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America: Land Of The Strategic Default

29 April 2010 10 Comments

Amazing times we live in.  It seems like more and more people are strategically defaulting on their debt obligations either simply due to being sick of dealing with it or with a larger goal in mind.  Allow me to explain.

Mortgage Default

I’ve been pondering (and many economists have as well) how consumption has been rising in recent months despite stubbornly high unemployment.  Most people are starting to point to the fact that people have simply stopped paying their mortgage.  It’s commonly accepted that people can live in their home for a year or more after stopping payment of their mortgage before getting foreclosed on.  This is due to the banks just being overwhelmed with volume of foreclosures and simply not wanting to add more houses onto their balance sheets.

The beauty of this strategy is that, well, people have more money to spend!  So, do you want a new iPad?  Just stop paying your mortgage!  Sure, your credit score will take a hit, but people are starting to say screw my credit score, what good did that get me?  A better rate for my house?  Yippee, I’m 100k under water!

Credit Card Default

Slightly more strategic and more insidious is the credit card strategic default.  There was a recent fascinating read over at Zero Hedge on a reader who has strategically amassed $100k+ in credit card debt purchasing real assets like precious metals with no intention of paying back the debt.  The thread got 100’s of comments with the majority of them either in support of the move or stories of people doing similar things.

What is the cause of such a move in these people?  People are sick of the banks having private gains and public losses.  People are sick of being beaten down by the system.  The system that is fleecing the middle class (suckers) and lining the pockets of the political and business elite.

Where Is This Heading?

The financial system as we know it is continuing to deteriorate in my opinion.  Eventually these losses will be recognized whether on the books of the banks, the individuals or the government.  Bad debt just doesn’t go away.  When it is recognized, there will be a major wake up call to the way of life here in America.

I identify with the individuals that are racking up thousands in debt with no intention of paying it back, although I’m not going to do this myself.  But,  the reality is that with each passing day of responsibility, living within my means, and paying my mortgage dutifully, I feel more and more like a sucker.  The system is rigged against me and against you.   The system favors those who live beyond their means (Joe blow who lives across the street from you, has no job, and skis behind his $70k boat every day while you work to pay your mortgage).  The system favors those who built the system to profit those at the top with billions in government backed profits and bonuses.  The system favors those in power from George Bush to Barack Obama to the lifetime politician who has never worked in the private sector.

So, this is only going to escalate because frankly, it has to escalate.  More and more people can’t pay their mortgage and more and more people are realizing that they don’t even need to.  More and more people are giving up on the idea that a credit score is important.  More and more people are losing faith in the system (as they should) and are instead buying iPads and silver coins.

I could make an honest case for maxing out the credit cards (I could probably get over $100,000 in credit from credit card companies – insane) and buying a bunch of gold and silver and a bunch of food supplies, guns, ammo, clothes, toys, iPads, etc and just saying screw it, then just waiting for the system to collapse.  I understand it.  I do.  Yet, I won’t do it.  Why?  Maybe I’m not ready to give up on the system which I exist in comfortably (we’re comfortable slaves).  Maybe it is because I have a family and I don’t want to introduce such risk into my family’s existence.  Or, maybe I’m just scared.  Or, maybe I’m just a sucker.  Yes, I think the last one is correct.  I’m a sucker, and if you’re reading my blog, you’re probably a sucker too.

Welcome to 21st America.  Welcome to the land of the strategic default.  I hope you enjoy your stay.

10 Comments »

  • 20smoney said:

    In times like today, Scripture is a great place to ground oneself. Thank you for the comment.

    My purpose for the post is merely to explain that we're in uncharted territory… keep your eyes open 🙂

  • 20smoney said:

    Stephan:

    I understand your frustration, but the blame is to be placed upon those making the policies that create the environment and create the moral hazard. The banks don't care about underwriting standards because they know the government will backstop them and bail them out.

    Also, because government is implementing programs that reward people who bought $500k homes and 3 cars and 2 jetskiis while making $40k a year, by letting them stayin the home and keep all their crap (thru loan mods and principal reduction!), people like you and me who pay our mortgage every month get demoralized. eventually people like us throw up our hands and say screw this, why am i working so hard just to pay my bills when others dont have to? We've taken our policy to a very dangerous place and this is the result.

    I don't blame the guy who runs up his card for one second. take his assets… what assets? He doesn't own a house or a car, and he has some gold coins buried somewhere. I'm starting to think that guy is smarter than me.

    For the record, i pay my mortgage every month and have no other debt. But maybe I'm starting to reconsider my entire financial strategy.

  • Joe Plemon said:

    I share your angst about the frustration of seeing people "strategically" cheat the system. But I won't go so far as to say I feel like a sucker because I keep my word and pay my debts. I want to be able to look myself in the mirror and like what I see. I don't want my children or my friends to learn that I break contracts when they don't suit me. And, in the long run, I believe that we reap what we sow. The real suckers are those who think they are getting away with something. It will come back to bite them.

  • William said:

    The Hurrier I Go, The Behinder I Get. When I first got my credit card the interest rate was less than 5% now it is almost 16%.

  • frank said:

    YOU ARE ALL SUCKERS!!!! Believe and have faith and follow your government. That is what I was taught and read in my bible. Yet our government should have the worst credit score, they borrow and borrow, spend and then spend some more. Print more and create a bigger headache, our government has failed us from day 1. We go without, not them, just create more problems while they get richer and richer. It is a losing battle for what they have created and left us with will be the end.

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  • Consumer said:

    Obviously people in US need more savings instead of borrows

  • crisis_daily said:

    According to a recent study, 26% of the record numbers of home mortgage defaults across the country are strategic. The study found that there were a few variable which correlate closely with borrowers’ respective willingness to intentionally default. First, and most obviously, is the value of the mortgage compared to the current value of the home. Specifically, those whose mortgages are most “underwater” are also most willing to default: “Researchers found that almost no homeowners would default if their equity shortfall was less than 10% of their home’s value, but one-in-six homeowners would default if their equity shortfall reached 50% of their home’s value.”
    In controlling for age, location, and education level, the study determined that well-educated borrowers, homeowners in the Northeast and West, and people under 35 or over 65 were less likely to have moral reservations about choosing to walk away from making mortgage payments . One’s sense of morality evidently plays a strong role in this calculation, with those who regarded strategic default is immoral 2-3 times less likely to default than their amoral counterparts.

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