When Debtors Decide to Default(nytimes.com)
nytimes.com
When Debtors Decide to Default
http://www.nytimes.com/2009/07/26/weekinreview/26streitfeld.html?_r=1&emc=eta1
9 comments
Or they go though it once and opt out of the system after that and live on cash. I know many people now that refuse to have a credit card as they became far too expensive in the long run.
People don't do it lightly, they do it because they are desperate and realistically the only consequence they really face is a crappy credit score. They are okay with that... many already have tanked credit before they start this.
Once millions of people have bad credit scores and bankruptcies in their credit histories, the social stigma of a bad creditor gets diluted. That becomes a self-reinforcing process. The more individuals default, the less defaulting looks bad.
I believe that it was social and moral norms rather than clear cut financial analyses that stopped people from defaulting. It seems those moral norms have changed.
People have simply lost faith in the system. They don't care about being nice little creditors, wrought by guilt if they overspent or made bad financial decisions, when the government is handing out hundreds of billions to to-big-to-fail banks.
Then as if mocking everyone, banks go ahead and hand out tens of millions as bonuses to their CEOs.
I cannot see anyone watching this circus feeling too guilty about screwing up and then not paying back $10000. Everyone, wants a bailout.
I believe that it was social and moral norms rather than clear cut financial analyses that stopped people from defaulting. It seems those moral norms have changed.
People have simply lost faith in the system. They don't care about being nice little creditors, wrought by guilt if they overspent or made bad financial decisions, when the government is handing out hundreds of billions to to-big-to-fail banks.
Then as if mocking everyone, banks go ahead and hand out tens of millions as bonuses to their CEOs.
I cannot see anyone watching this circus feeling too guilty about screwing up and then not paying back $10000. Everyone, wants a bailout.
"With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts."
So true. The sanctity of an obligation, as the article discusses, was destroyed when the government ruled one side of the obligation less sacrosanct than the other.
Is that an excuse for lenders to run away from their problems? Absolutely not. It is no more valid than the child's argument "he/she did it first!"
So true. The sanctity of an obligation, as the article discusses, was destroyed when the government ruled one side of the obligation less sacrosanct than the other.
Is that an excuse for lenders to run away from their problems? Absolutely not. It is no more valid than the child's argument "he/she did it first!"
Not quite -- the money for the bailouts comes directly out of the taxpayers' pockets, in the form of taxes. So debtors, who are nominally also taxpayers, are effectively having to pay these companies twice. Once, because of their own poor decisions, and again, because of the lending companies' poor decisions.
In this case, I think that not paying is more a form of civil disobedience, Thomas Payne style, than anything else.
In this case, I think that not paying is more a form of civil disobedience, Thomas Payne style, than anything else.
Most people who are defaulting on the loans essentially pay nothing in taxes (excluding the payroll taxes, which allegedly are separate).
I didn't feel like working so that my neighbor can walk away from their mortgage and my relatives can walk away from their credit card debt. So I don't anymore.
I didn't come here to see mindless talking points parroted back at me.
If you want to actually talk about the complexities of debt and the problems on all sides of the issue, by all means do so. If you want to shout slogans, please go somewhere else.
If you want to actually talk about the complexities of debt and the problems on all sides of the issue, by all means do so. If you want to shout slogans, please go somewhere else.
It's really not that complicated.
People are walking away from debt obligations. - mortgages (12% of all mortgage, 50% subprime, 50% options) - credit cards (13% default) - personal bankruptcies (up 28% in second quarter)
federal/states/local governments are walking away from debt obligation - pension reduction - massive printing of dollar, $250B treasury selling this week
Companies are walking away from debt obligation - commercial mortgages delinquency up 586% this half - pension discharged by bankruptcy
Guess who's paying for this. That's right; the taxpayers.
So. Are you the sucker that's gonna keep on paying taxes?
All these you can google yourself (too many links to list here) I didn't come here to list all the bad things, since I doubt you even comprehend 1% of the atrocities. Therefore, I kept it simple for you.
People are walking away from debt obligations. - mortgages (12% of all mortgage, 50% subprime, 50% options) - credit cards (13% default) - personal bankruptcies (up 28% in second quarter)
federal/states/local governments are walking away from debt obligation - pension reduction - massive printing of dollar, $250B treasury selling this week
Companies are walking away from debt obligation - commercial mortgages delinquency up 586% this half - pension discharged by bankruptcy
Guess who's paying for this. That's right; the taxpayers.
So. Are you the sucker that's gonna keep on paying taxes?
All these you can google yourself (too many links to list here) I didn't come here to list all the bad things, since I doubt you even comprehend 1% of the atrocities. Therefore, I kept it simple for you.
If society decides to declare a general "jubilee" year, and cancel all debts, and you decide to pay off yours, it is true that you are at a disadvantage.
If society decides in general to massively devalue the currency to help irresponsible borrowers, that will punish responsible savers.
However, these do not imply "not working". That can imply not valuing currency as much, so you consider your salary less, or defaulting on your own debts even though it is distasteful to you, or all sorts of things, but it is unlikely to work out well for you if you are on strike while the prolifigrate borrowers are not.
If you want to go on strike, you will have much more effect by going on a spending strike rather than a working strike. I have been considering getting a bumber sticker for my rusty 1988 VW that says "I am going to keep fixing and driving this POS until the bailout money is paid back".
If society decides in general to massively devalue the currency to help irresponsible borrowers, that will punish responsible savers.
However, these do not imply "not working". That can imply not valuing currency as much, so you consider your salary less, or defaulting on your own debts even though it is distasteful to you, or all sorts of things, but it is unlikely to work out well for you if you are on strike while the prolifigrate borrowers are not.
If you want to go on strike, you will have much more effect by going on a spending strike rather than a working strike. I have been considering getting a bumber sticker for my rusty 1988 VW that says "I am going to keep fixing and driving this POS until the bailout money is paid back".
While I will agree there a tons of irresponsible borrowers but I wish people would give some anger over the irresponsible lenders that helped create this mess.
There were far too many companies willing to throw as much credit around as it was more profitable to lend more than people could handle.
It was getting to the point that all you needed to get $10,000 of credit cards was a pulse... and even then that wasn't needed.
There were far too many companies willing to throw as much credit around as it was more profitable to lend more than people could handle.
It was getting to the point that all you needed to get $10,000 of credit cards was a pulse... and even then that wasn't needed.
Agreed; I already pay very little taxes in income and spending. I am going to Asia for a year soon also.
Rather than refusing to work, doesn't it make much more sense to refuse to use credit cards and refuse to buy a house on credit (as much as possible anyway) ?
After all, the credit card rates you pay reflect their defaults. So just use cash or a debit card or other means until the credit card industry quits giving cards to those people. Your mortgage rate and "mortgage insurance" and other fees reflect the defaults of sub-prime mortgages and other unwise decisions; rent until you can buy a cheap house on a 15 year fixed rate mortgage, or perhaps you have enough savings to buy a house at foreclosure auctions.
Of course, if you are frustrated because you are paying interest on a lot of credit card debt and have a high house payment for a bigger house than you need, perhaps you are more part of the problem than you think. Perhaps by holding on you are just becoming the last level of a pyramid scheme.
After all, the credit card rates you pay reflect their defaults. So just use cash or a debit card or other means until the credit card industry quits giving cards to those people. Your mortgage rate and "mortgage insurance" and other fees reflect the defaults of sub-prime mortgages and other unwise decisions; rent until you can buy a cheap house on a 15 year fixed rate mortgage, or perhaps you have enough savings to buy a house at foreclosure auctions.
Of course, if you are frustrated because you are paying interest on a lot of credit card debt and have a high house payment for a bigger house than you need, perhaps you are more part of the problem than you think. Perhaps by holding on you are just becoming the last level of a pyramid scheme.
This article is severely lacking in a discussion of consequences. Publishing an article like this, given the average intelligence level of Americans these days, is irresponsible. I have debts to repay (student loans!), and the idea of "just not paying" is very charming, but there are real consequences for these actions. It's not something to be done lightly or 'because I want to'.
The difference with Student Loans is you can't just avoid paying them. With most debt you can discharge it through a bankruptcy but since 1998 you can no longer discharge student loans unless it would be an "undue hardship". After you default they will simply attach your wages for up to 25% of you after tax salary.
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I hope that society developes a different view of debt and consumer debt in particular through all this.
One thing to note, is that either the paying off or writing off of debt is deflationary -- something that was an asset on someone's books, either simply vanishes, or else is replaced by money that was extracted from the economy.
One thing to note, is that either the paying off or writing off of debt is deflationary -- something that was an asset on someone's books, either simply vanishes, or else is replaced by money that was extracted from the economy.
The big winners are the businesses that sold products to these consumers. The losers are the banks and consumers themselves.
I think the biggest losers are actually "the rest of us": i.e. those of us who neither borrowed more than we could afford to pay back nor lent to those whom we knew could not afford to pay us back. There aren't many bailouts or special government programs (at least that I'm aware of) for people who acted responsibly in the midst of what was obviously foolishness.
Indeed. I feel very screwed over by all of this. Making the wrong decisions got people lots of free money. Making the right decisions got me nothing, except interest on my savings account is now so low that it barely makes up inflation. (It was nearly 5% before all this!)
All these people that don't pay off their credit cards ensure that those who do get higher interest rates and fewer services. Thanks a lot, guys...
All these people that don't pay off their credit cards ensure that those who do get higher interest rates and fewer services. Thanks a lot, guys...
That doesn't make sense. The banks make money off people who carry a balance.
They don't make much money off people that rack up $25,000 of debt and then refuse to pay, or people that borrow $500,000 for a house that's worth $150,000 who then leave and stop paying the mortgage.
People that pay the minimum payment on their credit card every month are great -- if everyone did that, there would be no credit crisis. I would be getting my 5% on savings, and would probably be able to own a house.
People that pay the minimum payment on their credit card every month are great -- if everyone did that, there would be no credit crisis. I would be getting my 5% on savings, and would probably be able to own a house.
Actually most banks did make money from those transactions. They knew it was a bad debt so they sold it before people defaulted. The US housing bubble actually ended up sucking up a lot of money from the rest of the world and dumping in on the US economy.
I am so glad I barely pay any taxes anymore (income and spending)
Why not lend only to people who have already shown that they can handle money? In other words, why not mandate large annual fees for credit cards and VERY high down payment requirements for mortgages?
And yes, in fact, I AM suggesting that we only loan money to people who already have some.
And yes, in fact, I AM suggesting that we only loan money to people who already have some.
During the Great Depression there was significant public sympathy for bank robbers as the banks were seen as having taken advantage of common people. I hope we're not headed for a similar breakdown in social order. Intentionally defaulting on a debt is one thing, but sticking a gun in a teller's face is something else altogether.
25% interest rate should not even legal in the first place. Do banks offer consumers 25% on savings interest? Not even close.
When banks give loans to consumers in the form of credit cards, they charge 25% interest because it is really risky - note the 12.5% default rate mentioned in the article.
When consumers gives banks loans in the form of deposits, they get very little interest because it is so safe - with the FDIC around what tiny percent of deposits have been lost to consumers in the last 50 years?
When consumers gives banks loans in the form of deposits, they get very little interest because it is so safe - with the FDIC around what tiny percent of deposits have been lost to consumers in the last 50 years?
Usury laws have been around for hundreds of years. Why the hell don't we (the USA) have them anymore?
http://en.wikipedia.org/wiki/Usury
http://en.wikipedia.org/wiki/Usury
Because along with usury laws comes debtor's prison and indentured servitude. It cuts both ways. You can't just pick the bits out of the past that happen to suit you in the present time.
In those countries where they do have usury laws (it's part of Sharia) it's a crime to miss a payment on a loan. You don't get annoying phonecalls from the bank - you get the local law enforcement confiscating your stuff and hauling you off to jail.
In those countries where they do have usury laws (it's part of Sharia) it's a crime to miss a payment on a loan. You don't get annoying phonecalls from the bank - you get the local law enforcement confiscating your stuff and hauling you off to jail.
Usury doesn't mean that high-risk debtors will have access to credit with reasonable interest rates; it means they won't have access to credit at all. If you're in a situation where your best option is to take a 25% loan to pay for bills, that's a truly shitty situation, but how can it be improved by taking that option (which we just agreed was your best option) off the table?
Some of my thinking on this subject was the result of this excellent thread on payday lenders: http://news.ycombinator.com/item?id=543086
Some of my thinking on this subject was the result of this excellent thread on payday lenders: http://news.ycombinator.com/item?id=543086
From personal experience with some people very close to me I believe that it is actually better not to have the option to borrow at 25%.
All it means is that they are able to live outside their means until they can no longer pay the minimum payment on their credit card, and at that point they are in deep trouble.
I firmly believe that the banks are too predatory these days. If a particular person is deemed too much of a risk to lend to then they should not be lent money. How is it a better idea to lend them money at a higher interest rate? All it does is (possibly)make more money for the bank and forces the rest of us to offset the risk in the form of higher interest rates.
All it means is that they are able to live outside their means until they can no longer pay the minimum payment on their credit card, and at that point they are in deep trouble.
I firmly believe that the banks are too predatory these days. If a particular person is deemed too much of a risk to lend to then they should not be lent money. How is it a better idea to lend them money at a higher interest rate? All it does is (possibly)make more money for the bank and forces the rest of us to offset the risk in the form of higher interest rates.
> If a particular person is deemed too much of a risk to lend to then they should not be lent money. How is it a better idea to lend them money at a higher interest rate?
That's the point of altering the interest rate: in many cases, it alters the outcome from "too risky [to be profitable]" to "profitable [based on modelling/predicted likelihood of payback]"
Imagine that a debtor borrowing $100 has a probability of paying back that $100 of p. If p is exactly 1 (for practical purposes), then the lender only needs to ask for nominal interest over whatever would be equivalent the "risk-free" T-bill rate.
If p is exactly 0.99, then they need to ask for some greater amount, perhaps roughly an additional 1% margin (somewhat higher in practice to offset the administrative work). Surely you would agree that banks should be allowed to extend people credit cards at a 5% interest rate, right?
Now make p = 0.95. Now a bank needs to ask at least 6% over the T-bill rate, but you're very likely still OK with them requiring 10% interest on credit cards.
Now make p = 0.90. Now a bank needs to ask at least 11% over the T-bill rate, but you're probably still OK with them requiring 16% interest on credit cards.
If you're on board so far, by this point (in fact, in the step from 1.00 to 0.99 does the same thing, but it's just much more obvious now), you've agreed that different people can be charged different amounts, and if someone is deemed "too much of a risk to lend to at 5%", it logically follows that it is not the only solution to not lend, but rather for some borrowers to increase the interest rate until it is again profitable. (It's only as p approaches 0 that debtors become unprofitable at any rate.)
That's the point of altering the interest rate: in many cases, it alters the outcome from "too risky [to be profitable]" to "profitable [based on modelling/predicted likelihood of payback]"
Imagine that a debtor borrowing $100 has a probability of paying back that $100 of p. If p is exactly 1 (for practical purposes), then the lender only needs to ask for nominal interest over whatever would be equivalent the "risk-free" T-bill rate.
If p is exactly 0.99, then they need to ask for some greater amount, perhaps roughly an additional 1% margin (somewhat higher in practice to offset the administrative work). Surely you would agree that banks should be allowed to extend people credit cards at a 5% interest rate, right?
Now make p = 0.95. Now a bank needs to ask at least 6% over the T-bill rate, but you're very likely still OK with them requiring 10% interest on credit cards.
Now make p = 0.90. Now a bank needs to ask at least 11% over the T-bill rate, but you're probably still OK with them requiring 16% interest on credit cards.
If you're on board so far, by this point (in fact, in the step from 1.00 to 0.99 does the same thing, but it's just much more obvious now), you've agreed that different people can be charged different amounts, and if someone is deemed "too much of a risk to lend to at 5%", it logically follows that it is not the only solution to not lend, but rather for some borrowers to increase the interest rate until it is again profitable. (It's only as p approaches 0 that debtors become unprofitable at any rate.)
> I believe that it is actually better not to have the option to borrow at 25%.
I can think of thousands of reasons why I'd like to have that option.
On example:
My dog gets hit by a car and it will cost $4k to save her life. I have an extra $1k in my budget each month, but only $500 in cash reserves.
I'd pay 200% annual interest.
If I lived in a paternalistic "aarongough knows best" society, my dog would die.
Please don't be so quick to imagine that your preferences and resources (parents, friends with money, etc.) apply to everyone else.
I can think of thousands of reasons why I'd like to have that option.
On example:
My dog gets hit by a car and it will cost $4k to save her life. I have an extra $1k in my budget each month, but only $500 in cash reserves.
I'd pay 200% annual interest.
If I lived in a paternalistic "aarongough knows best" society, my dog would die.
Please don't be so quick to imagine that your preferences and resources (parents, friends with money, etc.) apply to everyone else.
Dude, let the dog go. That is not an appropriate decision. If it was a person who was hit, then it would be ok to borrow at that; but I pay property taxes so the county hospital will fix the broken bones of indigents.
Unless the dog brings in income comensurate with that, like a high-end herding or show dog, it is irresponsible to spend that much on a pet. Even if you had the $4,000 sitting right there.
If I were judging your credit card application or a loan application and I had your post in front of me, I would be inclined to think that you did not make responsible financial decisions and not approve your credit.
P.S. I like dogs.
Unless the dog brings in income comensurate with that, like a high-end herding or show dog, it is irresponsible to spend that much on a pet. Even if you had the $4,000 sitting right there.
If I were judging your credit card application or a loan application and I had your post in front of me, I would be inclined to think that you did not make responsible financial decisions and not approve your credit.
P.S. I like dogs.
The dog does not bring home money, but so do not, for example, overseas vacations or even going to the movies. Would it be irresponsible to spend money on movies or tourism because this money produces no income for the spender?
The dog does bring positive emotions, and the loss of a pet brings negative emotions. These emotions can easily be valued by a person (owner) way over the $4000.
P.S. I like cats.
The dog does bring positive emotions, and the loss of a pet brings negative emotions. These emotions can easily be valued by a person (owner) way over the $4000.
P.S. I like cats.
There are many situations under which a person might spend $4,000 on a dog.
But we are talking about the specific situation in which you don't have $4,000 and intend to borrow it at 25% interest. In that case it is not socially acceptable to spend $4,000 on the dog. To note your other examples, it also irresponsible to borrow $4,000 at 25% interest to go to movies or spend on overseas tourism.
Note that I am not just claiming that it is unwise and irresponsible (it is); I am also claiming "social acceptance" in that society in some sense backs this up. My evidence is this: if you bring a child in need of $4,000 in care to a doctor, and don't have $4,000, the child will get the care; you may be dunned for the bills, but the child gets fixed.
You bring a dog into a vet, and you are indigent, the dog either gets given away to someone who will pay or it gets the needle.
My personal views go further, in that even someone who has $4,000 is being irresponsible by spending it on a dog (in most cases - a breed in threat of extinction or a highly trained dog might be worth it, I am sure many seeing eye dogs are worth $4,000 and not replaceable for that). But I know that many people hold the opposite, and would even say you should not own a dog if you are not willing and able to pay $4,000 on vet expenses.
If you have to borrow at 25%, then you fail the "able" part of "willing and able".
One of the things that will come out of the current economic situation is that our society is going to be less accepting of people who do things like borrow $4,000 to spend on pet bills.
But we are talking about the specific situation in which you don't have $4,000 and intend to borrow it at 25% interest. In that case it is not socially acceptable to spend $4,000 on the dog. To note your other examples, it also irresponsible to borrow $4,000 at 25% interest to go to movies or spend on overseas tourism.
Note that I am not just claiming that it is unwise and irresponsible (it is); I am also claiming "social acceptance" in that society in some sense backs this up. My evidence is this: if you bring a child in need of $4,000 in care to a doctor, and don't have $4,000, the child will get the care; you may be dunned for the bills, but the child gets fixed.
You bring a dog into a vet, and you are indigent, the dog either gets given away to someone who will pay or it gets the needle.
My personal views go further, in that even someone who has $4,000 is being irresponsible by spending it on a dog (in most cases - a breed in threat of extinction or a highly trained dog might be worth it, I am sure many seeing eye dogs are worth $4,000 and not replaceable for that). But I know that many people hold the opposite, and would even say you should not own a dog if you are not willing and able to pay $4,000 on vet expenses.
If you have to borrow at 25%, then you fail the "able" part of "willing and able".
One of the things that will come out of the current economic situation is that our society is going to be less accepting of people who do things like borrow $4,000 to spend on pet bills.
What is the acceptable and responsible limit to what you can spend to fix a pet, and why?
I disagree with your use of the word "the".
What is "the" acceptable movie to watch tonight?
What is "the" acceptable website to surf?
What is "the" acceptable book to buy?
The great thing about freedom is that we can all pick our own answers.
One-size-fits-all solutions suck.
What is "the" acceptable movie to watch tonight?
What is "the" acceptable website to surf?
What is "the" acceptable book to buy?
The great thing about freedom is that we can all pick our own answers.
One-size-fits-all solutions suck.
Yes, I completely agree, and that was my point :)
At that point, the credit becomes a risky investment--a significant percentage of people paying 25% interest will never repay their debts. If there isn't any return on the ones that do, then these people will just get outright blacklisted from credit. (Maybe that's a good thing.)
If you bought junk bonds backed by high-interest consumer debt, you'd get a high interest rate too. Unless you got nothing. But you're probably a safer investor than Bank of America.
It's also a bargaining tactic for when these people finally wisen up and renegotiate their debts through a consolidation agency.
If you bought junk bonds backed by high-interest consumer debt, you'd get a high interest rate too. Unless you got nothing. But you're probably a safer investor than Bank of America.
It's also a bargaining tactic for when these people finally wisen up and renegotiate their debts through a consolidation agency.
I agree, there should be a set limit that people can charge. It can be fixed to the fed's rate, but no more than 10%. There is no reason I should be making 0.0025% on my savings but being charges 19.5% on my credit.
> There is no reason I should be making 0.0025% on my savings but being charges 19.5% on my credit.
Technically there is a good reason.
You make so little interest on your savings because you are lending money to the bank, which means due to the banks credit rating and CIDC insurance that you are very unlikely to loose your money.
When the bank loans money to you via your credit card, they are taking a much much larger gamble. If you go bankrupt there is no CDIC insurance to protect them and give them their money back.
Hence the higher interest rate.
How big should the spread be? That's an entirely different question:) The
Technically there is a good reason.
You make so little interest on your savings because you are lending money to the bank, which means due to the banks credit rating and CIDC insurance that you are very unlikely to loose your money.
When the bank loans money to you via your credit card, they are taking a much much larger gamble. If you go bankrupt there is no CDIC insurance to protect them and give them their money back.
Hence the higher interest rate.
How big should the spread be? That's an entirely different question:) The
Nobody is forcing you to pay 19.5% interest. My rate is lower than that, but I never carry a balance, making my rate 0 (but with all the conveniences of a credit card). If I overspend, which sometimes happens, then I pay for it out of savings. That money is doing anything for me (1.5% interest, or whatever), so I might as well pay off the credit card with it.
It would be nice if lenders really stopped giving loans and credit cards to these people in the future, but I think plenty of people will default and in 5 years be back on new credit cards and new mortgages that some will end up defaulting on again.