The Ethics of Debt

August 28, 2007

The subprime mortgage loan crisis has been on the forefront of the news lately and has provoked an international financial crisis. According to Inside Mortgage Finance approximately one-third of mortgage loans belong to the subprime category. The recent increase in defaults is what has caused the crisis.

According to Habitat for Humanity, 95 million people in the U.S. have a housing problem. That represents approximately one-third of the nation.

Debt is at the very heart of the way we do business and plays a central role in our economy.

The U.S., has the highest consumer debt in the Western world. It has reached a staggering level of $ 2.17 trillion, according to the Federal Reserve and represents more than $20,000 per U.S. household.

Credit cards can mask the reality that one is spending real money. Studies have shown that people are less likely to buy (or spend) when using cash. Clarke, the Webmaster at Ruder Finn, told me the following anecdote: When she was 18, she decided to buy a pair of Chanel ballet flats — shoes that cost $500. She did not want to purchase them with her credit card because, although she paid her own bill, her mother might see the statement and know she was spending her money frivolously. She had saved enough money baby-sitting to afford them, but once in Bergdorf Goodman, with the $500 cash in her hand and looking at the shoes, she just could not do it!

The question for a consumer before a purchase often is, "Can I afford it, because my credit is good and I can pay the interest on this purchase?" When it really should be, "Can I afford it because I have money in the bank?" According to the National Housing Institute, millions of households are stretched so thin that they are just two paychecks away from homelessness.

A higher salary often means improving one’s lifestyle and that translates into more spending instead of savings. Sometime ago, I spoke with an executive in his late fifties, working for a large U.S. corporation. Although he has a very high salary and has for many years, he told me that he could not afford to retire!

What are the values and ethical consideration involved in the issue of personal debts?

I can think of three:

1. Responsibility in spending, making the right decision between what is necessary and what is superfluous? We also have to take responsibility for our own financial situation.

2. Wisdom in making provisions for the unexpected and difficult times that may lie ahead, as well as for eventual events such as retirement.

3. Honor in the will (and intention) to pay back creditors at some point. After all, a debt is a promise to return the money borrowed.

The poet Henry Wadsworth Longfellow inspiring words can guide us:

He looks the whole world in the face for he owes not any man.

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