IN PRAISE OF DEFAULT

Well worth reading

Excerpt:

The housing bubble was a massive, historic misallocation of capital. Wanting borrowers to keep paying over the odds for an asset, housing, which should be allowed to fall in price is to want to keep misallocating that capital. Rather than keeping house prices high and mortgage portfolios sound, the money that might go to repayments and interests would instead go to either consumption or investment in some other more rewarding area.

There are good reasons for the stigma against default; societies in which people can be counted on to honor their contracts generally produce better, fairer outcomes and are vastly more efficient.

Some will argue that if there are a lot of strategic defaults — defaults undertaken not just because a borrower can’t pay but because it is in their best interest not to pay — loans will become harder to get and more expensive.

Absolutely, and a good thing too, for banks and borrowers.  Let the bad lenders take their losses and, if need be, fail.