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Comment by dchmiel | Hacker News Reader

It is better for yourself and the creditor to just bypass the horrible and at times abusive debt collectors, but this would create a perverse incentive to ALWAYS default on loans.

Creditors asses your potential for default and base the rate of lending on that risk. In your scenario the rate of default would always be high therefore the rate that you borrow at would be extremely high, think loan shark high. Or you would find that no one is willing to lend money and this would cripple an important part of the financial system. Think student loans never existing.

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"but this would create a perverse incentive to ALWAYS default on loans."

Statically, yes. However I'm having a harder time mentally analyzing what this would do dynamically, which is a much more interesting problem, since the real world is not static.

My first approximation is that because "everyone" would know this is something they can do with their debt, that lending would consequently become much more rare, and lenders would be much more careful about securing their loans. The initial impact on the economy would probably be sharply negative; what happens after that is probably a "your guess is as good as mine" situation, even amongst economists. Attitudes about debt have varied widely throughout time and space. Some will say tightened lending will wreck the economy longterm, others would suggest that loose lending has already wrecked the economy and the initial shock would simply be paying down damage already done, after which the economy would be much healthier. Which side you fall down on probably has more to do with ideology than education; given how much trouble economists have explaining even our current economy I'm not willing to give even experts much credence for explaining how such a different one would work.

You're right on that dynamically it is a very interesting problem and something that from my exposure to economics, economists seem to spend very little time analyzing.

Changes beget other changes and so on. Finding the steady state level of change would be challenging yet interesting to model.

I have a PhD in economics and that is the first thing that an economist would think of (in my case it wasn't, but I did eventually realize it...).

One reason why many of the the "crazy" ideas posted on HN don't make it to policy, is that there are people trained in economics who are able to see the flaws in such policies.

EDIT: and in case you were curious, this wouldn't generally be considered a dynamic problem in economics. Once the policy was announced, interest rates would immediately change to a new equilibrium, which accounted for people's higher tendency to default. So the problem is simply to calculate the new static equilibrium.

Yes, in this case I merely mean to bring in the idea that changes are reacted to. I was using static vs. dynamic more in the physics sense, where "static" can be looked at as a snapshot of the system you're looking at, whereas dynamic brings in the concept of time. I agree that all else being equal, there's every reason to believe that this sort of change would produce a new static equilibrium, at least in terms of debt itself. (My doubt is more about the net effect on the economy as a whole, as debt seems to be a matter of some debate even today. The dominant economic thought seems to be pretty comfortable with it, I have to admit I'm coming around to more of a "Black Swan" sort view where I think the dominant consensus is overvaluing it, which interestingly also accords with a lot of historical thinking on the topic albeit not with that amount of mathematical backing.)

We usually call the immediate effect (in this case on interest rates) partial equilibrium, and the "full" effect including all flow on effects, "general equilibrium". And there are models which include dynamic and random effects (dynamic stochastic general equilibrium - DSGE - models). Can't tell you much about them apart from the name :-)

Anyway it seems like messing with debt contracts is a bad way to change the interest rate, if that's all you want to do, since that is precisely the lever that the Federal Reserve controls anyway.

>> It is better for yourself and the creditor to just bypass the horrible and at times abusive debt collectors, but this would create a perverse incentive to ALWAYS default on loans.

Doesn't valuing your credit counteract that incentive? You'd only get one shot at this before you lose it. Also, this has long been an option with credit cards.

>Doesn't valuing your credit counteract that incentive?

So what? All poor credit means is that it will be more expensive for me to borrow in the future. If I know I can buy back my debt for pennies on the dollar, who cares how expensive it is for me to borrow?

What this would do is make credit an essentially all or nothing proposition. One screw up and any future car loan, student loan, mortgage or other debt I want is out. I would rather have the opportunity to make up for my mistake by borrowing more expensivly than never being allowed to borrow again.

Or, alternatively, banks would simply stop offering credit to people with bad credit scores because it would always be a losing proposition for them.

That is how it works currently. For example, say I have good credit, and it is very easy for me to borrow. My brother has ok credit, and has to borrow more expensively. My parents have terrible credit, and they cannot borrow at all (right now, at some point, their poor credit will fall of their history).

Except defaulting on the loan still has a significant hit on your credit rating, and maybe buying your debt is another negative score on your credit rating.

> this would cripple an important part of the financial system. Think student loans never existing.

I'd see loans more as band aid for broken social structure: "People would not be able to pay for their important medical bills in case of crises." - If the US had a proper medical care system nobody would have to pay for important treatment personally, "Without student loans only the rich would be able to go to university" - If good education was free (at least until your first master degree) even more people from poor families would dare to get advanced degrees, and so on.

There are a lot of countries in which a debt free life is the norm and not the exception. The only parts of society where loans are necessary seems to be for startups and generally for corporate investments.

I see responsible debt with personal loans also playing important parts as loans to startups and corporate investments. It serves a function of distributing capital where it can be used most effectively at a smaller scale.

A creditor needs only say 5% a year return and will be willing to lend. I may need money now to buy a new computer or repair my car which has value greater to me than the 5% my creditor values if my car/computer allows me to work effectively or even work in the first place.

Countries without broken social structure such as Sweden and Norway also high debt to income ratios. Debt is not about having to pay for things that we think the state should pay, its strictly about our consumption patterns. And some of us debt finance high value items such as education and some of us debt finance lifestyle increases. http://www.norges-bank.no/pages/93708/Staff_memo_2013_05_eng...

i dont think lifestyle increases (i assume you mean improvements) should not be financed by debt. It should be financed by profit. I can understand financing education by debt - its an investment, which hopefully, should make a return afterwards in the form of higher productivity/output/value when doing a job.

Life style improvements - such as getting a better car, or going on holidays, or bigger tv etc, do are not improvements to your cashflow, and should never be financed by debt.

No, because people are not money earning machines. People earn money to satisfy their needs, and the ability of earning money doesn't always sync with their needs timely. A loan will help that. So you can take your children to Disney world when they are 8, instead of saving till they are 18 to make the first trip to Orlando.

or, you don't take your kids to disney world, but teach them, bright and early when they are young, that the family is poor. That they need to understand what circumstance they are in, and don't throw tantrums or compare themselves to their neighbours who _do_ have the money to go. Tell them they need to study hard, and make sure they get a good education from school, so that their future is better than the parent's.

Then, when they are 18, they'd have a much more mature mentality, and won't go out to get drunk and cause problems for themselves. They'd be able to get a job, or try start their own business, etc. When time comes for them to have their own kids, they'd have enough to take their kids to disneyland.

It seems that now we have the opposite, an incentive for people to go directly to debt collectors. I had a radiology office in Charlotte give me a needless CT scan and bill me directly (instead of my insurance), so I owed them hundreds, and they went to collections after I paid part of it in a month, and never let me view the balance online.

The problem is that people just go to collections without trying to collect the debt.

It would be better for the borrower, but since it would create an incentive to default on loans [slightly more], it is not better for the creditor - so creditors simply don't do it because of that.

They can and do make direct discounted offers to the debtor; but these are completely different offers than sales to debt collectors; it is not in their interest to match the offers.

> Think student loans never existing.

You mean free tuition for all like we used to have?

When did we have free tuition for everybody?

Before 1998 in the UK (http://en.wikipedia.org/wiki/Tuition_fees_in_the_United_King...)

Not quite for everyone - if you already had a first degree you had to pay your own fees if you did a second first degree. My wife did a law degree as a second first degree and we had to pay her fees - what was interesting was that the fees varied a lot from university to university. What was really odd was that the best universities were also the cheapest (by a factor of about 10 - from about £400 to £4000 a year).

Also, if you are Scottish and attending a Scottish university tuition fees are still paid by the taxpayer as they did in the old days. (NB I am a Scot and I've never understood how this can be justified).

I think it's justified on the basis of a rising tide lifting all boats - particularly for a country moving into a skills/knowledge economy.

What I mean is that I find it difficult to justify that kids in Scotland get their fees paid and those in England (and probably elsewhere in the UK) do not.

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