"I am from the Government and I am here to help”. In one of those iconic outbursts that would do so much to the popularity of his presidency, Ronald Reagan called these eight words as the most terrifying in the language Englishwoman. But beyond the shrillness of that supporting actor blessed by fate, the expression contains a truth that insistently whispers in our ears that the road to hell is paved with good intentions.
Altruism, that generic inclination of the species to help the other, is part of our evolutionary nature, although it is conditioned by the brake of reciprocity. But when someone else pays the bill, we step on the accelerator. And when the driver is a politician whose main incentive is to remain in office, there is no speed limit that cannot be crossed in this wild race to add another notch to the blazon of solidarity.
And although it is still in relatively good health, solidarity has been showing signs of exhaustion for some time now, of a senescence worn by use, of a glow that shines illuminating its darkest side. There is also a perverse moment in solidarity that appears when the equation that distributes the costs shows a negative balance in the income statement.
The current regulations that regulate the popularly known as "second opportunity” or more technically exoneration of dissatisfied liabilities (EPI), is a paradigmatic example of how legislation designed to help those disadvantaged who have been trapped in a spiral of debt, often the unforeseen consequence of an unexpected misfortune, has become a fraudulent instrument that generates perverse incentives, that favors the proliferation of irresponsible financing and that enriches a minority that has professionalized a kind of usurious business.
The cancellation of the accumulated debt in situations of insolvency seeks to reincorporate into the circuit of economic activity all those who have been temporarily displaced by virtue of supervening circumstances that are largely beyond their control (economic crisis, unemployment, etc.). It therefore has an easy macroeconomic justification: in the medium term it should increase activity by incorporating idle resources into the system. And from the social point of view Aid to those most in need is always an extraordinary political sounding board, a formidable echo chamber that no one who wants to survive in the electoral competition will ever dare to question.
Problems appear when we descend the steps that lead to the details. The market is an extraordinary resource allocation mechanism, but its proper functioning requires a legal basis that guarantees proper compliance with obligations and contracts. It is also, a complex system and when distortions occur in the value chain the effects are rarely linear and difficult to measure and quantify.
And this is precisely what has happened with the legal regulation that exonerates unpaid debts. The economic agents that operate in the market detect the cracks in the system with much greater precision and speed than the regulation that tries to cover them up. When a door is opened and rigorous control is not established, we run the risk of meeting all kinds of undesirable passengers. Unsurprisingly, the unwanted side effects have far outweighed any benefits that could be gained.
In the first place, there has been an extraordinary increase in the demand for insolvency applications in order to obtain the exoneration of liabilities. The number of bankruptcies has multiplied to the point that today they constitute more than seventy percent of the activity of commercial courts. In some casos, more and more numerous, it is observed that insolvency is purely artificial, a mere appearance created exprofeso to obtain the benefit of forgiveness since the liability is iscaso and, in everything caso, perfectly manageable with the income obtained.
The classic effects traditionally associated with perverse incentives also appear; the systematically irresponsible behavior of those who enjoy the privilege of immunity. The so-called "moral hazard" makes its triumphant entry into the exoneration system, spreading its pernicious effects like an oil stain, from the reckless request for a multitude of fragmented loans to the intentional accumulation of debt in order to apply for bankruptcy. Consumer loans of all kinds multiply on the dates close to the bankruptcy request because those who request it, duly advised, know in advance that they can always count on the generosity of a system that previously victimizes the appearance of indigence.
And naturally when blood runs, predators always sniff it out. One of the most significant virtues of the market system is that it transforms each opportunity that presents itself into value.. Sooner than later, everything that is capable of becoming a business will find an entrepreneur willing to manage it. And even, the market is capable of transforming into a business what apparently is not. It can be paradoxical to find a profitable niche in the dark and opaque world of the fracaso and bankruptcy, but economic agents detect value where it exists and exploit it. The world of insolvency has become a business, even at the level of individuals, for some professionals and companies that are capable of obtaining profitability from the huge volume of cases they generate. They are the main beneficiaries of the entire system. And there is no moral reproach in this statement; it is only a consequence of the design of the structure.
And then there is the best. whatWho pays all this huge bill? Someone, naively, might think that since a large part of the exonerated debt is made up of loans granted by financial institutions, it would then be the banks and other credit institutions that would have to "bear the expenses" and bear the costs of the exoneration. Nothing morally questionable. The "depraved bankers" who make "extraordinary profits" are not very popular in public opinion. No one would dare raise their voice in his defense. But the truth is that they don't need it either, because it is not the banks who pay the invoice. They are the professionals, the suppliers, the merchants, all those who do not have market power, those who cannot shift the costs because the competition forces them to adjust the margins, to assume the losses derived from non-payment. They are the true financiers of this labyrinthine and perverse carousel in which a multitude of intruders and free-riders comfortably travel..
Banks and financial institutions with the capacity to pass on prices know very well what they have to do. In reality, they behave quite rationally: they simply, pass the costs on to creditworthy customers. This undoubtedly makes loans more expensive. but demand is inelastic enough to support the increase. And while rising credit is bad news for the economy as a whole, it may not be for banks in particular.
And thus, virtuously, the circle of solidarity closes again. At some point in that circuit there has been an operation alchemical mutation, But nobody perceives it because it remains hidden under the velvety surface of generosity. It is a kind of hidden tax that, as in the caso of inflation, those who pay for it lack sensitivity to payment, with the difference that here the distribution is not random but purely selective.
Naturally, this long march towards privilege and immunity is only possible because of the almost complete lack of control. There is no administrative or judicial instance that performs an effective filter in the application of the system. The courts have very few legal possibilities and even less means to establish an effective selection system, which avoids the accumulation of the perverse effects that any distortion of the functioning of the market entails. And worst of all is that we lack any evaluation or follow-up mechanism. We should learn from the Anglo-Saxon world. We often censure his obsession with measure and quantifybut it has many virtues. Among others, it allows us rectify the mistakes. There is no secret in it. It is about trial and error, a success story, the application of the scientific method that, since the dawn of humanity, has brought us here.
Alvaro Lobato Lavin
Magistrate of the Mercantile Court 2 of Barcelona. patron of Fide.
Article originally published in the Blog Fide in the withfideinitial