Debt defaults as moral fault
Back in the day of Charles Dickens, anyone not paying a debt could be arrested as a moral menace to society. While debtors’ prisons aren’t coming back, it is worth recalling such Victorian virtue in light of three debt crises:
1. Come Aug. 2 – the deadline for raising the United States debt ceiling – Congress may simply allow the US Treasury to default if lawmakers don’t reach a budget deal.
2. Greece appears headed for a debt default (or “restructuring”), which could trigger Portugal, Ireland, and other European countries to follow. Last year, Greece’s debt woes dragged down the world economy.
3. More than a quarter of Americans holding mortgages worth more than the value of their home – and who can afford to pay – say they would consider walking away from that payment promise. And the percentage of these potential deadbeats who may commit such a “strategic default” has doubled over the past year, according to Fannie Mae.
If the world isn’t careful, a certain ethical callousness may set in soon about the ease of breaking one’s word, as well as ignoring the ricochet effects on others.
Voluntary default, either by countries or individuals, corrodes the trust needed to hold a society together and help it grow. Such a loss of integrity can take years to regain while dragging down others with it.
Just look at American neighborhoods where those with “underwater” mortgages simply pack up and leave. The value of nearby houses deteriorates and banks have less money to lend. If enough people default, the housing market will worsen even more, causing more government red ink and slowing the economy.
Greece’s unwillingness to dig itself out of its huge debt hole runs the risk of derailing the grand experiment of European unity and the single currency, the euro. Greeks also need to consider this: Argentina, which defaulted on its debt in 2001, is still a pariah in global credit markets.
A default by the federal government in the coming weeks would not only send US interest rates sky-high and possibly bring on recession, but it could set off a chain reaction. Other debt-wobbly countries might find it easier to renege on their debt.
China, the largest holder of US debt, has warned Washington that it is “playing with fire” by not resolving its deficit dispute. In April, Standard & Poor’s downgraded US bonds, eroding the nation’s creditworthiness.
Someone, perhaps President Obama along with other Western leaders, needs to raise the current debate over fiscal and financial debt to a higher level of ethical responsibility.
Breaking contracts should not be done lightly. There’s a reason certain financial instruments of debt are called bonds; they are what bind individuals to a joint enterprise.
Or as poet John Donne might say, no default is an island entire of itself.
