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Walking away from your mortgage: Waldman vs. McArdle

Megan McArdle and Steve Waldman have been going back and forth about the morality of walking away from underwater mortgages (via Kevin Drum).  McArdle thinks people should keep paying, and Waldman thinks they should walk away. Between the two of them, they’ve cataloged many of the likely consequences of our descent into a mutual ethos of “I’ll-get-mine-and-screw-you.”  Their disagreements are mostly about the desirability of those consequences.

McArdle fears the predicable response of lenders in a world where borrowers abandon the ethical norm of paying back debts:

In a world in which people normally walked away from debts the moment they found them personally inconvenient, the average level of credit access over time–including access to housing credit–would be much, much lower, and the laws surrounding insolvency and foreclosure would be much, much more punitive.

Waldman, on the other hand, not only doesn’t fear such a world, he welcomes it:

We have different preferences regarding the kind of world we want our normative frameworks to support: McArdle favors a world with both easy credit and easy bankruptcy. I favor the easy bankruptcy, but not the easy credit. I think that debt arrangements are hazardous and should be entered into only with great care. I don’t consider increasingly leveraged homeownership and aggressively accessible consumer credit to have been positive developments. As a practical matter, I think we must rely on creditors rather than potential debtors to differentiate between wise and unwise loans. So I consider it a feature rather than a bug that holding creditors accountable will encourage them to think twice before sending out convenience checks.

Personally, I’ll give the victory to Waldman, for at least two reasons.

First, I agree with him that easy consumer credit is not as great as McArdle cracks it up to be.  Sure, it might allow us to live more consumptive lifestyles for a few more years, but at great cost.  It enables us to continue to avoid acknowledging the increasing peasantization of America’s middle class, as higher-paid jobs disappear overseas and are replaced with much lower-paid service jobs without benefits.  And all this at the same time that the upper crust of workers in industries like finance and insurance are bringing home increasingly gargantuan incomes.  How we deal with this growing income disparity is open to debate, but we ought to have that debate soon.  Extending easy consumer credit so that the middle class can continue living as if their real wages weren’t stagnating will not spur us to face reality.

Second, the kind of world that McArdle seems to be arguing for is not a world I’d like to live in.  Tolerating cutthroat behavior on the part of corporations (and even celebrating it on the basis of some misguided libertarian ideology or any other such mistake), while at the same time holding individuals contracting with those corporations to a different ethical standard, seems inherently unstable as well as repellent.  Whatever normative atmosphere surrounds the making of contracts, it should be roughly the same for both parties, so long as the law treats them roughly as equals.  That’s the point I took law professor Brent White to be making in his paper describing the asymmetry of norms between bank and borrower, which I posted about earlier.

Norms that aren’t symmetrical probably aren’t stable, as the debate between Waldman and McArdle demonstrates.  Sooner or later, someone’s going to get pissed off, and change their behavior.  Asymmetrical norms are repellent in this case because they support behavior by the banks (“adhering to the letter of the contract”) that people like McArdle are unwilling to tolerate when the borrower does the same thing.

McArdle is probably right that it’s a shame that people don’t hold the value of paying back promises any more highly than they do.  But it seems to me that this is the inevitable result of the kind of economics that she supports.  When you deal with corporations focused solely on their bottom lines for long enough, you’re gonna learn to play that game yourself, or you’re gonna get chewed up and spit out and left for dead.


  1. JKH wrote:

    Waldman wins on the basis of an effective argument on why they should be doing it. But both McCardle and Waldman miss the most critical point made by White on why they won’t do it, which is fear of credit reprisal.

    Tuesday, December 22, 2009 at 9:09 pm | Permalink
  2. Russ wrote:

    It’s kind of ridiculous that we’re even calling this a “debate”, since the McCardle “libertarian” side is, as you say, so blatantly hypocritical.

    They have no legitimacy, no right to argue, and no point to make. This is exactly the outcome they always wanted.

    I do have one objection to this way of phrasing things:

    Between the two of them, they’ve cataloged many of the likely consequences of our descent into a mutual ethos of “I’ll-get-mine-and-screw-you.”

    This wasn’t a passive “descent”, as if it were some natural disaster.

    This state of affairs has been very aggressively and systematically imposed from the top down for 40 years now.

    It’s about time the people are starting to wise up to it.

    Wednesday, December 23, 2009 at 2:45 am | Permalink
  3. Barry wrote:

    IIRC, McArdle supported the 2005 bankruptcy tightening act. So her love of ‘easy bankruptcy’ is only for business bankruptcies.

    In the end, she’s what she appears to be – a Chicago-trained propagandist for the rich.

    Thursday, December 31, 2009 at 6:21 am | Permalink

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