17 September 2005

Massive Losses to Identity Fraud

From the Register:
Reported ID theft losses represent only the tip of an iceburg, dwarfed by fraudulent losses run up by crooks assuming completely fictitious identities, according to analysts Gartner.

It reckons ID theft will claim 10m US in 2005 resulting in losses of around $15bn from 50m accounts. By comparison "victimless" fraud - bad debt run up in the name of non-entities - will hit $50bn this year. [...] US banks are so keen to recruit new customers they will open up accounts on the basis of identification from only a pay-as-you-go mobile phone bill (a type of account that is even easier to open) without checks on the validity of supplied social security numbers. Once a bank account is open crooks will pay bills religiously, eventually earning enough trust to obtain credit cards with higher and higher limits.

A lot of populist readers out there may be tempted to run out and try this. It strikes me as an example of the moral hazard that I feared might arise in the latest bankruptcy bill. For those of you unfamiliar with recent US congressional activity, in March our Congress passed a bill that made our bankruptcy laws much tougher on debtors, but also facilitated the formation of unsecured liabilities on the part of banks. Any honest economist (as opposed to the prostitutes employed by the financial sector) would advise against this, on the grounds that it stimulates banks and other financial intermediaries to make it easier for unworthy borrowers to borrow, since the lenders know they will have an easier time of it collecting—on the government's dime, of course.

In order for an economy to function, it is necessary for borrowers to be financially responsible. But under the new legislation, all of the onus was placed on the borrower, while lenders send out almost 2000 pieces of mail for each new account. That this would lead to endemic fraud, seems like a reasonable thing to expect most economists to anticipate. Didn't happen.


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