Personal bankruptcy law will jump-start the lending market in Romania

Whenever we speak of capitalism, boom, bust, bankruptcy invariably we think of corporations.  I am also guilty of spreading this type of thinking as in my posts about bankruptcy I specifically referred to companies, banks, and states. Never once did I mention personal bankruptcy.  It is only fair, in my view,  that individuals should have available to them the same instruments available to corporations.  This is one more law that we need to implement in Romania if we ever want to become a developed country with a small state: personal bankruptcy law.

I came to this idea after talking with a lawyer friend last week over couple of beers.  We were discussing ways to free up resources. It was easy when we talked about capital. When we talk about a corporation everyone agrees that sometimes it is better to default and start over.  There is no stigma attached to it. No threatening calls from collection agencies, no credit bureau, no feeling that you are being a criminal. In fact even in Romania throughout 2009 and 2011 we heard of well known companies that filed for bankruptcy and most of the time analysts and bankers applauded the solution.  Moreover, the owners of those companies did not suffer any social stigma. They were still among the most present people in TV and still had access to financing or to start over other companies or restructure the old ones.

But if we allow this for our companies why don’t we allow it for our individuals? If it is ok and even recommended for corporations to go bankrupt why don’t we allow people that have mortgages worth much more than the actual asset to declare bankruptcy?  Why don’t we allow the individuals to do the smart thing?

I do not see a reason not to.  In the case of corporations the economic thinking is that by allowing it to go bankrupt it frees up resources and those can be employed better by other sectors in the economy.  In the case of states going bankrupt is a solution to stop the waste of public money to pay debts that it is impossible mathematically to ever be paid off.

The problem I see is once again the double standard. We treat our corporations better than our individuals when dealing with the same problem: debt.  Even today when real incomes of Romanians are falling, it is much easier for corporations to restructure their debt than for an individual. Not to mention the threats and humiliation an individual in Romania has to go through for missing one or two payments.  Indeed, at times the double standard is quite ugly and offensive.

Here is the problem: it is not in the interest of the banking sector to allow personal bankruptcy. As much as it is not in the interest of the banking sector to provide hedging instruments for individuals to protect them from the FX risk. For the latter it is cheaper to have a tacit deal with the NBR which will keep the exchange rate depreciating at a pace that is not alarming. But for the former I do not see why there is no political will to implement such a law, personal bankruptcy law.

I understand that many borrowers made mistakes and borrowed too much money and thus acted irresponsibly. But they did so enticed by deals that at that time looked to be too good to be passed. It turned out, as it usually does, that those deals offered by banks were in fact too good to be true.

As in the case of sovereign debt and banks problem we need to find a solution to the impoverished Romanian borrower and banks problem. Allowing personal bankruptcy together with easier restructuring terms and hedging instruments will  most definitely jump start the lending market.  Otherwise we will still get people backing out of their mortgage contracts, I.e. bankruptcy, only that the emotional and monetary costs will undermine Romanian growth for some time to come.

 

Effect of the restructuring event on the number of employees

Overall outcome of restructuring

16 thoughts on “Personal bankruptcy law will jump-start the lending market in Romania

  1. Good point! There was some talks about this personal bankruptcy law about 2 years ago …. but they where suddenly and mysteriously (from my point of view!!!!) pulled out from the public agenda :):):)

    1. Given the corruption in Romania many people will try to use this law, in collaboration with public workers, to their advantage, even though they may not qualify for bankruptcy.

      They did it when they received ill based pensions, they do it in the black market and they did it when they borrowed more money than they were allowed legally by declaring higher net wages. It’s the same pattern of behavior.

      Politicians don’t really want banks to go bankrupt because they already fund their system(i.e. con game).

  2. @Florin Citu
    “I understand that many borrowers made mistakes and borrowed too much money and thus acted irresponsibly. But they did so enticed by deals that at that time looked to be too good to be passed. It turned out, as it usually does, that those deals offered by banks were in fact too good to be true.”

    How do you guarantee that the exact same people will not make the same mistakes all over again? You can’t just pass a law to change the behavior of millions of people. Most people’s habits are too ingrained.

    People should be allowed to sell their homes, if they haven’t finished paying them, with the condition that all the money will go to the lender. Banks shouldn’t be allowed to stop a debtor from selling their mortgage and borrowing a lower amount from another bank.

    Example: Let’s say a person borrowed 40.000 euros in 2008.At the moment, the principal is 35000 euros. Now, the exact same apartment sells for 30.000 euros. And that person still has to pay 70.000 euro until he will have paid off the debt + interest if he does it month to month.

    A person in this situation should be allowed to sell their home at 30.000 euros with the condition that he will take a credit for the remaining 5000 euros with which he will pay the remaining debt to the bank immediately.

    I heard situations where banks don’t let the debtor sell their asset. This shouldn’t happen with the condition that you take a new smaller credit for the difference.

    The actual mistake is not that you borrowed 40.000 but that you lost 10000 euros from the price of the house + a few thousand euros in interest that you have already paid minus how much you benefited from the house because you lived in it.

    And plus and minus other expenses and benefits that are usually too small to count.

    1. @adrian t.
      All I am saying is that if we allow corporations to go bankrupts we should use the same rules for individuals. I am not saying your view is not right. Yes, there is a dose of moral hazard in allowing someone to bail on their obligations, but if you allow a group you should do it for all the others.

      hey, banks are allowed to go bankrupt and we have deposit insurance for that. So, allow individuals to go bankrupt and just buy insurance against that.

      1. “but if you allow a group you should do it for all the others.”
        That’s not a logical conclusion. If a law is good for everyone, it should be allowed for everyone. But in this case it’s not good for most groups. Some loose and some win depending on the context.

        The problem with bankruptcy like in US is that someone will support the costs. It’s a zero sum game. No value is added. It’s similar to what the government does with their interventions, subsidies and other similar things. It picks winners and losers. It doesn’t let the real world decide.

        In the end, what works will ultimately be decided by the real world. It’s just a form of procrastination and waste at a macro level to avoid reality. In the end, reality will catch and it will be that much harder to adapt to it.

  3. “I came to this idea after talking with a lawyer friend last week over couple of beers. We were discussing ways to free up resources. It was easy when we talked about capital.”

    You should brainstorm things like these with a successful entrepreneur and not with a lawyer. He will give you a law-based idea rather than a practical idea that makes a real difference.

    The world will be better with less lawyers, less accountants and less politicians. Here’s a lesson on this topic: (The context is a little bit different but it applies just as well.)
    http://gettingreal.37signals.com/ch11_Dont_Do_Dead_Documents.php

    Laws and regulations should be simple and easy to understand. Should make life easier not more complicated. Easier for everyone not for just a chosen few.

    1. @adrian T
      I have to be in total disagreement with you here.
      1) Bankruptcy should be a part of life in a capitalist society
      2) if you allow corporates to be protected by their creditors by a bankruptcy law than you should allow individuals to be protected by their creditors by a bankruptcy law
      3) any law can be abused, look at insurance law, but the cost of abuse will be born by the entire society through higher premiums. That is why insurance companies charge different premiums based on age, gender, type of car, history etc. Please do not bring the argument we should not have insurance. As I said before, I look for solutions to improve the current set up of the world/economy not just ideas that sound good on paper.
      4) A successful entrepreneur who is a lawyer is the perfect person to brainstorm about a law. Especially a lawyer that deals with bankruptcy law for corporations. Also, how do you estimate the social value of lawyers, accountants, politicians? Or should you put the lawyers, accountants and politicians in the same group? I agree that laws and regulations should be simple and easy to understand. But also should apply to everyone not just a chosen few. I speak from personal experience, a corporate will not hesitate to abuse the law against an individual. They have more resources and they can even influence the trial process. Especially if by law they have more rights than an individual. A good lawyer will protect you against these guys.
      5) I do not agree that bankruptcy law introduces inefficiencies. It might make people take more risk, like in the insurance case, but in the end it will make the deleveraging process easier and simple. Even in the US where the personal bankruptcy is allowed, because of the stigma associated with this most of the people keep paying their mortgages even thought their house today is worth much much less. Basically they are just throwing money out the window every month. But I did not see the shame on the face of Goldman, AIG, ING, GM, RBS, Media Galaxy, Diverta, when they used the law to either restructure or use public funds to survive. The problem is that the very same corporates have contracts with individuals who cannot ask for time to “restructure”. They do not have the luxury to have access to public funds or not to pay their creditors for couple of years until their personal finances improve. This is the mother of all double standards if I ever saw one.
      6) The main question I am asking is if a world were you allow corporates and individuals to go bankrupt and start over is a Pareto superior world to the one where you only allow one group or none? In other words is US a more efficient economy than Europe? My view is that yes, bankruptcy is part of a capitalist system and should be available as an option. Otherwise will just keep rolling bad debts into our personal/corporate balance sheet forever.

      1. @Florin Citu
        1)”Bankruptcy should be a part of life in a capitalist society”
        Why? Why should someone else pay for the stupidity of some people? No one makes you loan money. It’s not a mandatory thing so the borrower has to be responsible.

        The bankruptcy law is against the capitalistic system where both loses and gains count. If loses shouldn’t count, why gains should count?

        2) “if you allow corporates to be protected by their creditors by a bankruptcy law than you should allow individuals to be protected by their creditors by a bankruptcy law”

        I understand your assertion. But it doesn’t make any sense to have a corporate bankruptcy law for a corporation in the first place. That’s the real problem. You make a mistake, you pay for it. You earn money, you enjoy them. Otherwise, we would have to take from the people who make as well.

        You can’t just imbalance and system from one side and hope that you don’t do any damage. It’s like working too hard during weekends. You need to take time off during the work week in order to balance the system otherwise your life will soon become miserable.

        3) “Please do not bring the argument we should not have insurance.”
        Insurance doesn’t create any value, it’s a promise for the creation of value. We should have insurance that says for example: “If your car was destroyed by x date, you will get this amount of money for 100% of the repair costs.” Not insurance like: “If your car has been destroyed by the fault of other person who hit it in a certain way.” That’s not insurance. That’s gambling because the insurance company can play the loopholes inside the law system. And the gambling is even worst when the insurance is mandatory.

        4) “Or should you put the lawyers, accountants and politicians in the same group?”

        Yes, they are in the same group because they don’t add any value outside the system. Their jobs exist just because some people created a too complicated system to manage. Their jobs are almost entirely, something like 95%, dependent on these artificial systems.

        Politicians created their political seats with hundreds of people in the parliament and with thousands all across the country. Accountants have a job because there hundreds of taxes and hundreds of pages of laws. Otherwise, almost anyone would go and pay 1 tax and not worry about anything else. And lawyers have also a job because the laws issued by politicians are too complicated. The laws should be simple, easy to understand and few.

        Destroy these artificial and stupid systems and 95% of these people will be out of job. And that’s a good thing because they will be forced to do something that adds value. At the moment, they spend most of their time solving problems that don’t really exist in the real world.

        “A successful entrepreneur who is a lawyer is the perfect person to brainstorm about a law. Especially a lawyer that deals with bankruptcy law for corporations. ”

        No, it’s not, because he’s biased. Of course he wants more work. It will be quite easy for him to get more work and hire more people in order to solve cases in the personal bankruptcy sector. He already does it in the corporate bankruptcy sector for corporations as you said it.

        He is lobbying for more work that doesn’t add any value to the society at large. The work will add value to himself and for the people who made the mistake of borrowing too much money.

        I was referring to successful entrepreneurs in the private sector. Your friend is an entrepreneur but he is dependent on the public sector for his work. People don’t just buy his useful products and services. I don’t consider him as an entrepreneur in the real sense of the word. In the same way, I don’t consider any person who does business with the state as an entrepreneur.

        “But also should apply to everyone not just a chosen few. I speak from personal experience, a corporate will not hesitate to abuse the law against an individual. They have more resources and they can even influence the trial process. Especially if by law they have more rights than an individual. A good lawyer will protect you against these guys.

        Don’t you see what’s the problem? Lawyers want more laws so they can have more work. The overall society doesn’t benefit from more regulations. Only the lawyer, the state and the person with more influence do because they gain or not loose money.

        An amazing lawyer creates value for people only because the legislative system is screwed up. Otherwise, there would be no need for the lawyer’s services in the first place. His brains would do a better job for the society in any other business area.

        I do not agree that bankruptcy law introduces inefficiencies. It might make people take more risk, like in the insurance case, but in the end it will make the deleveraging process easier and simple.”

        Deleveraging sounds so innocent. This bankruptcy law will encourage the destruction of value and it will make other people pay for the mistakes of people who make mistakes.

        The easier and simple you make it to destroy value and not pay for it, the more value will be destroyed.

        “Otherwise will just keep rolling bad debts into our personal/corporate balance sheet forever.”
        The debt itself is not something found just on the balance sheet. Debt = money = represents value. You are not just cleaning a balance sheet. You are destroying the world and encouraging the people to destroy the world to an even greater scale in the future.

        ” The main question I am asking is if a world were you allow corporates and individuals to go bankrupt and start over is a Pareto superior world to the one where you only allow one group or none?”

        It’s not a Pareto superior world because someone else has to pay for another person to go bankrupt. The mistake he made involve other people’s money and resources.

        Let’s say I’m a bank and a lend 1000 to someone with an interest of 20% per year. If he doesn’t pay the principle and goes bankrupt I loose my money. If he pays the principle you may say that I’m not loosing any money. I’m actually loosing on the other side, because that money could have been put to better use and lent to someone who can pay it back. Even if I would waste the money on, it would have still benefited somebody. But the borrower took the money and invested in something that produces less than the input. That’s called negative inefficiency or value destruction. And he alone should be responsible for it, not me.

        “They do not have the luxury to have access to public funds or not to pay their creditors for couple of years until their personal finances improve. This is the mother of all double standards if I ever saw one.”
        Exactly and the problem is the double standard. But if we allow that luxury to everybody, who would be stupid enough to make their payment earlier if there’s no penalty for doing so or if the penalty is too small to matter? It’s nothing wrong with allowing someone to not pay for a while if they pay more in the future. I think that individuals already have this option included in the bank’s penalties.

      2. @Adrian T.
        Things are very simple. If you make a mistake you should pay. I hope you agree. You are a bank and made a bad investment you should pay.You are are corporate and made a bad investment you should pay. You are an individual and made a bad investment you should pay. Sometimes your losses from your investment are so big that you go bankrupt. I am not sure what you are disputing? The law? Fine, take it out for corporations and then we do not introduce it for households. But you cannot leave it like it is, you have to introduce it for households as long as you have it for corporations.

        I am not sure what you mean that if you declare bankruptcy someone else pays for your debt. you lose your house or other assets. How about the bank that gave you the loan for an overpriced asset? didn’t they make a mistake? how do they pay for it?

        Bankruptcy does not mean that someone pays for your stupid investment. Bankruptcy means stop loss. Game over. you pay for your mistake by being bankrupt. Yes,the other side of the contract has a loss, but it also has an asset (sometimes) but it too has to own up to its own decision.
        In every contract and transaction there are two parties trying to increased their own profits and odds. There is no innocent and victim.

        Finally, I do no know how else to explain that in capitalism we should have success and failure. In my view failure releases resources to be employed again. The “zombie” banking sector today keeps resources locked only to survive and fund the government. If we allow them to fail those resources could be put to use in other sectors of the economy.

      3. @Florin Citu

        “Sometimes your losses from your investment are so big that you go bankrupt. I am not sure what you are disputing? The law?”
        I don’t care about laws. I care about the value that is exchanged between parties. And the debtor makes the world a poorer place.

        I am not sure what you mean that if you declare bankruptcy someone else pays for your debt. you lose your house or other assets. How about the bank that gave you the loan for an overpriced asset? didn’t they make a mistake? how do they pay for it?”
        That someone omeone doesn’t pay the actual debt. It pays for your mistakes.

        Here’s the basic exchange of value:
        Debtor The world at large

        The world contains everyone but the debtor. The lender, your neighbor etc. are part of the world.

        What happens when you borrow money? You take something that represents value to other people from the world with the promise that you will return it back + interest.

        If you buy something or invest it in something that decreases in value and you can’t really pay your loan back, what happened?

        You, as a debtor, destroyed the value of the world represented by the money you borrowed. You made the world a poorer place.

        If you would have invested your own money and lost, then you would have become poorer just by yourself. And it’s your problem.

        If you stop there and declare bankruptcy, you didn’t actually destroyed your value(those assets you bought were never truly yours). You destroyed the value of other people that loaned you the money.

        If a person comes in your house, you lend/give him your furniture for 2 weeks to throw a party. You both sign a contract and he also agrees to buy you a brand new chair that represents your 2 weeks costs or interest. And after 2 weeks, he says that he has burned your furniture and he is bankrupt, what would you do?

        Wouldn’t you stick to get your furniture back until the last penny/part. And wouldn’t you want to also receive the interest for the time you didn’t make use of your furniture? It may take him 1 year to buy back to you a new furniture set.

        During this 1 year you don’t use your furniture. You would have used your furniture if you didn’t give it to him. Or you have done anything else with it. It doesn’t matter, it’s your furniture.

        What would happen if you wouldn’t do that? You would have lost 1 valuable furniture. And he would have lost nothing. Who’s the winner? The thief. Who’s the looser? You.

        Who became richer after this transaction? The thief who doesn’t want to give your item back. Who became poorer? You.

        And I’m not talking even what will happen if the thief gets away with it to a smaller scale. He will find other suckers and now he will make a profit out of it. He will not burn it by mistake. Then he will hide the money and he will declare bankruptcy.

        “How about the bank that gave you the loan for an overpriced asset?”
        The asset wasn’t overpriced if a person agreed to pay the price of the asset. It’s true that he didn’t have the money to pay for it and he borrowed them.

        Many people bought a Ferrari, aren’t they overpaying for it? Yes, they are by my own estimation. But they probably don’t think it like that. Value exists only in the mind of people. And it’s not overpriced if they think so.

        The price is what a buyer pays for it. A price can never be overpriced if a person decides that it’s worth it.

        “Bankruptcy means stop loss. Game over.”
        No, it means stop loss for the person who made the mistake — that’s the person who stole resources from someone else and he doesn’t want to pay for them. Normally, a person who makes mistakes becomes poorer. A poor person has less leverage to make mistakes in the future.

        People who make mistakes should become poorer because of their mistakes. And people who make good decisions should become richer and have more power in the world because what they do benefits other people as well.

        “If we allow them to fail those resources could be put to use in other sectors of the economy.”
        This will not happen without the elimination of the state’s demand for bank’s resources. This is the cause root. The state is in a position of monopoly created by force. They have the resources to pay back their loans, at least at the moment, because they take money from other people through taxes. Not because they necessarily create value and improve the world.

        The whole purpose of an economy should be to increase the prosperity for all. And you can’t do it by encouraging thievery. You do it by letting the people who make the world a better job to become richer and richer while they increase the world at large.

        “In every contract and transaction there are two parties trying to increased their own profits and odds. There is no innocent and victim.”
        If you go to a supermarket and you take an item and run with it, isn’t that stealing? Isn’t there an innocent and a victim? If you take money from someone, money that can easily be traded for a product or service, and you refuse to give it back, isn’t that stealing as well? Taking money away from someone is no different with taking away a product or using a paid service for free.

        The problem with lending and borrowing is that the transaction is not over until the borrower pays the loan back. There’s that time difference between the time they borrowed the money until they pay it back.

        This is why there’s a contract for the transaction signed by both parties. And during this time frame many things can change in the world. So both parties take the risk. The borrowed can die tomorrow and have no descendants and no assets.

        The transaction is not over until all the terms of the contract are completed. The borrowed agreed to some terms, he has to respect them. The same happens when you buy apples, you respect the price and he gives you the actual product now, not in 20 years.

      4. @ Adrian T.

        You think that when someone borrows money takes resources away from the economy? Unless that is the central bank I do not see what kind of monetary system you envision. Someone borrows money to buy something or invest which means those resources are always in the monetary system. If one does not pay back its debt it does not mean that it stole the money or that it destroyed value. Maybe you want to say that in the future people with the same profile will pay more than would have otherwise because they fit the “description” of a person that has a higher probability of default. What is actually happen is that you ask capital to be more productive in the future because creditors will charge more for it. In a twisted way you are forcing future entrepreneurs to be more innovative and get better return for their investments/purchases.

        When you borrow you agree to pay back plus interest. But that interest incorporates a probability of default, so the creditor already has priced in the fact that some of his clients will go bankrupt. Is not like the creditor is this benevolent institution. In fact in the absence of risk, competition among creditors should make interest close to zero or even zero. In the absence of risk, diminishing marginal returns will should make creditors expect less and less returns for their investments. Even banks in Romania know this very well as there are plenty of cases were the margin charged to a client was zero as all banks were seeing the client as risk free.

        Furthermore, there is such a thing called collateral. Besides an interest a creditor will ask for collateral, again because he/she knows that there is a chance of default. In case of default the only loss to the creditor is the future income stream from the interest payments, but that is the risk he/she took knowing all the available information.

        Irrespective of our different interpretation of the right to default of an individual , my point was that as long as you allow corporations and states to go bankrupt it is fair to allow your citizens to go bankrupt also.

        Finally, do you think that we would have seen the technological advance and investment in technology in the US if those people that borrowed thought that they could never be allowed to fail? It is the right to fail and start over again that makes capitalism work. But that is just my view.

  4. @Florin Citu
    “You think that when someone borrows money takes resources away from the economy? ”
    Not when he borrows the money but when he makes the mistakes. There’s a destruction of value. The world is less rich overall because that person invested money in a stupid way.

    Example 1: You borrow the money. But an expensive home and have to sell it for less because there’s no other way to pay back your loan. You lose 10% of the price of the home because the home is no longer new. And the rent would have cost you 5%. So you lost around 5%. The home is automatically less valuable.

    Example 2: You take the money, you start a business. The business flops. You have allocated resources in a poor way. The tools you used become harder to sell. There’s a destruction of resources that you have to pay for not the bank.

    “Unless that is the central bank I do not see what kind of monetary system you envision.”
    I’m not talking about a monetary system. Don’t translate what I say through money. Look at what money represents. Money is both meaningless and useless without something to exchange it for like a real asset. What happens is actually the exchange of assets through money. Money is just a layer on top of the real thing.

    “Someone borrows money to buy something or invest which means those resources are always in the monetary system.”
    Do you mean the paper inside the money is always there? But if it buys you less it doesn’t matter. And if you spent it on something that depreciates in value, you still lose. And if you don’t want to support the loses and declare bankruptcy it means that you didn’t respect the terms of your contract. The bank’s terms were to give you the money, and it did, and to respect the other terms like the interest rates, penalties etc. You were the one who didn’t respect the terms of the contract.

    “But that interest incorporates a probability of default, so the creditor already has priced in the fact that some of his clients will go bankrupt.”
    Did he price inside the interest the fact that the loan becomes less attractive because of the higher interest rate?

    Also, probability is something, the actual thing is something else. You seem to take the probability of default like something that exists out there. But it doesn’t. There may be more or less people who will go bankrupt or not. Probability in this case is just wishful thinking combined with conclusions based on partial information.

    “In fact in the absence of risk, competition among creditors should make interest close to zero or even zero.”
    That will happen only if they have access to an infinite supply of money. Otherwise, they will have other costs like finding people who would like to deposit money, marketing, wages etc.

    “Even banks in Romania know this very well as there are plenty of cases were the margin charged to a client was zero as all banks were seeing the client as risk free.”
    This is what I call a stupid decision.🙂 The client wanted the money right now. And they were stupid to work for free. Their time and resources to run the bank doesn’t have any worth whatsoever?

    These types of decisions only show what decisions people made. They don’t show how the real thing really works.

    “Furthermore, there is such a thing called collateral. Besides an interest a creditor will ask for collateral, again because he/she knows that there is a chance of default.”
    Yes, and this is a smart thing. And it wasn’t employed very often and rigorously before 2008. And the bank’s risk probabilities were dead wrong. Where’s the actual probability included in the interest rate?

    “In case of default the only loss to the creditor is the future income stream from the interest payments”
    The future income stream is not a lost. Something is lost only if it’s in the past. You can’t lose anything in advance.

    It’s nothing wrong with people paying back their loans ahead of time. Only banks seem to think the opposite and charge for the transaction. They think like a thief not like a value creator that improves the world and the economy.

    “my point was that as long as you allow corporations and states to go bankrupt it is fair to allow your citizens to go bankrupt also.”
    The problem is that money doesn’t have anything with fairness. You are asking to solve a monetary problem and a resource based problem with fairness. You can’t based anything on fairness in the real world. The world is not fair.

    A contract is something needs to be respected by both parties because it’s a voluntary contract. The terms of the voluntary contract should be law, anything else doesn’t really matter.

    “do you think that we would have seen the technological advance and investment in technology in the US if those people that borrowed thought that they could never be allowed to fail?”
    What you are saying is called:
    http://en.wikipedia.org/wiki/Confirmation_bias

    For what I know, people invented PCs in a garage. And the customers were the real investors in these companies. Phones become cheaper because there’s innovation. And why is there innovation? Because people have incentives to make better phones and to make a profit. There’s a real demand for the thing. And the phone is valuable. It doesn’t have anything to do with becoming bankrupt. It has to do with a manageable risk and taking chances.

    And there’s no real risk involved to become bankrupt if you invest your own money. In the worst case scenario, you would lose all you have without becoming bankrupt. The risk is real when you invest other people’s money. You don’t work just for your customers, you work for different parties.

    “But that is just my view.”
    Bankruptcy is not a perception. It really happens and affects more parties than it appears to affect. You don’t see all the parts just by looking at it from the point of view of the person who borrowed the money. His view is biased. He doesn’t take into consideration the entire system.

    1. @adrian T
      There is one thing you keep avoiding. Why allow a bank or a corporate or state to not pay back their borrowed money which means that you allow them to go bankrupt and not extend the same courtesy to individuals?
      In fact the question is : if we never allow anyone to fail where would we find the resources to move forward? The fact that we do not allow banks to fail in Europe makes Italy and all of us borrow more expansive.
      Even more moronic is the fact that we allow financial institutions that made a poor allocation of resources to stay alive to make more poor allocation of resources. That is destruction of value and inefficiency.
      “ Example 2: You take the money, you start a business. The business flops. You have allocated resources in a poor way. The tools you used become harder to sell. There’s a destruction of resources that you have to pay for not the bank. “
      In your example here you pay for it by losing your business, i.e. going bankrupt. It is the end of the story, you made a mistake and you lost all your money. Move on. The main point here is that the resources you allocated poorly are now free to use by others: capital and labor. Now someone else that wants to take a risk and start a business can employ some of that capital and maybe some of the labor and try to do a better job than you did. Don’t tell me that you consider computers an asset that was allocated poorly.

      “The future income stream is not a lost. Something is lost only if it’s in the past. You can’t lose anything in advance.
      It’s nothing wrong with people paying back their loans ahead of time. Only banks seem to think the opposite and charge for the transaction. They think like a thief not like a value creator that improves the world and the economy. “
      These two sentences here show me that you do not know exactly how banking works. Every loan has to be funded. That is the cost as banks do not make money (or capital) they borrow it. To make it very simple here is an example. I give you a loan for 5 days for which I receive interest. To cover my risk I take a deposit for five days for which I pay interest. You pay back your loan after three days. That means that I lose two days of interest income and I still have to pay interest for two days on my deposit. There are no feelings involved here is just how things work. You might think you are making me a favor by paying early but that would have meant to keep the “position” open and hope you will pay back in the future.
      I am not going to get into your last part where you assume a very weird world of benevolent technology developers and with perfect foresight. I know too many examples of entrepreneurs that had to start 4 or 5 business before making it to believe the story of some people developing technology because they assume the world want it. How about blue-ray, or mini-discs, or VHS do they seem like a big success to you? Those “inventors” took a risk and some failed. And the world is much better for it.

  5. @Florin Citu

    “There is one thing you keep avoiding. Why allow a bank or a corporate or state to not pay back their borrowed money which means that you allow them to go bankrupt and not extend the same courtesy to individuals?”

    I already mentioned it 3 times: don’t do it for either one. It’s stupid to allow a corporation or a person to go bankrupt. So, if it’s stupid for a corporation why would you apply it to an individual?

    It’s stupid because there’s a destruction of value as I explained in a previous post.

    “if we never allow anyone to fail where would we find the resources to move forward? ”
    No, it should fail. The person sells all the assets they have. And he starts from scratch and with a debt difference left to pay back. If it takes their whole life to pay for their mistakes, so be it.

    “I give you a loan for 5 days for which I receive interest. To cover my risk I take a deposit for five days for which I pay interest. You pay back your loan after three days. That means that I lose two days of interest income and I still have to pay interest for two days on my deposit.”

    Yes, banks borrow from each other and from other sources in order to give away loans. The problem is that they don’t have to do it. And it’s not how the banking system mandatory has to work, it’s how they run it. They could simply limit their loans based on how many deposits they have. Or list themselves on the stock market and get money from there. They don’t have to borrow money in order to loan them.

    It’s nothing wrong with being a small bank that grows quietly over time and it’s funded by entrepreneurs as stakeholders and not as lenders. Or simply by its customers.

    “That means that I lose two days of interest income and I still have to pay interest for two days on my deposit.”
    Normally you don’t have to lose any. But you lost because you didn’t lend your own money as a bank. The problem is that by design banks operate as a parasite. They leverage things and have no regard for property rights. The moment you un-link money from the real assets and products, you are getting on shaky grounds because you start basing your assumptions on human emotions and states like perceived risk, confidence, risk aversion etc. You become out of touch with reality.

    “You might think you are making me a favor by paying early but that would have meant to keep the “position” open and hope you will pay back in the future.”
    No, look up again at what I said. The customer is not making you a favor. The problem is that the bank’s interest is different from the customer’s interest. This is the real problem. And this conflict leads to inefficiencies.

    “I am not going to get into your last part where you assume a very weird world of benevolent technology developers and with perfect foresight.”
    I’m not an idealist in my views even though I might appear as such.

    I’m just saying that the banking system, the political system is not based on solid principled anchored in reality. They behave like parasites and they will gradually reduce their power. It may take 10-20 years, or even more but they will change dramatically.

    These technology developers didn’t borrow huge sums of money when they got started. They risked but to a small scale. They tested their ideas. And they made sales. They didn’t risk bankruptcy.

    There’s out there the myth that entrepreneurs are risk takers. It’s not actually true. Entrepreneurs take chances and the most successful ones don’t engage in a new venture unless they know what they can afford to lose.

    Most people don’t take chances and stay in their comfort zone all their lives.

    “How about blue-ray, or mini-discs, or VHS do they seem like a big success to you?”
    There are millions of people in US who are millionaires in net worth. And you never heard of them. And most of them were growing their assets over time and without too much risk involved. They had one or two businesses and they provided quality services to their community. They saved, delayed gratifications, educate themselves about investing and had patience.

    You can figure out how a system works but looking at most people who use it. You don’t just look to a few exceptions, in this case the technology entrepreneurs. A system is not defined by its all-starts. It’s defined by how it works for most who actually try it.

    Most of them are not benevolent but among the results of their work, you will find happy customers. Value is not necessarily something good. Value can be a scary movie. Value can be security alarm. Value can be taking money because they joined a cult and you are their leader. Value can be having an surgical operation.

    Value is what other people believe as valuable. Banks at the moment through many of their practices destroy value. It’s nothing wrong with loaning money. It’s something wrong when you depart from the capitalism and private property.

    As a bank, you might think that you are smart. But you are smart for a while. Without the money printing from the governments almost all banks had to collapse. At the moment, most states are bankrupt too. We will see how this will end but it will not end good for the banks. They will have to change dramatically in order to survive.

  6. Hi Florincitu,
    I know what you mean, The bankruptcy laws in the United States vary from state to state and the Florida bankruptcy laws are also not an exception. If you are planning to file for personal bankruptcy, it is important for you to understand the specific rules that are applicable in the state. In order to make things easier for you, I must clarify that the main difference in the insolvency rules of the various states, lies in the way the exemptions are interpreted. Every state has a specific set of rules for various property exemptions, other than the exemptions as specified under the federal exemptions.
    Regards

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