Falling confidence that debts will be repaid has consequences . . .
There are many things that -still- function today, but once a trickle becomes a flood, will cease to function. Bank runs are the most obvious example – as soon as more than a handful of people withdraw their deposits, banks close their doors. Those who expect to be bailed out by deposit insurance are in for a nasty surprise, as deposit insurance won’t be worth the paper it’s written on in a systemic banking crisis.
Pension funds are chasing yield, buying the financial equivalent of ‘land-filling toxic waste’. Many pension fund assets will be worth pennies on the dollar as soon as extend and pretend can no longer be maintained and there is a serious price discovery event.
The structure of the credit default swap market virtually guarantees that such an event will take place in the next phase of the credit crunch.
In short, pension funds are in serious trouble. As a result, we are already seeing moves towards preventing early withdrawals, ostensibly to ‘prevent people from impairing their retirement’. In actual fact such moves are meant to cover up the lack of funding for as long as possible. As with bank runs, the first few to make withdrawals may get their money, but, again, once a trickle becomes a flood, the door will close.
Another such problem area is the consequences of indebtedness. Presently bankruptcy is relatively civilized in comparison with earlier eras. However, such a situation is highly unlikely to persist. Expect less civilized methods of dealing with debt to resurface. In fact, they already are. See for instance this article from the Minnesota-St.Paul Star Tribune:
It’s not a crime to owe money, and debtors’ prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts. In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.
As the article goes on to discuss, debts which are at risk of non-payment are often sold on to those lower down the financial foodchain. Debts can be sold on multiple times, to operators prepared to use harder and harder tactics, until the debt can end up in the hands of ‘Vinny the Knee-Capper’, or equivalent.
It doesn’t appear to matter that debt is not a criminal matter. We are seeing the early stages of the return of debtors’ prisons and other less palatable consequences. Debtors beware.