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Personal Financial Morality

photo: bitzcelt via Flickr

The New York Times recently published an article about people facing foreclosure. Many of them stop paying the mortgage, and stay in the house free until the lender pushes them out. They save the money they would have spent on the mortgage, and use it to rent a place after the foreclosure, or they use it for ordinary living expenses. David Dayen’s post on this article, the NYT article, drew hundreds of comments. Let’s take a look at the arguments.

1. It will hurt me by driving up the cost of borrowing money. Doubtful. Nothing can affect the terms of existing mortgages. Your interest rate, monthly payment and other obligations are fixed by contract. As to the future, there is no doubt that interest rates will increase, and credit standards for mortgages will be higher, but not because of foreclosures, or because people stay in their houses while waiting for foreclosure. It will strictly be supply and demand for long-term money. There will only be modest impact on credit-worthy borrowers. Banks need to lend money, and are looking for good borrowers. It is the only marginal borrower who faces increased interest costs, which is reasonable.

2. My taxes will go up. Doubtful. Mortgage defaults could cause federal taxes to go up if a) the losses at Fannie Mae and Freddie Mac are very large; and b) Congress decides to pay for the losses by raising taxes on middle Americans. That’s not likely. Property taxes won’t go up, because they are paid when the property is foreclosed, and after that, the lender is on the hook.

3. The banks brought it on themselves. Mostly irrelevant. It is relevant to individuals whose lender cheated them. But it isn’t at all relevant that many lenders cheated many people. Whether my actions are right or wrong relates to my transaction, but not to any other transaction.

4. You should be ashamed. Nonsense. Business is business when it’s business. It’s also business when it’s personal business. Nevertheless, most people are ashamed, even when their problems aren’t solely their fault.

5. “If Americans didn’t live like such gluttonous pigs – they wouldn’t have these problems.” Commenter exkiodexian. Perhaps this is a rude way to say that people should live within their means, which is true, but irrelevant. Individuals are where they are, and the country is where it is. People have to act to protect themselves and their families.  . . .

6. From commenter karens:

I guess what bothers me about all this is that because I DO pay all my bills, I do not have money to do the things that these foreclosed upon people do. I do not go out to dinner (and if I did, I would order the cheapest thing on the menu), I do not have an airboat! etc. It just really sucks for the people who play by the rules–who live within their means even when it is tempting not to.

I just find the whole thing (and I am not forgetting about the banks) discouraging and defeating.

This argument gets at something important. Walking away from debt offends our sense of fairness, and that feeling is aggravated by the sense that people who stay in homes they can’t pay for, or use procedural protections of court systems, are taking advantage of the situation.

The hallmark of the middle class is a strong sense of responsibility, to ourselves, to our families, our Churches, our unions, our neighbors, our towns and cities. It is self-defining, a part of our understanding of civic life that just goes without saying. When someone violates that unwritten rule, we feel let down, and somehow cheated. It undermines our sense of living in a good society. Complex societies rely on the cooperation of all of us, and our compliance with the rules. It is devastating when people realize that large numbers of their fellow citizens can’t or won’t live up to those rules.

It is worse when the massively wealthy cheat the rest of us for a few extra dollars, and keep the money they stole, with no consequences. Karens expresses this disgust and dismay clearly.

I was a bankruptcy lawyer for years. I know the reality that the people in the NYT article are facing. Almost all of them will suffer the legal and practical consequences of their misbehavior. The debt collectors call, lawyers sue, they eat up their retirement savings trying to survive, and eventually they file bankruptcy. They will have lousy credit ratings, the airboat will be repossessed, the expensive TV will get old and they won’t be able to replace it. If they should, heaven forbid, lose their jobs, they won’t be able to protect themselves from their creditors by filing bankruptcy again for years. They are stressed out and their health suffers. Their families suffer as the parents battle over money. Many will get divorced. Those are the consequences of fouling up in debt, and those are the sanctions they face.

Those consequences are the social methods of enforcement of the moral standards we set. We don’t have any other way to force people to behave in accordance with our own moral sense, or in the harsher morality those like exkiodexian espouse. There isn’t any other way to enforce the social trust rules. We can talk all we want to about the morality of business decisions facing people, but in the end, we have to accept the limits of our own power to enforce the rules. We are largely reliant on people’s personal willingness to enforce those moral rules against themselves. If they don’t enforce the rules against themselves, there is nothing we can do past the social sanctions.

I never met anyone who deliberately set out to screw up their personal finances. Filing bankruptcy was the last thing people wanted to do. They were ashamed. I used to see couples at meetings of creditors, and the women did all the talking; the men just sat with heads bowed looking at their hands. That sense of shame is the personal enforcement of moral norms. The NYT reporter only discussed the actions of the people, not their personal feelings. The bravado we see may be a defense mechanism to hide their sense of shame and dismay. I doubt they feel so courageous and self-righteous in the middle of the night when they wake up sweating. But if they don’t care, there is nothing else we can do.

People who live like karens don’t lose sleep at night, they meet their responsibilities, they keep their assets, and they are able to take care of themselves and their families in most circumstances. Eventually, they will be able to retire comfortably. I hope that will happen for all of the people devastated by the Great Crash.

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