Hacker News Reader

Comment by ryandrake | Hacker News Reader

> But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly

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.

View on HN

>>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.

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).

That sounds more like fraud.

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.

While I agree with everything you said, I feel your argument should stand on its own merit. Just because a corporations screw people isn't a good enough reason for people to screw them back.

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.

I think there a "tragedy of the commons" sort of moral responsibility here to only take out loans you have a good chance of paying off as you theoretically raise interest rates for everyone else.

But everyone is definitely not lumped together into a commons. If their is information to delineate people, it will be used. That is what credit scores are used for. Also, of some interest, it was when banks sullied the information, that the housing market really went off the rails.

BTW: We've got to watch out for these financial guys, they'll try it again if they have the chance.

It's not the "financial guys" forcing everyone to sign up for the huge amounts of per-capita debt we're now up to. People are doing that themselves out of their utter lack of self-discipline to save money instead of buying a stupidly overpriced SUV or pickup truck.

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.

> 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 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.

Yep, like casinos, we should regulate banks to avoid allowing them to provoke the worst impulses in people. But at the end of the day, in the current environment, people need to be able to take care of themselves. Regulation should not be treated as a substitute for discipline.

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.

When I got my mortgage (c. 2006) I had an idea of what I could afford. I went to the bank hoping they would approve me for that much. Not even taking into account my wife's salary, they approved me for at least $100k more than that. There is no way we would still have our home if we took the bank's advice.

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.

I blame the "sharing is caring" and "safe space" culture. If people were exposed to reality at a younger age they'd know that any advice given is for the advice givers benefit.

Good on you for making your own decision rather than outsourcing responsibility to a company that clearly doesn't have your best interest at heart.

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.

> It's not the "financial guys" forcing everyone to sign up for the huge amounts of per-capita debt we're now up to.

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.

In a world of hawks, it is foolish to be a dove.

Not quite. You make the mistake of adding significance to individual each loan. The reality is a lender might loan to 100,000 people and they know some of those loans are going to fail. If they had a process to only lend to people who would never default, well, impossible.

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 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.

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?

>>That sounds more like fraud.

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.

Sorry but what you are saying is since people are too stupid to understand the contract they signed and to do some math it is the companies fault?

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.

The companies are more than capable of doing the math as they are signatories on the same contract. They interest rate they charge on the loaned money is based on their own internal algorithm that determines the risk of default on a particular borrower. Risk is priced into the loan.

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.

I agree but that is not the case for most of this. People spend to much and run up to much debt because they are trying to keep up with the Jones. My wife was property manager for a large company. One of the properties in Orange County, New Port Beach area, had the highest rate of late payments and evictions. This is a A+ complex and has some of the highest rents for the units in the area. Guess what, those people that were late came in to the office with their bags from Nordstrom that they just came from in their BMW or MB asking for extendtions because they did not have the cash (but still had the CC to run up shopping). We as a country over all have made it okay for people not to be responsible for their actions and it will be our downfall. I agree with having the bankruptcy laws but we need to make it harder to get a reset whenthe cause of the situation was your own stupidity. I personally know people (Not friends) that have gone through bankruptcy 2 times, doing the same stupid shit the 2nd time as the first and it does not look like anything has changed with the last.

I personally know people (Not friends) that have gone through bankruptcy 2 times, doing the same stupid shit the 2nd time as the first and it does not look like anything has changed with the last.

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.

Oh they had a clue all right. They were charging the appropriate risk premium. People with bankruptcies are getting credit--expensive credit.

After seven years that data is removed from your credit report due to consumer protection laws. Its possible they had no idea, and even if they did its illegal for them to deny credit because of it if it was 7 years or more ago.

Do you have sources for your statement?

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.

So the bankruptcy is removed from your report after 7 years. It is really simple to get credit after a bankruptcy because you have no debt. Stupid I know.

People are debt for all sorts of reasons, regardless of how you want to characterize it. Let's say your claims are generally right. But lenders are still willing to lend to people they probably shouldn't. And as long as they come out ahead overall they will continue to do so.

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.

Wow. A personal attack. Way to make a point, not.

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.

An economic argument would be that a customer defaulting now will signal to future lenders that they are a risky customer, leading to a raise in rates for future loans. The moral framework which says that defaulting is bad is in some way codifying the economic argument, by categorising actions that will lead to future difficulties as "immoral".

>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.

This was well-said. Without the risk of default the loan would be worthless for the lender.

Whole countries are in huge debt that affect people that were not even born when the debt was established because of US economic hitmen [0]. I feel that all these countries should default and the corporatocracy fof the US should be ashamed of itself.

[0] http://www.goodreads.com/book/show/26593431-the-new-confessi...

You can declare bankruptcy all you want, but if you are able to pay your debt, it will not be accepted.

"Fuck yeah you should be ashamed (and also go to prison)."

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.

I would like to point out as an addendum that any laws that would harshly punish defaulting debtors would strike equally harsh towards the delinquent and the morally admirable down on his luck.

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.

And present day Dubai.

> 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.

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.

And the politicians who make the decisions to run up the debt have zero skin in the game. They just get to spend other people's money. In many cases it goes out the door as political payoffs for getting votes.

Yet the people elected them instead of someone pledging austerity and higher taxes.

There's a difference in perception between personal, corporate, and government bankruptcy. Personal bankruptcy is seen as a black mark of either poor personal discipline or a string of bad luck. Corporate bankruptcy is largely ignored, held up in rare cases as a source of embarrassment (but little else), or more often in startup-land, a signal of "experience". Government bankruptcy is something else entirely, and generally unforgivable without significant outside catastrophes. You can blame the politicians, but in a Democratically-elected government, these are your representatives.

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.

At the end of the day, they're all just humans making bad decisions

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

You make a really good point. HN seems to venerate startups that fail, which isn't very different from defaulting on a loan (and in many cases these startups are defaulting on loans as they shut down).

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.

>> HN seems to venerate startups that fail, which isn't very different from defaulting on a loan (and in many cases these startups are defaulting on loans as they shut down).

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.

The answer, as I see it, is big dollars and moral focus. A VC investing a couple million bucks in a long-shot startup? You expect risk. Ditto, say, a $300k mortgage to a family of four, but that's more portfolio statistics.

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.

Eh, that's cheap. A citizen has far less control over their government than a corporation's managers over their treasury or an individual over their own finances. So your argument applies far less to a government than in the other cases. In any case, politicians actions do not equal the will of the people, as anyone acquainted with a Republican form of government should know.

Majorly cheap, but you're also highlighting a massive bystander effect. "What hope do I, one citizen, have of changing anything?"

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.

> If there was zero risk there should be zero premium.

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.

> 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.

|Default is an option specifically written into every debt contract out there.

Except student loans :(.

You can default on student loans.

Ooop, yeah, you are right. Was thinking bankruptcy.

You can discharge them in bankruptcy, too, it's just harder than most other debt to do so.

My mind immediately went to that too. Smh.

I'm pretty sure taking out a loan that you intend to default on is fraud, but making a contract with someone that you expect to be very profitable to you is not.

Who said anything about taking out a fraudulent loan?

I was responding to "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." The idea is, if "default" were just a neutral acceptable option then we wouldn't think of it as fraud if you took out a loan that you planned to default on.

If I were to look for fraud anywhere, I'd start by looking at the people who give inflated ratings to bonds.

Start there, sure, but don't stop there.

What about politicians that use the government to take action against firms when they lower particular ratings ?

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...

Intent to default sure, but realizing that defaulting is the best option after your circumstances have changes is not fraud.

Not paying your debts is immoral. Sure the risk is priced in but so is the risk of shoplifting in the prices you pay at stores. That doesn't mean that because the risk is priced in that it's somehow moral to shoplift.

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.

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.

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?

Whoa whoa whoa! If people default, then bankers might actually have to work for a living and actually evaluate potential customers instead of just cargo-curling their way through forms and praying that everything will be ok.

The C- students that became bankers can't be expected to actually work for a living!

(Sarcasm)

The largest owners of US government debt are US pension funds. This situation exists mostly because politicians demand they get to pick what the bankers invest in (at least 80% in "safe" instruments, ie. from a short list with government bonds).

Also how to resolve this situation ? You do want a pension, right ?

Reply on news.ycombinator.com