I have written elsewhere about the potential for moral trickle down effects associated with no-strings bailouts for wealthy TBTF investment banks and corporations. Yves Smith at Naked Capitalism provides evidence that the trickle has begun. Homeowners who can afford to make mortgage payments on homes where the amount they owe exceeds the market value of the house are rationally choosing to cut their losses and walk away (or live in the house until evicted). Yves makes a point similar to one I have made previously: markets are the warp and moral sentiments (primary of which may be trust) are the weft of the social fabric that binds us into a cohesive and productive nation.When the fabric fails, transaction costs (contracts, a proliferation of laws, court costs from increased legal wrangling) skyrocket and we all suffer.
Even more disturbing, it looks like we are regressing to those wonderful days of yesteryear: debtors are being thrown into prison. Maybe we should bring back indentured servitude and debt bondage while we're at it. Alas, that we had not thought of jailing debtors, oh, say, in September 2008.
The beauty of throwing someone into prison for a $250 debt is that court costs far in excess of the debt are paid by we, the people. Nice. More of our hard-earned money supporting the same people whose predatory lending and collection practices ran us into the ditch. Even better is when a small unpaid bill can be mutated into a large debt that allows someone to grab your house.
And talk about unintended consequences, a new form of moral hazard. We, the people, bail out wealthy investment bankers with no penalties. We, the people, notice the somewhat cold and calculating behavior of the same banks and other creditors. And now some of we, the people, are expecting the same privileges as those same investment bankers and creditors! I'm starting to wonder if maybe moral sentiments trickle down a lot faster than any coins that might be tossed from financial elites' passing carriages.
I'm not saying it's OK to default on one's financial obligations. I'm just saying that I wish we were all treated the same when we default or go bankrupt or try to offload a bad investment. And if I have a choice, I'd prefer to be treated the way investment bankers are treated when they screw up royally.
It's about fairness.