Topic: Economics
Debt: Secured and Otherwise Looking at Debt as what it really is might straighten things out a bit.by Gene DeNardo
(libertarian)
Friday, July 3, 2009
Unsecured debt has absolutely no backing. This is sometimes misunderstood. There is no collateral, asset or value attached to the security or the performance of the contract. Because of this, the entire risk of the enterprise bears on the creditor.
The creditor may judge that some of this risk is alleviated when the debtor "agrees" to repay the loan. But this agreement can never include the certainty of repayment due to the nature of the future. No one knows what the future will bring and that is why we experience risk. With a certain future, there would be no risk.
The creditor can do his "due diligence" and determine what sort of risk the debtor may be. Still, the inherent risk of the marketplace remains. The voluntary agreement to allow the creditor's private property [capital] be utilized by the debtor can never carry the full assurance that the terms of the contract will be realized; that the principal and the return will be repaid and repaid within the time frame. Neither party has the ability to predict the outcome, to predict the future.
It first must be realized that the debtor can never commit "theft" in this transaction. The agreement to voluntarily allow another to use one's Capital can in no one be interpreted as theft. Theft is the taking of property without consent. Consent has been granted. This does not preclude deception and fraud which can be committed by either party.
In a completely free, unsecured contract to borrow, utilize and return Capital to the creditor, there is nothing left of substance in the case of non-performance by the Debtor, other than the "agreement to repay". Since nothing is "secured", there is no value at risk by the debtor other than his agreement and his future access to credit.
Because of this fact and the vagaries of the marketplace which neither the creditor nor the debtor can predict, there is no recourse for the creditor. He has freely invested and lent his Capitol and it has become a casualty of risk. Only the collective force of government can shift the risk from the creditor to the debtor and coerce the repayment. It is the path of least force that would attribute the situation to the inherent risk of the markets.
There may be terms in the contract that specify the direction of the Capital. If this is the case, although the contract is still "unsecured" the agreement has introduced specific potential for fraud or deception. If the debtor hasn't carried out these terms as voluntarily agreed by both, he has been deceptive and the courts have the power to use force to compensate the creditor as they see fit. For example, if the contract calls for the construction of an office building in Des Moines and the debtor instead buys an island in the South Pacific, he has committed deception and fraud. If justice is served, it is likely the creditor will at the least soon own an island!
Any agreement that states remedies that would incur if the debtor defaults, is no longer an unsecured contract. The remedies are the security. The only difference is when the creditor takes possession or title of the security. If the debtor signs his property over to the creditor before the loan, that is security. If the contract calls for the debtor to sign his property over upon default, that is a remedy and may require the backing of the court to consummate the required action. A remedy has more risk in that the asset may not have its original value by the time the debtor defaults. This influences the burden of risk and the distribution of the return or the rate of interest.
A very important concept in relation to the creditor-debtor contract is that of "indentured servitude". A debtor could agree that in the case of his default he will "labor" or pledge the future products of his labor to the creditor. That is freedom of choice. But no one can be "forced" to labor against their free will. That is slavery or indentured servitude. So, the "enforcement" of a promise such as this would be the improper use of "collective" or government force. Still, the promise may carry some weight as debtors strive to preserve their credit standing and creditors may take this into account, if they choose.
This concept must be separated from any agreement in the contract to "perform" certain actions upon receiving the credit. This is simply the consent to "labor" in exchange for the compensation of the utility of the borrowed funds. Again, the debtor is not forced to do the labor but failure to do so would be a breach of contract. The debtor may also be liable for deception and/or fraud. In a sense, the debtor has been paid in advance for labor but does not perform the actions required. Courts would be just in awarding compensation to the creditor, if the creditor does not receive repayment of the loan from the debtor.
In contrast, the debtor who has performed actions called for in the agreement but is unable to complete the financial requirements of the contract because of the vagaries of the market and the resultant failed enterprise, cannot not be forced to perform additional labor to repay the loan. Again, this would be indentured servitude or debt labor. This particular situation could never arise in a secured debt transaction, since the creditor has possession of value that he has accepted as equal to or greater than the value of the credit, or has accepted the lesser value.
The key to a free economy is the absence or the limitation of force. The path that provides the least use of force is most commonly the freest way. This only makes sense. Being free to act without force is being free.
We have agreed as a Society that the harm and injury that results from theft, fraud and deception are valid reasons for the use of the "collective" or government force to rectify the situation and compensate those who have been victimized.
A creditor can certainly be harmed by the loss of Capital that occurs when an investment goes sour. But to justify the use of collective force to reimburse the creditor, who has allowed the consensual use of his Capital by another, the harm must be caused by and be the responsibility of the Debtor. The Debtor cannot be held responsible for that which is not under his control.
A good analogy would be the loaning of a boat [Capital] to a fisherman with the agreement that the boat will be returned and the boat owner will receive twenty fish [interest] upon return. It is entirely possible that the boat could be destroyed in a violent storm even though the fisherman is an excellent sailor. And, there is the possibility that even though he is also an excellent fisherman, no fish will be hooked.
Both parties have consented to the agreement and they both understand the risk that is involved in the enterprise. If the boat owner does not call for any value to secure his "investment", is it the responsibility of the State to determine and award that value if in fact, risk is realized? That coerced remedy would be a violation of the original contract which did not state security and an improper use of governmental force.
Secured debt is by its nature secure and only calls for government intervention in the case of deception or fraud. Unsecured debt is by its nature laden with risk of varying degrees. This is no reason to provide security through the use of the coercive force of government. Judicial review should be limited to the same areas that would apply to secured debt; deception and fraud. Other government involvement can only be considered intervention and an infringement upon freedom.
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Let me just make a couple of quick points so that you don't end up gagging on your own mistakes.
1) Unsecured credit is given to borrowers who are well-established and have the financial strength not to need collateral. Unsecured credit is only given (in sizeable amounts) to those who are financially STRONG ENOUGH to warrant it.
2) There is still recourse to recovering UNSECURED CREDIT. That's what CREDIT DEFAULT LAWSUITS are about. If you default on your unsecured CREDIT CARD, the banks still have recourse to recover it.
So, don't delude yourself that UNSECURED CREDIT is BAD. It shows STRENGTH not weakness.
As far as I am concerned, and the point of the article was that unsecured credit can be given to whoever the creditor wishes, that is their business alone.
And that was the point, it is their business [and capital]. Unsecured credit, is just that, unsecured. Other than deception or fraud, the courts have no business "forcing" the repayment of defaulted unsecured credit. Using collective force to coerce repayment of what results from the vagaries of the marketplace is simply government supplied insurance to the creditor.
Credit cards are a great example. There is no need for either regulation or court action to back up what probably shouldn't been lent out in the first place. Simply define it for what it is.
That's about the most garbled mouthful of jibberish I've ever read! You don't see the point I'm making at all because you're too concerned about trying to justify your own, and you don't realize that you don't have a point.
"It is their business" and "they shouldn't have lent the money" and "the courts have no business forcing the repayment of defaulted unsecured debt", blah, blah, blah. You're one of those guys who voices his opinion AFTER the big game. Well they should have done this, they shouldn't have done that.
And, to say that there shouldn't be any recourse for bad loans is like saying that if YOU sell someone something and they don't pay you, YOU shouldn't have any recourse to get your money back.
Ha! Ha! I don't know what dream world YOU live in, but it sure doesn't have much justice in it.
For example [rather the article example], a completely unsecured loan, credit "given" to a debtor without any security or backing, with only the promise to pay back by the debtor which is pervented by the vagaries of the market, without any deceit or fraud occurring on either side:
Are you saying you believe the repayment should be "enforced" by the State? should we set up a payment scheme based on the "labor" of the debtor? should the debtor be detained anywhere in particular?
You mentioned justice?
Tell me what you think should happen in the "boat" example in the article?
You really struggle with syntax. I can barely make sense of that first sentence of yours. I think, at the least, you're missing a VERB and a POINT. Although that could just be that I write in a different language than you do. You write in that wild-eyed, hysteria of someone out to BASH something, and I write in a more reasoned, calmer, easier to understand fashion. But, I'm sure you enjoy the FREEDOM to write as you please. Atlhough, if you were in a classroom, I think you'd find yourself sitting in the corner somewhere.
Anyway, your request to have me unravel "the boat" example for you is like a 6 year old asking his older brother to tell him about SEX. I'm not sure you will really understand it if you even have to ask the question.
Right in the first sentence of your "boat" example, you state that "the loaning of a boat [Capital] to a fisherman with the agreement that the boat will be returned and the boat owner will receive twenty fish [interest] upon return." Apart from the obvious difficulty with syntax (which you may think is a tax on sins like drinking and smoking, but is actually difficulty with grammatical structure), you have laid the foundation for an AGREED UPON CONTRACT.
If there is a breach of CONTRACT -- in this case, the fisherman does not pay the required fish -- then OF COURSE the boat lender has recourse on the fisherman. He could go to the man's house and take something of equivalent value or he could have the man thrown in jail, or whatever is believed to satisfy the obligation.
The obligation never becomes NULL AND VOID just because someone can't pay it. Ha! Ha! Only someone who regularly defaults on his obligations to pay would think that. Anyone who has ever lent something to someone else and not had it returned would see it in a much different light.
If on the other hand, you're trying to insist that there is no WRITTEN contract, let me add that there is ample legal strength in VERBAL contracts to also enforce the obligation. Not only that, but all the other fishing boat lenders would probably have the guy beat up and take MORE than what he owed if it were to be resolved without a court of law.
So, I think you miss the point entirely of what is involved in two parties agreeing to terms and conditions of borrowing. Whether the debt is UNSECURED or SECURED, it is still a debt that must be paid. The only difference is that with SECURED debt, the collateral is described. When you have UNSECURED debt, anything is available as recourse.
'When you have UNSECURED debt, anything is available as recourse.'
Really? where does it say that in the contract? if that is so, what then is 'unsecured' debt? If that is the case, why do we have bankruptcies and bailouts?
Your "unsecured" debt is simply debt secured by the force of the State.
Freedom is a concept that allows people to act freely. It doesn't transform itself to accomodate the whims of those who face and wish to transfer risk.
To give those who contract the most freedom and power to act, not to allow the State to determine and alter every situation and benefit whoever it wishes to advantage, the terms of the agreement must be honored. It is not the duty of the State to "invent" security after the fact, unless of course, you wish to "legislate" advantage. It is the duty of the State to determine only if fraud or deception have occurred.
Actors can agree to whatever they want, but if they haven't agreed to something, the State has no right to enforce what they haven't agreed to. That is simply common sense.
No one knows the future, that is the nature of risk. Again, this may be hard for you to fathom, but borrowing is not theft. The creditor consents to "loan" the capital and the borrower "promises" to pay it back. The risk is dispersed according to the security or lack of it.
The borrower must act in good faith or he commits deception. But, neither the creditor nor the borrower can control the future. When there is no security, they both share the risk that the debtors "promise" will be broken. The return is distributed accordingly. If the creditor wishes to include provisions that occur if the debtor fails to fullfill his promise due to factors beyond his control [ie. the fishing boat], then certainly that is his right. But, failure to do this during the agreement and subsequent use of the State's power to enforce provisions that did not exist in the contract is fraudulent and deceptive itself.
If you have any valid reasons why you think unsecured credit should be secured and insured by the government to the benefit of the creditor, when it can be insured by private firms with the consent and agreement of either the creditor or debtor, let me know. Otherwise, I believe you are trying to define "unsecured" debt as secured.
I'm not even going to take the time to go through this again. You should already know some of these things, but you pretend you don't. To ask a question as elementary as "where does it say that in the contract?" means that you haven't the slightest clue as to what laws and contracts are.
When I say that "anything" is available, it means that the defaulted borrower must pay with SOMETHING! Anything of value that he/she has is then "available" to be taken -- bank accounts, his home, his car, whatever -- to satisfy the obligation.
You have no idea AT ALL what UNSECURED means. It means that nothing IN PARTICULAR has been specified as collateral. It does NOT MEAN, as you seem to think it does, that you owe NOTHING if you don't pay the debt.
Don't even expect another answer from me on this issue no matter what you say. You're like talking to a blank wall.
So, let me get this straight, because nothing was mentioned in the contract, let's see, that means that "everything" or "something" was meant but not mentioned in the contract? Again, according to your logic, someone outside the bounds of contract, namely the government, knows what was meant by what was not mentioned in the contract, even though the parties to the contract don't know themselves.
I must be a "blank wall" because I just don't get how when "nothing" is mentioned, "something" was meant!
It is a very simple concept. When the creditor wishes no risk and little return, he can ask for complete security. When the creditor wishes high risk and large return, he can omit any security.
Currently if you are "favored" by the same government that decides where the risk shall lie, you are able to falsly "claim" no security within a contract, receive the high return and then if there is default due to conditions beyond the control of the debtor, such as market risk, revert to the same government to force collection.
If you think that is a "just" system, then that is your opinion.
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