It appears that the Labour party has decided that, in some cases, contracts shouldn’t be enforced. Phil Goff has suggested that people should be able to easily break out of their fixed rate contracts to jump on a lower interest rate.
I tell you what, while we’re at it why don’t we also make it that employers can break contracts and make employees reapply for their jobs when wage rates are falling (when unemployment is high)? Why don’t we make it the contracts are only a suggestion and have no actual legal force in setting the price and quantity in a transaction.
I’ll tell you why – because contracts act as a mechanism to prevent “hold-up” between agents. It allows trade to happen in places where issues of bargaining power prevent efficient trade.
People committed to a mortgage in knowledge of the costs and risks – why should we suddenly make banks pay for that? If the government goes around intervening in contracts, will the banks be as willing to loan to people who want to buy homes anymore?
Wow, I’m glad that we don’t have Labour in charge in this tough economic climate …
Update: Anti-Dismal covers here. He provides a tighter argument for hold-up than my rant 😉