Dubai: Land Without Bankruptcy

Via Megan McArdle, a story of a Canadian woman down on her luck in Dubai:

Her husband, Daniel, bought two properties. “We were drunk on Dubai,” she says. But for the first time in his life, he was beginning to mismanage their finances. “We’re not talking huge sums, but he was getting confused. It was so unlike Daniel, I was surprised. We got into a little bit of debt.” After a year, she found out why: Daniel was diagnosed with a brain tumour.

One doctor told him he had a year to live; another said it was benign and he’d be okay. But the debts were growing. “Before I came here, I didn’t know anything about Dubai law. I assumed if all these big companies come here, it must be pretty like Canada’s or any other liberal democracy’s,” she says. Nobody told her there is no concept of bankruptcy. If you get into debt and you can’t pay, you go to prison.

One point to make here is that this is why we have bankruptcy laws in the United States. The alternative is terrible.

Another point, though, is that no normal human being will be all that shocked to learn that a Canadian couple might move to Dubai and even enter in credit transactions in Dubai all without ever having thoroughly research Dubai bankruptcy law. This is the kind of terrible-in-retrospect oversight that people make all the time. But according to the same model of human behavior that taught us that a free market in financial products would be self-correcting, this kind of behavior is impossible. People are rational maximizers and would never make this kind of mistake!