Much of the post-crisis focus on debt has been on making debt safer – on restricting debt and deleveraging debtors. Insights from behavioural economics and the economics of financial crises inform us why disclosure-based regulation is inadequate to protect both the individual and society. For the individual, the problem with disclosure-based regulation is cognitive. Individuals lack adequate rational capacities to evaluate debt to promote even their own self-interest. Governments have become increasingly paternalistic in the regulation of debt. For society, too much debt is a collective action problem. Debt can cause substantial private and social harm. These harms are related. Without product-based regulation and access to credit restrictions, private actors are prone to take on too much risky debt, exposing overly leveraged financial institutions to further risk, in turn risking an economic recession of national and even global scope.

Because of these dangers, the overriding policy aim for debt regulation has come to be almost singularly that of economic stability for the economy as a whole, a mandate to restrict and deleverage, regardless of the burdens such a regulatory design imposes on various categories of debtors. Debt presents a dilemma for societies: we need debt to make our lives go well, but we also need to avoid debt to make our lives go well. In other words, debt can be bad for people, firms and governments, but so can restricting it.

My working paper, Debt in Just Societies, challenges the regulatory design of debt regulation based primarily on economic stability. With an overriding focus on economic stability, the moral requirements of egalitarian justice are almost wholly ignored in policy discussions about the design of access debt regulation. Economics tells us a great deal about how to measure the economic effects of inequality and what these effects might be on, for example, consumption or economic growth, but it does not tell us whether the inequality in question is right. A suitable theory on distributive justice, such as the luck egalitarian approach developed in this paper, fills the gap.

Access to credit is a resource used to achieve something important to the life projects of persons, usually to acquire important resources essential to those life projects, such as in the purchase of a home; to borrow to pay for a university degree; to use a credit card to avoid spending savings budgeted for other purposes; to use personal credit to finance the start a small business; or to use credit to pay health care bills if government fails to provide basic health care. A home mortgage, for example, finances more than a place to live. Priced into the housing market is access to good schools, locations with low levels of environmental pollution and health hazards, and access to good transportation and other public infrastructure. The less well off a person is in society, the more she must rely on debt for access to these basic resources. The focus only on economic stability in regulatory design leads to substantial restrictions on access to credit for those most in need of that access.

My paper, develops a set of principles to assist policymakers in the design of debt regulation to take criteria other than economic stability into account, but which do not undermine the aim of economic stability. More sensitivity to equality concerns in law and policy should lead to developing incentives to promote hybrid instruments to relax the rigidity of debt in appropriate cases. Some forms of debt are more egalitarian sensitive than others. I argue for a plural approach to regulating debt. A spectrum of normative principles should be at work in regulatory design, from efficiency as an overriding norm for many forms of corporate debt but with more sensitivity to egalitarian demands for other forms of debt.     

John Linarelli is a Professor in the Durham Law School and the Co-Director in the Institute of Commercial and Corporate Law.