John Quiggin asks:
Bankruptcy is once again as common as divorce. … And, as with divorce, we must soon be reaching the point where most people who take out loans will do so in the knowledge that default is an option. The question is – can the consumer credit system survive this?
But I think his more interesting point is:
Lowenstein’s key point is that businesses (including those owned or controlled by the banks themselves) treat default as a straightforward business decision, to be adopted whenever it is profitable to do so. … To be fair, it’s only in the last thirty years or so that such ethics have become dominant in the corporate sector, to the point where a board that rejected profitable opportunities to stiff their creditors would now be regarded as having violated its fiduciary obligations to shareholders
This recalled to mind Brad de Long’s work on the early years of the stock market. Or actually a comment on that work, published with the paper in Temin’s book to which I don’t have a link. In this comment Charles Sabel argued that in fact the first duty of any firm whose stock issue was underwritten by Morgan was to make sure that creditors were repaid. That is, the author argued that in order to maintain their reputation, the first duty of Morgan’s Men was to protect the bond-holders.
So I think there’s another question here is: How long can the bond market survive in a world where default has just become a business decision?
Update: In fact as I read Mark Thoma (“you have to ask (and understand) why securitizers were so willing to take this paper from the loan originators”) I think that maybe there’s a sense in which this question explains the whole of the crisis.