To some extent, I actually agree with this. Though I'll also note that if you default, the worst thing that generally happens to you is that it's hard to get credit. Yet, the way the credit card companies allegedly bring on your default is by giving you credit. I'm not sure that the argument that credit card companies should deny you credit, because otherwise you won't be able to get any credit, really works too well.
But leaving that aside, why should you feel morally obligated to repay, at great personal cost, a company which feels no obligation to you? No particular reason, maybe, except that the belief in a moral obligation to repay one's debts may be the only reason we can have both credit, and relatively light legal sanctions for overusing credit. If people really acted as if the choice to default were morally neutral, we'd either lose most of our credit system, or the legal rules would have to be much more punitive.
That's speculative, of course, but there's some evidence to support it. Meet Memphis, Tennessee, America's Miss Bankruptcy 1997:
The roots of the problem in Memphis are tangled and deep. One problem is Tennessee's debt collection law, which makes it easy for creditors to collect overdue bills directly from borrowers' paychecks--"garnishment" in legal terms. George Stevenson, a Memphis bankruptcy trustee, says perhaps as much as a third of petitioners want to stop a garnishment. Another problem is simple overborrowing. The average Memphian owes $10,137 in nonmortgage debt, 18% more than the typical American, according to the debt rating agency Equifax. A third problem is an apparent propensity for personal misfortune. Studies have shown that three main life disasters tend to push people into bankruptcy: job loss, illness, and divorce. Memphis' divorce rate is about 10% above the national average.
But all these put together aren't enough to explain the tremendously high bankruptcy rate in Memphis. A visitor soon concludes that this boomtown has a culture of bankruptcy. The city itself went bankrupt in 1879, and so have many of its leading citizens, from the founder of the Piggly Wiggly grocery chain to rock & roll legend Jerry Lee Lewis. Because so many people have lived through bankruptcy, there's a strong informal support network for anyone in financial trouble. Friends and neighbors tell each other "bankruptcy works," says David Monypeny, Jerry Lee Lewis' manager, who claims that Lewis' 1988 filing gave "The Killer" a chance to start his life over. There's also plenty of professional support for bankruptcy: The Memphis Yellow Pages features more than a dozen large lawyers' ads offering to wipe out debts for no down payment; a Honda dealer (its slogan: "The bankruptcy specialists") runs TV commercials promising to sell you a car no matter what your credit history. For some Memphians, bankruptcy is a way of life. Most financially strapped Americans liquidate their possessions and wipe out their debts in one blow, using Chapter 7 of the bankruptcy code. Memphians prefer Chapter 13, which allows debtors to keep their property but requires regular payments for five years. (Incidentally, Chapter 13 was written by a former mayor of Memphis.) Most Chapter 13 filers lose their protection because they fail to meet repayments, so they often just refile (which, to be fair, inflates the bankruptcy statistics somewhat).
There are serious costs to being the No. 1 deadbeat, of course. It's almost impossible to cash checks in Memphis. Used-car dealers charge their wholesale cost as a down payment. And lenders are either tightening or giving up. First Enterprise Financial Group, for instance, an Illinois-based sub-prime lender, closed its Memphis operations in May.
People tend to underestimate the cultural infrastructure of capitalism. At a moment when we're looking for villains and victims, this is worth remembering.
I'd like to add that if your creditors are tradesmen and small businesses rather than huge credit card companies, you're taking food right out of the mouths of their children.
You might not feel bad screwing BoA, but you sure as hell should feel bad screwing Bob's Plumbing or Dave's Auto Repair.
Why shouldn't you feel bad for the small businessmen, tradesmen, teachers, and other salt-of-the-earth types who are BofA shareholders (either directly or through their retirement funds)?
Because BOA gets bailed out?
In the old days, they had debtor prisons. But there was arguably more of a moral issue at the time because credit ratings were more difficult to track, so it was relatively easy to screw your creditors without consequence.
You can still screw some creditors today, such as the small businesses Rob mentions. But I think the future will see a continued evolution away from morality and toward simply utilizing information better, so that the consequences of default simply are what they are.
It's interesting that regulation actually impedes this function to some extent. You probably don't want to make a loan to someone who's delcared bankrupty every time the limit from the last one ran out, but I don't think they can actually keep bankruptcies on your credit report indefinitely.
Great. One can spend somewhere in the vicinity of $10,000 in legal fees to collect $500.
Automotive has an advantage. They possess your property until you pay the bill. Otherwise there are expensive and time consuming hoops to jump through. For example, in Canada at least, if you install equipment pertinent to the operation of the building, you can't remove it, ie. heating system, ductwork, or something like that.
There is huge risk involved as the dollar amounts are large. Probably the primary skill that determines success of such a business is the ability to sniff out people like the Andrews and helpfully refer them to your competition.
Derek
Damn blockquote
Should you feel bad about exercising an in-the-money put option you are paying for? No.
Default is an embedded option in the credit contract you sign. You pay for it, and people are working hard to estimate how much you should pay. Like most embedded options, they are very easy to sell to someone, and make them pay extra for, because they don't realize it's been bundled in.
Related: For the residential mortgage market, prepayments are often a much bigger problem for bankers than defaults. Should you feel guilty if you prepay your loan?
Thing is, the amount you pay for the embedded option is directly determined by how often the embedded option is exercise. Keeping in mind that for many kinds of credit contracts these options are mandated, the exercise of them therefore has a negative externality. This being the case, you could then be interpreted as having an imperfect duty to not exercise the option (to the extent that you have a duty to contribute to the provision of public goods, especially ones that would be excludable if not for governmental intervention, if any).
But Joshua I'm paying for the option, it isn't paid for by the government. The government sets terms, and the quants adjust the rates accordingly. If I am riskier, I am charged more; I'm charged the expected loss of lending to me. That loss is the value of the option to me.
If you were a quant, how would you estimate "how often the embedded option is exercised" and charge for it? I imagine you'd use a benchmark that it gets exercised when it is profitable, not based on how polite or gentlemanly the person in question seemed, or how likely it is he'd follow imperfect duties.
I don't understand what you mean by externality here, at least outside the case of housing.
Given your assumptions, I think your reasoning is correct; however, I wouldn't rely on an a priori estimate of how often the embedded mandatory option is exercised (except for stress-testing); I'd try to measure it. Under that assumption, the price forced on everyone who becomes party to a regulated contract rises on the margin as people exercise the option more often (presumably, up to the limit of the a priori estimate) . That sounds an awful lot like a public bad, iff the option actually is exercised less often than your methodology suggests.
Maybe you should use your real name if that is your attitude. Just to protect the innocent.
Derek
"prepayments are often a much bigger problem for bankers than defaults"
In sum, yes. But that's mostly because prepay rates are much higher than default rates. If default rates rose tot he level of prepay rates, it would basically be impossible to lend.
Good point.
But in addition I think the obligation is different between subprime and prime. If one is given an expensive subprime loan with exorbitant rate I would say there is very little moral obligation to pay if one runs into difficulty -- that should have been priced into the loan. On the other hand those who get a prime loan should feel more moral obligation to pay otherwise they will be adding costs to their prime peers.
What a bunch of utilitarians! Western culture puts a very high value on promise keeping. I don't doubt it applies to artificial persons (corporations, foundations, etc.) because it is people who make the promise and people who must see to it that the promise is kept.
To be sure, it is the kind of norm one would expect in a commercial culture, especially as it applies to strangers to the family, tribe, nation, etc. It also is limited by excuse based on "good reason". But the excuse does not justify not feeling bad about not keeping the promise.
Not really. Someone charged with 5% annual rate has a very different contract with his creditor from someone charged with 27% annual rate.
fs-
Someone charged with 5% annual rate has a very different contract with his creditor from someone charged with 27% annual rate.
I love it!
I'm sure your similarly outraged by the fact that there is even a greater difference between paying 2% of your earnings to Socialist inSecurity in 1940 and paying 12.6% of your earnings to Socialist inSecurity today.
Can I change my "contract"?
You don't have to love it. It is financially impossible for all 27% debt to be paid off in a non-inflationary environment. Defaults are built in by lenders. As long as there is no intention to defraud the lender there is no moral obligation.
To view it another way, the cost of defaulting on 27% debt is borne by the lender and the defaulting borrower while the cost of defaulting on 5% debt is shared by other prime borrowers.
Now you may have a better understanding of you 12.6% SS.
I think the morality of this issue is very much in a state of flux right now. We have one remaining credit card with a balance - never been late, never been close to the max, always paid more than the minimum - yet the interest rate was raised 40% last week.
Why I asked? Because we can was the essence of the answer.
If banks can change terms and conditions at any time for any reason, why should I feel the need to fulfill my contractual obligation to pay back the loan? At some point doing what you always believed was the right thing just leaves you feeling like the last sucker in America.
We can afford to pay this balance off as we've paid off all our other debt but I'm so angry at this point I'm seriously considering ruthless default.
If you can afford to pay back it is much better to just pay and close the account. The bank doesn't really expect people to be able to afford 40% compound rate. It is a way for them to force customers they no longer want to leave.
Defaulting on the card will ruin your credit and cause trouble with your other lenders or potential lenders.
There seem to be two types of bankruptcy story. One is the big gamble that didn't pay off. Start-up companies.
The other is people who lived beyond their means, and need relief from their (hopefully mended) prodigal ways.
Each one of these has its own moral imperatives. The big gamble requires that you took the money in good faith. The reformed prodigal requires that you go and sin no more. Both require that this action was not a premeditated strategy to defraud creditors.
Should defaulters feel bad?
Yes. It's basically stealing or lying. An honest person will do everything they can to repay a loan because they said they would repay the loan. Sometimes it proves impossible and the debtor shouldn't be punished for an accident of fate, but they should still feel bad that they weren't able to keep their word.
@rortybomb
For the residential mortgage market, prepayments are often a much bigger problem for bankers than defaults. Should you feel guilty if you prepay your loan?
No. It may be a problem for the mortgage market, but if the creditor allows prepayment through the contract, that is what they both sides agreed to. No promises were broken.
This Jonathan Sacks quote seems rather appropriate
Source: http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5946941.eceShould defaulters feel bad?
I think they should. They signed their name to an agreement to repay a loan. Unless their loan had a clause releasing them for responsibility for a given circumstance, they're morally obligated to repay the loan.
But what if they were forced to sign the paper? Frankly, that's impossible. I hear stories about bait-and-switch tactics, etc. Doesn't matter. You still have the option to walk away from the house. It's your dream house? Tough. You should have chosen a better lender to handle the transaction on your dream house.
From a utilitarian perspective, consider how much different our economy would be behaving right now if everybody did whatever is necessary to repay their debts.
I've personally run into several situations where when I went to sign the papers, the terms of the loan were worse than what had been discussed and agreed to, sometimes in writing. Fortunately, I didn't sign the papers, though the first time it happened, if it weren't for my father's double checking I would have. This is fraud and fraud does matter. The government should spank lenders hard enough if they try this kind of garbage that they have to find a new line of work.
The last time I went to take out a loan I ended up walking away from it. Sadly, I might not have done so if the lender had the slightest amount of competence. Instead, I was told to come into the bank at such a time, but when I got there the loan officer was not there. So I rescheduled , and once again, they hadn't gotten organized. So I took to ringing up and checking that the officer was there before I went. This time I got there, and the officer was there, but the paperwork wasn't. They'd sent it to the wrong branch.
Finally I got the actual forms, with no witness ready for me to sign, so I took them home with me.
I hence got several hours to read them carefully, rather than the 30 minutes I would probably have spent. After reading them, I didn't go back and sign them, I walked away.
And no, I didn't bother to tell them that I wasn't coming in.
(On reflection, did I really want a major contract with such a group of incompetents, even if the contract had been what I'd asked for?)
A moral argument mainly on the ground of "promise keeping" seems to be missing something. Part of the traditional judgment about running up debt is based on the judgment that the debtor is not exercising self-control. There is a reason that debtors are grouped together with alcoholics, gamblers and other addicts.
In other words, the argument against walking away from debts might not be so much that it is bad for the community, and your lender, and more that it is bad, in the sense of unhealthy, for the debtor.
It may also make some sense to draw a distinction between credit that is for an investment of some kind - to start or expand a business, purchase a college degree - and credit used for personal consumption and the borrower never intended to use to produce a profit or increase earnings. As a policy matter I'm guessing that we want more of the former and are more or less indifferent to the latter.
"It may also make some sense to draw a distinction between credit that is for an investment of some kind - to start or expand a business, purchase a college degree - and credit used for personal consumption"
Majority of students use most of their student loans to fund consumption while they have no income, not to pay tuition and fees.
Also, not all degrees produce a profit in the future. Many simply give one more status in society, without increasing productivity.
I would not be too quick to lump student loans in the same category as business loans.
Offtopic: Whats the tag for the block-quote thingie?
<blockqoute>
It's so obvious that I used to have trouble remembering it.
Offtopic: Whats the tag for the block-quote thingie?
blockquote with "less than" "greater than" symbols around it.
how do you make a less than sign?
Use the HTML escape characters. < = <, > = >
Although I hope that a defaulter feels horrible, which is why I refer to them as "bums," whether they do or don't is besides the point. Megan's point that capitalism is based on a set of morals is correct, at least in terms of US Capitalism, but it's important to recognize that there are other environments that capitalism has thrived within.
...such as prisons and within organized crime.
To work, Capitalism requires redress for injustices. If "guilt" is adequate to prevent defaults, that's great - but I've yet to see guilt be adequate.
If you don't repay a mobster, you won't feel remorse. You will feel fear, followed by pain - or worse.
Ditto if you don't honor your committments in prison.
And what about our own form of Capitalism? There must be consequences for defaulting on *any* contract, and they must be so odious that borrowers will go to great lengths before default.
Whether the person feels "bad" is there business. Default should be something that people actually fear. They should realize that it is a life-changing activity, in the negative sense of the word.
Debtors prisons didn't work since people couldn't work to pay back their debts while they were incarcerated. A modern version, however, where the inmate did truly productive work, earned actual money and used that money to (a) pay for their own incarceration, and (b) used whatever was left to repay their debt... hmmm, that might work.
I only ask for the sake of the slow readers. But are you literally asking for a return to debt slavery? If you are please use the term. If not tell me what the difference between your proposal and debt slavery is.
I am, as long as the labor is fairly paid.
What made debt bondage fail was corruption, not theory.
Why are you against it, if the debtor is fairly paid?
A debtor prison where the prisoner works to pay off the debt? Makes sense if the debtor is an author, or if you have a whole group of factor workers. But a journalist? Once the first one has done a couple of "inside the bars" stories, they will be out of a job. Likewise most professions.
It could be more of a work-release, where the debtor leaves for work every day but comes back to prison for the evening.
It has to be a strong enough disincentive to make it very unappealing, but the debtor still must be able to earn cash to repay their debt.
Metis: Who's to say that taking responsibility for one's foolishness or lack of self-control is not a good thing? The norm that promises should be kept has an admonitory function, too -- you should feel remorse (reinforced by censure from others) and apologize -- perhaps this will encourage better behavior. Of course, it doesn't work most of the time with some kinds of people, but that's irrelevant. What is relevant is that the norm is important, and should be "enforced" by remorse and censure by all persons in the community.
This is, of course, a stern approach to things. It denies special help to idiots and those who are easily fooled into following their avaricious dreams by clever loan agents. It may be a bit too Jewish or Christian, but would you have another kind of approach and makes us all incompetent wards needy of supervision and protection?
I don't think that I claimed that taking responsability for foolishness or lack of self-control is a bad thing - just that the promise-keeping frame is a little bit limiting and that people seem to think differently about differently about different types of debt and reasons for default.
To mention a few examples that jump to mind - I feel somewhat differently about GM's likely bankruptcy and default on bonds than I do about the NYT columnist and his wife.
In the case of GM bonds my reaction can be summarized sophisticated investors, knew the risks, caveat emptor, invisable hand, amen.
In the case of Mr. Andrews, and even more so his wife, my reaction includes more judgment of the borrowers. Phrased most strongly indebtedness seems to be something of a character trait for Ms. Barreiro. She may feel bad about that. I would. Some alcoholics feel bad about that too. Others don't.
A system based upon contracts will ultimately fail if enough parties -- whether lender or borrower -- don't act in good faith.
However, that does not justify sloppy underwriting, excessive leverage or predatory lending practices. It does not excuse a lender for lowballing default projections. It does not make it reasonable for lenders to turn to retroactive fee gouging as a method for shoring up its losses that were created by its sloppy underwriting, excessive leverage or predatory lending practices.
Ultimately, the morality argument goes nowhere. The lending industry is ultimately driven by statistics, i.e. what is the likelihood of defaulting, and what is the cost if a default occurs.
Morality discussions get in the way of factfinding. This quote from your article should have caught your attention:
The average Memphian owes $10,137 in nonmortgage debt, 18% more than the typical American
Why are you surprised that people who are more heavily leveraged have a higher default rate? That's a basic rule of finance -- the more debt one has, the more likely the risk of default.
Here's how you know that the argument you've made fails -- because these borrowers were given more debt. If the system was as bad for lenders as you claim, then they would not have issued the debt because the lenders would have said no. The lenders apparently said yes, so they were not deterred. Rightly or wrongly, their lenders obviously should be able to live with the terms, because they made a decision to extend credit in the first place.
<blockquote>
Woot, got it.
Can someone give me an example of an actual predatory lending practice? All I've seen so far were just bad deals. One offered to my by my lender was
"We can finance your house at 2 percent lower with a variable rate mortgage"
"Whats a variable about a variable rate mortgage?"
"After 2 year your rates will reset to the market rates"
"And those can be anything?"
"Yes"
"No thank you"
(The irony was that the girl selling me this idea actually took one on her house. And had to sell it a year later before the new rates kicked in)
Is that predatory? Or is there something more evil and sinister out there?
Can someone give me an example of an actual predatory lending practice?
It's overused, but I think there is a legitimate case for this term when people get loans and aren't told the terms and fees, or are deliberatly misled about them. This is sort of like selling cigarettes without the warning of health consequences.
tall dave-
It's overused, but I think there is a legitimate case for this term when people get loans and aren't told the terms and fees, or are deliberatly misled about them.
Can you point to an actual example where this has happened?
I spent 6 months shopping for a "mortgage broker" in 2003- and they were all so disgusting that I simply decided that I would pay "cash".
Meanwhile, it still took 2 hrs to "close" the purchase of my condo in 2005-- I hired a lawyer at $200/hr to 'protect my interests'. And he explained each and every document that I signed on July 18, 2005 during the "closing" to my satisfaction.-- Why should I worry if other "purchasers" are simply too stupid to do the same?
Oh, I'm sure it's happened many many times. What they give you to sign isn't always what they tell you orally. Not having tape recordings of mortgage brokers I can't definitively prove it, but I find it hard to believe it doesn't happen in mortgage as it does in other industries like car sales (I was once given a sales contract for $2K more than we agreed. The sales manager told me his finger slipped (really). /eyeroll).
Should you be reading what you sign? Definitely. But they also have a duty not to mislead you.
I suggest that those who wrote iffy loans knowing they could resell them were in the ethical position of someone fouling the waters upstream of the rest of us.
There are three main mechanisms of social control: fear, shame, and guilt. Every society uses a mix of the three.
fear = the worry that you might get caught and be punished
shame = the worry that your misdeeds will become public knowlege
guilt = the feeling you get when you do something wrong, even if nobody will ever know.
The West uses guilt. I understand that the Japanese use guilt also. I do not know personally. Guilt is better. It works when nobody is watching. It doesn't work perfectly, but then nothing does.
The Soviet Union used fear. They tried to use shame, too, but it was largely ineffective. This is particularly bad because once fear replaces shame and guilt, people will do anything if they don't think they'll get caught. The echoes reverberate in the FSU to this day.
Many confuse shame and guilt. They are not the same. Shame is when your misdeeds become public, to the disaproval of your neighbors.
Our competitive advantage was that we trusted people. We din't have to spend huge resources on enforcement. Everything not compulsory was not forbidden.
We're losing that.
People who game the system spoil it for the rest of us.
Much of the discussion on this blog about debt has been about mortgage debt; and the debate of "stupid borrowers" vs. "greedy lenders."
But the real culprit is credit card debt, where the contract changes unbeknownst to the borrower and terms rise to the level of usery at the blink of an eye.
If you're talking about the culture of money, America has a credit-card culture; more so with the ubiquitousness of debit cards masquerading as credit cards. Even the most basic financial function -- a bank account -- makes you part of the culture. Leading a cash-only life, an old American tradition, evolved to counter-culture.
I agree; a large part of the current economic problem stems from irresponsible action. It stems from unrealistic expectation. And both sides of the contract bear some responsibility. If you borrowed more than you could pay back, and you didn't control your spending, you're guilty. If you lent to people who shouldn't have had such profligate credit, you're also guilty. If you raised the rates on someone so that they never even begin paying off the principal, you're also guilty. You've just helped dig the debtor hole.
And we all know that many people follow the pink slip, busted marriage, or the diagnosis into the debtor hole through no fault of their own.
But if we really want to understand the cultural habits that created our problems, I think the credit card and with it's 30% interest and late-payment fees and easy credit came first. Then came the McMansion. How else do you qualify for the mortgage? You have to have a credit-card to get a mortgage these days, it seems.
But those easy-money cards fueled a whole bunch of companies now gone or going bust; places to buy curtains and couches. They paid medical bills or the mortgage itself.
And the rates climbed and the penalties grew. And the avalanche of offers for more credit cards flowed into your mailbox as people in glass towers made billions figuring out how to spread risk.
Credit cards form the first line of defense to avoid the debtors hole. And credit cards are the place in our financial system where both usery and abuse flourish.
And he signed the bill.
You can carry your gun in a national park now. Yippee. I feel so much safer.
Yippee, indeed. Grizzlys in Glacier are no laughing matter.
But I hate the perversion of the legislative process.
I don't think this is an accurate characterization of the situation. The bank isn't changing the terms of the contract - they can't do that by law. They're changing the terms at which they're lending the cardholder money, which is a provision of the contract. If you read through the stuff you sign to get a card, you'll see they have that ability because you're giving it to them.
The real problem here extends far beyond credit cards. The problem is legal contracts are written (intentionally?) such that people without a law degree can't understand them. So most people don't even try, relying instead on the law to make sure the terms of the contract are basically fair. That seems like a strategy doomed to failure.
For the average person, I don't think there's much difference between a change in terms -- which you're not told about beforehand -- and a contract that obscures the potential for that change in legalese.
You're broadening the subject from credit-card contracts to all legal contracts written in legal language. Do you think reforming our finance systems to be fair to both the lender and borrower requires reforming legal terminology?
I would rather have the card issuer and the customer come to agreement on what's fair than have the government impose conditions. Right now the critical missing piece for that to happen is the inability of competent people to understand the contracts they're signing.
Fairness is such a subjective concept it scares me when people try to codify it - there are always extenuating circumstances. In the case of credit cards, for instance, if you limit the maximum rate an issuer can charge the net effect will be to boot thousands of people out of the system. If you had bad credit, wouldn't you rather have the option of a card at a high interest rate? If nothing else it gives you a way to show you can be responsible.
totha,
I think the inability of competent people to understand the contracts is a business advantage lenders want to protect. Why else would they have reams of lawyers slaving away to wheedle out that kind of advantage? Such tiny print on card offers?
Government, on the other hand, is supposed to be "of the people." In this scenario, it would be government's role to make sure you don't need a lawyer sitting beside you when you sign your name on something as simple and necessary as a credit-card contract.
It's like ams development and armor; every time they improved a way to protect yourself from a weapon, somebody came up with a more lethal weapon. They made a shield that couldn't be pierced by a long-bow, so someone devised a cross bow. And While I would like to improve our schools to the point nearly everyone could read and understand a contract no matter how dense, finely printed, reference-laden, or obscure, we've not hope of that happening for a generation. And if we could magically do fix our contract illiteracy tomorrow, I'm certain lenders, seeking business advantage and profitability for their shareholders, would find more complex language and smaller, fainter print with which to obfuscate.
Since customers, as an aggregate, are "we the people," one could argue the government "setting limits" is "we the people" expressing our side of the agreement.
Of course they want to protect it, but I'm not sympathetic.
Look, we're not very far apart on this. I agree something should be done to curtail shady contracts written in indecipherable legalese, which is why I brought the subject up in the first place. I would support a law requiring a standard disclosure form you see for other sorts agreements, but I just think it's a good idea for the government to step in and dictate the terms of the contract. It might work for most people, but once you code something into the law that's the way it is for everyone.
Tsotha, please forgive the earlier typo on your name.
I notice liberals and conservatives frequently see the same problems, they simply often disagree on the details of remedies.
There's also a constant tension between laws that are too specific and laws that are too vague. Setting specific limits means people below the limits might be getting away with something they shouldn't, people above get caught when they shouldn't. But without that specificity, problems of favoritism seem to arise.
When it comes to credit-card debt, we both agree clear contracts are crucial. I'd argue that retro-active changes in terms are unfair (raising the rate on old debt, instead of just raising the rate on future debt). It creates uncertainty, a problem for both families and small businesses on the edge.
Here's a great analysis from Rortybomb of credit-card interest policy.
His conclusion:
The banks will do anything within the bounds of the law (and sometimes beyond it) to squeeze extra money out of you. They have no moral compulsions, and are motivated by nothing other than profit. They coldly evaluate your risk, including the risk of you utilizing the bankruptcy code that they wrote substantial portions of, and charge you based on that. All of that is fine.
But to suggest you should feel bad for exercising your legal rights when dealing with a fundamentally amoral actor is absurd. It's like being ashamed of going into the store to only buy their loss leaders, despite knowing full well they'd never make a profit if everyone was like you.
Afraid to use your real name when saying that?
Derek
You think only using your first name makes you better?
Why do so many people here use pseudonyms? What are you all so afraid of? You aren't saying anything beyond the pale.
"Should defaulters feel bad?"
I think SL had it right. It depends on the type of debt. For debt taken on to fuel consumption, i.e. mortgages, I think we want people to feel bad for defaulting. If everybody treated the non-recourse aspect of many mortgages simply as an option to walk away that they had paid for, I suspect it would drive up interest on those types of loans for everybody (forcing people to actually pay for the option, whether they want it or not). Since we don't really care about encouraging consumption (or at least overconsumption), having a stigma beyond the legal consequences helps keep the rate of default lower, thereby making mortgages cheaper.
For debt taken on to fund investments, I'm not sure if we should care. Yes, having a stigma/guilt attached to default might help keep business loans cheap, but it also discourages using debt to fund investments, which presumably we don't want to discourage.
Morality doesn't play into it. You default and you pay the cost. If that cost is less than the benefit of not paying, then you don't.
The chance of you defaulting is why you are priced into the interest rate. If it were a moral imperative that you pay it back, then the interest should only be calculated using the opportunity cost to them of loaning you the money.
They don't see you as a human (it's just business), you'd be at a huge disadvantage if you did.
Now, you can -choose- that disadvantage, because you have a sense of principle related to it. But it is not a matter of 'moral' in any meaningful sense of the word. You are adding how you feel about yourself to the 'cost' side of defaulting.
If a friend loans me money, I will pay it back come hell or high water. If I loan a friend money, I will not stop being friends with them if they don't pay me back.
The bank is not my friend.
Yeah, it's always seemed weird to me that we don't expect large organizations to have any sense of morality, and yet we expect individuals to have that kind of sense, even when dealing with those large organizations.
Actually, we do expect large organizations to be honest and fulfill their obligations to us.
But leaving that aside, why should you feel morally obligated to repay, at great personal cost, a company which feels no obligation to you?
Because you said you would.
Duh.
;-)
Bankruptcy is a failure. There are benefits to a society to not punish failure excessively, but it is a failure nonetheless. House prices don't always go up. Duh. Many are learning the hard way, and will make different decisions next time. Credit cards are useful if used appropriately, otherwise they hurt. Maybe a lesson to be learned by failure and the miserable work of paying them off. A business idea may work, may not. Failure teaches serious lessons on what not to do next time. Trusted a financial adviser? Another lesson. We learn from our mistakes only if we consider them a mistake. A measure of pain helps define the issue.
I happen to be very lucky. I live in an area where people generally pay their bills. I also have a healthy fear of failure, and make sure that what I do makes it easy for them to pay me.
I notice that on the rare occasion those who haven't paid me end up losing in so many other ways, ie. it shows something about their character that becomes evident in other situations.
Ability to pay has no bearing on who pays their bills. It is character.
Derek
You really need to read Margaret Atwood's (nonfiction) book Payback; it traces a lot of the moral framework for debt and also looks at the roots of fairness in primate behaviour.
I've long been a fan of Atwood. I will have to look for that.
I saw Michael Shermer give a BookNotes lecture on C-SPAN about his book The Mind of the Market - this was a pretty good overview of (human) evolutionary economics. Link to video: http://bit.ly/eBgZi
Bank examiners (and bankers) used to evaluate the 3 "C"s of a loan
Character
Collateral
Capital
some say cashflow is a fourth
these days - as witness E. Andrews' story - character is supposed to mean nothing. If the collateral declines in value and my capital and cashflow dry up, then screw character. (Credit score such as FICO are supposed to be markers of character but things like BK, judgements, lawsuits are good markers)
Of course, credit bureau files are rife with mistakes and I have seem plenty, even in my own charmed economic life, but you can, over many years time, judge another's financial character.
Spending too much is irresponsible, not paying it back worse
Zic-
Here's a great analysis from Rortybomb of credit-card interest policy.
Rortybomb is obviously a frikkin' moron.
"You can have my answer now if you like- My final offer to the credit card companies is this."
"Nothing."
"I will always expect them to continue to provide me with $15K in 'purchasing power' that I pay no interest on for 30-45 days(despite the fact that the last time my annual earnings were even $35K/yr was 1994), and they will also be required to provide me with "subsidized airline flights" at my leisure- not to mention the random gratuities that I have come to expect to encourage my patronage."
Meanwhile, I have not paid even a single penny for having a VISA card since 1985.
I think Memphis's apparent debt culture has it right in a couple of big respects. Bankruptcy should be available readily, quickly, simply and cheaply, and people should not hesitate to use it when things get too tough. It makes a huge difference i npeople's psyche. Lenders should take that into account in extending credit. If that results in less consumer credit being made available, as it logically should, I think that is a good thing generally over the long run. The situation of the last few years, where lending to finance consumption is liberal and bankruptcy does not provide relief, is designed to perpetuate and amplify financial mistakes.
Serial bankruptees seem to be under the silly impression that previous, older bankruptcies are "off the radar", due to federal law prohibiting retention of these records past 10 years.
Yes, but what about Cayman Islands law? or Swiss law? Do federal record retension laws apply there? No they don't!
Records of your personal and/ or business bankruptcies going back to the 1960s are still alive & kicking - offshore.
These records are expensive to obtain, but worth it if the stakes are high enough.
If you were crazy irresponsible with debt in the '80s & you want to get some big financial backing for some new venture, you'll get turned down if the venture capitalists perform their due dilligence.
Just my 2 cents...
The average Memphian owes $10,137 in nonmortgage debt, 18% more than the typical American.
I find that surprising, given the price of new cars. Does the average purchaser of a new car pay cash? Do they finance it, but only to the extent of $8200 (on average)? Are there so few purchasers of new cars who finance the purchase that they can't push non-mortgage debt of the "typical American" above $8200?
This claim just seems implausible.
As for the offtopic question on pseudonyms, I can't speak for others but only for myself. If my identity were to get out as being connected with my socially moderate but fiscally conservative views, it would make my wife's job much much harder in the community where she works. "Liberal" communities can be some of the least welcoming to any difference in viewpoint.
Fletch,
I am afraid you HAVE paid -- and dearly -- for your VISA card, in the form of purchases made because you had access to credit, rather than having to use cash or a check.
Why do so many vendors take credit cards? Because they make more sales. Why do they make more sales? Because it is easier to make a purchase, or upgrade a purchase, if you are using a credit card.
The fee for your credit card comes in the many thousands of dollars in unnecessary purchases you have made due to access to credit.
I am a "prime" example (so to speak) of exactly why morality matters in a western, capitalist society like ours. I have good credit and a good job. I purchased a house exactly at the peak of the bubble, and my home is now worth around $60,000 less than when I bought it. The loan I have is an interest only 80/20 loan with no money down. Which basically means that I'm renting my house from the bank for far more than the rent should actually cost now. But I was aware of all the interest rates and fees going into this. I cannot claim any unfair practices at that point, I simply chose a poor time to buy a house. So what is my motivation for staying here and for paying my mortgage? Nothing but my good name. I'm not worried about credit, because quite frankly I no longer think it's as important: I'll either save up for my next house, or I'll simply rent. I don't plan on borrowing for a car ever again. I'll drive a $500 beater if need be. But none of that is influencing my choice to continue paying a loan that I made in good faith. The only thing that does is the fact that I made a promise to pay back a loan, and so that is what I'm doing.
On the other side of the coin, I'm starting to believe that my moral obligation to that contract is undermined by the bailouts. I agreed to pay a certain amount of interest for a specific loan. If the bank that loaned me the money is getting bailout money, then I have actually paid them MORE than I agreed to, totally against my will. Which has lately been weakening my moral stance on the issue and making me MORE likely to say "screw it" and send the mortgage company some jingle mail...
By the way, MY pseudonym is because the military legally restricts my ability to have an opinion.
As long as there are actual financial consequences for defaulting, there doesn't need to be a very strong moral sentiment against defaulting. (There does need to be strong moral sentiments against fraud, but that's not entirely the same issue.)
In any society, there will be people who will do whatever it takes to repay their loans, and others who will default as soon as it appears that it will make them a little better off, and all shades of in-between. It's likely that one's attitude towards default is linked to one's attitude to paying on time, limiting one's debt exposure, and other indicators as well as to one's likelihood of defaulting. Therefore, someone with an attitude towards default which makes defaulting more likely will also likely have a lower credit score, which in theory will, at least statistically, reflect their risk of defaulting. So long as the credit score formulas remain statistically accurate, changes in people's attitudes will be factored into the price they pay for credit.
Removing the longer-term financial consequences of bankruptcy would do more damage than a big shift towards the attitude that defaulting is ok, provided there isn't a similar shift towards accepting fraud against lenders.
Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://obamadebthelp2009.blogspot.com
to see if they can help. I am glad I did read it before I talk to my CC company and it helped - Jane Jim, California
Similarly, we've been inculcated by various means, including folk wisdom, to "read the small print" before signing a contract. But often, when people start to look at the small print, their eyes start to glaze over, drool issues from slack mouths, and they do their best Homer Simpson imitation muttering, "oooooooh... DOnuts!" But the refusal to buckle down and actually read the darn thing is nothing more than pure fecklessness. Nobody forces them to take the loan. Shame on them for not reading it before signing - even if reading it is the most boring and tortuous thing.
Lest I sound unsympathetic, I'm not. I've actually been dumb enough to get myself into trouble in the past. But the moral imperative to repay what I owed, based on the recognition that I held some personal responsibility for getting myself into trouble, is what motivated me to dig deep and do what it took to get out of it. As a culture, we've invested deeply in creating a society without personal consequences or personal responsibility, and now we find ourselves mired in a situation of our own creation.
The answer isn't to further insulate ourselves from consequences, but rather to restore consequences to the process. Neither lenders nor borrowers will mend their ways until both learn that there is a price for abusing a system that relies on good faith to survive.