[rayiner]

> However, moral duty is relevant when it comes to how society should think about debt.

A debt is a contractual obligation and should be treated as such. One should not moralize contractual obligations.

E.g. During the housing crisis, there was a lot of moralizing about homeowners walking away from their underwater mortgages. Moralizing about debt in that way is bullshit. When lenders make a loan secured by collateral, they take the risk of the value of that collateral dropping. There is absolutely nothing immoral about forcing a lender to eat a risk it knowingly on.

Similarly, a corporation would not hesitate for a second, on moral grounds, to restructure its debts through bankruptcy, and neither should individuals. No moralizing needs to enter the equation. There is a penalty for declaring bankruptcy and failing to pay your debts, and that is future lenders being wary of lending you money. There is no need to add a moral dimension to the issue.

[mc-lovin]

What I meant was that when designing rules for bankruptcy etc., but also for how education is funded and other things, society has high level goals which are guided by morality.

My point was that when society considers what it's goals are, it should never be a goal that a person should be able to do things that "give their life meaning" when they can't afford them, because ultimately it is a person's own responsibility how they manage their money.

So my post was aimed at people who thought "isn't it horrible that this woman can't do what she wants in life simply because she can't afford it"

[grecy]

>a corporation would not hesitate for a second, on moral grounds, to restructure its debts through bankruptcy, and neither should individuals.

I see what you're saying, but I really dislike that way of thinking, because it's justifying something bad by saying "That's what others are doing"

That's like saying that because BP are spilling oil into the oceans and getting away with it, you shouldn't stop doing it yourself.

The world would be a better place if morals were used in more decisions, not less.

[rayiner]

You're begging the question. Spilling oil into the oceans inherently hurts people and the environment in an uncompensated way. Bankruptcy, meanwhile, is just part of the rules of the game, just as much as enforceable debt obligations are part of the rules of the game. Everyone knows, a priori that repayment obligations can be enforced by recourse to the courts, and everyone also knows, a priori, that those obligations can be discharged by those same courts (what the federal court giveth it can taketh away). Because bankruptcy is part of the rules of the game, it's priced into interest rates. When a bank loans you money, it expects you to default with some probability and charges you a premium for that risk. There is nothing immoral about forcing them to eat the consequence if the risk you compensated them for.

It's not a matter of ignoring morality. It's a matter of not ascribing a moral dimension to something that doesn't inherently have one.

In that vein, Google "efficient breach."

[jack-r-abbit]

But by your own words, this woman's bankruptcy does hurt other people... the people looking to get a loan later. They are now paying the even higher interest rate due to her bankruptcy being priced in. The more people that default, the higher the probability that the next person will default and the higher the premium the bank charges for that risk.

[rayiner]

The rates for subsequent borrowers will only go up if her bankruptcy was unexpected. That is to say, if the bank charged her interest assuming 10 of 100 loans would default, and she is one of those 10, then her bankruptcy does not change the interest rate the bank charges. On the other hand, if the default rate is higher than the bank expected, whose fault is that?

[jack-r-abbit]

They can only do so much to predict the future based on the past. When they fund loans today based on today's default rate they have no way to know what crisis hits in 3 years to cause a spike in defaulted loans. The system must correct itself with enough padding to cover the smaller fluctuations.

[tptacek]

Isn't that also known as "ruthless default"? :)

[harryh]

If people thought this way on a large scale interest rates would probably be moderately higher than they are today. It's not clear to me if that would be an improvement on the status quo.