Moral bankruptcy

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Four weeks ago, I bought a grill on my credit card.  It was not the best grill Home Depot had--indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models. 

It's a nice grill.  But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200.  Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200.  For that matter, I can't even sell it for the value of the loan with which I financed it.  The equity in my grill has dropped by about 50%.  


Given all that, I don't see why I should be required to pay back the credit card company.


After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to.  Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan.  I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts.  The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you're the one I borrowed the grill money from.  I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200.  So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?

Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed.

Now, if you can't repay the money you've borrowed, I think bankruptcy is an excellent thing.  And I have always staunchly resisted the tide of Republican moral outrage at people who make stupid decisions about borrowing money and then have to declare bankruptcy.  People make stupid decisions, yea, even unto stupid decisions about their ability to afford large flat-panel televisions and jet skis.  Any system that punishes stupid decisions so harshly that it makes people a prisoner to the dead past cuts off its nose to spite the faces of people who wouldn't be in that kind of debt in the first place if they had been any good at predicting the consequences of their behavior.

By the same token, however, I can't really buy the argument that people who made stupid decisions about lending money perpetrated some kind of moral outrage on the borrower that renders any obligation to repay them moot.  It is all very well to note that the originators may not have cared because they just repackaged the loans into securities and sold them on, but that just pushes back the stupid decision one more level.  Felix is urging his namesake to shaft the people who bought those securities, on the grounds that because they were stupid enough to have bought them, he has a perfect right to push the costs of his own stupid behavior off on to them.

Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people.  This strikes me as fundamentally wrongheaded in two ways.  First, the bourgeois belief that an honorable man repays his debts if he is able is one of the unnoticed underpinnings of a stable, prosperous democracy.  Countries that believe that one can pick and choose whom one is obligated to repay on the basis of how good a person the lender is, how tight their relation to you, or whatever, are low-trust societies with extremely high transaction costs and underdeveloped markets.  If you think you're only obligated to repay regular folks like yourself, then no one but your close friends and family will lend you money.  This makes capital formation tricky.

But second of all, just as there is no way to tax a corporation, there is no way to default on a corporation.  Whenever you default, you are taking money from some person:  a shareholder, a creditor, an employee who loses their job when the corporation is liquidated.

And to return to the question I asked earlier:  what if Felix were defaulting on you?  Because he probably is.  His mortgage bonds are owned by pension funds, bond funds, and of course, investment companies whose debt is in turn held by bond funds, pension funds, and insurers.  If they suffer gigantic losses, they will either leave a bunch of people unprepared for various forms of financial distress, like retirement or a house fire--or the taxpayer, aka you, will bail them out.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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