Megan McArdle weighs in on the strategically defaulting homeowners described in the Wall Street Journal article I discussed in my last post. She isn’t impressed; in fact, the original title of her post was “The New Breed of Deadbeats.”
McArdle thinks clearly, which makes this essay a good read because it demonstrates the confusion that results when we confuse what is right with what is allowed, i.e. when we try to legislate morality.
I am afraid that I am one of those people who have no patience for people who refuse to pay their debts.
Okay, fair enough. Debts are an obligation of one party to another that ought to be fulfilled. But how do we go about insuring that a debt will be repaid? Surely the obligation can’t be absolute. There are obvious situations where the debt cannot be repaid. McArdle recognizes this, and is glad that the law does as well. [Emphasis added throughout]
People who can’t pay their debts? All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions. Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start. Yes, some of them go on to make even more stupid decisions. But most people who declare bankruptcy do so only once, which means they don’t make that sort of mistake–or at least, that magnitude of mistake–again.
It’s important to note that the lines McArdle draws above are much more generous than the ones a debtor would have encountered even into the 1800s, when debts were forever and a defaulting debtor could be thrown into prison until someone paid the debt for him.
On the other hand, while I was mostly against the 2005 bankruptcy reform, I was happy to see that it tightened up the rules on the small minority of people who were unequivocally using bankruptcy to game the system–filing and then vacating serial Chapter 13 petitions in order to keep from being evicted or foreclosed out of houses where they’d never intended making the monthly payments. Those people were few in number, but they were really morally appalling (and before you get your progressive outrage on, they tended to be affluent and well educated, which is why they were able to game the system. They really had no redeeming excuses).
Here McArdle makes it clear enough that she thinks the right way to handle the situation is to adjust the rules so that they match our understanding of what is right and wrong, so that the people who deserve sympathy get sympathetic treatment and the morally appalling ones without redeeming excuses get the punishment they deserve.
I am very sure that most people getting their houses foreclosed upon are simply folks who made a stupid decision and took on more house than they could really afford–or who got hit with a crippling job loss and didn’t have quite enough of a cushion to see them through. Which is maybe why when I read about people like this, my outrage rises so hot: […]
Maybe the reporter made them sound worse than they are . . . but it sure sounds like they just decided that once the price of their property fell, they shouldn’t have to pay back the money they’d borrowed.
McArdle assumes that most of the people going through foreclosure deserve sympathetic treatment, and is glad that the rules as currently laid out are providing it for them. But she is outraged that the rules are not finely grained enough to keep some people from getting what she sees as unfair benefits.
Why is this so important? There are plently of other legal situations where we are willing to allow some of the guilty to go free in order that the innocent are not punished. And in this particular situation, there is going to be a lot of such leakage, because it is not feasible for the rule of law to distinguish accurately between people who truly can’t pay their debts and those who could but simply choose not to.
So why can’t we just be glad that those debtors who deserve our sympathy are getting it, at the price of some others getting benefits they don’t deserve?
There is a sizable school of thought that says why shouldn’t they? They made a contract with the bank under known rules, and as long as they’re willing to pay the penalties, why shouldn’t they just walk away, the way a corporation would? Well, for one thing, companies don’t always behave like this, and those who get a reputation for stiffing their suppliers run into trouble. But for another, because society doesn’t really work on such clean logic. The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible. I’m not saying you should live on Kraft dinner and water for twenty years to slave at an impossible mountain of debt. But I think before you walk away from three different mortgages, you should explore life options that do not include $1,800 worth of new furniture.
Exactly. To put it another way, the consumer credit market would not work if people treated debts not as absolute, morally binding obligations but as simple business agreements with clearly defined legal and social penalties, i.e. if individuals treated their debts the same way that corporations treat them. So it is important that people think that a debt is morally binding, and just about every force in society works to force that kind of thinking on a person.
Am I suggesting that individuals should treat debt as cavalierly as businesses do? Not at all. I agree with McArdle’s concluding paragraph:
We are better off living in a culture that believes that if you say you’ll do something, you’ll try your level best to do it. Most of us get pretty outraged, as we should, when companies violate those norms because hey, they’re not actually legally obligated to ensure that you have a computer that turns on, or a toaster that makes toast. That outrage serves a valuable function whether it is directed at people or companies. It allows us to put some level of trust in those around us.
I think McArdle recognizes here that there is a kind of obligation that cannot be legally enforced. A believer would make the distinction between living within the law and living righteously. And a believer would note that any effort to use the rule of law to enforce righteous behavior is doomed to fail.