[rfrey]

I totally understand your sentiment, but to me this reflects one of the biggest scams that has ever been pulled on the "average guy" - the notion that debt has moral weight.

I was taught by my parents, and by the books I read and TV shows I watched, that "paying your debts" made you a good person. If you don't pay your debts you're slacking. We've all heard the parables of the great person who went broke, but managed to pay his debtors later even though he legally didn't have to.

What hogwash. Lenders get paid interest in compensation for the risk that the loan might go bad. They deny credit to people if the risk is too high. That's their business. If you borrow to start a business and the business goes south, that's not a moral issue - it's built into the bank's models. Turning it into a moral issue, rather than "just bizness", is just a way for the lenders to shift the risk - that you're paying for - back to you. It's like buying insurance and then not collecting for your burnt house, because you didn't work hard enough to put out the fire.

OK, sucky analogy, but you can bet that people like Donald Trump don't worry about the morality of debt when one of their companies go broke. It's in the contract.

[gmunu]

This is a very interesting comment and I used to think similarly, but Matt Levine over at Bloomberg convinced me over several articles (couldn't find exactly which ones on a casual searching) that it's a little more subtle than that. In contracts between big companies, this is absolutely true. Financial institutions expect that companies will act as rational economic actors and discharge their debt when it's beneficial for them to do so. But in contracts with very small business or with individuals (say mortgages), people act economically irrationally, constrained by social norms, and not dumping their debts as quickly as the laws allow. This results in lower delinquency rates than would otherwise be the case, so the actuarial models allow for the pricing of lower interest rates, more lenient credit policies, etc. If individual people starting acting like big corporations, then default rates would go up and correspondingly interest rates on things like mortgages would go up to.

This isn't to say that that state of the world is worse. It might be better! Certainly we shouldn't discount the burden it places on people to feel guilty over their debts. That's real cost to them and to society generally. But if the social norms around debt changed, they wouldn't change in a vacuum. Probably rates would go up and that's a real cost as well.

[sergiosgc]

You make a common economy error. You are assuming the price of a good or service is defined by its cost. This is only true in very liquid (competitive) markets. Banking is no such market.

You make a perfect case of justifying that the cost of providing the lending service would be higher. However, prices are not defined by cost. They are defined, loosely, by what the market can bear. The cost is a lower limit, but nothing more. Namely, it does not define the price.

For the price of a good or service to approach cost of goods, you need very strong and constant competitive pressure. The banking market, in most countries, is not nearly competitive enough.

[gmunu]

It is certainly not the case that cost == price, I agree. Price is determined by supply and demand. But if you change the cost of mortgages, you probably change their supply curve and hence the market clearing price. To argue that raising the cost of mortgages doesn't change the market clearing price is make a pretty strong claim about the shape of supply and demand curves.

[refurb]

The banking market, in most countries, is not nearly competitive enough.

You don't think money lending is competitive enough? You can get loans for houses, cars and school at just a few points over the risk-free rate.

I'd say the banking market is very competitive since they are all offering the same thing, money (a commodity).

[bko]

I agree that paying debts is deeply engrained as a moral issue. Although I think this is more cultural and is persistent across many cultures, not necessarily something conjured up by lenders. There is a distinction between personal debt and debt tied to a business venture.

How would you feel if your parents passed away with unpaid debt? Although not legally obliged to pay it, many people do [0]. I, personally, would feel a little sadness to know that my parents had unpaid bills. Nor would I abuse the system by taking out large debts on my death bed.

[0] http://www.nytimes.com/2009/03/04/business/04dead.html?pagew...

[JetSpiegel]

> How would you feel if your parents passed away with unpaid debt?

It depends. If they owed a real human being, I would probably pay it. If it was a faceless corporate conglomerate, or a bank that reported millions in profits on the last quarter, I wouldn't bother.

[raverbashing]

That's true. Sure, pay the debt if you can, otherwise just trigger the warranties (read: repo)

Of course you want to pick priorities in what to pay and what to not pay when in difficulty.

And negotiation/consolidation is an alternative

Just keep in mind your credit score will go down the drain, and yeah, maybe you can't get another credit card to hang yourself with, which might be a good thing

[cmdrfred]

I think this is true about loans from banks and credit cards. One place I don't believe this is true is for personal loans, often they have no interest and while you can be declined (they can so no), it is often socially awkward to do so.

[blcArmadillo]

Do lender's get paid interest in compensation for risk? If I'm not mistaken, lenders get paid interest because a dollar today is worth more than a dollar tomorrow.