16 ms·

That's true in any individual case. But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the e

That's true in any individual case. But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't it be a better equlibrium? And we can work towards such a world bit by bit in how we respond to crises like the Puerto Rico one.

fiatjaf 9y ago
If someone has already defaulted on a loan, that will make you not want to lend to him anymore, perfect. 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.
- enraged_camel 9y ago
  >>If someone has already defaulted on a loan, that will make you not want to lend to him anymore, perfect. 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.
  - nsp 9y ago
    All but one of the big banks stopped loaning him or his ventures money after the first few bankruptcies
- myrryr 9y ago
  That isn't how it works. It is never how it worked. Plenty of countries have defaulted, and they can still borrow money. And yeah, it does effect other lender-borrower relationships. It's all people, and people get nervous.
  - fiatjaf 9y ago
    Because in case of governments something spurious always happen. That's a special case, and it doesn't have to be that way.
  - cjalmeida 9y ago
    Brazil in late 80s and Argentina in early 2000s default. Both spent a decade with no access to foreign debt whatsoever and prompted a massive crisis. In Argentina it let to the populist Kirschner govt. 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.
    - anigbrowl 9y ago
      OK. Now tell me about the other side of the coin.
    - vkou 9y ago
      Defaulting worked pretty well for Iceland. It worked poorly for Brazil and Argentina. 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.
      - throwaway2048 9y ago
        No defaulting and instead trying to rough it out and pay off a crippling debt is massively more harmful for a country. Because they have to basically cut all services and investments into the economy, which causes GDP to contract heavily, which causes a huge decrease in taxes, which causes yet more cuts in government investment. 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.
- prostoalex 9y ago
  If you're a mutual fund or an ETF with exposure to PR municipal bonds, you're looking at somewhat of a loss come tomorrow morning. 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.
- peter303 9y ago
  Wrong. A borrower who defauls is more attractive than a tightwad who never borrows. There is a chance of making money on the former. People going into foreclosure get innudated with loan offers.
ythn 9y ago
Exactly. Do we really want to create a society where the lenders have to do an inordinate amount of background research to determine whether you are a default risk? Bad for everyone in that case.
- vkou 9y ago
  We already live in that society. What do you think the millions of people working in finance do, if not try to quantify risk? 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.
  - dragandj 9y ago
    There are other models other than two extremes. For example, in (at least some) European countries there is not such thing as private person going bankrupt. However, of course that that person won't be sold to slavery. Simply, if you can not repay the loan, your property will be confiscated and sold to repay it. You can dodge that by not having any property on your name, of course, and most such people do that, but that also means having no flow on your bank account (everything over a small life-sustaining minimum would be taken every month). 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?).
    - MrFantastic 9y ago
      In many European nations if you start a business and fail you will never get another chance. The USA financial system that allow for bankruptcy is part of the reason that we are an entrepreneurial nation. Failure is part of innovation.
CJefferson 9y ago
Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?
- ericd 9y ago
  A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.
  - whatnotests 9y ago
    Define "promise" in this context though. VCs invest in opportunity, not promises.
    - ericd 9y ago
      The person I replied to specifically mentioned owing money, so I took it to mean that he wasn't talking about the investors. I do think that a business owner who is unable to pay people he owes should feel bad about it, and should make every effort to pay them back. Just because he's legally off the hook doesn't take him off the hook ethically, in my opinion. 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.
  - goneri 9y ago
    Promises only bind those who believe. Those pepole are paid to evaluate the risk.
  - ceejayoz 9y ago
    If I promise to meet you for coffee, it's understood that there's a silent "but not if my wife winds up in the ER". 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.
    - 9y ago
hkmurakami 9y ago
Well your default risk is priced into the yield of the bond you issue. 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.
jerf 9y ago
"it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on?" 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.
- Ericson2314 9y ago
  In the case of greeece the austerity is far worse than the debt. In America you have to wonder how bailing out the home morgages themselves (including hypothetical haircuts) would have compared in cost and economic effects to bailing out the banks.
yequalsx 9y ago
I think bankruptcy is nothing to be ashamed of. The only people who tend to think bankruptcy is something to be ashamed of are middle class and poor people. Rich people and corporations have no issue with bankruptcy. The President of the United States has no issue with bankruptcy either. He's used it to his advantage.
maxerickson 9y ago
Some people argue for jubilees. 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.
- maxerickson 9y ago
  (And of course, bankruptcy has much in common with jubilees; not everything, but it implements the idea that debt shouldn't be forever)
  - klipt 9y ago
    The other end of the spectrum is debtors' prisons, which are such a terrible idea for multiple reasons that we've mostly gotten rid of them (except for situations like child support debt where self righteous indignation overrides good policy).
    - Terr_ 9y ago
      From a ruthlessly clinical evolutionary game-theory perspective... It's also that someone who spreads their genes by creating a child is obtaining a kind of "asset" for themselves, one which society can't transfer and won't morally destroy in retribution. 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.
      - klipt 9y ago
        If that were the issue we'd throw parents who give their kids up for adoption in debtors' prisons too.
        deleted 9y ago
        [deleted]
jlg23 9y ago
> If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't it be a better equlibrium? 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!").
- savanaly 9y ago
  I wasn't making commentary about Puerto Rico, except in taking exception to the poster above me who was pushing the line that not only should Puerto Rico default on their debt, they shouldn't even regard it as a bad thing that they have to, since after all the people lending them the money knew it might never get paid back and built it into the interest they charge.
  - anigbrowl 9y ago
    Well, they did. There's nothing morally superior about being the lender vs. the borrower. Rich people are not better simply by virtue of having money. It's just business.
  - rhizome 9y ago
    What is the exception you're taking? It sounds like it's the "regard it as a bad thing" part, which you present without support. As long as we're talking about pushing lines.
  - intended 9y ago
    The joy of the contract is that it is a non-moral document. Its a contract. Success or failure in being able to meet the conditions are all mapped in.
andys627 9y ago
Things like shame and "taking lightly" aren secondary to interest rates - a quantitative pricing of the risk. If a gov't sucks at borrowing then their rates will be higher in the future.
Pxtl 9y ago
Bankruptcy is perfectly normal for business institutions. Limited liability is the foundation of the entire stock market. It's a basic economic tool used for navigating choppy waters. We only attach a moral value to it when individuals and governments use the tool.
- prostoalex 9y ago
  With a company bankruptcy, the suffering is limited to employees and creditors, who eventually move on to other companies. With government bankruptcy, one can't exactly shrug it off and entrust local affairs to another more competent and better-run government.
- vkreso 9y ago
  Apples and oranges. The effect of a government bankruptcy on the economy and the society (present and future) is not really comparable to the effect of a bankruptcy amongst individual economic agents. Those are completely different scales. 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.
  - ellius 9y ago
    Without bankruptcy protections, what prevents companies from lending out an unlimited sum of money? Countries don't die. You can't send them to debtors' prison. A lender could effectively sell a corrupt or stupid government unsustainable amounts of debt and then effectively put a lien on the country in perpetuity to get its money back. That hardly seems just towards the citizens, who committed no crime other than electing stupid leaders, many of whom might have been elected before they were even born.
    - Laforet 9y ago
sandworm101 9y ago
This isn't about a social norm. This isn't about non-payment of debts generally. This is about a very specific and narrow type of loan. The creditors here chose a risk. They could have insisted on security. They could have asked for collateral (ie the deeding over of a property right for a mortgage). They did not. They extended credit on nothing more than a promise and in full knowledge of bankruptcy laws. They also sold these debts onto other knowledgeable investors. The social norm at risk here is the idea that all debts should be treated equally, that we should force unsecured debts to be repaid as if they were secured. To equate credit card debt with mortgages and car loans, that's the really dangerous moral path. 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.
- jpttsn 9y ago
  > If someone has no hope...bother trying Could it about setting an example? Showing the lost case a hard time might scare others into good behavior.
  - sandworm101 9y ago
    Yes. By allowing investors to realize an actual loss we train future investors to not be so careless with thier money. 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.
ryandrake 9y ago
> 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.
- cbr 9y ago
  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.
  - e0 9y ago
    Who said anything about taking out a fraudulent loan?
    - cbr 9y ago
      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.
  - analog31 9y ago
    If I were to look for fraud anywhere, I'd start by looking at the people who give inflated ratings to bonds.
    - lmm 9y ago
      Start there, sure, but don't stop there.
VLM 9y ago
The problem with that is large scale economic forces. Sometimes there is not much opportunity "supply" so the price of an asset is wildly bid upward and it seems immoral to not permit the owners to keep their windfall. However fundamentally everyone's about the same on average so the bidding process is really a selection system to award the asset and the obligation to fund the loan payment stream to the least financially responsible "winner". There's some economic term for this along the lines of auction winners dilemma. The guy who lost out in the bidding last place because he was only willing to pay $200K is ironically the guy most likely to pay the bank back its $200K whereas the "winner" who bid $400K to win is incredibly likely to default. Then add a bunch of social engineering such that we all earn equal chance at loans from a bank, and the inevitable result of a system with a pinched supply is the only people earning assets are the people very comfy with screwing the bank and people not willing to screw the bank are going to be eternal renters or homeless or otherwise asset free. So supply weakness freezes the people most likely to pay the bank back out of the economy. Then when it collapses, get the government to bail them out because who can imagine modern life without banks taking their cut? 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.
anigbrowl 9y ago
But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly If? That's already how the USA is compared to most European societies. Our current President has been through a string of bankruptcies.
gwbas1c 9y ago
"Default" is what disincentives giving loans to people who can't pay them off. 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.
naasking 9y ago
> won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? 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.
eropple 9y ago
Bankruptcy is only considered something "to be ashamed of" when it's personal and when you're poor. How many startup founders around here are positively feted after they have ridden one or more rockets into the hillside? 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.
Nelson69 9y ago
Aren't the interest rates and credit ratings supposed to factor that in?
furyofantares 9y ago
> won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on 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.
- jpttsn 9y ago
  Banks lend out of their clients' holdings, so they wouldn't approach 100%.
FullMtlAlcoholc 9y ago
Limited liability, along with joint stock ownership, was possibly the greatest financial invention of all time. In terms of big history, I would mark the inception of this form of human social organization as the beginning of "The Great Acceleration." To a great degree, this is also why the West became so dominant until recent times, allowing for the building of then state of the art ships to undergo risky trade and exploration missions. Without it, no one besides monarchs would invest for fear of being financially ruined for the rest of their lives. 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.
- mfukar 9y ago
  > I commend him for being able to reinvent himself by learning how to create an effective brand and sell his name. Which is quite an achievement on a personal level, but is a completely useless thing in every other aspect of society.
  - FullMtlAlcoholc 9y ago
    If some people get satisfaction out of living in a Trump building, as if that is synonymous with class, more power to them. 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.
foobarrio 9y ago
Any change in equilibrium will be expressed as "higher risk to default" and will make interest rates higher no? Seems like everything will continue to work as intended.
_delirium 9y ago
Hasn't that ship long since sailed? One of the first "shameless" local bankruptcies of significant scale in the U.S. was that of Orange County, CA, a wealthy conservative suburb of Los Angeles, in 1994. They could have paid off their debts if they had wanted to, but their voters did not want to, and repeatedly voted down tax hikes to rapay the bonds. So they defaulted in 1994. This county is still one of the richest in the USA, and can today borrow without any problems, having suffered no real long-term consequences from their default.
- mobilefriendly 9y ago
  The situation in Orange County isn't comparable to Puerto Rico. OC bought derivatives for leverage and wiped out their pension fund. Unlike PR, OC is generally well managed and has a vibrant private sector economy. The courts also forced OC to repay most of the defaulted money.
- prostoalex 9y ago
  Considering that Orange County default was caused by local government's mismanagement of the public funds (via highly risky strategies and derivatives that had been banned since then), you can kinda-sorta-maybe see why the citizens didn't exactly line up to give even more of their money to the local government.
eli_gottlieb 9y ago
>But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? "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.
rwallace 9y ago
> But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? 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?
ptaipale 9y ago
Shame is not the word I'd argue is important here, even if it is a factor. But reputation matters. 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.
Kurtz79 9y ago
Agreed. It's pretty much a "Tragedy of the Commons" scenario, IMHO.
LeifCarrotson 9y ago
> If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't it be a better equlibrium? 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.
tertius 9y ago
Bankruptcy is the norm in the U.S. That's one of the reasons for the immense economic growth the U.S. has seen. Appetite for risk is good in the aggregate. PR will get downgraded for sure though.

fiatjaf 9y ago

If someone has already defaulted on a loan, that will make you not want to lend to him anymore, perfect. 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.

enraged_camel 9y ago
>>If someone has already defaulted on a loan, that will make you not want to lend to him anymore, perfect. 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.
- nsp 9y ago
  All but one of the big banks stopped loaning him or his ventures money after the first few bankruptcies
myrryr 9y ago
That isn't how it works. It is never how it worked. Plenty of countries have defaulted, and they can still borrow money. And yeah, it does effect other lender-borrower relationships. It's all people, and people get nervous.
- fiatjaf 9y ago
  Because in case of governments something spurious always happen. That's a special case, and it doesn't have to be that way.
- cjalmeida 9y ago
  Brazil in late 80s and Argentina in early 2000s default. Both spent a decade with no access to foreign debt whatsoever and prompted a massive crisis. In Argentina it let to the populist Kirschner govt. 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.
  - anigbrowl 9y ago
    OK. Now tell me about the other side of the coin.
  - vkou 9y ago
    Defaulting worked pretty well for Iceland. It worked poorly for Brazil and Argentina. 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.
    - throwaway2048 9y ago
      No defaulting and instead trying to rough it out and pay off a crippling debt is massively more harmful for a country. Because they have to basically cut all services and investments into the economy, which causes GDP to contract heavily, which causes a huge decrease in taxes, which causes yet more cuts in government investment. 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.
prostoalex 9y ago
If you're a mutual fund or an ETF with exposure to PR municipal bonds, you're looking at somewhat of a loss come tomorrow morning. 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.
peter303 9y ago
Wrong. A borrower who defauls is more attractive than a tightwad who never borrows. There is a chance of making money on the former. People going into foreclosure get innudated with loan offers.

ythn 9y ago

Exactly. Do we really want to create a society where the lenders have to do an inordinate amount of background research to determine whether you are a default risk? Bad for everyone in that case.

vkou 9y ago
We already live in that society. What do you think the millions of people working in finance do, if not try to quantify risk? 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.
- dragandj 9y ago
  There are other models other than two extremes. For example, in (at least some) European countries there is not such thing as private person going bankrupt. However, of course that that person won't be sold to slavery. Simply, if you can not repay the loan, your property will be confiscated and sold to repay it. You can dodge that by not having any property on your name, of course, and most such people do that, but that also means having no flow on your bank account (everything over a small life-sustaining minimum would be taken every month). 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?).
  - MrFantastic 9y ago
    In many European nations if you start a business and fail you will never get another chance. The USA financial system that allow for bankruptcy is part of the reason that we are an entrepreneurial nation. Failure is part of innovation.

CJefferson 9y ago

Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?

ericd 9y ago
A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.
- whatnotests 9y ago
  Define "promise" in this context though. VCs invest in opportunity, not promises.
  - ericd 9y ago
    The person I replied to specifically mentioned owing money, so I took it to mean that he wasn't talking about the investors. I do think that a business owner who is unable to pay people he owes should feel bad about it, and should make every effort to pay them back. Just because he's legally off the hook doesn't take him off the hook ethically, in my opinion. 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.
- goneri 9y ago
  Promises only bind those who believe. Those pepole are paid to evaluate the risk.
- ceejayoz 9y ago
  If I promise to meet you for coffee, it's understood that there's a silent "but not if my wife winds up in the ER". 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.
  - 9y ago

hkmurakami 9y ago

Well your default risk is priced into the yield of the bond you issue. 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.

jerf 9y ago

"it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on?" 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.

Ericson2314 9y ago
In the case of greeece the austerity is far worse than the debt. In America you have to wonder how bailing out the home morgages themselves (including hypothetical haircuts) would have compared in cost and economic effects to bailing out the banks.

yequalsx 9y ago

I think bankruptcy is nothing to be ashamed of. The only people who tend to think bankruptcy is something to be ashamed of are middle class and poor people. Rich people and corporations have no issue with bankruptcy. The President of the United States has no issue with bankruptcy either. He's used it to his advantage.

maxerickson 9y ago

Some people argue for jubilees. 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.

maxerickson 9y ago
(And of course, bankruptcy has much in common with jubilees; not everything, but it implements the idea that debt shouldn't be forever)
- klipt 9y ago
  The other end of the spectrum is debtors' prisons, which are such a terrible idea for multiple reasons that we've mostly gotten rid of them (except for situations like child support debt where self righteous indignation overrides good policy).
  - Terr_ 9y ago
    From a ruthlessly clinical evolutionary game-theory perspective... It's also that someone who spreads their genes by creating a child is obtaining a kind of "asset" for themselves, one which society can't transfer and won't morally destroy in retribution. 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.
    - klipt 9y ago
      If that were the issue we'd throw parents who give their kids up for adoption in debtors' prisons too.
      - deleted 9y ago
        [deleted]

jlg23 9y ago

> If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't it be a better equlibrium? 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!").

savanaly 9y ago
I wasn't making commentary about Puerto Rico, except in taking exception to the poster above me who was pushing the line that not only should Puerto Rico default on their debt, they shouldn't even regard it as a bad thing that they have to, since after all the people lending them the money knew it might never get paid back and built it into the interest they charge.
- anigbrowl 9y ago
  Well, they did. There's nothing morally superior about being the lender vs. the borrower. Rich people are not better simply by virtue of having money. It's just business.
- rhizome 9y ago
  What is the exception you're taking? It sounds like it's the "regard it as a bad thing" part, which you present without support. As long as we're talking about pushing lines.
- intended 9y ago
  The joy of the contract is that it is a non-moral document. Its a contract. Success or failure in being able to meet the conditions are all mapped in.

andys627 9y ago

Things like shame and "taking lightly" aren secondary to interest rates - a quantitative pricing of the risk. If a gov't sucks at borrowing then their rates will be higher in the future.

Pxtl 9y ago

Bankruptcy is perfectly normal for business institutions. Limited liability is the foundation of the entire stock market. It's a basic economic tool used for navigating choppy waters. We only attach a moral value to it when individuals and governments use the tool.

prostoalex 9y ago
With a company bankruptcy, the suffering is limited to employees and creditors, who eventually move on to other companies. With government bankruptcy, one can't exactly shrug it off and entrust local affairs to another more competent and better-run government.
vkreso 9y ago
Apples and oranges. The effect of a government bankruptcy on the economy and the society (present and future) is not really comparable to the effect of a bankruptcy amongst individual economic agents. Those are completely different scales. 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.
- ellius 9y ago
  Without bankruptcy protections, what prevents companies from lending out an unlimited sum of money? Countries don't die. You can't send them to debtors' prison. A lender could effectively sell a corrupt or stupid government unsustainable amounts of debt and then effectively put a lien on the country in perpetuity to get its money back. That hardly seems just towards the citizens, who committed no crime other than electing stupid leaders, many of whom might have been elected before they were even born.
  - Laforet 9y ago

sandworm101 9y ago

This isn't about a social norm. This isn't about non-payment of debts generally. This is about a very specific and narrow type of loan. The creditors here chose a risk. They could have insisted on security. They could have asked for collateral (ie the deeding over of a property right for a mortgage). They did not. They extended credit on nothing more than a promise and in full knowledge of bankruptcy laws. They also sold these debts onto other knowledgeable investors. The social norm at risk here is the idea that all debts should be treated equally, that we should force unsecured debts to be repaid as if they were secured. To equate credit card debt with mortgages and car loans, that's the really dangerous moral path. 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.

jpttsn 9y ago
> If someone has no hope...bother trying Could it about setting an example? Showing the lost case a hard time might scare others into good behavior.
- sandworm101 9y ago
  Yes. By allowing investors to realize an actual loss we train future investors to not be so careless with thier money. 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.

ryandrake 9y ago

> 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.

cbr 9y ago
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.
- e0 9y ago
  Who said anything about taking out a fraudulent loan?
  - cbr 9y ago
    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.
- analog31 9y ago
  If I were to look for fraud anywhere, I'd start by looking at the people who give inflated ratings to bonds.
  - lmm 9y ago
    Start there, sure, but don't stop there.

VLM 9y ago

The problem with that is large scale economic forces. Sometimes there is not much opportunity "supply" so the price of an asset is wildly bid upward and it seems immoral to not permit the owners to keep their windfall. However fundamentally everyone's about the same on average so the bidding process is really a selection system to award the asset and the obligation to fund the loan payment stream to the least financially responsible "winner". There's some economic term for this along the lines of auction winners dilemma. The guy who lost out in the bidding last place because he was only willing to pay $200K is ironically the guy most likely to pay the bank back its $200K whereas the "winner" who bid $400K to win is incredibly likely to default. Then add a bunch of social engineering such that we all earn equal chance at loans from a bank, and the inevitable result of a system with a pinched supply is the only people earning assets are the people very comfy with screwing the bank and people not willing to screw the bank are going to be eternal renters or homeless or otherwise asset free. So supply weakness freezes the people most likely to pay the bank back out of the economy. Then when it collapses, get the government to bail them out because who can imagine modern life without banks taking their cut? 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.

anigbrowl 9y ago

But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly If? That's already how the USA is compared to most European societies. Our current President has been through a string of bankruptcies.

gwbas1c 9y ago

"Default" is what disincentives giving loans to people who can't pay them off. 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.

naasking 9y ago

> won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? 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.

eropple 9y ago

Bankruptcy is only considered something "to be ashamed of" when it's personal and when you're poor. How many startup founders around here are positively feted after they have ridden one or more rockets into the hillside? 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.

Nelson69 9y ago

Aren't the interest rates and credit ratings supposed to factor that in?

furyofantares 9y ago

> won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on 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.

jpttsn 9y ago
Banks lend out of their clients' holdings, so they wouldn't approach 100%.

FullMtlAlcoholc 9y ago

Limited liability, along with joint stock ownership, was possibly the greatest financial invention of all time. In terms of big history, I would mark the inception of this form of human social organization as the beginning of "The Great Acceleration." To a great degree, this is also why the West became so dominant until recent times, allowing for the building of then state of the art ships to undergo risky trade and exploration missions. Without it, no one besides monarchs would invest for fear of being financially ruined for the rest of their lives. 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.

mfukar 9y ago
> I commend him for being able to reinvent himself by learning how to create an effective brand and sell his name. Which is quite an achievement on a personal level, but is a completely useless thing in every other aspect of society.
- FullMtlAlcoholc 9y ago
  If some people get satisfaction out of living in a Trump building, as if that is synonymous with class, more power to them. 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.

foobarrio 9y ago

Any change in equilibrium will be expressed as "higher risk to default" and will make interest rates higher no? Seems like everything will continue to work as intended.

_delirium 9y ago

Hasn't that ship long since sailed? One of the first "shameless" local bankruptcies of significant scale in the U.S. was that of Orange County, CA, a wealthy conservative suburb of Los Angeles, in 1994. They could have paid off their debts if they had wanted to, but their voters did not want to, and repeatedly voted down tax hikes to rapay the bonds. So they defaulted in 1994. This county is still one of the richest in the USA, and can today borrow without any problems, having suffered no real long-term consequences from their default.

mobilefriendly 9y ago
The situation in Orange County isn't comparable to Puerto Rico. OC bought derivatives for leverage and wiped out their pension fund. Unlike PR, OC is generally well managed and has a vibrant private sector economy. The courts also forced OC to repay most of the defaulted money.
prostoalex 9y ago
Considering that Orange County default was caused by local government's mismanagement of the public funds (via highly risky strategies and derivatives that had been banned since then), you can kinda-sorta-maybe see why the citizens didn't exactly line up to give even more of their money to the local government.

eli_gottlieb 9y ago

>But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? "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.

rwallace 9y ago

> But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? 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?

ptaipale 9y ago

Shame is not the word I'd argue is important here, even if it is a factor. But reputation matters. 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.

Kurtz79 9y ago

Agreed. It's pretty much a "Tragedy of the Commons" scenario, IMHO.

LeifCarrotson 9y ago

> If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't it be a better equlibrium? 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.

tertius 9y ago

Bankruptcy is the norm in the U.S. That's one of the reasons for the immense economic growth the U.S. has seen. Appetite for risk is good in the aggregate. PR will get downgraded for sure though.