I don't know about "taken lightly" but bankruptcy and defaulting on a debt should not be something to be "ashamed" of, for an individual, a company, or a government. Default is an option specifically written into every debt contract out there. There should be no more shame in choosing to default as there would be for choosing to exercise a stock option that causes your counterparty lose all his money. Lenders reap a huge premium for doing nothing but assuming the risk of default. If there was zero risk there should be zero premium.
No surprise that it's mainly bankers pushing the "it's immoral to default" line.
It totally depends. There is nothing shameful about declaring bankruptcy because you got into an accident and your insurance company refused to pay your six-figure hospital bill. But if you take out a big loan to build a new hotel and blow it all on hookers and booze? Fuck yeah you should be ashamed (and also go to prison).
What if I take out a loan, am perfectly capable of paying it off, but the asset backing the loan has lost sufficient value so as not to be worth the continued investment? Is there any shame in defaulting and letting the lender suffer some of the consequences?
In my personal opinion, no. Especially with secured or collateral-backed loans, the lender knew there was risk going in and there's no reason they shouldn't also suffer some losses in the case the plan doesn't work out.
This is the situation many Americans found themselves in after the last housing bubble and it still makes me sad that some people still feel a sense of obligation to corporations that would screw them in a heartbeat if it would make them a legal dollar.
My wife and I at one point were in the hole nearly 1m. The crash put my house way under and the job money fun time went away. It sucked. You know what we did. We canceled the cable TV, we stopped eating out. We watched every penny. I work jobs I hated, hated, hated. We got credit councling and got on a plan with them and stuck to it. We paid our debt.
I am by no means saying that banckrucy should not be an option in some cases. Our medical systems is a mess and that is a huge cause of banckrucy. However let's be clear people signed those loans without understanding it and it is their fault. I knew the cost of the interest only loan I had. I got burned but it was a bet I entered after doing research and math, etc. When it did not work out I sucked it up and delt with it.
I agree that some companies did some shady stuff, but really? You get something to good to be true and you don't question it? The consumer has to take some responsibility for their actions.
I am glad you and your family were able to work your way out of the debt you found yourself and I commend you for it. Many others are not able too. Provided they did not get themselves into debt just to keep up with the Joneses' while living on credit cards, they should not be ashamed or made to feel stupid for taking advantage of a legal option that has been priced into their loan via their interest rate.
You talk of doing the math and taking a bet on your loan. The lenders do the same math and take the same bet. They just don't apply any moral imperative to their actions.
Life happens, and at the end of the day their is no shame in looking at the math and your situation and determining that the numbers don't add up and its time to reset.
The companies that lent them money for the second time should have gotten a clue, shouldn't they? Isn't this precisely what credit reports are for? It is definitely stupid to live over one's means and then go bankrupt, but it is just as stupid to lend money to people that have proven themselves irresponsible in the past, and so whoever lends to them should also suffer the consequences.
Regardless of what anyone says to the contrary, we all want the world this way. When we need credit or a loan, we want it to be easy to get because "we'll be responsible about it" and we don't want to be burdened with everyone elses irresponsible debt baggage.
If this was really a problem for lenders they would adopt different practices to avoid this sort of outcome. So instead they are happy to persist it and use whatever tactics they can to maximize their benefit. Lenders lend. They know the risks. They've been doing it for a long time. And they're smarter than you. I'm sure they appreciate your help in fighting their version of the good fight.
Most people aren't consciously running up debt with plans to declare bankruptcy. It happens, but they're not any sort of population to fall back on for an argument about a worldwide system of debt and lending. Using them is really an argument for your own ego and how you're a better person. Maybe you are. But it really has nothing to do with the other 7 billion primates on the planet.
There is this statement that about 60% of bankruptcy are from medical debt. Here is a quick over view of that number:
http://www.snopes.com/643000-bankruptcies-in-the-u-s-every-y...
So lets say it is true (it likely is) then what are the other 40% from?
The problem I have with your statements is that you make the companies out to be evil. They should know better and not lend anymore is what you are saying. However how does that work? Should that 60% that filled for the pure reason that someone got really sick not be able to get credit later? Should we have 2 classes of the ability to get credit after bankruptcy? "Okay, well it was medical so no issues. Hey looks like you spent to much but you learned you lesson this time so I guess I will give you a loan. Hey you seem to have not learned your lesson so no loan for you." This is a slippery slope. How does a company value all of this? The answer is they cannot really. There is math behind the lending and it is faceless and has to be because anything else is subjective and could be discriminatory.
This is no different then:
"Hey you should put limiters in to only let the car go the speed limit."
"Hey you had enough soda this week. No more for you."
The company that lends the money can only profile on the finances and payment history. Anything else is really out of bounds. It is not the lenders job to KNOW that you cannot control your spending and they are not EVIL because they do not do so. They are not your parents.
You are blaming the company for something that is the persons responsibility. No one is saying that there are not bad situations were bankruptcy is required. All I was saying that doing it should not be easy. There is a reason a judge is required to rule on this.
If a bad borrower keeps getting loans then it's the fault of the lender. We have nothing to gain by putting such moral weight on bankruptcy.
This was well-said. Without the risk of default the loan would be worthless for the lender.
[0] http://www.goodreads.com/book/show/26593431-the-new-confessi...
Your point that the risk premium you pay while taking a loan implies that the lender is willing to take some pain from your failure is sufficient in itself.
The interest rates you're being charged aren't tailored specifically to you. But they look at everyone else with similar income and credit and look a the default rate and figure out what they need to charge to make a profit.
It's the sum of the whole lending business, not individual loans, that matter. They'll do as much as they can to mitigate the loss on loans that do default. It's just throwing money away not to. But they've got it all figured out to loan money, have some of it default, and still make plenty of profit. The idea that the minority of people who do default and declare bankruptcy causes them any pain is really quaint and naive.
But boy is that an image their PR would love to get everyone to buy into. If you can convince people to feel bad. If you can convince society as a whole to shame and pressure people into doing something that's the most advantageous for lenders, that is just a lending vision of utopia.
(Disclaimer: I've never been in serious debt or declared bankruptcy. There's no morality that should be implied or assumed by that.)
But don't these number take into account the fact that the average person is scared/ashamed of defaulting? If personally declaring bankruptcy were much more common, would interest rates be where they are right now?
BTW: We've got to watch out for these financial guys, they'll try it again if they have the chance.
And the housing market really went off the rails because people were making stupid bets. Does the casino enable stupid bets? Damn right. But we don't blame them when a gambler loses all their money on a stupid bet.
I'm as pissed as anyone that bankers didn't go to prison en masse, but what they did was package mortgage debt up as more safe than it was. It was home buyers eating up easy money with no restraint that caused the pricing to hit bubble territory.
I think the only reason for that is follow the money. Casinos pay taxes. I'm trying to follow a machine learning mooc and I'm just realizing how much humans (specifically me) suck at classification and at pattern matching.
Planet money I think asked the question: if sugar is addictive, why isn't it regulated?
My questions are Why is alcohol regulated? Why is tobacco regulated? Why is cocaine banned? Why can't we have kinder surprise in the us?
Why is gambling a state monopoly? Why does a casino need a license?
We all don't agree on everything but there's plenty of blame to go around if you think of gambling as an addiction (and addiction as a disease to be treated rather than an excuse to kill people). I think of gambling is a disease, casinos are a "guilty until proven innocent". Sort of like Google's famous " don't be evil" motto which recognizes that an organization in this position is likely to steer towards being evil by default and only by constant vigilance can we prevent ourselves from being evil. In the case of many casinos, I think it is just a matter of cover my ass when they have programs against gambling addiction.
tl;dr I love the idea of personal responsibility but we can't throw people in prison for victimless crimes.
And I agree that sugar should be regulated and taxed, or that we should at least do more to educate them on how destructive it can be to health.
Except that the price of houses rise when everyone else can take out loans beyond their ability to pay. You can't opt out of this game.
Not to mention that most of the people defaulting on their mortgages had the ability to pay - until they lost their jobs. Which they lost because of other people defaulting on their mortgages. The economy was a tinderbox.
Sure, people make bad decisions. But how can they be expected to make better ones when the people that are supposed to be relied on for good advice give such bad advice.
Who has ever said that banks are supposed to be relied on for good advice? Hire an accountant for that, the banker works for the bank, not you.
What do you mean "more like fraud"? Immoral behavior and fraudulent behavior are not mutually exclusive. It is possible for something to be both immoral and fraudulent, such as the example I gave in my post.
>>What if I take out a loan, am perfectly capable of paying it off, but the asset backing the loan has lost sufficient value so as not to be worth the continued investment? Is there any shame in defaulting and letting the lender suffer some of the consequences?
No, I don't think there is any shame in that. Like you said, the risk for that is known upfront and is therefore built into the interest rate.
I'm sure you would enjoy 18th century england and US. Debtors prison was once totally a thing. I like to think of it's dismissal as an evidence piece that a civilization evolves.
When considering seriously hard punishments, think for a while what if the person is actually in the situation from no fault of their own. Because, court often has a hard time doing any moral judgements and just looks at the cold facts.
Defaulting on a debt is not about shame. Governments don't feel shame. The ramifications are that future credit becomes much more expensive, as the next contract's debt provisions will be harsher.
> No surprise that it's mainly bankers pushing the "it's immoral to default" line.
Plenty of honest, hard-working individuals pride themselves on always paying their debts. Similarly there are those who think that you shouldn't extend yourself beyond your means. It's not just bankers who consider not paying dues to be immoral.
Interesting to note on the corporate angle, bankruptcy laws are a fairly-recent invention. (Where by "fairly recent" I mean "several centuries".) The US's laws, in particular, are credited with fostering some of the innovation in this country, as they reduce the impacts of failure.
Yet, in any thread where Greece, Puerto Rico, etc come up there's this strong backlash against defaulting as being somehow immoral (as though it's not written into the lending agreements). What exactly is the difference between burning a bunch of VC money then shutting down and defaulting on a loan? In both cases we have an institution putting money at risk in the hopes of making a profit, and then losing it. I don't see the big moral difference here.
I don't subscribe to the notion that "bankruptcy is immoral", it's just a business transaction within the established framework with checks and balances in place.
That said though - situation with startups and business development loans in general is a little different because startups are by definition attempting to turn the idea they present to investors into reality with investors' money. So unless they fail because of a blatant mismanagement of funds (which does happen of course) - in a typical startup failure situation where something is built but there's no more runway and no more money coming in and no buyers to take over the operation - this just feels like it's easier to justify the less negative vibe around that situation.
Multi-billion dollar governments go bankrupt because of mis-management. Less "Uber For Dogs" and more "Enron", minus the intentional criminality. Governments go bankrupt because its citizen "shareholders" vote for continued debt accrual and negative EBITA. But citizens don't care. It's OPM: Other People's Money. Since they're also "customers", their goal is to get as much possible out.
The other point is (arguably) that government should not be risking bankruptcy for the sake of innovation. Which in the cases of government bankruptcy, was not the reason for insolvency anyway. So then it comes back to mismanagement, where maybe the better analog is personal bankruptcy. If an individual came to you and said they were declaring bankruptcy because they had spent more than they made for the last 20 years, you probably wouldn't have much sympathy.
But it seems like it would honestly be the opposite (i.e., government bankruptcy being bad). The more people that are involved, the higher chance there is of a tragedy of the commons
Suppose someone living the HN dream makes a bunch of money from his startup, and decides to pay off his mortgage. It might be structured as a loan from his company to himself, which then has zero risk.
A bank processing an FHA loan has zero default risk, since the government steps in to pay them. And they often sell the loans to a government-run company anyways.
A bank giving a conventional mortgage will often require 20% down, and again they resell the loans to a government-run corporation after a few years anyways. If you default in those first few years, they effectively get a 20% discount on the original purchase price of the house when they take it. Not zero-risk, but the 2008 financial crisis appears to have only had a 30% drop in house prices. (Obviously, subprime lenders can't resell their loans to the government, and didn't require a heavy down payment)
Generally speaking, the idea that interest mostly pays for risk assumes that there is no 'low-hanging fruit' where guaranteed returns are possible if only there was money. Paying down high-interest debt is one form of guaranteed return, so theoretically there shouldn't be such a thing as high-interest debt if the market was mostly efficient.
I guess the conclusion of your view is that: If people were more diligent about handling their money, banks wouldn't make as much risk-free money.
That's very likely the case. Although the real world does not like zeros and tries hard to push some complex high order effects that will be triggered before any zero is realized.
Except student loans :(.
Are those committing fraud too ?
What, incidentally, about politicians who force pension funds to buy bonds "they like" by legal means ? (at least 200 politicians in current service are guilty of this)
These are US government bonds, by the way, if a default happens with them, the sort of organisation that will suffer the most is US pension funds.
[1] https://en.wikipedia.org/wiki/United_States_federal_governme...
Also the reason for default does have some bearing on morality -- a person that declares bankruptcy because of years of buying a new TV every year and going on expensive vacations is much different than a default due to factors outside of one's control (such as being laid off or suffering a medical catastrophe.)
Puerto Rico has, for years, knowingly overspent without much of a fiscal plan to pay debts. This issue isn't due to forces outside their control, but specifically because of decisions they consciously made. It is political malpractice and the people of Puerto Rico will now pay the price for generations. If that isn't immoral, then immoral has lost all meaning.
So the children of the children of the children of people of Puerto Rico should accept their situation because of "decisions they consciously made"? They're not even born yet. How does that work?
The C- students that became bankers can't be expected to actually work for a living!
(Sarcasm)
Also how to resolve this situation ? You do want a pension, right ?
Also, morality is always attached to anything which involves society and its institutions. For example, good faith in contracts (bona fides) which has evolved all the way from the roman republic is an example of codified morality which proved to be quite useful in societal transactions (i.e. it solidifies expectations of behavior and hastens transactions). Explicit moral value perhaps may not be visible ("basic economic tool") but it is certainly built into foundations of every and any contract.
https://www.one.org/international/issues/debt-cancellation/
http://www.huffingtonpost.com/marcelo-giugale/does-debt-forg...
Countries pay back loans because they like to keep a good reputation for future loans, but this does not work in a situation where there is nothing to lose since you can't service loans anyway.
(Of course banks can enlist other states to do strong-arming: See eg Greece who were pressured to accept a deal worse than default to benefit foreign EU banks)
how are they being pressured?
> What would you use it for? Buy olives?
No, of course not. What government sells olives ? You'd use it to pay Greek taxes. Those you'll pay anytime you want to buy anything from Greece.
So it doesn't matter if export companies get paid in Euros, Dollars, or anything else. They'd still owe taxes in (presumably) Drachma and that would create a market for Drachmas.
A citizen today is no more accountable for actions taken that long ago than for actions taken 4000 years ago.
- Love to. How about Global Thermonuclear War?
- WOULDN'T YOU PREFER A GOOD GAME OF CHESS?
- Later. Let's play global thermonuclear war.
What makes you think Puerto Rico did not try? How much longer will the poor have to suffer until you accept they've learned their lesson? Some facts about Puerto Rico:
Puerto Rico is poor, almost half of the people live below the poverty line.
They already, for years had to pay higher taxes and fees on almost everything to fight the deficit.
Years ago the first economists called for a restructuring of the debt because it's highly unlikely Puerto Rico will ever be able to repay it.
For years, those with a good education left Puerto Rico because there is no hope of turning the country around while staying on the current course.
From some abstract moral-focused point of view you are absolutely right of course, but here I agree with Berthold Brecht: Food first, moral second. ("Erst das Fressen, dann die Moral!").
It's just business.
As long as we're talking about pushing lines.
Its a contract. Success or failure in being able to meet the conditions are all mapped in.
Bankruptcy is a legally accepted aspect of economic transaction and you need to establish that there are moral means before you start talking about moral hazards.
Which has the effect of limiting the sorts of loans people are willing to write.
I think some limit is a good idea. The idea that a city can borrow from the people living there in 20 years is sort of dangerous. Maybe not for durable infrastructure that will still have much value, but for present day services? That's a horrible deal.
If A and B both invest in, say, a house, and B disappears leaving debts behind, at least A can sell the house and B isn't getting any ongoing utility from it.
My genetic future isn't any kind of investment. I'm never seeing any return on that.
Conflating personal morality with economics... is very bad. It leads to things like debtor's prisons (which, unfortunately, exists more or less in America) and heavily prejudices against poorer people. It's an easy to understand system... you borrow money, you pay it back with interest. Its the lender's responsibility to ascertain your credit worthiness. If you default, it becomes harder for you to get credit and you pay higher interest. There is no need to also attach negative behavioral characteristics. Lets face it, we all know someone who is bad with money, but that doesnt make them a bad person, it just means they need an accountant.
How many times has the President declared bankruptcy? I have many issues with Trump but this is not one of them. in fact, I commend him for being able to reinvent himself by learning how to create an effective brand and sell his name.
You wouldn't bat an eye if a company made a controversial decision, like laying off a number of workers for the benefit of shareholders. Yet too often, we judge people if they cannot pay back.
They should just default. Youll have a higher interest rate for future loans, but youll have something to invest for growth and not stifled by austerity. Ask Greece how austerity is going for their economy.
Which is quite an achievement on a personal level, but is a completely useless thing in every other aspect of society.
The name though literally means nothing. There is no consistency, quality, customer service, or otherwise, to any of the properties that bear the Trump moniker.
On the other hand, governments are perceived to be reliable borrowers, so they can receive low interest rate loans and are expected to repay their debt. There is not really a way for governments to issue equity like companies, so if governments become lackadaisical about paying their debts, then we should expect their loans to become much more expensive as well, and this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills.
Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.
It is also important to separate local governments from the sovereign federal government. The federal government is allowed to print money to cover its debts, which dramatically reduces the concern among creditors that it may default. Local governments have no such option, however; they can only address their deficit by reducing spending or raising taxes. Both options are politically unpopular (hence why most politicians do nothing and pass the buck to their successors), and may be counterproductive because the local citizens can just pack up and move if taxes are increased, or if public services deteriorate.
Edit: I forgot to mention that the most attractive way to raise government revenue is to actually attract more productive citizens to move there and increase the tax base (aka how California managed to dig itself out of its immediate financial hole). However, this is obviously very difficult to achieve in practice.
Yes, that is true. Governments typically don't pay off the principal on their loan - more specifically, as soon as the loan matures, they take out another loan.
This is not a problem if you've got some 30-year bonds maturing (As a dollar borrowed 30 years ago is trivial to pay off today), but this is a big problem if most of your debt is in the form of rolling, 1-year, or 3-year bonds.
This is still quite different from a mortgage you need to renegotiate every 5 years, or where the interest rate is pegged to prime + X%.
For anybody who has taken a look at the balance sheets of public entities, it is shocking how poorly capitalized many of these local governments actually are, and how aggressive some of their financial assumptions are (with low interest rates and 50% of their capital held in debt, a 8% assumed rate of return is extremely aggressive, and they would need financial rock-stars to achieve this at their scale). If investors are spooked, then interest rates could spike for many other government loans, and cause contagion among local government entities that would eventually require the federal government to intervene.
If I promise to pay you back a loan, it's understood that the interest rate you'll charge me is related to the risk of my defaulting and that the option exists.
This isn't usually some freak unforeseeable accident. The 2007 crisis was caused as much by people overlevering themselves to take advantage of a situation as it was by predatory lending practices and greed/fraud at the I Bank level. But people love to put all the blame on the banks, and none on themselves for not being prudent.
If I take my car to a mechanic am I expected to know as much about my car as the mechanic? Do I tear down and redo/inspect any work they do to my car? If I go to a mechanic and ask them if it's okay to do something dangerous to my car and they go ahead and do it, I'd say the mechanic is way more on the hook morally than the idiot driver.
Similarly if I go and ask for a 1,000,000 USD mortgage when I'm only making $20,000 USD a year and have no savings or investments and the bank gives it me... You're saying both me and bank are on equal moral footing? You would then have to ask what incentive the bank had to give me the money. Either they are greedy and wanted to charge a super high rate or they intended to pass the buck and sell the loan which can be fraud if they lie about my credit worthiness to the next buyer of the loan.
Morality is a human defined concept. We also only seem to apply it to individuals, a company declares bankruptcy, fires a large number of employees and then rights itself society shrugs but if a person does it we cast shame on them.
Life is short, if I dig myself into a whole with the best of intentions, I am not going to spend years living a lesser life and condemning my kids to that same lesser life if there is a reset button.
I don't think that it's right for a company to do what you describe wantonly. I absolutely think we should shame companies when they mistreat people.
And what you're describing with your children is selfish, but it's an understandable selfishness - your children are of course going to be a higher priority to you than society at large, as it is with almost all parents.
Anyway, my idea about the obligations of fulfilling one's debts seems to be an unpopular one, and I'm sure I won't change anyone's mind, especially if they've chosen to take on a lot of debt themselves, so I'll stop here.
Then why does the borrower have moral culpability in addition to financial culpability, while the lender only takes a financial haircut.
Yes, I blame the supposed experts, not the folks they suckered.
VCs invest in opportunity, not promises.
But regardless, you should try to make your investors whole, if at all possible. I view that as your ethical responsibility as someone who receives investment.
With governments, it's a lot about the credibility. You could say that it was wise economically for e.g. Argentina to default on its loans in 2001 given the circumstances; however, the default and the associated political rhetoric have cost a great deal to the Argentinian government and people, and it continues its decline, although it was a very wealthy country 80 years ago and effectively avoided the Second World War. The economic and political institutions in the country are not trusted.
I live in Finland, which in 1918 suffered a famine after a bloody civil war. The new government took a loan from U.S. creditors in 1919 to buy food. Many other countries who took similar loans at the same time defaulted them at the Great Depression or the following years in 1930's. Economically, that would have made a lot of sense.
But the Finnish government kept paying it back, even during the beginning of World War II while being attacked by U.S.S.R. This gained a huge positive reputation which helped the country a lot. After the war, the old loan was eventually converted to a fund whose payments were given as university grants and stipends to students coming from Finland to U.S. universities.
It would have been quite easy to default in 1920's or latest in 1940, and most modern economists would have advised for it, but not doing that was a good move.
The loan was eventually finished back in 1984, but the process attracted donors who gave further funding so that the stipend/grant system still exists.
We cannot force debtors to repay money in perpetuity. That's half way to indentured servitude, or worse. If someone has no hope of every paying off their debts, the logical thing to do is not bother trying. That is waste. And we long ago abandoned the idea of debtors prison. Puerto Rico cannot be jailed nor can it be forced to make payments forever as that would destroy their economy forever. The only reasonable thing is to eliminate the debts through the legal process.
Could it about setting an example?
Showing the lost case a hard time might scare others into good behavior.
These are two-sided contracts negotiated between adults. It is not the role of government to always side with one type of party over all others. The risk of loss is a cornerstone of investment. So too is the concept that one may borrow without risking a lifetime of punishment should the venture fail.
If the Puerto Rico government defaults now, no banks should lend money to it again ever. Perfect.
This outcome doesn't affect other lender-borrower relationships.
And yeah, it does effect other lender-borrower relationships. It's all people, and people get nervous.
Brazil is once again facing mounting debt due continuous budget deficit. This time the govt is pushing for austerity reforms that, if not approved, will lead once again to default. The govt approved ratings are abismal and populist candidates are expected to win next year's general election.
So, defaulting sucks.
Not defaulting worked extremely poorly for Greece.
It all depends on the particular circumstances of a country. If you're going to be building massive amounts of infrastructure, then yeah, you may want to consider not defaulting. On the other hand, if the foundations of your economy are sound, you may do well to default, and live with the credit rating hit.
You get a Greece like deflationary spiral that basically totally destroys your economy, and any hope you ever had of paying off the debt.
Bring on the defaults.
They're shut off from [cheap] public markets though. So while your statement is technically correct, they are usually stuck with lenders of last resort, such as IMF or direct country-to-country loans, which generally come with pretty harsh terms.
That's the lenders' fault. Bleed the suckers dry. Lenders like that shouldn't get to manage money.
If after the default, they are in a reasonable state, then yeah, people will lend them money, because there is a good chance they will make a big enough profit.
You WANT to be a lender which balances the risk with the rewards. You don't want one which just blanketly says no to something which has a low risk, which will make a lot of money because you are arse hurt about it.
Yep, for example this is why no American bank will give loans to Donald Trump anymore. Too many bankruptcies. So he isn't worth the risk.
If you have any spare cash on hand (investor inflows, interest payments and bonds redemptions on other bonds) your choices are:
1) Hold cash, the more the better, in order to prop up the value of the fund.
2) Lend it to another borrower.
I'd say that if you expect a smooth sailing or are in a situation where investors cannot liquidate, strategy (2) is reasonable. But even then you might want to extract some better terms from the borrower by quoting PR as a scare factor.
Most funds, however, will expect either investor outflows or markdowns in other municipal bonds with similar characteristics. For better or for worse, the municipal market is frozen for a new borrower, at least for the next few days.
If you've defaulted in the past, your cost of capital will go up in the future.
You can weigh the future effects of renegotiating your debt now, and make a decision.
Iirc GM debt holders took a large haircut in their bond holdings. GM is still a going concern and I'm sure they've issued debt in the last few years after their restructuring.
Well, one of the questions is whether the modern definition of "efficient amount of lending" is in fact the correct value. If we're undervaluing the risk of a fat tail of defaults, and worse, correlated defaults, then the true "efficient amount of lending" may in fact be less than it is today, even much less.
Ten years ago, I could have said that if you looked around, it seemed like a there were an awful lot of entities carrying debt loads that they couldn't possible discharge and default seemed inevitable. Of course, I would have been poopooed and had the claim dismissed because, basically, "debt is good for the economy". Now we live in a world where at least some of those debts have indeed caused catastrophe; Greece is still reeling, the stresses that financial crisis put on the EU are still echoing, Puerto Rico is now declaring bankruptcy, and the "financial crisis" that we have still really not "recovered" from was 100% driven by debt and the slicing and dicing thereto. In light of that, take another fresh look around at the sheer staggering number of entities in massive and probably unsustainable amounts of debt right now, and in light of the fact that it is clearly not impossible for them to default after all... what happens next?
Furthermore, this sort of implicitly presumes that "lending" is the only possible method for attaining the goals, but there are other possibilities, such as selling equity stakes. Selling equity stakes are not equivalent to lending, which indeed is part of the point, and fully exploring the second-order consequences would be on the order of a PhD thesis or beyond, but at least equity-based systems don't have the catastrophic collapse that debt-based systems do due to the lack of leverage. In an equity system, an entity can lose its shirt, but if it does, that's that and it's all done. In a debt-based system, an entity can lose more than its shirt.
And, you know, human society has discovered more than once that debt-based systems are attractive nuisances where the long-term dangers strongly outweigh the short-term gains. I hesitate to directly apply the lessons of the past because a lot of things have changed about the financial world in the last hundred years... but that doesn't guarantee that the modern world won't in fact dig itself in even deeper than any of the ancient civilizations did, with much greater skill, and consuming all the slack in the system before the collapse far more effectively than the ancient world could ever have dreamed of.
If? That's already how the USA is compared to most European societies. Our current President has been through a string of bankruptcies.
Just saying, bubbles / relative lack of supply times are a really bad time to be a moral and ethical purchaser. You're either not gonna win and a crook will win, or you'll have to become that crook who willfully screws the bank.
Meanwhile centrally controlled low interest rates mean money is sloshing looking for any return, any. Everything higher return got financialized. So loan money is going to be aggressively thrown at those willing to take out large loans and pretend they'll pay back. A flood in the money supply due to low interest rates gets the same result in the long run as a pinch in worthwhile asset supply.
"Inefficient" is whatever the heck the market decides it is, subject to supply, demand, and risks. If we make it a social norm to take bankruptcy lightly, oh well, the efficient thing to do for markets is to factor that in.
It has to be considered on moral grounds rather than economic ones.
Either there's money to be made, or there isn't. There are penalties for defaulting too, like greater difficulty securing future loans, or higher premiums. It's not like defaulting is free of consequences.
No. This will result in bad actors defaulting with little penalty except shame and guilt (which they won't care about) and good actors suffering. We want an equilibrium where good behavior results in at least equal if not better economic outcomes to bad behavior.
This should be priced into the lending until the penalties of defaulting (loss of credit, future lending problems, loss of existing assets and so on) creates the right cost to balance out the cost of paying off the loan.
Yes, at one extreme, nobody ever pays anything back and no lending ever happens.
But at the other extreme, everybody always pays their debts and the bankers asymptotically approach ownership of 100% of the money.
I think we are closer to the second extreme than we should be.
Remember that interest on loans that's higher than inflation is effectively profit for the lender; the lender needs to weigh the profit of the loan over the risk of default.
The goal is that every loan is paid off; that's what keeps interest rates low.
Is there any reason to favor that hypothesis over the competing one that if debt is made onerous, an inefficiently and damagingly high amount of lending goes on? Seems to me the evidence favors the latter hypothesis. It's worth bearing in mind that debt as a social instrument has so easily and often turned toxic that some societies have gone so far as to outlaw it altogether. If you agree with me that this would be an overreaction, would you agree that we therefore need to take steps to tame it and mitigate the damage before that sort of overreaction repeats?
Appetite for risk is good in the aggregate. PR will get downgraded for sure though.
It's pretty much a "Tragedy of the Commons" scenario, IMHO.
Do you want to live in a society where you and your family can be sold into slavery if you fail to pay off your debts? Because that's the logical consequence of not allowing debts to be discharged from bankruptcy, regardless of your ability to pay.
Being a money-lender shouldn't be a license to print risk-free money.
That is at least in theory. Since a considerable part of the economy is in the gray zone, there are ways of dodging that. Large part of the law system is corrupt, so well connected people always find a way to be untouchable. The system is also inefficient so lots of those debts exist just on paper. Basically, you can't go bankrupt as a person, and you wont be sold to slavery, but you will effectively still own the debt and the only way to not repay it is to work in the black zone outside of the system, or wait so long that the lenders write it off themselves (after a few decades or so?).
The USA financial system that allow for bankruptcy is part of the reason that we are an entrepreneurial nation.
Failure is part of innovation.
In many there is, though it's more restricted in some countries than others, which leads to https://en.wikipedia.org/wiki/Bankruptcy_tourism
At least in some "debtor's jail" systems you could get your rights back after spending some time incarcerated.
Rich banks losing money vs poor people being exploited for the rest of their lives.
I think I know which one I prefer.