Heroes of the Credit Markets, Third Class

I find the reaction to my post last week about undeserving deadbeats rather . . . odd.  Odd, because it came mostly from the left, who seemed to think that refusing to pay your mortgage so that you could spend more time and money on cruises and Disney furniture was not merely rational, but admirable.

I thought that the left had cast the rigid view of the rational value maximizer aside, but if not, let me hurl it away with great force.  Institutionally, people may be rational value maximizers in the context of many markets.  But markets work on deep social infrastructure, norms that permit trust to develop.  And one of the norms we have developed is that you make a reasonable effort to repay money you have borrowed.

This is obviously not perfectly observed, and I do not much like the European systems that encourage judges to make value judgments about who "deserves" bankruptcy--whether they deserve it or not, people who are insolvent can't, er, pay their debts, so we might as well do an orderly liquidation of their assets and liabilities.  But it's a pretty broad and strong social norm.  If a friend borrowed $10,000 from you to buy a car that turned out to be a piece of junk, you wouldn't think it was okay for him to stick you with the car and walk away, simply because it was legally possible.

Should we treat corporations differently from friends?  In many ways, yes.  I owe my friends loyalty and effort that I decline to give to any corporation except the one that I work for.  But moral norms don't change just because we're dealing with stockholders.  It isn't okay to shoplift from CVS even if they have crappy customer service and overcharged you for your prescription.  It isn't okay even if the security cameras are busted and no one will catch you.  It isn't okay even if the mayor has announced that the city will no longer prosecute shoplifters.  And if one of your colleagues announced that he was planning to lift several hundred dollars worth of condoms, you wouldn't think "Bravo!"

Now, if I was desperate to feed myself or my kids, I might shoplift, and I'd give a moral pass to someone who did it in a moment of that kind of desperation.  But not to someone who did it because they'd really prefer to spend their paycheck on a new television.

So while I think that most people who declare bankruptcy or give up their houses are deserving of empathy, not shame, I think that the small minority who abuse the system should be made to feel shame. Not because they're being mean to big fat banks.  But because they're hurting the rest of us, by doing things that we clearly recognize aren't right if they are done to us.

I'm surprised to find so many liberals equating what is legal with what is moral.  It is legal to let the bank take your house because you want to have all the upside, while the bank takes any downside.  But I am not much moved by the argument that it is okay, because after all, the bank lent the money under those legal conditions.  Like everyone else, the banker also lent the money under the social norms of our community--what I think of as the operating system for a functioning liberal democracy.  The bank extended credit in the belief that the overwhelming majority of people would do their very best to pay it back.

A lot of people seem to think that changing this norm is some kind of blow against the bank.  But the bank doesn't just go and tap the money bush in its back yard whenever it takes a loss.  We can have easy credit and the most consumer-friendly bankruptcy system in the world (yes, still) precisely because we have a social norm that most people will try very hard to repay their debts, even if the asset they purchased with the money has now lost value.  If we change that norm, that doesn't make the banks suddenly less profitable and leave everything else equal.  It means that they will drastically alter their credit standards.  A world in which the bank expects to be forced to eat any sizable loss in the home's value is a world--at least for the foreseeable future--in which a 20% downpayment and a substantially higher interest rate than we pay now is for the carriage trade, available only to people with long and unblemished credit records.  It's also a world in which bankruptcy law probably gets tightened up considerably, putting discharge out of reach for people who genuinely need it.

So no, I don't see jerks who speculate on houses and then walk away from their mortgages because they'd rather spend the money on cruises as heroes of the working class, striking a well-deserved blow against the banks for the rest of us.  I see them as the folks who are doing their best to ruin a very good thing for the rest of us.