The entire financial crisis of the late 2000s as it has played out has sprung directly from one source. All the affected industries and bad assets have at their core one problem: loan default. The drop in home prices stemmed from people with subprime loans, people who should by all accounts not have had loans in the first place, defaulted.

The first problem was the government push for all people to be homeowners. Not everyone needs to be a homeowner, nor should everyone be. The government guarantee on these loans was the cause of the predatory lending practices that pushed up home prices by 95% in the past decade, and thus was also the cause of the wave of defaults that ensued once prices started to nosedive.

The feasibility of a debtor’s prison will obviously require the government to stay out of the financial system, lest there become any incentive to entrap people in impossible loans, as there has been in the past. But barring predatory loans, one of the surest ways to boost confidence in the economy from the bottom up is a debtor’s prison.

I will first make the case that this is a proper role of government. What then is that? Most libertarians/minarchists would restrict the role of government, criminally, to the prevention of violent or fraudulent acts, and civilly, to the enforcement of contracts. While the government currently engages in all sorts of monetary insurance (FDIC, bailouts, FNMA, etc.) that conform to neither of these roles (and in fact work against them), a debtor’s prison falls squarely under the role of the enforcement of contracts, and effectively eliminates the need for the former. No man is forced into taking out a loan against his will in a nominally free economy, and every loan is contingent upon agreement to a contract.

If anything, default and bankruptcy are improper government shields against personal responsibility, and at its heart, every financial crisis has been predicated on mass failure to repay loans. A debtor’s prison will first of all decrease moral hazard and adverse selection with regard to loans. With real consequences for the failure to repay a loan, people will be more careful in seeking them out, and more wary to default. Though there still remains some degree of inalienable default risk (a creditor cannot follow a debtor beyond the grave), it would nevertheless be a real and fundamental decrease, and a remarkable stabilizer to economies everywhere. In fact, implemented in any country, it would be a great boon to investment as the fundamental risk is substantially mitigated.

As a sidenote, bankruptcy would still be a necessary option for businesses and corporations, as the amount of debt accrued thereby that would force it into a state of bankruptcy far exceeds the capacity of the culpable to repay in a lifetime of manual labor. This is, however, already taken into account in current risk analyses, and neither diminishes the effectiveness of the debtor’s prison for the individual debtor, nor is a disimprovement from the current state of affairs.

The debtor’s prison is not entirely punitive either: the goal is not to punish, but to restore the debt by the expenditure of labor to which the debtor is suited (one cannot complain that these people are being taken off the labor market, as one of the foremost causes of loan default is failure to contribute to the economy in the first place: people don’t pay back their loans because they don’t have jobs. Thus there is little, if any economic cost to the action of taking the debtor off the labor market). Perhaps this can be the provision of public goods such as roads and parks, as the government would be hard pressed to get such a mass hired by firms on the market (the monitoring costs would be far too high). In such a case, the provision of public goods is merely a natural outgrowth of the proper government role of enforcing contracts, rather than a completely separate function, as it is now. Though the burden of the repayment of the debts would ultimately fall upon the taxpayer in this model as well, the disincentives against default, as well as the merging of the public goods function with the insurance function, would still reduce taxpayer burden significantly.