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The (Im)morality of Strategic Defaults


Yet another contribution (by Roger Lowenstein, the author of the definitive book on the LTCM fiasco, a book that, in many ways, foretold the events of 2008) to the ongoing debate over the morality (or lack thereof) of so-called strategic defaults (emphasis mine):

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower.Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

The subject was also treated extensively on the Interfluidity blog (herehere and here). Check out the comments, they're just as valuable as the posts.
The irony of having professional speculators and/or unfettered free market advocates berate folks for making rational economic decisions is not lost on anybody who's been paying attention. Then again these are the same people who gladly accepted the government's help when they were in deep trouble. And the same people again who are now biting (or trying to bite) the government's helping hand, for fear it might morph into a taxing and regulating fist (they might have a point there).

Disclosure: No Positions