Default, Please

[Joanne98]

Yves here. Bob’s post highlights a shift in attitudes that is entirely logical and is the inevitable result of financial firms, taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.

Banks may find themselves hoist on their own petard, and the larger implications are even more significant. A calculating, contract-driven mindset eats away at the foundations of commerce. When I was young, it was possible to deal with most clients on a handshake (I’d still write the arrangements up, but it was mainly a device for confirming that we had heard each other correctly). Now pretty much every one I know has very carefully crafted agreements precisely because if things stray outside the bounds initially contemplated, it is much less likely that the party on the other side of the table will try to reach a middle of the ground resolution. It is now the norm that parties to a contract will try to exploit ambiguous or unforeseen situations to their advantage.

An erosion of trust leads to much greater contracting and dispute-resolution costs, a de facto tax on all commerce. As I discuss in ECONNED at greater length, it’s prohibitively costly and time consuming to negotiate agreements that contemplate every scenario (although banks increasingly endeavor to do that when they can dictate terms; credit card agreements that were one page in 1980 are now a full 30 pages when all the attachments are included).

I very much look forward to reader comments. From Bob Goodwin:

What we are experiencing is called the global credit crisis for a reason. There is too much debt in the world. More and more economists are talking about the threat of a deflationary crisis ahead. What does this mean for you? Well, if you have a house that is under water, or more debt than you can reasonably hope to repay, your best options may be the unthinkable. But it really should not be unthinkable to default on a loan or even to declare bankruptcy. Don’t stop reading. It is really a good option for many, it is moral, legal and good for the country. It is also become very common. You and your children will look back in a generation with pride.

http://www.nakedcapitalism.com/2010/06/guest-post-default-please.html