This is a great point. The difference in bankruptcy law between the US and e.g. France or Germany creates an incentive for US entrepreneurs to take more risk since if things don't work out (and they usually don't) they can dust themselves off and try, try again without crippling long-term debts or too much of a social stigma.
On the other hand, relaxed bankruptcy laws can be taken too far as in the housing crisis since homeowners took in huge profits by flipping houses during the housing bubble but can just walk away from their mortgages if they're underwater which means the loss is eaten by the banks/taxpayer.
Think too about the "crippling long-term debt" on the other side of the contract, too.
Loans are built on standard contract law. There are penalty clauses and associated costs with exiting the contract, and you (from whichever end of the deal you're on) have to expect that those exit clauses might be exercised.
When thinking about these "strategic defaults", consider the responsibilities of and the systemic risks that occur on the origination. If you're originating or are repackaging what may be questionable loans or derivatives, or are incurring excessive leverage, isn't that also a systemic risk?
It's a balance.
The folks that are severely upside-down (and staying that way) won't be consumers, they'll approach indentured status. They'll be paying for the losses they've taken by not walking away, and (given that these folks are taxpayers, and if they have any money left) in taxes, and (indirectly, economically) by not being able to buy the products and services that businesses are looking to sell (meaning a slower recovery).
If this topic is interesting, here is some "light" reading out of the University of Arizona: "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis":
And playing devil's advocate here, if you're +not+ exercising what you're entitled to within a contract (and from either end of the deal), then what does that say about the sustainability and efficiency and equality of the business system?
And yes, this sort of legal and contractual mire can bury a country and an economy. As we're seeing.
Comments
This is a great point. The difference in bankruptcy law between the US and e.g. France or Germany creates an incentive for US entrepreneurs to take more risk since if things don't work out (and they usually don't) they can dust themselves off and try, try again without crippling long-term debts or too much of a social stigma.
On the other hand, relaxed bankruptcy laws can be taken too far as in the housing crisis since homeowners took in huge profits by flipping houses during the housing bubble but can just walk away from their mortgages if they're underwater which means the loss is eaten by the banks/taxpayer.
It's certainly a balance.
Think too about the "crippling long-term debt" on the other side of the contract, too.
Loans are built on standard contract law. There are penalty clauses and associated costs with exiting the contract, and you (from whichever end of the deal you're on) have to expect that those exit clauses might be exercised.
When thinking about these "strategic defaults", consider the responsibilities of and the systemic risks that occur on the origination. If you're originating or are repackaging what may be questionable loans or derivatives, or are incurring excessive leverage, isn't that also a systemic risk?
It's a balance.
The folks that are severely upside-down (and staying that way) won't be consumers, they'll approach indentured status. They'll be paying for the losses they've taken by not walking away, and (given that these folks are taxpayers, and if they have any money left) in taxes, and (indirectly, economically) by not being able to buy the products and services that businesses are looking to sell (meaning a slower recovery).
If this topic is interesting, here is some "light" reading out of the University of Arizona: "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis":
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467
And playing devil's advocate here, if you're +not+ exercising what you're entitled to within a contract (and from either end of the deal), then what does that say about the sustainability and efficiency and equality of the business system?
And yes, this sort of legal and contractual mire can bury a country and an economy. As we're seeing.