Topic: Regulation
How Our Government Secures the Unsecurable. When it comes to debt and contracts, the actions of government are hardly impartial.by Gene DeNardo
(libertarian)
Thursday, September 24, 2009
There are two basic forms of the credit-debt situation and they couldn't be different than night and day. While the conditions that accompany secured debt are as plain as day, unsecured debt exists in a murky and dark world.
Secured debt is simple. In actuality, it is a transaction in which the creditor temporarily purchases a good that the debtor owns. The creditor holds this valued good physically and/or by contract and returns it after a period specified in the contract. The creditor if all goes well, by the end of the term has received a greater sum back than he originally paid for the good, either through payments or a lump sum. The debtor if all goes well, has received the use of the creditor's capital for a time and at the termination of the contract receives his property back.
The creditor is not assuming any of the risk that the debtor may apply to his capital. He is simply exchanging capital for the debtor's value and then exchanging the value back for the original capital and interest. If the debtor invests unwisely, the creditor keeps the debtor's property. It is up to the participating parties to determine if the value of the "secured" property is equal to the capital value.
Unsecured debt instead, relies completely on the success of the investment to "secure" the contract. The capital must be used wisely and the markets must prove hospitable for the creditor to receive his capital and hopefully interest back at the end of the specified period. Because of this, there is substantial risk to the creditor.
A lot of unsecured debt is what is referred to as "consumer" loans. An individual may need money for a purchase and "promises" to pay the funds back through time. You might ask, what exactly does this have to do with the markets?
Everything. Anyplace capital goes and expects a return; it has created or facilitated a "market". The "individual" debtor is an actor in this capital market and his past performance and future plans estimate the risk. The creditor Capitalist is also an actor and contemplates the risk and the "rate" at which he will accept this risk. The creditor consensually agrees to risk his capital in this market. At least, it appears so initially! However, this is not how it plays out in our culture.
To complicate matters, the government steps in. Obviously, there is a role for the courts when fraud or deception has occurred. This is why we have courts. But, government and the court system have been and are determined to "adjust" the risk factor by backing some forms of unsecured credit with force, while ignoring others. While, this force in itself is a form of unnecessary intervention, the application of this force is done in a manner to advantage some and disadvantage others. By pointing out the inconsistencies in the application of this force, we realize just how partial the role of government has been regarding unsecured debt.
Bigger and corporate seem to be better in the eyes of the government, while smaller and individual seem to be a drawback. If you are a big and corporate creditor, chances are the government will forcefully back and "secure" the unsecured contract, while the little, non corporate guy is out of luck.
While all unsecured loans are simply markets, the rules are changed by referring to some as "investments" and others as "loans". We expect to find risk within the investment category, yet we demand that the loan category is risk free to the creditor. Sure, the creditor may get the same or even fantastic interest with "loans" such as credit cards, but since we don't consider these "investments", we expect and demand the capital to be returned, no matter the "market" conditions. These statements aren't conjecture; these conditions are backed by law.
The role of "contracts" in this realm is a given. Most all unsecured debt is bound by a consensual contract between at least two parties. Since, both have agreed to a contract that involves no security, one would think that if the future proved that the debtor had no ability to completely fulfill the debt obligation despite his best efforts and no security had been agreed upon, then that would be that. But, this is definitely not the case. Our ever watchful government has decided that certain creditors should get paid and certain should not. Likewise, certain debtors will have to pay and certain get off cheap.
It is curious where the actual contract originates in relation to the terms we use describing these "investment-loans". In the majority of "investments", the debtor writes the contract. In the majority of "loans", the creditor authors the contract. In both cases, in the bulk of these situations the creator of the contract is a corporation, and usually a big one. It doesn't seem to matter who has the game ball, the rule book is written by the same team.
Some will bring up the point that "investments" are loans that are directed to capital producing markets, while "loans" may go to individuals. Well, every individual is or has the potential to be a laborer. If you think capital can be produced without labor, have at it. Even a loan for food, is an investment in labor which hopefully produces capital. The word itself means "to clothe". What is at issue is not the type of loan or who or what it may go to, but the risk and reward involved. All unsecured loans are investments and all investments are loans.
Investment in "public" stock is an interesting concept that can best be described as unsecured ownership or paper ownership. Unless one has a majority interest, there are few actual ownership qualities. And, there is really no credit-debt relationship. The original purchase may be best described as a "donation" to the corporation with the hope that some small interest or return will be periodically rendered and the larger wish that another "buyer" will see your "ownership" as more valuable than you did. In any case, you can be sure your "debtor" will not be repaying their loan. In the case of insolvency, there is always government instituted corporate "limited liability", to insure your "donation" was just that.
Getting back to the true credit-debt scenario, corporate and municipal bonds are often unsecured. All of course, are accompanied by a "good faith" promise of repayment, with of course, conditions. But, we all understand that they may NOT be paid back and we could lose our money. And again, limited liability looms behind the scene, waiting to limit who and how much would be paid in case of poor business decisions or the consequences of an angry market. Seldom will the government be found forcing repayment, especially on their own bonds.
The exception to this is "bailouts". It seems when behemoth corporations owe other behemoth corporations and don't have the funds, the government feels the need to step in with the taxpayer's money and help out. We can be assured that this is all for the "common good"!
What of annuities, those loans, err, I mean. insurance company investments? Most states require insurance companies to join Gauranty Association. There is some recourse but annuities themselves often have no guaranteed value. In other words, money can be lost. Your loan to the insurance company can go away. Naturally, this should properly be called an investment.
What of that most common of investment loans, the bank account? You might ponder that the insurance provided by the FDIC would run counter to the basic argument presented in this article, that the little guy pays and the big guy walks. Doesn't FDIC insurance protect the individual investor creditor from poor decisions of the corporate banks?
Sort of, but with the individual taxpayer's own money. The FDIC collects relatively small amounts of premiums from the banking industry and never enough to be prepared for even a moderate run on the banks. But, their power to draw money from the taxpayer, who is also the same depositor, and the ability to print money and devalue the citizen's currency, is endless. So, we back our own bank deposits with our own money.
And to be honest, the primary goal of FDIC insurance is to keep our money in banks, where wise bankers can decide where to invest our money, rather than slow witted depositors. Even the slow witted depositor would demand real return from their funds if the mirage of FDIC self insurance were removed and the true risk uncovered. The banking cartel would be in bad shape if they had to actually compete for depositor's funds, rather than having the funds bestowed upon them through government insurance policy.
The bulk of individual consumer and small business loans are unsecured. But, that is where the similarity ends. While the agreed upon contracts may be unsecured, government policy, laws and the courts believe otherwise. Failure to pay up can have disastrous consequences. Collection agencies are busy enterprises. There is no "limited liability" protection for the individual and because of this, bankruptcy is serious business. Your debts will be "reorganized" and you will spend your life laboring to repay them. Unlike "investment" debt, personal debt is extremely hard to escape. Pay up, it's the law!
Something like 60% of bankruptcy proceedings are based on medical debt. The "patient" cannot afford to pay for their medical treatment. The majority of these cases involve uninsured patients. And, for some interesting reason, the uninsured are charged four or five times the cost for the same "insured" procedure or service. Must be "bulk discount"!
Curiously enough, your outstanding debts will be repaid to, you guessed it, corporations. This is not a two way street. While we consider non secured "loans" individuals make to corporations an "investment" and subject to the risk of the marketplace with the possibility of no recourse for non payment, we consider "corporate" loans to individuals and small businesses as "loans" with repayment enforced by our fair and just government. Surely, just a coincidence.
What are we saying here? We should all be able to skip out on debt? In simplest terms, other than enforcement of fundamental laws concerning fraud, deception and theft, the government should not intervene in "unsecured" debt. Whether corporate or individual, big guy or little guy, if two consenting parties agree to transfer capital without security, it is their business. They are consensually agreeing to undertake the risk of the marketplace and what will be, will be. They are waging capital into the unforeseen future, a place no one has actual knowledge about until they get there. Let the loaner beware. Government has a role in enforcing the terms of a contract, not adding security where none is accounted for.
This does not pave the way for unscrupulous permanent "borrowing" of capital. If the debtor party does not fulfill the terms of the contract to perform in good faith, they have been fraudulent and/or deceptive. But, a "promise" to repay no matter what, is not good faith but "blind faith" and is out of the jurisdiction of the government and the courts. No one can describe future events and guarantee a return on capital. This should apply across the board, whether individual, small firm or corporate.
Many say they are for less government and they speak truthfully. They are for a little less government here but not there. Remove a few regulations here but leave some there. Get government out of our lives where it benefits you, but leave a bit where it advantages me. It is very hard to let go of advantage, just ask Barry Bonds.
It is not the role of the State to help us decide where to "invest" our capital. It is not the role of government to back with force that which we failed to back with security. It is not the role of the State to "insure" the future for us. It is not the role of government to define what we do with our money or treat the same action differently depending on the social position of the actor. We can all be "secure" in this realm, without the intrusion of the State.
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The views expressed in this
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