Sunday, April 11, 2010

Debt Repudiation

After a long time we have come back to essential question. Is it ok for households to walk away? Naked Capitalism has a post by Edward Harrison titled Guest Post: Is Debt Repudiation a Good Thing or a Bad Thing? « naked capitalism.

I do not see why not. I think households should be allowed to walk away from non-recourse mortgages and no one has any business trying to create social pressure into paying more. Banks and financial institutions have played this as an economic game, no emotions. So why blame individuals when they make economic decisions.

Second, writing debt off is also used as a trick. You write off the debt but hold on the portfolio. Whatever the household pays back is then directly added to the profits. It might seem idiotic, but I have seen banks do it with ill intention.
Third, The written off portfolio is, in some cases, sold to "recovery agents". These agents follow up and try and recover as much from this as possible. In principle this is not wrong. But with inflated loans and deflated incomes this can be harsh. 

These steps will impede recovery of consumption in developed countries.