An Obvious and Offensive Double-Standard

James Surowiecki published an article in the December 19 & 26, 2011, issue of The New Yorker magazine in which he argued that there is a double standard when it comes to bankruptcy (See Living By Default by James Surowiecki). Business bankruptcy is part of doing business, and the smart thing to do. Yet average Americans are considered moral failures for doing the same thing.

He begins by discussing American Airlines and their choice to file bankruptcy. In spite of the fact the company had billions in the bank, their board decided that paying debt was “throwing good money after bad,” and it would allow them to break their union contracts. This was considered by analysts to be a smart business decision.

Surowiecki follows up by pointing out that while this is the generally accepted way of doing business, “When it comes to another set of borrowers the norms are very different.” Millions of American homeowners live in homes on which they owe more than the house is worth, but rather than strategically default and walk away from bad debt, they continually to make their mortgage payments on time every month.

Why? Because while it isn’t always practical for homeowners to pick up and move, the biggest reason people stay in homes where the mortgage exceeds value is that socially it is considered immoral to just walk away. He quotes Brent White, a law professor at the University of Arizona, who says Americans are bound by “shame, guilt, and fear.” Bankers capitalized on this, portraying those who would walk away from underwater mortgages as deadbeats. “David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message ‘to their family and their kids and their friends.’”

Surowiecki then points out that while paying one’s debts is generally a good thing, there is an “obvious and offensive” double standard when it comes to businesses versus the average person. Individuals are criticized and moralized against for the same actions that are done by companies as a normal part of doing business. Further, businesses often cut their losses using taxpayer funded subsidies.

The “hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.”

He concludes that while it is true that some individuals act irresponsibly, banks and businesses do so as well by lending to those who are not a safe risk and not requiring more in terms of down payments. “The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead.”

I have long said that bankruptcy is not a moral issue, but an economic one. If this system was moral, we wouldn’t lose our homes and livelihoods because of medical bills. Medical care wouldn’t be considered a commodity, with third parties profiting every step of the way. Companies wouldn’t be able to get out of their labor contracts by filing their own bankruptcies when they have millions in the bank, leaving their employees worried that their own bankruptcy is immoral, when their situation was helped along by a company that didn’t honor its agreements. Usurious interest rates wouldn’t be normalized where it’s expected that a quarter of every dollar goes to line the pocket of lenders who net billions of dollars in profits every quarter. Capitalism isn’t moral; it’s economic, and it’s ruthless. Making the decision to file bankruptcy is not about morality. It’s not about whether it’s the right or wrong thing. It is an economic choice, and one that gives citizens freedom from a systemic double-standard.