Santorini, Greece
If you haven’t reviewed your asset allocation this year, I highly encourage you to do so today. The US stock market could easily correct by 10% as capital flees riskier asset classes. We’re seven plus years into a bull market, and things are looking toppy.
I’ve always grown up believing that taking on too much debt is a bad thing. What’s even worse is taking on debt and not paying back your lender. Whether the lender is an institution or a relative, paying back money lent you in good faith is an absolute must. They trusted you. Not paying them back is not only selfish, but highly dishonorable.
But when the worst punishment given to people who break their debt promises is a bad credit score or a garnishment of wages by the IRS, it’s not surprising that not paying off debt is becoming as common as spanakopita. Do garnished wages even count as punishment, since you’re simply paying back what’s owed? We’ve already discussed how a good credit score doesn’t really matter very much anymore!
The more I think about it, the more it seems like people who keep on paying their debts during bad times are fools. Deep down, I think all of us who keep on paying our mortgages, student loans, and credit cards when we’re hurting for money know we are being silly since there are so many bailout programs available for those who don’t.
When my Lake Tahoe property got crushed during the financial crisis, the smart economic thing to do would have been to stop paying my mortgage. California is a non-recourse state where lenders can’t come after your other assets to be made whole if you default on your primary residence. They can if you default on a rental or vacation property. Throwing good money after a bad investment is generally not a good thing to do. But I feared humiliation.
Instead of letting my property go, I sank another $100,000 in mortgage payments over the next three years until the storm finally passed. Luckily, out of the blue, I was able to get a loan modification to help with the expense. Otherwise I would have spent even more. Today, I still own the vacation property.
Key point: The reason why debt welchers are admired is because they have the GUTS to say F&*# Y*$ to their lenders and not give a crap about what other people think of them. I’m sure every one of us who owes money has thought about not paying back our debt, especially when money becomes tight. But most of us are too chicken shit to actually stop returning all forms of communication with our lenders. We’re too worried about our reputations, our careers, and our safety. Who wants to be in fear of opening the door one evening to a debt collector with a baseball bat?
Nobody rewards people who do what they are supposed to do. That’s like giving a trophy to someone who shows up for work on a Monday and Friday. What gets rewarded is doing what you’re not supposed to do, like not paying back your college loan or strategically defaulting on your mortgage.
I’ll prove to you why having poor financial habits are actually admired with several examples below.
DEFAULT ON STUDENT LOANS JUST BECAUSE
If it was so bad to default on your student loan, the New York Times wouldn’t publish an editorial on why those with student debt should default without a balanced rebuttal.
Lee Siegel, the writer encourages people to default because he wasn’t born wealthy. He writes,
“I have found, after some decades on this earth, that the road to character is often paved with family money and family connections, not to mention 14 percent effective tax rates on seven-figure incomes.”
Lee’s other reason for encouraging people to default on their student loans is because other people are defaulting or committing financial crimes.
“Tax fraud, insider trading, almost criminal nepotism — these won’t knock you off the straight and narrow. But if you’re poor and miss a child-support payment, or if you’re middle class and default on your student loans, then God help you.”
There’s over $1 trillion in student loan debt outstanding, a level much larger than the amount of credit card debt owed by consumption-loving Americans. Plenty of people owe student debt, which is why plenty of people are rooting for Lee’s message! We want student loan forgiveness, and we want it now!
The New York Times, one of the most venerable media institutions in the world, is implicitly supporting student loan defaults by running this editorial without responding with a well thought out counter argument. Is this not financial irresponsibility given the next financial crisis will likely be the result of student loan debt defaults? Guess not.
STRATEGIC MORTGAGE DEFAULTING
Carl Richards, a certified financial planner and writer for The New York Times strategically defaulted on his mortgage when he owed $200,000 more than what his home was worth in 2010. He could have kept paying the mortgage like his friends did, but he chose to let the rest of us pay his mortgage instead.
The public likes to blame banks for the housing crisis. Oh those evil banks who provided capital for thousands of people to live the American dream. What happened to blaming the people who decided not to pay their mortgages instead? If everybody paid their mortgages, there wouldn’t have been a financial crisis.
If defaulting on your mortgage was bad, why would Richards still be paid by the New York Times as a columnist, a job that very few people can get? If defaulting on your mortgage is seen as a poor financial move, why is Richards making money from a couple books he published about how to be smart about your money? Clearly the publisher sees an opportunity. Finally, if defaulting on your mortgage is so bad, why would he be invited to be a keynote speaker at a conference?
The rational answer is that defaulting on your mortgage is not considered bad. Defaulting on your mortgage can give you a unique story as a CFP who is supposed to know what he is doing with his money. People love a good story. The key is to hang a lantern on your problems and profit from your mistakes. Even if you end up making millions after strategically defaulting, you still don’t have to pay the debt back.
BAD MONEY MANAGEMENT CAN MAKE YOU A PRESIDENTIAL CANDIDATE
Sen. Marco Rubio, R-Fla is a star on the rise despite his poor money habits.
The New York Times reports,
“An analysis of his financial disclosures by Jude Boudreaux, a longtime financial planner and an adjunct professor at Loyola University New Orleans teaching personal finance, shows that Mr. Rubio earned $2.38 million from 1998 to 2008 but ended up with an estimated net worth of $53,000 (slightly more than Mr. Rubio disclosed himself). His savings rate during that period was about 2 percent.”
So where did all that money go? Well, he bought a $80,000 boat despite owing $150,000 in student loan debt and $30,000 in credit card debt. He then leased a $50,000 2015 Audi Q7, despite disclosing he had liquidated $68,000 in his pre-tax retirement account, which cost him an estimated $24,000 in taxes and penalties.
Then it was reported by the New York Times that Rubio used a Republican Party credit card for personal expenses –to cover a trip for a family reunion and to pay for stone pavers at his home in Miami. Bad money management is one thing, but using Party funds for personal use is a no-no, especially for elected officials.
It’s OK to be bad at managing money. If it weren’t, then Senator Rubio wouldn’t be Senator, and he wouldn’t be a candidate for POTUS. We know about the temptations of credit cards and buying things we can’t afford. Nobody is really going to fault you for poor financial decisions. We’ve ALL made them, most certainly including myself. The key is to just learn from our mistakes and move on.
Learning from our financial mistakes is exactly what Marco Rubio is doing. My only advice to him is to drive a less expensive car, because since he’s still in so much debt, the media will attack him relentlessly for all his toys.
EVERYTHING IS RATIONAL
Every country is borrowing more money
If welching on debt was frowned upon, there would be greater punishment than simply getting a bad credit score or having your future wages garnished. The level of debt welching would drastically decline if we had a system where each finger would get chopped off after being more than 90 days late.
Instead, debt welchers are seen as heroes because they do what most of us dare not do, break our promises. Getting someone else to pay for our mistakes, and allowing us to reap the benefits when things go right is one of the smartest ways to build wealth if you can get away with it.
Everybody will screw up their finances at some point in their lives. And no matter how bad we screw up, there’s always forgiveness if we stay humble and try not to repeat our mistakes. We are OK with bailing each other out at least once, because we might need our own bailout some time in the future.
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I have a family member who was upside down in her home by about 30% of the value and after a job loss let it go back to the bank. The second payment she missed they threatened to take the house from her the following month and she panicked and moved all her stuff out. It then took the bank over a year to actually take the property. Had she played chicken with them and made them evict her she could have had free place to live for over a year.
It will be interesting to see what happens in Greece. I was just reading an article about grocery shelves being empty as people spend the only cash they have available on necessities.
That’s an interesting story. Based on all the news stories we saw on TV it seems like most people who had hardships like your relative during the crisis squatted for as long as possible. It’s hard to figure out what the actual percentage was of people who actually followed instructions to get out like your relative versus those who squatted for free for as long as possible. It’s intriguing to hear her story because if I was in that situation I probably would have reacted like she did based out of fear and panic, but in retrospect it would have been better to stay for free for that year.
I know several people who decided to stop paying their mortgage and live for free for a year until they had to get out. Then they turned around and blamed the banks for them having to move out. Seriously folks, their neighbors paid their bills every month on time, why are they blaming others for not paying their own mortgage?
Interesting topic as always.
If anything, we can see (with loose empirical evidence), that holding people liable forever doesn’t really work. Case in point: student loans which cannot be discharged and seem to drag down the borrower and society at large.
Unfortunately, the free flowing credit to anyone with a pulse to any “accredited” school for any amount of money is ludicrous.
Although unpopular, I’d advocate that each college be on the hook to guarantee x% of student loans that the federal govt underwrites. If they provide a good education and students have good careers, then they will have minimal losses. Also, it aligns the incentives of the university to truly HELP students obtain gainful employment, whereas right now the onus is more on the student.
It’s good to see we are finally cracking down on the for profit schools. Hopefully we can eventually make it down to the majority of public universities
I am impressed with how some universities with massive endowments can sleep well at night knowing they are charging hopefully kids massive tuition and not doing everything possible to get them a job after graduation.
People should see the UNFINISHED $25 million house in Pacific Heights once owned by the Phoenix Online founder. Then they might realize.. hmmm.. maybe the true benefit is to U of Phoenix and not them!
The Greek people ARE responsible for this mess. They voted the bums in who spent the pot. And then they kept doubling down. I just had an interesting discussion with my wife’s friend’s husband about this. He’s Greek (born here but parents are from Greece) and he said it wasn’t the Greek people’s fault for voting in those idiots. I told him he’s delusional. We didn’t talk much after that. My wife wasn’t happy about it but she doesn’t really like him anyway. I told her I have no room in my life for bums who don’t pay their debts. And he and his wife just had a kid. Can you imagine what he’s going to teach that kid? How do you trust someone who doesn’t pay back their debts?
I’d say there is a lot of blame to go around. Is it simply the fault of the borrower if the lender continues to lend him money?
If he/she doesn’t pay it back, yes, it’s absolutely the borrowers fault. The lender is in the business to lend money. Was that not understood? Under your logic, all the candy shops should remove all the candy from the shelves just because some people are getting fat…
I don’t absolve the Greek people of any responsibility. But other countries kept lending Greece money. They shoulder much of the blame for not getting that debt repaid – they lent to a deadbeat. The lender is in the business to lend money. All the more reason to make sure you are lending to a party that can pay you back. And if they stiff you once – perhaps you should not continue to lend to them.
Do we punish the drug addict or the drug dealer? In America, we punish both, but provide more leniency to those who are addicted.
But perhaps, the drug dealer is addicted to making more money?
You’re blaming one guy for the collective decision of millions of people? I think that’s a bit harsh. The guy may have his opinion, but turning him into an enemy just because of his nation’s decision? Feels weird to me
to Defender: Greeks are not responsible for their government’s debt more than americans are responsible for 11 trillions Obama has added to 6 trillions of Bush etc. Just divide 17 trillions by 300 millions and multiply it by number of your family members to calculate your fair share. How do you feel paying that? For government services… Did you get enough of those services for the money? Did you ask for them? Did you vote for Obama? Did you ever see those money you are responsible for? What if social security money is given to chinese to satisfy the debt and your contributions are lost and you are told there is no retirement money left? You can not opt out from SS contributions, can you? You had better life than greeks living beyond your means have not you?
Or you still feel it is government responsibility to return your contributions to SSA in form of retirement? Well, they have already returned them to you in form of wonderful government services. EBT, stealths, Pakistan, Iraq etc. are all yours. Why did you vote for it anyway? You did not? Then who did? Well you are still responsible even if it is not your fault, even if you are outvoted. You should have done something, right? Like taking power back, organizing community, taking arms in your hands… or at least just pay it as you go. Is that your advice for greeks? When do you follow it?
Those, who live in a glass house should not throw stones…
The Greece situation was/is inevitable in regards to Euro currency experiment.
Greece would have always been better off controlling their own currency through their own central bank (such as the United States).
The Southern European countries have a much different culture/economy/ideology/and social needs versus Northern Europe. Most knowledgable people consider the Euro a defacto Deutsch Mark.
I think maybe a good compromise would be maybe a Northern Euro and a separate Southern Euro.
In summary, my argument is not so much the level of debt (Japan has a much higher level of debt), but the inability to devalue your own currency.
Unemployment slack, market wages, and now currency all determine what does a Greek earn.
Everybody in this comment section is missing the point: The “Euro” equates to a fixed exchange rate.
There is no United States of Europe, consequently, without a strong central government, the “Euro” is simply controlled by the largest (and strongest economies). Primarily Germany. And the Germans have completely different needs from the Greeks.
Greece very badly needs its own currency. Having a currency with a much lower exchange value would help their economy.
The best thing for the Greeks is to leave the Euro behind.
^^^^ Nice~!:-)
Why do you think Germany just doesn’t save Greece by bailing them out in order to help improve their image after WWII? They had their own debt forgiveness w/ the Marshall Plans.
Sam,
That is a wonderfully complex sociological question!
I’m not sure as an outside observer, I can answer that. We would have to spend some time in bars, talking to German folks (and enjoying great beer), in order to get a feel for what the current thinking is.
What I can say: The world today is a much different place from 70 years ago. In 1945, there was a very legitimate concern that a certain Soviet Union would expand their empire to the English Channel (and maybe beyond).
In many ways, the western world needed Germany, at least as a buffer. And maintaining an occupying military force in a foreign country is so much easier if the locals kind of like you (see how badly the recent Iraq occupation went for example).
The other thing is the very strong cultural connection between the United States and Germany. I would say upwards of 50% of Americans have some German ancestry.
2015 Germany is a much different place. I don’t think today’s generation has much real emotional connection with the early post World War II era.
Modern Germany is extremely prosperous/wealthy and has a very high quality of life. Their primary concern is keeping inflation low. Greece needs inflation… They are living through a deflationary problem (because of the Euro). It would have been much better for everyone if Greece (and several other Southern European countries) had stayed out of the Euro.
Maybe this link to a BBC economics article is useful:
https://www.bbc.com/news/business-18868704
It describes a really relaxed culture in modern Germany.
Perhaps a bit of a social/psychological bubble?
Q: A Greek, an Irishman and a Portuguese go into a bar and order a drink. Who picks up the bill?
A: The German!
Good one Jay!
And a point well taken! I suspect the German populous feels like they are always picking up the bill.
I can see why people who default on a big debt are admired, for the same reason there’s a weird admiration to someone who drops an F-bomb on the boss as he quits and walks out of the office. It’s gutsy.
However, I don’t think that the lack of strong social/financial consequences necessarily means that an action is fine and dandy. That line of logic assumes a perfectly rational society: one that sets up consequences in perfect correlation with every action.
But if it wasn’t fine and dandy, why are debt welchers being promoted in the media, profiting from book sales, and getting paid to speak at events?
But society doesn’t perfectly matches consequences to actions. We get it right a lot of the time, but of course that’s not true all of the time.
To answer your question, the media, book publishers, and those choosing public speakers don’t apply a perfect moral compass when choosing who to promote.
Obviously, their choices are based often on what will get viewers/readers, not simply promoting ‘good people’.
I find this topic interesting. There used to be debtors prisons in England (I’m sure other places as well). I’m not sure what the best way to stop people from living beyond their means and running away from the obligation of repayment, and providing a way for people to get back on their feet. As long as there is money to be made the current system will continue to be tweaked. Once a financial institution loses too much money or some loophole needs to be closed then there will be more drastic changes.
You should look up what governments did to debt welchers during feudal Japan. Yikes.
I can only hope that the lessons of a socialist regime are learned through all of this carnage. When the drachma is reintroduced at a 50% discount to the Euro, all those who voted “no” can only look to themselves as to why their bank accounts can suddenly buy 50% fewer goods.
On the plus side, we Americans can now visit Athens and stay at the finest hotels for a crisp Andrew Jackson.
In addition to cheap vacations to Greece and Europe in general, if Greece left the Euro that event should easily take the Euro to parity with the US dollar, at least temporarily. If that happens, I’m going to buy hard Euro’s to diversify my cash holdings. When’s the last time they were equal? 2002…
I plan to do the same, and also go back to Europe for a 4 week business trip.
Blaming the borrower is easy but they wouldn’t be a borrower without a lender. It takes two to tango.
Personal debt is not like sovereign debt.
Finger wagging is easy but boring. There are more interesting angles to these issues.
Feel free to share the more interesting angles. Thanks Matt!
The statement you made sums up my stance on debt “Whether the lender is an institution or a relative, paying back money lent you in good faith is an absolute must. They trusted you. Not paying them back is not only selfish, but highly dishonorable”. It is my worst nightmare not to pay back a loan I have financially committed. It was simply not how I was raised and part of my values.
The next big financial collapse: I am guessing will probably be the stock market but the student loan debt may be a close second. Perhaps one will affect the other?
It seems the big talk track anymore is about how unfair and costly college education is and the extreme amount of debt that has been racked up in student loans. It would not be surprising to see the president attempt to create a program to ease this debt burden.
Most student debt is co-signed by the parents. I totally agree that the situation is out of control. The universities need to be held to account.
Most student loan debt is definitely not co-signed for by the parents. There’s no requirement for a co-signor for Stafford loans, only PLUS (those were the terms when I was in college – not sure what they’re called now). I have a lot of debt and not a dime is connected to my mother. The only connection is that I was charged 8.25% in unsubsidized interest because the government incorrectly assumed my parents were secretly giving me money. They penalized me for having parents who made money.
Yes, I believe if there is another debt crisis in America, it will be from student loans. The NY Times pushing the agenda is irresponsible, as you know there are more people at the margin thinking about, and planning on defaulting after reading Lee Seigel’s column.
Don’t forget to add Donald trump, he filed bankruptcy a a couple times. He found ways to become a billionaire despite the fact.
It’s probably much better for Greece when they get their currency back. A “no” vote also equal to lower pension. Say right now they get 600 euro = 600 drachma, then the drachma get devalued, they would still receive 600 drachmas, which will equal to 300-400 euro. The pensions then doesn’t cost as much for the government, lower currency can make Greece a productive country rather than a consuming country .
The EU will eventually stabilize.
Gotta be careful – Donald may come get you (seriously). He’s never filed for b/k but some of his companies have. He’s a little sensitive on the issue. Mark Cuban has had a lot of fun with that over the years.
There is a term for this: “the Prostitute Effect”. Once services have been rendered, the motivation to pay for those services dramatically declines. And like millennia of debtors who come before, once somebody has obtained the goods/services they now resent the obligation that remains. There is no question that goods/services were received. So now the VALUE of those goods/services must be called into question; otherwise, the debtor will be seen, even by themselves, as a bad, untrustworthy, and unethical person. (i.e. “my home is underwater, so I made a business decision and walked away!” “my degree is worthless, and the proof is I can’t get a job I want!” “the banksters are evil!” “Mitt Romney pays only 15% effective tax rate!” it goes on, but my favorite one is…wait for it…”Nobody told me that (fill in the blank)!”)
What is happening in Greece might seem detached to some (i.e. “personal debt is not like sovereign debt”) but the very same thing is happening right now in the U.S. $18 trillion in the Federal debt has been spent (at the moment, 71% goes to service entitlements and interest on the debt). Something was received for that $18 trillion, by somebody. We (the U.S. and citizens…and non-citizens) are just not as far down that “Prostitute Effect” road as Greece.
FS, point of interest…the “non-recourse” in Cali is only for primary residences, not second homes or investment properties. Not only did you do the right thing, but your assets were/are subject to pursuit by a lender in the case of default.
Always ask for the money up front, right? Or I guess have a pimp stand outside ready to beat you up for non payment.
Good call on non-recourse not being in effect on non-primary residences!
We can all apply the ‘Chris Tucker method’ of commerce, when it comes to handling our money. (NSFW, 80 seconds)
JayCeezy, you taught me something today. I was surprised to read what you wrote about the nonrecourse statutes only applying to primary residences, and I was geared up to tell you that what you said was inaccurate, but after doing some pretty serious research to be sure before I shot my mouth off, you’re closer to correct than I was.
As you probably know, lenders can only get deficiency judgments if they pursue a judicial foreclosure, which takes more time and is typically more expensive to a lender than a nonjudicial foreclosure. Virtually all foreclosures are done by the nonjudicial route. But if the shortfall is big enough, it’s to the lender’s advantage to take the lengthier judicial foreclosure route and obtain a judgment against the borrower for the difference.
I had always thought that purchase-money mortgages on commercial properties were protected by the anti-deficiency statute. C.C.P. 580b. But reading it again, and looking into the judicial decisions interpreting it, it looks like that statute only protects buyers of investment properties from deficiency judgments on seller-financed properties. If the buyer borrows funds from a bank instead of the seller, the borrower is not protected by the anti-deficiency statute. Weird.
That code section just changed in 2013 to give homeowners additional protection in the event that they refinance their purchase money mortgage. It used to be that they lost their anti-deficiency protection when they refinanced, even if it was not a cash-out refi. Now, they keep that protection after a refinance (but not for the cash-out portion). C.C.P. 580b(c). But I haven’t seen a court decision (yet) interpreting that provision to determine whether it applies to purchase-money mortgages on commercial properties. C.C.P. 580b(b) says that a 1-4 residence property occupied by the borrower is a “purchase money loan” for purposes of 580b(c), but it doesn’t specify whether other types of loans, such as purchase-money loans on commercial properties, might qualify for the same protection.
According to the plain language of 580b(c), it seems to me that commercial borrowers would be exempt from deficiency judgments as well. But reading the legislative intent behind the change, it was enacted to protect homeowners, not investors. I’d be interested to see if a Court decided that the statute as currently written protects purchase money loans for investment properties, for loans that were originated on or after January 1, 2013.
Thanks for the lesson! :)
“Stick with me, kid. It ain’t much fun, but it’s educational!” – W.C. Fields
Somebody else paying the price for others mistake, Not paying debt or becoming financially responsible, I think at one or some other point of time its going to come back to you, law of the Karma. Wealth built on good values rather than smart immoral strategies always stands tall!
We live in a global culture of amorality – the only law is what can I get away with.
Eventually, the road runs out and there’s nowhere to kick the can and our entire global civilization collapses, be it next month or next century. You can’t have civilization without commerce, and you can’t have commerce without trust.
People like to think there are no consequences, or in some cases ‘it’s legal so it’s ok.’
Nothing could be further from the truth.
Whoever lasts longest wins. But will it be the US? No. We’re too weak as individuals and as a nation. It could be China or India though, if they can get a handle on their corruption problems.
I’m not sure about China or India being any better than the U.S. over the long run, but the rest is spot on.
What you can legally get away with is a perfectly rational action though.
If it’s just a bad credit score, why NOT default on $200,000 in mortgage loans right? You can still be gainfully employed, publish two money books, and speak and conferences.
The people who manipulate the system to get what they want regardless of how it hurts the global system, or who they hurt… are they not called sociopaths? Check out the book “The Sociopath Next Door” by Martha Stout. Scary reading that a good chunk of the CEO’s out there are meeting the criteria.
I’m not sure, but I will definitely look for it at the next library visit. Good beach reading?
Interesting angle with the sociopath analogy. Perhaps what we need is a Dexter equivalent. For those that don’t know, Dexter was a TV series about a sociopath, whose father having recognized who his son really was channeled his son into killing really bad people to satisfy his evil needs. Thereby turning a personal negative into a societal positive. It all worked wonderfully until his policewoman sister found out what was going on. So, is their new leader a Greek Dexter?
And.. Donald Trump had a huge negative net worth before he became a billionaire. The banks propped him up so they would not have to realize the enormous losses if they just let him go under. His big risk taking eventually paid off and now he is running for President. I say “the Donald” should become the next President of Greece. He would be the perfect person to fix em’ (plus a win for the U.S. to be rid of him)
The Donald…. what a marketer. Gotta give him that.
The GOP field for 2016’s Presidential Race looks comical. It seems obvious to me that Hilary Clinton will win.
Any thoughts on Bernie Sanders?
Make less than $250,000 and you’ll get to reap the rewards if he is elected.
$250,000. That’s 95% of U.S. citizens. . . .and most of us reading this.
I think a youthful appearing Marco Rubio has a very good chance (I’m “not” claiming that he is competent!).
He is young and handsome (movie star looks). And the USA has a very large Spanish speaking population. America votes for young and pretty/handsome. Elections are 90% marketing.
And Mr. Rubio has that “All-American” story. We both share that.
Instead of punishing people AFTER they take on too much debt, we should make it much more difficult to go into debt in the first place. Before about 1980, it simply was not possible for folks to go into as much debt as they’re in today. We need to go back to those pre-1980 days.
Makes sense, and that’s what the government in the US has done to raise tier 1 capital ratios for banks, and implement much stringent mortgage lending standards.
The irony is, fintech companies are growing/profiting/fundraising to unwind all of that. I bet the government starts regulating fintech lenders equally as hard. There can’t be a double standard.
Especially regarding student loan debt. I’m not advocating default, but too much of the student loan business has a predatory aspect, where kids are encouraged to borrow too much, and interest rates appear excessive for a loan that is guaranteed, and can’t be defaulted. Why don’t parents lean in more to prevent such abuses? Seniors aren’t allowed to take a reverse mortgage without mandatory counseling. Same should apply to student loans, for a population that is also vulnerable, and often naive.
Just found out counseling is required. But a 30 minute session is totally inadequate for such a complex topic. And by defaulted above, I meant erased by bankruptcy.
My student loans were taken out in 70s & early 80s. I was charged 4%.
Who else pays 8-8 1/2% for loans? Certainly not the financial institutions that are loaning the money. And it is guaranteed by the fed. govt.
Trump’s kids and Chelsea did not need student loans.
Something is wrong with this picture.
Q: “Voting for a politician who promises to give you a tax cut or allows you to retire by 50 with a lifetime pension makes logical sense. Who wouldn’t vote for such benefits?”
A: Responsible and rational people know getting their taxes cut and pension benefits raised at the same time is unsustainable. So this just goes to show the ugly truth that humans are often irresponsible and irrational.
But we know this, which is why it shouldn’t come as a surprise that a lot of debt welchers do what they do, and a lot of people root for them because that’s what they want to do as well, but don’t have the guts to do.
A bad credit score is a bad penalty. People with bad credit scores pay more for everything. The people with the least tend to pay the most.
Bad credit score for 7 years, or free $200,000 while still having a job, speaking at conferences, and publishing books? 7 years is not that long of a time.
If it’s a bad credit score for 7 years AND you get two fingers chopped off… that’s a different story.
They only have to pay more if they need to borrow. Not having that $200,000 mortgage = more cash in hand. Hence they can just pay cash and probably get a discount versus someone with a good credit score taking out a loan.
My Grandfather who passed in 1999 ( so adjust the following for inflation) had a saying:
If someone owes you $10, it is their problem.
If someone owes you a $1,000, it is YOUR problem.
Hence, never lend more than $10?
Hence, never lend more than you are comfortable lending.
Actually, change my last word to ‘losing.’ ;)
It is amazing that Carl Richards promotes himself as a CFP that helps people make “smart, simple decisions with money” yet strategically defaulted on his mortgage and hurt the value of his neighbors house.
I guess really people don’t really care about what people do with their money, even those who are supposed to be finance professionals. Makes me want to take advantage of the system too!
It’s impressive indeed. I asked the conference organizer about the situation, and he mentioned he likes his presentation style.
People forget and/or don’t care what we’ve done in the past, which is awesome. I’ve fucked up when I was a kid, and nobody gives a crap. What people do care about is what you do going forward.
With information that we can make a lot of mistakes on many different areas of our lives, we should feel more confident to take risks and do whatever we really want.
Wow! Is the next financial crisis going to come from Japan? Makes me want to rebalance!
I disagree that “debt welchers” are admired. Just read the comments to that NY Times editorial you link above (I haven’t tallied the comments, but they seem to be pretty evenly split). Many of us empathize with so-called debt welchers — in certain contexts — because they’re simply doing what their contractual counterparties (i.e., banks) do every day in business: undertaking an efficient breach. Those banks also receive bailouts from our government, which average citizens don’t. And when you look at student loan debt, which is generally non-dischargeable, and consider that more than a third of it relates to folks that went to for-profit colleges, which have a well-documented history of misleading prospective students concerning the advantages of a degree, you begin to empathize even further.
Look at my own survey. Roughly 89% of the 500 respondents say there should be stronger punishment against debt welchers.
If the comments are split evenly 50/50, that is a HUGE data point for a lot of people admiring debt welchers.
I wonder, if there should be a double standard for bailouts for institutions and individuals? Hmmm.
I do hope that more students realize paying big bucks for education is becoming a worse and worse ROI. Information is fast becoming FREE folks! To pay more money for free education is stupid.
Related: Public Or Private School?
Germany is being especially hypocritical about Greece’s bailout at the moment. They would still be paying off their post war debts now if it wasn’t for generous forgiveness programs and the Marshall Plan. Greece shouldn’t have been let into the Eurozone, they effectively got Goldman Sachs to lie for them, but that doesn’t mean they need to crush their economy to repay the debt.
Good point. I wonder why nobody really brings this up about the Marshall Plans?
Sam I assume you are ok with corporate bankruptcy law (and LLCs)? One could argue that without it no one would take the risk of starting a business.
Also… It’s not peaches and cream if the ratings agencies hate you. It’s harder to get jobs, housing and transportation.
I’m in agreement: pay your debts. But it’s not black and white. More effort should be paid to the front end (think BEFORE) going into debt
I’m OK with it. You take a risk, and you fail. But if nobody ever took risks… then it’s hard to progress. It’s the same as people investing in a private fund. You know there’s a chance you could lose it all. That responsibility is solely born on you.
If you’ve welched on a huge amount of debt, what business do you have buying a house or car on debt? That makes no sense. Rent and take the bus!
The moral hazard right now is that the majority of the drug dealers (bankers, Wall Street) got bailed out. The drug addicts (the middle, lower middle class) is not getting bailed out. This creates the moral problem where the average person sees a lot of unfairness, therefore there is not any shame in defaulting on debt anymore.
Greece will be bailed out. They will be given more time, and more money. Congress will get a program passed for low income people that have student loans, most that do not graduate.
There are no consequences for not paying debt anymore. You can be on welfare and make $40K a year equivalent…
Once the baby boomers retire, the greatest income producing generation will be gone. After that, more people will be riding in the wagon, and less people pulling it.
But how could all debts be paid in a system where there is not enough money to cover all outstanding debt?
The way I understand the fractional reserve system, it seems to me that it works in a way that’s incompatible with all the debts being paid. I might be wrong but it seems to me that since banks are allowed to create money from nothing and then expect to be paid interest on that money means that there is not enough money in existence at any given time to cover all the debts. So it follows that some debtors will default on loans.
The only way it would work would be that system keeps getting bigger and bigger (the economy grows) and when you have growth forever, which for anyone with an engineer mind is irrational. We do not have an infinite Earth. Of course we could expand to other planets, but even so, I suspect that the universe is finite.
I’m going to call it early: capitalism will be dead when the African continent is no longer at war with itself. Capitalism, banks and the fractional reserve have already infiltrated Asia, Eastern Europe and South America. When we have dutiful consumers in Zimbabwe, all lining up to get a loan and buy a house at an inflated price, then there will truly be no untapped market and growth will stop globally. I predict this to happen in 2042. In autumn. Probably October.
I think we are seeing a breakdown of trust between individuals and large powerful institutions. Ethics and morals are often contextualized based on relationship. For example, we know lying is wrong, but lying to a fascist government to protect innocents would be justified and even considered heroic.
Many people perceive banks negatively. They believe banks have too much influence in congress. They resent the tax-payer bailouts and the fact that much of the crisis was caused by over leverage in risky derivatives from some of the same institutions that they owe money to.
If banks didn’t do things that make them perceived as dirty and fascist then people wouldn’t be heroes for sticking it to them.
Seems a person’s idea about debt can change swiftly if it’s somebody owing them versus them owing somebody else. I always wonder what Lee Siegel’s attitude would be if the guy down the street owed him $40,000 and didn’t pay it. Pretty sure there’d be a court case and not forgiveness.