Is default moral? Assorted thoughts

These guys don’t look very moral to me.

Deficits is a wonderfully crazy collection of conference papers edited by Charles Rowley, Robert Tollison and the late “Nobel” Laureate James M. Buchanan. It has been called “the Rosetta Stone of insane conservatism”, and it contains a chapter on the Ethics of Debt Default. Matt O’Brien has promised me a piece on it which hasn’t appeared yet—he assures me that he will not default on this obligation because default is immoral—but I have some thoughts in response to what I think he will write that I might forget, so here goes. Besides, it’s easier to formulate a response to something if you haven’t read it.

1. During the financial crisis there was a lot of discussion about whether it would be ethical for underwater homeowners to default and walk away from their mortgages, especially in no-recourse states. The legal scholars were generally agnostic on the ethics: from their point of view, a mortgage loan is a contract, breaching a contract is not even illegal (it would simply expose you to damages), and something that is not illegal cannot be wrong. Liberal types tended to favor this sort of strategy because it would alleviate misery.
2. Conservative and libertarian types, perhaps because it could be good for poor people, railed against any sort of effort to encourage homeowners to do default. The argument goes something like this: There is a social contract that borrowers will try to stay current on their loans and not default. This social contract cannot be enforced in a court, but if it is broken, it will inevitably lead to higher mortgage interest rates because it would change the behavioral assumptions about default that are used when interest rates are set. If borrowers start defaulting willy-nilly, they will hurt themselves in the long run.
3. I basically think that analysis is correct, even if I might disagree with the conclusions. I do, however, worry about the ethics of encouraging one group of borrowers [not] to do something for the benefit of a larger, and possibly different, group. The people we would be encouraging to default probably would not be able to borrow again for a while, no matter what they do.
4. Some (subblog!) even tried to argue that strategic default by corporations is perfectly fine. Default is only bad if individuals do it.
5. Buchanan makes a moral argument for the US defaulting on its debt, or maybe just half its debt. In my reading, he stops short of actually advocating for default, but the whole theme of the book points in that direction.
6. Matt thinks that default is immoral and Buchanan is nuts. (This is a danger of responding to something that hasn’t been written yet: maybe his views aren’t that strong.)
7. Is it moral for individual underwater homeowners to default strategically? Yes.
8. Is it moral for the United States to default to make a point about the Affordable Care Act? No.
9. Is it ever moral for the United States to default? In the present situation, default wouldn’t serve any useful fiscal purpose. Trust-with-a-capital-T is important: we should fulfill the obligations we incur. With the possible exception of the most questionable loans, we should expect borrowers to pay what they owe. But part of the implicit contract was also that they could default if they had to and were willing to suffer the consequences. There’s a reason we call it the default option. Many homeowners were (are?) in a desperate situation where they could clearly benefit from defaulting.
10. The implicit contract for US government debt is different. While a subprime or credit card lender knows that the borrower might default, the expectation on both sides of the US Treasury debt contract is that there will never be a default. In a sense, the US government has promised never to default, a promise that regular borrowers—whether they are individuals or corporations—do not and cannot make.
11. The US does not actually benefit fiscally from defaulting right now. Would default be more moral or advisable if the United States were in a situation where debt is high, interest rates are high, but deficits are low, so there would be some conceivable benefit from defaulting? I am not sure.

Update: Read this, this and this from Matt Bruenig.