Consumer Law

Moralizing Bankers

By Alan White

By Alan White

Last week the chief executives of JP Morgan Chase, Bank of America and Wells Fargo home lending wrote to Congress, and decried the danger and immorality of forgiving debts.  Specifically, they protested that any effort to compel them to reduce the principal owing on mortgages that exceed home values would strike at the heart of the sanctity of contract, and furthermore, discourage bankers from ever making any future mortgage loans. 

Moral hazard in money lending, of course, runs both ways.  The more we condemn the debtor, imprison her, and flog her for breaching her promise, the more reckless the lender can become in making loans that cannot possibly be repaid.  Rigid enforcement of loans creates moral hazard for lenders, while fair and realistic bankruptcy relief and debt jubilees cause banks to lend prudently and fairly.  Chase is now the owner of billions in reckless loans made by Washington Mutual, and Bank of America now has the Countrywide portfolio, both of which are fattened with the infamous ?option ARMs,? loans so hopelessly unrepayable that the borrowers were not asked to pay even the full interest due every month. 

In various faith traditions, the moralizing is more likely to condemn the lender than the borrower.  Isaiah railed:  ?ye have eaten up the vineyard; the spoil of the poor is in your houses.?  The Q?uran and the Dhamappada are to the same effect.  Saint Thomas Aquinas urged the restoration of all interest as essentially the fruit of theft.

One might also note that Washington Mutual, unable to keep its promises to bondholders and depositors, relied on Chapter 11 bankruptcy and the FDIC to cancel its promises or fulfill them in its stead, and Bank of America compromised with bondholders on $36 billion in promises made by Countrywide.

Yes, homeowners made promises, nearly eleven trillion dollars of promises.  But these obligations were placed on them by moneylenders who should have known better, and whose imprudence has now cost millions of people their homes, their jobs and their life savings.  If forgiveness of debt today will make lenders more reluctant tomorrow, then let us forgive our debtors.

Full post as published by CL&P Blog on April 18, 2010 (boomark / email).