I've been thinking about this a lot lately.  A number of people have made the argument to me that the credit system is morally neutral, at lest from the point of view of the debtor.  The banks knew when they lent to you that there was a risk of default, and if you do, you pay the penalties.  Why feel guilty?  They don't, for selling you the rope with which you hung yourself.

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.

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