When you really look at it, the entire premise that there is a moral obligation attached to repaying debts that were extended to you based on an evaluation of your credit simply doesn't hold water. Regardless of what the recorded message says when you call your bank's toll-free number, they don't value your business - they value the potential profit the business you do with them represents. The bank's motivation for doing business with you has nothing to do with morality - it's profit. There's absolutely nothing wrong with that fact, since a bank's stated purpose is do conduct business in order to enhance shareholder value. If you don't like it, find a different type of banking relationship (such as a CU, perhaps).
When banks lend money, they do so by evaluating basically 2 primary factors - risk and profit. Morality has nothing to do with it. Now, for some convoluted reason, there is this expectation that a borrower should repay this debt due to some some moral obligation. This is where I call BS. Why should the borrower be bound by morality, when the bank is not? If the borrower doesn't pay, is the bank's decision to repo the collateral based on morals? When the bank signs an order to have a former owner evicted from what was once their own property, is that decision based on morals? ABSOLUTELY NOT! They are simply following the terms of the contract. But, that street runs both ways! If a borrower determines that it's in his/her best interest to not fulfill the terms of a contract, that's a business decision. The consequences of that decision are clearly outlined in the contract, which should enable the borrower to do their own risk/reward assessment and make a decision. It's the same with a mortgage, credit card, car loan, or anything else. Banks breach contracts all the time when it makes financial sense for them to do so. Consumers need to approach these contracts with the same mindset.
As for the premise that homeowners should do the "responsible" thing, and continue to make bad business decisions by throwing away good money after bad in order to keep their neighbor's house from dropping in value or other similar arguments, again I don't think these arguments hold water. The problems with our housing market are systemic. Sure, it's worse in some areas than in others, but there really isn't anyone that hasn't been impacted. Until the system as a whole starts to re-balance itself, which is a ways off, the best each borrower can do it make a determination for their own situation.
Then why did some of the most severe bubbles and crashes in our history happen when we were on the gold standard, long before the Fed came to be?
Small bubbles and corrections are normal. It's called Austrian Business Cycle Theory. Fiat money, however, exacerbates these normal events and turns them into the monster bubble/crash/recession/recovery cycles we all know and love. An example would be the economic crash following the civil war. Lincoln took the US off the gold standard during the war, and as a result, the economy crashed shortly after the war ended. Luckily the government didn't really try and "fix" the problem, allowing the economy to recover pretty quickly.
The worst crashes, However, have been a result of Fed manipulation of interest rates, followed by manipulation of the money supply. In the crash of 1929, the Fed had been manipulating rates, causing a bubble. When the market crashed, FDR massively inflated the supply of money by forcing all Americans to turn in their physical gold, then resetting the price of gold from $20 per oz to $35 per oz. That along with the biggest binge of reckless government spending in history up to that point caused the depression to continue for a decade. If you can't see the parallels, maybe a couple of books would help -Meltdown
by Tom WoodsEconomics in One Lesson
by Henry Hazlitt