Felix Salmon has a post up, arguing about reducing the shame of default. He seems to be advocating that more people with underwater mortgages default on the mortgage, both as favour to themselves and to teach errant bankers a lesson. He says “If there’s less shame attached to default, we will end up with exactly what we want — less badly-underwritten credit, a more solvent society, and much less tail risk. We went far too many years believing without really analyzing the proposition that credit is nearly always a Good Thing.”
Well, that not only seems unhelpful but can only make things worse. What we need to be doing is shaming bankers, the ones who misled the people who shouldn’t be borrowing into taking out loans they have no hope of paying, so the bankers find a way of renegotiating these mortgages. We shouldn’t be reducing shame of default of the borrowers.
What would happen to the financial system once everyone no longer has shame of default? More defaults leading to more underwater mortgages leading to more defaults, all the way down to financial armageddon. Why stop at mortgages? What about all other indebtedness backed by any sort of asset that may have gone down in value? Stock loans? Equipment loans? People have also been known to borrow against these. And not paying debts because banks didn’t do their jobs properly could be just one step away from not paying taxes because the government isn’t spending your tax money correctly. Is that next?
Pls. let’s bring the talk back on how the mortgages can be realistically and orderly fixed. Nationalize the guilty banks, fire the errant bankers, institute the needed financial reforms. Threats like making personal defaults more common seem attractive at first, but they will only lead to more pain down the road. If defaults become at all common, it won’t be long before we forever say good-bye to any notion of providing credit to anyone.