Tuesday, March 10, 2009

Moral Obligation

Megan McArdle explains why she thinks that people do-to some degree-have a moral obligation to repay their debts (lengthy excerpt warning):

Four weeks ago, I bought a grill on my credit card. It was not the best grill Home Depot had--indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models.

It's a nice grill. But I've since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200. Meanwhile, I've discovered that I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company. After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to. Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan. I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don't have any sort of moral obligation whatsoever to make good their debts. The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you're the one I borrowed the grill money from. I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200. So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?

Call me bourgeois, but I think that when you sign your name to a document promising to repay money you've borrowed, you have an obligation to repay the money you've borrowed.


Undoubtedly many of my readers think that that sort of thing is different because we don't have a moral obligation to repay our debts to corporations the way we do to people. This strikes me as fundamentally wrongheaded in two ways. First, the bourgeois belief that an honorable man repays his debts if he is able is one of the unnoticed underpinnings of a stable, prosperous democracy. Countries that believe that one can pick and choose whom one is obligated to repay on the basis of how good a person the lender is, how tight their relation to you, or whatever, are low-trust societies with extremely high transaction costs and underdeveloped markets. If you think you're only obligated to repay regular folks like yourself, then no one but your close friends and family will lend you money. This makes capital formation tricky.

She makes a reasonable argument, but there are a few things I think she's missing. First of all, her personal experience is not really analogous to a homeowner handing over their keys and walking away from their home and whatever debt they have remaining on their mortgage. Obviously, someone may opt to pay for a $200 grill they don't really need, whereas a home mortgage payment can be a crushing burden on a family's finances, especially when the interest rate has shot up or the home's value has declined dramatically. But let's leave that aside and take her argument at face value; that there is a moral obligation, at least to some extent, to repay one's debts. This is actually not a proposition that I disagree with completely, though I don't think I've been clear about that in the past. It's clear that many or most people feel some compunction to repay their debts as a matter of principle, or honor. After all, few things seem as irresponsible or dishonorable as borrowing money from someone in good faith and willfully failing to pay that money back.

But the reason I've been so opposed to speaking of a moral obligation to repay debt is because the obligation to behave morally or honorably only ever seems to be imposed upon the debtor, and not the lender. McArdle misses this when she argues that there should be no distinction between paying back debts to corporations and debts to family or friends. The existence of a moral obligation to pay is not premised on who the lender is; it's premised on how the lender behaves towards you. That's why most of us would make every effort to repay family and friends, who we can presume will for the most part lend to us and treat us in good faith. But you can expect no such treatment from a bank or corporation, which not only will hound you for your debt to them if you fall behind (as they are legally entitled to do) but also alter the terms of your agreement, slash your credit limit, raise your interest, and report various sundry things to the credit reporting bureaus and then take their time correcting what they've wrongly reported (among other things.) This is why it seems so strange to impose upon debtors a moral obligation that doesn't exist for lenders; if we're talking about obligations that go beyond something other than a straight business transaction, then there should be reciprocity, right?

Second, I think McArdle gives too much credit to this obligation as a means to keep the credit economy flowing smoothly. What really keeps credit flowing are the legal obligations that bind those who enter debtor-creditor relationships. Yes, most of us feel some moral obligation to repay our debts, but we also know that if we don't, our lender will send us nasty letters, call us repeatedly, report our late payments to the credit bureaus, and they may even sue us for the debt. Since most people want a good FICO score on their credit record, don't want to be called at all times of day, and don't want liens imposed on their property, they'll continue to pay even if they feel no moral obligation to do so. Of course people in worse financial circumstances may decide for whatever reason that they'd rather face these consequences than attempt to keep paying on the debt. They may even enter bankruptcy at some point, despite the fact that most people are still embarrassed and/or ashamed of admitting that they can't pay their debts. And it's true that some people will decide that-even if they can pay the debt-they simply don't care about their credit score, don't mind the phone calls and nasty letters, or have no property to speak of that they're worried about losing. But such is the system of incentives, not obligations, that lies at the heart of our credit economy. Lenders-for the most part-have incentives to lend and to treat their customers/borrowers decently, so that those people (and businesses) will want to lend again from them in the future.  Borrowers have incentives to pay their debts back in a responsible and timely manner, so they can borrow again in the future and so they can avoid the negative consequences of failing to pay back their debts. 

Liberals like myself would like to see a more balanced system of incentives, so that the lender's incentive to treat their borrowers decently is roughly equal to the borrower's incentive to pay that lender back. To us this means mostly balancing the playing field between lenders and borrowers, such that both enter a credit transaction as something approaching equals and will have an incentive to fulfill meet the obligation to each other they've both contractually assumed. This is why talk of a moral obligation that somehow is imposed only on one party in the transaction is annoying and frustrating to me. Such an obligation is an impediment to a business relationship between equals and-more frequently-is used as a rhetorical tool by people on the right who want mostly to protect the interests of corporations that have no desire to level the playing field or let people off the hook for even unconscionable debts.

And beyond that, it just seems silly to start talking about anybody's obligation to do anything by anybody in our present economy, where home lenders fudged numbers to produce more loans, banks sold bad mortgage-backed securities left and right,  credit ratings agencies rated themwilly-nilly, and execs at giant financial institutions pay themselves billions in bonuses with taxpayer money. Compared to that, the morals of credit cardholders and homeowners seems a small concern.

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