizenship. Another issue is that Israel must do a better job of maintaining property boundaries between different individuals. With property boundary adherence the key issue is non-discrimination and following the appropriate legal guidelines.

Overall the biggest question in establishing an Arab Palestinian state is how to create it. For most the creation of this state appears to be a means to an end, facilitate peace between another group of Arabs and Israel. However, there are no guarantees that such a peace can be maintained, especially with the long-standing animosity between the two parties. Applying the element of fairness is difficult due to the outright initial refusal of arrangements, which would have established an Arab Palestinian state associated with the history of Arab hostility to Israel. Weakening Israel as a cost to creating such a state for Arab Palestinians would demonstrate an environment where there are little consequences to negative and unjustified Arab actions. While a number of individuals may claim such a stance is unfair, which is true in a way, it is more inappropriate to resolve one aspect of unfairness by taking another unfair action. It cannot be argued that Arab Palestinians have made any significant contributions to the success of Israel, thus to weaken Israel for the benefit of Arab Palestinians would be unfair and wrong. Therefore, it appears that the establishment of the an Arab Palestinian state demands a certain leap of faith which goes against existing precedent.

Monday, September 26, 2011

Scratching the Surface of Criminal Behavior

In the formation of a global society, such a society will need to answer the question of how to reduce to prevalence and significance of crime. In a broad sense criminal activity can be divided into two categories based on the motivations that drive the action. Gain crimes are actions that are taken in effort to either gain financial resources or political influence. The overall level of violence associated with a gain crime tends to be low. Damage crimes are actions that are taken in effort to inflict either physical injury on another individual or structural harm to some institution. In contrast to gain crimes, damage crimes typically have significant violent elements.

Effective neutralization is interesting between these two categories because gain crimes are more instinctual due to the nature of human self-worth and greed contrasting morality, basically the desire to acquire resources with greater ease than conventional and available means allow. Damage crimes have a more defiant driving motivation. An individual commits a damage crime because he/she wants to inflict some level of physical or psychological damage to an individual or group typically with single-minded motivation, the desire for vengeance or superiority.

It is appropriate to divide gain crimes into two separate categories: major and minor. While eliminating minor gain crimes would be nice for the most part their effect on society is limited. Behaviors like speeding, jaywalking and similar traffic violations can be considered examples of minor gain crimes. Ironically any minor gain crimes, which have probabilities of detriment, can be neutralized through simple logical analysis regarding the insignificance of the gain. For example suppose an individual elects to speed and run the occasional red light to save time. Normally it is reasonable to assume that these actions will save no more than 2-3 minutes of travel time in most experiences. Clearly running red lights greatly increases the probability that an individual is involved in an accident, especially a fatal one. So initially one could argue that the individual in question is significantly increasing his/her chance of being involved in a fatal accident to save 2-3 minutes in travel time during a given trip. In addition there are moral ramifications applied to running the red light in that any accident involves other individuals who took no illegal actions.

Regarding the question of increasing fatality probability one could argue that this increase is a misrepresentation of the actual significance of a fatal accident, that the increase in this case is more political speak than anything. Political speak in this case is defined as: ‘on their face meaningful statements which later appear less meaningful after more in-depth analysis.’ For example consider one country at three different times, Time A, Time B and Time C, in sequential order from past to present. At Time A the country has a GNP of 9 million with an annual growth of 1.5 million over the next year. At a later time, Time B, the country could have a GNP of 24 million and see a growth of 6 million over the next year. Finally at an even later time, Time C, the country could have a GNP of 8 million with an annual growth of 2 million over the next year. Upon completion of that year the appropriate authority may then make the statement that GNP growth is at its highest level since Time A. This statement is somewhat misleading because although the percentage of GNP growth is at its highest level since Time A, the absolute growth, is not. While the statement may imply ‘rate of growth’ unless explicitly stated most individuals will take the statement to mean absolute growth.

Returning to the speeding example, one could argue that the probability of getting involved in a fatal accident is so low that even though running red lights significantly increases the probability the probability is still low. For example assume that the probability of a fatal accident is 0.01% versus 0.1% when running a red light (note these are not actually figures, just trend relevant numbers for the sake of the example). The change in probability is 10 fold, definitely significant, but the overall probability is still quite small, so one could argue that the importance of the change is mitigated. So one could argue that such a relative increase is still not enough to prevent an individual from preferring to save 2-3 minutes a day at the cost of increasing their probability of death.

However, the above abatement of risk argument typically falls apart because most individuals who commit minor gain crimes do not only commit them once. Thus, simple time-risk association can be used to demonstrate the overall detriment of such behavior. For example suppose an individual runs an average of one red lights per 100 minutes of drive time. This individual drives 15,000 miles per year at an average of 40 miles per hour resulting in a total drive time of 22,500 minutes per year resulting in 225 run red lights in a year. Running this many red lights would increase the probability of getting into an accident due to this action to 22.5%. Running these red lights saved an average time of 450-675 minutes per year.

Suppose that due to this increase this individual dies at age 40 years and 0 days and had been receiving the time saving benefits since age 19 years and 0 days. Had this individual not run red lights due to typical life and occupation expectancies you would have lived to the age of 71 years and 0 days and worked until the age of 63 years and 0 days (this individual makes a lot of life decisions on his birthday). So how much time did this individual actually save? Looking at the overall numbers shown in table 1, this behavior actually cost the individual up to 16,284,150 minutes of existence.

Table 1

So in this example taking the action of running a red light is not logical or intelligent at all. Of course an individual may believe that the probability of a fatal accident is so small that the numbers themselves are meaningless and in the end it is up to the individual to decide whether it is worth the potential of wasting some number of years of his/her life to save a number of minutes that only amounts to miniscule amount of the time that could be lost. In addition one must remember that this ‘additional’ time is not actually extra time, but simply the ability to utilize available time in a different way other than in transit, so if the individual in question does not effectively use this time it is meaningless to increase the probability of death, regardless of the overall probability.

Significant gain crimes are obviously more difficult to neutralize than insignificant gain crimes because logic cannot simply act alone. Revisiting that rational, significant gain crimes are appealing because they allow an individual to save time and/or resources while acquiring an equal or greater amount of resources than would have been available under conventional means. There are two strategies that can be utilized to limit the occurrence of such crimes.

First, increase the certainty of punishment. In the typical cost-benefit analysis there are two important factors relating to the cost, its severity and its certainty. Most criminal activity is largely dependent on the certainty of negative consequences. Most criminals act out of one of two rationalities: 1. Necessity of action where the criminal action is taken to ensure future survival (stealing food, etc.) 2. Dissociation of consequence where the criminal action is taken because the criminal does not believe that he/she will be caught. For this mindset severity of consequence is minimized because if one does not believe he/she will be caught then the consequence for being caught is unimportant. Therefore, if law enforcement is able to increase the certainty of these negative consequences criminals will be less likely to engage in any actions that would trigger those negative consequences. In addition increasing the certainty of capture will also increase the amount of resources that the criminal will need to devote to evade capture, thus reducing the profitability of the criminal venture making it less attractive to the potential criminal.

The biggest concern with this first strategy is the resource expenditure required to increase the certainty of punishment. Both technology and training of law enforcement need to remain at an equal to or higher than level versus the technology and strategies generated by the potential criminal. In addition not only will society need to provide the resources to capture criminals it will also need to make a significant number of arrests in the initial stages of enforcement programs to demonstrate to possible criminals their future if they elect to commit crimes. After capturing the criminals incarceration of these individuals may result in the construction of new detention centers adding additional land and financial costs. Overall the strategy of increasing certainty of punishment largely emulates the prevention-cure analogy, an ounce of prevention equals a pound of cure. The cost of the necessary technologies, personnel and incarceration should be less than attempting to neutralize more rampant significant gain crime in the future.

The second strategy focuses on reducing the overall benefit derived from these criminal actions to the point where the criminal no longer views the action as worthwhile. The best way to achieve this goal is to create barriers by either limiting distribution channels or restricting access to middlemen and/or customers. For example dealing illegal drugs is much more difficult when the number of individuals available to purchase the drugs is small because most individuals elect not to take drugs. Logically it is easier to eliminate customers of illegal or unnecessary products through the use of education and financial cost-benefit analysis with viable alternatives; however, some would argue that such strategies have not found success when actually applied in society.

Education is the first and theoretically most promising strategy for eliminating potential suppliers and buyers for criminals. By improving the awareness of individuals to unnecessary and/or detrimental actions, these individuals would be less inclined to commit such actions. For example for the major gain crimes of embezzlement, identity theft and grand larceny the victims are frequently careless or lax in security standards so the education process revolves around making more practical decisions that better safeguard information and limit the opportunities. Education in this respect is the easiest way to reduce this type of crime because an individual only needs to be made aware of existing defense mechanisms and how to utilize them. This is not to say that this education, even if followed by all individuals, will completely end this type of crime, but it will increase both the entry and maintenance costs for criminals engaging in these activities which will reduce the number of criminals. Unfortunately as previously mentioned an ample number of individuals to not even take the basic steps to protect themselves, such as using the word ‘password’ for their security procedures. This lack of action is detrimental for all of society because it easy ‘scores’ further instills resources and confidence in criminals driving more criminal action.

For individuals who fund criminal activity by purchasing the fruits of the action education can also reduce criminal opportunity. There are two types of buyers for criminal activity those who are unaware that the product is stolen/counterfeit and those who are. For those who are unaware, information relevant to the product purchased, both in cost, authenticity and availability can help differentiate between legal transactions and illegal transactions. For instance when attempting to purchase goods knowing the typical retail cost of the items and defining physical characteristics can serve to differentiate between stolen goods and legally acquired goods. Overall in a situation where the authenticity of the product could be questioned, the old adage of “Caveat Emptor” remains a good rule of thumb. One topic for debate may be whether or not harsher penalties should be attributed to buyers of stolen property who do not take reasonable steps to authenticate the legality of the purchased merchandise.

For individuals who know the transaction is illegal education can only offer some level of support regarding certain products. For example illegal drugs like heroin and cocaine can lose some of their desirability in light of the deleterious effects those drugs have on the body. In addition one can also inform drug users how much money they would save by eliminating drugs from their lives. Unfortunately education has little effect on neutralizing an individual making a non-consumable purchase, like buying a stolen stereo, because the individual is aware that the stereo is stolen, so the only education possibility would be on a subjective moral level.

Although education is a necessary and important first step, it is clearly not a “silver” bullet. For example one may cite that the federal government has been fighting a war on drugs for decades including multiple public service announcements, the most memorable being the fried egg-brain association, along with the D.A.R.E program and drug use has not collapsed into an activity only conducted by the most loathsome bottom dweller. With most criminal activities, the first step is to educate the individual to the detriments of participating in such an activity, the second step is introduce viable alternatives to the criminal behavior that will either provide similar, if not improved, sensory experiences or opportunities for resource acquisition. Therefore, it is not only essential to reduce the desirability of criminal activity, but also provide other opportunities or tasks that can replace the criminal activity. In essence this two-pronged strategy creates a situation where the criminal activity is not appealing while implying the availability of another more beneficial, to the individual and maybe even society, activity.

One could argue the curiosity is a significant motivating factor for buyers, especially of illegal drugs. While true, logic demonstrates that this curiosity is artificial. The curiosity largely associated with initial drug use is the typical ‘I wonder what is it like?’ despite plentiful information describing the positive short-term and negative long-term effects. The same curiosity motivator could be applied to putting one’s hand on a hot stove. Sufficient information exists regarding the outcome of such an action outside of direct experience. Despite the lack of direct experience there is not a rash of people putting their hands on hot stoves. Thus the curiosity motivator for drug use has simply maintained its faux legitimacy over touching a hot stove largely attributed to lack of acquired education regarding direct and indirect physical damage to the body.

Preventing damage crime appears to be more difficult than preventing gain crime. The chief problem, as previously mentioned, is the motivation behind damage crime. Although there may be some level of residual motivation through resource gain, the primary driving force is injury or damage to a person or group driven either by vengeance for a past wrongdoing or to prove one’s superiority over another. With this motivation cost-benefit analysis is more difficult as the cost becomes somewhat distorted because of the emotion and belief(s) involved in the action. Removing the cost-benefit analysis from the picture implies that very little can be done to dissuade the motivation beyond doing more to prevent the action before it occurs. Punishing the individuals after the fact is necessary, but its ability to act as an effective deterrent to future offenders is suspect. Overall there are four major scenarios when considering damage crimes, a single individual versus a group, a single individual versus another individual, a group versus a single individual or a group versus another group. In any of these situations the motivational factor can either be superiority or vengeance.

Looking first at the motivation of vengeance, interestingly enough although vengeance should be a stronger motivational force than superiority, it seems easier to derail, when using simple logic especially when large groups engaged against other large groups. The statement ‘an eye for an eye’ is an effective description behind vengeance motivation, with a counter being ‘an eye for an eye leaves the whole world blind’. The overall idea of the counter statement is to discourage one from retaliating when wronged for it will create a cycle of retaliation in which everyone ends up worse off.

Unfortunately this logical deterrent strategy seems to go against human nature and rational action. First, human nature tends to demand a response when one is damaged physically, emotionally, financially, etc. rather than simply shrugging it off, whether that response is an apology and proper redress by the damaging party or similar wrongdoing inflicted upon the damaging party. Simply shrugging it off can frequently lead to two possible interpretations. The damaged party is too weak to respond or the damaged party is unaffected/unconcerned by the action. To individuals with malice intent neither interpretation is favorable.

If the damaged party is viewed as too weak to respond there is a concern that the instigator may shift intrinsic interaction motivation from vengeance to superiority instead of eliminating any motivational element. It stands to reason that a shift in motivation to superiority will increase the negative interaction between the damaged party and the instigator whereas action motivated by vengeance is only a single event. The superiority motivator is largely demonstrated by the relationship between a bully and his/her victim(s). The concern with the damaged party appearing unaffected by the action is lack of satisfaction. If the vengeful party does not believe that the damaged party was sufficiently damaged then the vengeance motivator may not be satisfied and the individual may attempt another negative action against the previously damaged party in the name of original element ‘yet-to-be’ avenged.

While the above analysis seems to favor violence as a response to violence, such a belief is not wise. One option may be to attempt to restrict the number of retaliatory actions between the two parties as long as each side receives an equal number. Unfortunately that strategy would probably not be successful because the possibility exists that with each side knowing there are only a limited number of opportunities they would attempt to inflict maximum damage creating more overall damage than if there was no pre-set limit. So when one party commits a damage crime against another party there are three vengeance-motivated options that can be expected from the damaged party, none of which appear to be very attractive. No retaliation can be conducted, possibly leading to a greater number of negative actions. A set number of retaliation and counter action can be conducted, possibly generating a larger damage per attack ratio than might otherwise exist. Finally retaliation can continue for each counter action creating a cyclic nature of action counter action.

The only advantage stemming from the indefinite retaliation strategy is the possibility of no attacks in general. For example if there is not a significant difference between the power/resource levels of the conflicting sides, logic dictates that launching attacks is meaningless in effort to fulfill vengeance or demonstrate superiority because no significant change in the status quo would occur, simply more death and destruction. Two wrongs may not make a right, but the potential for two wrongs may eliminate the occurrence of the first wrong. Unfortunately in practice this strategy does not typically result in this logical outcome, as seen most notably in the Israeli/Palestinian conflict and the Shite and Sunni conflicts, because of strong religious and emotional factors involved in the crimes themselves, thus logic tends to be pushed into the background.

What happens between parties of differing power levels? If a weaker individual or group is attacked their options are few because to retaliate would invite 'vengeance' motivated attacks and to do nothing would invite more 'superiority' motivated attacks. Even though once again logic can fail in practice and weaker individuals can launch attacks against stronger parties. If a pre-emptive or retaliatory attack occurs by a weaker party it is important to analyze why the attack occurs.

The most probable reason for such action can be attributed to frustration. The weaker party is frustrated about either being weak in general or the negative superiority motivated actions of other stronger parties. The problem is that despite what is depicted in the movies these frustration-motivated responses rarely succeed in changing circumstances. After absorbing the attack the stronger party is not going to crumble resulting in the weaker party becoming the victor nor will the stronger party suddenly have a ‘new-found’ level of respect for the weaker party and stop initiating actions of superiority. Instead the more likely result is the stronger party will become agitated and begin executing vengeance-motivated actions. In addition the emotional nature of the response augments the danger. The worse case in this situation is that the frustration pushes the weaker party to act in a severe fashion far beyond anything the stronger party does which frequently results in significant bodily harm to the stronger party, the weaker party or uninvolved bystanders.

The second reason for an aggressive action by a weaker party would be an attempt to ‘stick-up’ for themselves. The concern with this motivation is similar to frustration in that such action will result in reprisal over respect. A third reason could be delusion in that the weaker party does not realize that he is the weaker party. Typically this reason is quickly eliminated as a motivating factor act the weaker party committees his action. Incidentally the best way to address vengeance motivated actions is to admit wrong doing before the action is committed and arrange proper redress.

The best option for the individual or group is to play defensively creating an environment where continuous demonstrations of ‘superiority’ cost more than their produced benefits and the lack of direct retaliation does not produce vengeance motivation. It is difficult for an individual or group to continue to devote resources to an action when those resources are wasted based on the result. If defensive techniques are not sufficient then the weaker party should request assistance from another party to bolster defense.

Overall negative actions will need to be dutifully addressed by society as with an expanding population characterized by no resource ceiling and unequal distribution resource acquisition opportunities are becoming fewer and far between. Therefore, continuing to educate the population as well as provide alternatives along with adequate and appropriate punishments are imperative to an evolving society.

Wednesday, September 14, 2011

Student Loans - The Coming Crisis?

Recently some have begun to raise concern about a perspective bubble in the student loan market. In the past student loans served a vital purpose in society allowing intelligent students who lacked the financial means the ability to attend college augmenting their education and helping them develop the necessary skills to succeed in an advanced job. Success in these advanced fields garnered larger salaries which allowed for timely repayment of the loans and effective participation in the consumer-based economy. This system worked as long as each component: high quality colleges, available advanced jobs, available and skilled workers and effective lending institutions were present.

Unfortunately the “Great Recession” has greatly handicapped the availability of not only high-quality jobs, but even medium quality jobs, which adds significant delay to the repayment schedule, if payment occurs at all. In addition to this failure in the original system the rise of ‘diploma mills’ / ‘for profit’ colleges which charge traditional college tuition amounts, some charge even more, but typically provide a questionable education have also added undue stress on the education-loan-job cycle. The development of these stressors demand deterrent options, in case an economic recovery (which would restore the cycle to balance) is slow to develop, to avoid unpaid loans becoming a long lasting problem.

In this cycle a cause of concern is the relationship between private lenders and student borrowers. Before the “Great Recession” private lending to students for college was on the rise largely driven by ‘dream college’ syndrome (where the student wants to attend college x no matter what the cost) and dramatically rising college cost with over 100 now exceeding $50,000 a year.1 These two factors consistently drove college costs outside of the total yearly caps offered by federal government loans demanding that students seek financial assistance elsewhere. The problem for students is that the private lending industry with respect to student loans is almost completely unregulated with a significant number of instances where even the limited regulatory rules are ignored without consequence. This lack of regulation provides little protection for the borrower and its prevalence throughout the entire private student loan industry is frequently an unnecessary burden on student borrowers.

On its face the most glaring initial difference between federal student loans and private student loans is the variable interest rates associated with private loans opposed to the fixed rates of federal loans. Not only do the private loans use variable rates, but also these variable rates are unnecessarily high. Variable rates typically include a quasi-floor in a margin which is added to the prime rate to ensure the rate does not go too low. It is almost unheard of for these loans to have a rate ceiling. The standard argument used by private lenders for these high rates is to absorb risk, but such an argument is not substantiated. The student loan market is similar to the sub-prime mortgage market, which demonstrated that opportunity pricing governed mortgage rates over perceived risk that the borrower would default. Also most of this ‘risk’ based pricing forgets to note that higher interest rates, especially in this economic environment, should increase the probability of default. At the moment private student loan lenders are not deterred by that reality because bankruptcy laws are designed heavily in their favor.

Others try to justify a high variable rate based on the university that the given individual is attending using university prestige as a means to measure of potential future income. The problem with this justification is that outside of a very select few, university prestige has little meaning anymore in the workforce. The fact is that most of the value in the high variable rates stems from the desire to profit, nothing else.

This desire to profit is further emphasized in the numerous fees which private lenders add to loans and their general dealings with borrowers. Lenders constantly charge for loan origination, late payments, arrangement of deferments or forbearances, copies of loan payment histories and loan verifications.2 Not surprisingly most of these services are widely utilized by borrowers especially deferments and forbearances (when available) in effort to avoid delinquency and default when payments cannot be made. It is an interesting strategy by these lending organizations to charge a fee for a service that is designed to limit short-term payment burden due to a lack of available funds.

In effort to ensure a high volume and probability of collection, most observers view the behavior of private student lenders as both ‘predatory’ and unethical. This behavior is demonstrated through a majority of loans have mandatory arbitration clauses, typically buried and hidden, which strip the borrower of most court-based litigation avenues instead directing disputes to arbitration where the arbitrator is frequently selected by the lender.2 Also private lenders rarely offer flexible arrangements which could tie repayment rates to income, initiate rehabilitation for formerly defaulted borrowers or offer long-term repayment relief.2,3 In addition forbearance, is rare and deferment is unsubsidized (interest accrues). A number of subjective or poorly defined default triggers are commonly found in private loans such as a borrower could be declared in default if in the lender’s judgment they experience a significant lessening of ability to repay even if a payment has yet to be late or missed.2 Finally loans are typically not discharged even in the death of the original signatory or cosigner.

In addition the poor regulatory environment does little good for potential borrowers due to a lack of transparency and/or an ample amount of ambiguity. Such specificity gaps allow the lender to quickly change or manipulate elements in the loan to the lender’s advantage without the concern of legal reprisal. The lack of certainty in consequences for failure to abide by the limited existing regulations renders those regulations moot.

For example private loans under $25,000 are covered by the Truth in Lending Act (TILA), which largely governs disclosure and repayment timing.4 The TILA contains a ‘loop-hole’ of sorts in the special rules for interim student credit extension, which are used when the repayment amount and rate/schedule are not known at the particular time when credit is extended.2 Due to the lack of disclosure on the day the credit is extended, mandatory and complete disclosure is supposed to occur when an agreement on the repayment schedule is created; however, the creditor may delay disclosure until the due date of the first payment.2 Unfortunately this delay commonly creates violations mostly stemming from improper or incorrect APRs. Normally lenders provide two APR disclosures, one for the interim period before repayment and then one for the repayment period (the repayment APR is almost always higher). However, a significant number of times lenders incorrectly report this second APR to the borrower which is in violation of the TILA.4

Another regulatory problem is a lack of note inclusion. The lending organization, sometimes legally referred to as the ‘holder of the note’, is subject to the claims and defenses that the borrower can assert based on conditions created by the Federal Trade Commission. The basis of this information is provided in a notice in the note itself and its inclusion is required by the holder. However, a number of lenders (40% in one study) simply do not include the notice in the note in an attempt to limit potential liabilities (liabilities which frequently only exist when lenders break the law).2 In other instances 90% of those who included the notice also included contradictory information or clauses which sought to undermine the ability or the desire of the borrower to utilize the information in the notice.2

With respect to the ‘holder of the note’ one of the issues that is creating concern among financiers is a repeat of the sub-prime mortgage fiasco as securitizing student loans has continued to gain in popularity as a means to increase revenues. However, at the moment it is difficult to see such a crisis coming to fruition because unlike the sub-prime crisis the federal government handles a vast majority of the student loans. Therefore, any crisis from student loans involves one of two issues. The first crisis, as mentioned previously, is a slowdown in the economy due to less available capital that loan holders can spend in the U.S. consumer-based economy because they cannot discharge or steadily payoff their loans. A secondary element of this first crisis is that economic conditions could worsen to the point where individuals elect not to attend college creating further shortages in highly-skilled workers creating employment skill gaps.

The second crisis is lost government funds due to student loans not being paid back at a high rate. This second crisis is a long way off though due to the generally small total amount of the student loan program relative to the size of the government and the interest payments made by those individual who are able to pay back their loans in full filling some gaps. One concern is that if private lending does increase the significant lack of regulation and no borrowing limits the rate of default among student borrowers could increase dramatically worsening both potential crises.

Some may argue that private student lenders fill a need in the marketplace and that if a potential borrower does not like the terms that are given he/she can go elsewhere, that is theoretical basis of competitive capitalism. The problem with the ‘don’t like it don’t do it’ reasoning that is typical for those who want to strip any complexity from an issue due to its potential detriment, is that these practices are endemic within the private student loan industry thus there is rarely a viable alternative which would be more beneficial to the potential borrower. Therefore, if these funds are needed, which they most likely are otherwise a private loan would not be sought out, the borrower typically has to decide on college or no college. Selecting the latter frequently results in a negative for society because an individual is denied an opportunity to increase his/her skill set, intelligence and overall usefulness to society. Overall the argument that government should not regulate the student loan market is a foolish one that is not supported by reality. For example look at usury law for banks; standard government regulation on a similar level should apply for private student lenders because the environment has become homogeneous in a negative manner due to a lack of regulation and pure greed.

One of the crux issues involving the first potential student loan crisis is the difficulty in which student loans can be dismissed through bankruptcy. In 1976 Congress enacted a nondischargeability provision to respond to complaints that recent college graduates were abusing the bankruptcy system to eradicate their student loan-based debts soon after graduation.5 Whether or not abuse was actually occurring was controversial due to a lack of empirical evidence demonstrating the alleged abuse. Logic also seemed to go against this mindset because relative to inflation most college tuition was not excessive in the 70s and bankruptcy came with significant penalties. In some respects the logic behind using bankruptcy to discharge student loans before even trying to pay them back is similar to using abortion as a primary form of birth control, any benefits are heavily outweighed by the costs/detriments. Overall this nondischargeability provision applied to only federal and non-profit loans and had two exceptions. First, a debtor could discharge student loans when filing for Chapter 7 bankruptcy five years after loan maturity. Second, the debtor could discharge if he/she could prove ‘undue hardship’.6,7

The first provision was eventually abolished by the Higher Education Amendments of 1998, after a brief increase in wait time from five years to seven years, leaving undue hardship as the only means in which to discharge federal student loans.8 Seven years later the Bankruptcy Reform Act of 2005 eliminated the differences between how bankruptcy affected private student loans and federal student loans with private lenders receiving similar protections, which were previously held only for the federal government.9,10 Basically prior to 2005 loans from private lenders could still be discharged through normal bankruptcy, after the Bankruptcy Reform Act of 2005 the only means to discharge any student loan, federal or private, was through undue hardship. The U.S. is the only jurisdiction under review to have extended the application of the exception to discharge to non-government funded or guaranteed student loans.6

Applying for undue hardship occurs through filing an adversary proceeding after filing for bankruptcy. Typically the chief, sometimes the only, criteria for determining undue hardship is the Brunner test which includes three elements: 1. the debtor cannot maintain a minimal standard of living when factoring in repayment of the student loan debt with respect to current income and expenses; 2. there is no reasonable expectation that these circumstances will change within the timeline of the repayment schedule; 3. the debtor has attempted to find other avenues in which to provide some means to repay the loans;11

While the Brunner test is supposed to impart some measure of consistency in whether or not a student loan(s) should be discharged, one of the prevailing problems is that this consistency is left up for interpretation. This dependency on interpretation creates an environment where the attitude of the ruling judge tends to be much more important than whether or not the conditions of the Brunner test are actually met. Overall some individuals seem to misrepresent the student loan crisis as individuals always being mired in debt when in fact a past study found that 45% of individuals who filed for a discharge of student loans through undue hardship were successful. The crisis is that the discharge only becomes available when the point of undue hardship is attained, which means the person is probably in significant financial peril even without the loans. Note that it is a misconception that when discharge is granted through undue hardship that the entire student loan amount is forgiven; instead typically a given percentage is forgiven to a point where the loan debt is not longer viewed as undue hardship. In the above study where 45% of applicants received discharge, approximately 72% of the debt, on average, was discharged.7

From at least this study the fear of being saddled with student loan debt over the course of your entire life seems somewhat overblown; especially in this down economy where the unemployed have less reason to take personal blame for not having a job or having a much lower paying job than previously planned and thus not having the necessary income stream to pay back the loan in a timely fashion. For even those who agree with the premise that student loans are not a forever crippling albatross the problem of consistency is still a significant issue. Thankfully because the Brunner Test does provide some guidance the issue of consistency should be solvable by simply expanding the pool of judgment. Instead of having a single judge presiding over an undue hardship hearing five judges could preside with the majority ruling acting as the official decision. The most important issue for this solution would involve ensuring appropriate scheduling due to the lack of an ‘official’ undue hardship panel for the judges involved would be drawn from the pool.

However, some argue that a 45% discharge rate is too little, what about those 55% that are still saddled with their debt and no feasible means to successfully discharge it? First, it must be assumed that the expansion of ruling judges to 5 will result in a similar discharge rate for undue hardship, the accuracy of such an assumption is unknown. Overall the best solution is to simply eliminate the restrictions on eliminating student loans via bankruptcy, especially since no one has produced valid evidence on the original reason for its restriction, rampant filing to eliminate debt right after completing college. One could argue that the bankruptcy filing and penalties would prove to be a deterrent to fraudulent bankruptcy filing. Also an alternative to simply eliminating the discharge restrictions would be to create some level of interest forgiveness for those that successfully acquire a college degree. In this instance individuals that make effective use of the funds and have a higher probability of contributing to the economy should have a better opportunity to fulfill that potential by not having to deal with superfluous interest.

The issue of bankruptcy is only one element driving the potential student loan crisis; while there are others of minor importance, the second major issue is the rise of for-profit educational institutions. For the purpose of this post a ‘for-profit’ can be defined as: institutions of post-secondary education that are privately-owned or owned by a publicly traded company and whose net earnings can benefit a shareholder or individual.12

The rise of the for-profit educational institution was driven by filling the presumed need to offer more flexible courses and hours to currently employed individuals, typically older than traditional college students, who wanted to pursue advanced degrees largely motivated by thoughts of promotion at their current job. Some also argued that these institutions would remove any stigma associated with older individuals interacting in a traditional college environment with younger individuals. In addition for-profit institutions utilized an open admissions policy so their busy professional applicants would not have to be burdened by taking standardized tests. Unfortunately this intention has seemingly been corrupted by the pursuit of profits.

A scathing report about numerous acts of irresponsibility at best to outright fraud in the for-profit industry were documented by the GAO in 2010.12 While going over the entire report here is not appropriate the most detrimental elements in the report describe multiple instances of fraud where potential recruits were told to lie about their total assets and/or income to make themselves poor enough to qualify for government loans, the tuition disparities between for-profits and other available public institutions and the loan default disparity between students enrolled in for-profits and students enrolled in traditional colleges.12

In 2010 some members of Congress determined that the questionable tactics and frequent complaints regarding for-profits stemmed from a lack of regulations. Regulation was also deemed important because for-profits only accounted for approximately 10% of secondary education students, but utilized 23% of total federal loan funds and their students were responsible for about 50% of total loan defaults.12,13 Therefore, new regulations referred to as ‘gainful employment’ were proposed in typical draft form for all for-profit institutions over a given academic year.13

- At least 35 percent of former students must be actively paying down their federal student loans, defined by lowering their loan balance by at least a dollar.

- Graduates must spend no more than 30 percent of their discretionary income on student loan payments.

- Graduates must spend no more than 12 percent of their total income on student loan payments.

These draft rules would have began in June 2012 with the following conditions applying in each given situation:

- No penalties for a program that is abiding by all three rules;
- Failure to abide by one or two of the rules results in placement on restricted status which could reduce the amount of loans which could be offered to students attending the program;
- Failure to abide by all three rules results in black listing (no loans would be offered to students attending the program);

However, those draft rules were significantly altered in the favor of the for-profit institutions due to changes in enforcement and measurement after what some characterized as heavily lobbying by the for-profit industry. While the rules remained the same the enforcement penalties changed so dramatically that the rules were rendered rather meaningless. For example instead of starting in 2012 the rules associated with ‘gainful employment’ start in 2015, so for-profit institutions have another 4 years to participate in their current questionable practices before changing. Also accountability for rule violation was extended from 1 year to 4 years and a single strike was only given if an institution failed all three rules in a given year. Failure to comply with two of the three rules results in absolutely no penalty or consequence. Finally the penalties associated with various violations over the four-year evaluation period are:

- One strike requires the program to disclose that failure to prospective students;
- Two strikes requires the program warn students of excessive debt, the potential of closure and give students options for transferring to other schools as well as require the single strike penalty;
- Three strikes or more the program is black listed;

At the moment proponents for for-profit institutions, not satisfied with completely neutering these rules, have also filed suit in the U.S. District Court for the District of Columbia towards eliminating the rules entirely. Most proponents cite that the application of these rules will make it more difficult to offer loans, thus reducing the probability that low-income students can attend their institutions and receive a ‘quality’ education. Unfortunately this argument has little to no merit when recalling from above that for-profit institutions routinely and heavily overcharge their students for tuition relative to existing public educational institutions in the same region.

A second argument made by for-profit proponents is that these rules unfairly target only for-profit institutions and all educational institutions should have to abide by them. Once again this argument has little merit because the fraudulent and even predatory environment created by for-profits drove the creation of these rules. So why should a group that has not demonstrated this behavior be penalized in the same way as a group that has? Also a large percentage of for-profit enrollees borrow (upper 80s)14 which is more than traditional students, so once again targeting these rules make sense. Therefore, logic dictates that all these new rules, unchanged from their draft form, would have done on any meaningful scale would have been to reduce the amount of profit that for-profit institutions would have generated from their students, clearly something not in the interest of the for-profit proponents.

Another problem with the above rules is that they do not address the transparency problem that most students face when gathering information about for-profit institutions, especially because recruiters have a tendency to omit information they should not omit in their discussions with potential students.12 Therefore, additions to these rules need to be made. For example all colleges need to have an easily identifiable section on their websites (or a pamphlet available through mail) which identify current tuition costs for a given year, total tuition costs associated with a four year degree over a 4 to 6 year period, what colleges will accept credits from the particular college through transfer, accrediting agency with current status and a working hyperlink to the Department of Labor and Statistics content page to reference starting salaries for a given job.

Also referencing the lenders themselves borrowers should have a clearer picture regarding the terms of any loan, especially after repayment begins. This goal can be accomplished by requiring lenders to provide estimates of all important loan items that will apply once repayment begins. Note that these would only be estimates so they would not be binding, but they would give the borrower a better understanding of whether or not he/she could afford the loan and what to expect when going into repayment. Currently lenders are ‘encouraged’ to provide similar type information, but rarely do, so it should be required. There is no detriment to providing this service unless the lending institution is planning on screwing over the borrower.

Also the above rules do not demonstrate any way to measure the methods used by for-profits to ‘hide’ defaulters by using forbearance and other deterrence tools. Therefore, individuals who are almost guaranteed to default or even exceed the income caps can be shuffled to another analysis period to avoid penalties for the current period. Associating this ability to hide defaulters with the excessive administration failures required to even receive one strike, it is difficult to conclude that these rules will have any negative impact on for-profit practices.

This ‘hiding’ issue is also important because most of the information that is gathered and reported on regarding loan health and default rates only take into consideration defaults, not long-term ongoing delinquency avoidance. Delinquency is commonly defined as ‘failure to make monthly payments within 60 days of the due date when expected to’. Default commonly occurs when a borrower exceeds 270 days of delinquency.14 However, for students that have departed college, tools like deferment and forbearance are usually a bad sign regarding their ability to reengage in loan payments, especially in the current economic climate. Therefore, while these individuals have technically yet to default, for a number of them it is only a matter of time until they do, but when they will is not clear because of continued delay through the use of these various tools.

The problem with this situation is that most of these individuals who are delinquent or quasi-delinquent (avoiding delinquency through continuous use of forbearance, etc.) are basically in default because they are not making significant enough payments to pay off their debt, yet officially these individuals are not counted as in default so statistically the problem is typically worse than people think it is. Such inaccurate information may provide some pause to those that are concerned about student loans becoming another sub-prime mortgage crisis.

Overall if the current economic climate continues a high probability exists for a problem to develop in the student loan environment. While this problem should not be similar to the crisis that struck the sub-prime mortgage industry because the federal government is responsible for a vast majority of lending (over 80%),15 the more pressing issue is that without an effective and reliable means to discharge student loan debt the inability to find jobs will force borrowers out of the economy. Less money in the economy means less economic growth which hurts society in general. This situation can quickly start a self-sustaining feedback cycle (similar to what has been seen in the housing market), which further damages the economy and becomes even harder to escape. Another aspect of this problem is the lackadaisical attitude individuals in government have toward the for-profit education industry which frequently exacerbates the loan problem by charging excessive tuitions and other fees and using potential predatory tactics to convince recruits to pay them. Regulatory enforcement is needed for this industry to stem this contributing problem. In the end steps must be taken to address this problem otherwise the reduced capital in the market will create a significant drag on the economy as well as negatively affect the future educational prospects of millions of potential college students.


1. Brainard, J. “A Public University Joins the Expanding 50K Club of College Prices.” The Chronicle of Higher Education. October 31, 2010.
2. Loonin, D, and Cohen, A. “Paying the Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers.” National Consumer Law Center. March 2008.
3. Institute for Higher Education Policy, “The Future of Private Loans: Who is Borrowing, and Why?” at 6
(December 2006).
4. Truth in Lending Act.
5. B. Hennessy, "The Partial Discharge of Student Loans: Breaking Apart the All or Nothing Interpretation of 11 U.S.C. 523 (A)(8)" (2004) 77 Temp. L. Rev. 71 at 73
6. “Government Student Loans, Government Debts and Bankruptcy: A Comparative Study — Part 2” Office of the Superintendent of Bankruptcy Canada.
7. Pardo, R, and Lacey, M. “Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt.” (Tulane University School of Law, Public Law and Legal Theory Research Paper Series, Research Paper No. 05-06 (August, 2005)).
8. C. Morea, “Student Loan Discharge in Bankruptcy – It is Time for a Unified Equitable Approach.” Am. Bankr. Inst. L. Rev. 1999. 7(193) at n 2.
9. Pardo, R, and Lacey, M. “The Real Student-Loan Scandal: Undue Hardship Discharge Litigation.” Am. Bankr. L. J. 2009. 179(83).
10. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8 § 220, 119 Stat. 23, 59 (to be codified at 11 U.S.C. § 523(a)(8)(B)).
11. Brunner v. New York State Higher Education Serves Corporation 831 F. 2d 395 (2d Cir. 1987
12. Kutz, G. “For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices.” Government Accountability Office. Aug. 2010.
13. Program Integrity: Gainful Employment-Debt Measures. Education Department. 6/13/2011.
14. Cunningham, A, and Kienzl, G. “Delinquency: The Untold Story of Student Loan Borrowing.” Institute for Higher Education Policy. March 2011.
15. DeRitis, C. “Student Lending’s Failing Grade.” Moody’s Analytics. July 2011.