Sunday 15 May 2011

Defaulting on Loans

With the troubles that some European countries are having, it seems that some (many, most?) supporters of the free-market are urging those countries to default. See for example Tim Worstall in his post today about Greece. Now, these guys obviously know a lot more about economics and philosophy than I do but the question occurs to me that surely defaulting without repercussion is not in line with free markets?

A loan implies a contractual obligation to pay that money back. So how is it possible to square a desire to see contracts enforced with the acceptance of defaulting on loans? I could understand if the suggestion was for Greece to default and have her assets taken by others rather than continue on borrowing more and more and making things worse. But the implication is that it would be OK for Greece to simply refuse to pay back the money and yet retain her assets. Her only "punishment" being that no one would lend any more money to her again.

4 comments:

  1. On the other hand, sovereign debt is a funny one from a moral point of view, as the politicians who agree to the borrowing never were fairly elected by 100 percent of the population (for a start, there's all the inhabitants that were too young to vote), and yet they sign contracts that purport to bind the whole population, and indeed generations that haven't been born yet.
    And there's generally no penalty for emigrating away from a country that's taken on a massive amount of government debt, even if you did vote for the governments which did it.
    Personally I think there's a decent case to be made that governments should be banned from borrowing, because they have no moral basis for committing future generations to pay for their borrowing. But there's a massive bell-the-cat problem here - the government is the only one able to stop itself borrowing from willing lenders, and generally it doesn't want to.

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  2. Isn't that saying that since the borrowing was illegal or illegitimate than they should be free to continue breaking the law?

    Yes Libertarians believe that most of what government does is not correct or legitimate, but how does that carry over into forgiving further illegitimate acts such as breaking contracts?

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  3. Governments write the law. What they do might be illegitimate but I doubt that it is illegal.
    Anyway when governments borrow someone gets shared, either the people liable for repaying debt they never consented to, or the people who lent the the money. I can't think of a libertarian reason why the first group should be more liable than the second.

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  4. I meant to say, "someone gets shafted". Dratted American autocorrect.

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