Obama plans to bail out people who took out mortgages they cannot repay [h/t Instapundit]. This sucks. Why? Why would I be so heartless as to oppose helping people whose home ownership stands at risk due to the banking crisis?
Simple, an individual’s ability to pay their mortgage has nothing to do with the solvency of the lender who issued the mortgage. Money flows from the borrower to the lender. The fact that the lender made too many dubious loans does not in any way affect any particular individual’s ability to pay their own mortgage. Only the individual’s income and budgeting controls whether they can pay.
What about people who lost their jobs? Loosing jobs is part of life. Everyone will lose a job at least once in their life. People who took out mortgages and who did not budget for the possibility that they would lose income for a period behaved irresponsibility. Besides, people who pay rent also lose their jobs. Who will help them out?
The ugly truth is that most people who are in trouble today fall into two groups: people treating their houses like ATMs and people speculating on residential real estate. The former took out home equity loans and then spent the money on lifestyle/consumer spending or to buy a business. The latter purchased houses not to provide themselves housing and a long-term nest egg but rather to flip them over in a few years for a profit. They treated their houses like a business. Both these groups took financial risk on their own initiative for their own benefit. They should bear the consequences of those individual financial choices.
The only people who really need help are people who need to borrow money for unanticipated repairs. People do have a reasonable expectation that they can borrow a few thousand dollars in order to repair some damage not covered by insurance. The present banking crisis prevents them from doing so. Since the government jammed up the banks, the government can step in temporarily to help people get loans unrelated to the original mortgage.
Just as with the bailout of the states, Obama seeks to reward the reckless and self-indulgent at the expense of the prudent and self-denying. People who did not take mortgages they could not pay now must pay for their neighbors’ extravagance. People who bought houses to live in must bail out those who speculated recklessly.
The ants are enslaved to the grasshoppers.
Equality means equal outcomes. Not everyone is as smart, as good looking or as lucky as you. Therefore government must step in to level the playing field. They do this by taking from them whats got too much and giving it too them what deserves it more.
The problem, as Obama says, is that words have meaning. So we won’t call it socialism. We will call it reinvestment.
During the election, there was a clip that was shown several times, of a woman saying she was going to vote for Obama because then she wouldn’t have to pay off her mortgage.
While I generally agree with the moral thinking behind this post, I think the situation is a little more complicated.
1. There are huge frictional and external costs to a foreclosure, not least the effect on the value of neighboring property. There is some societal value to avoiding these costs.
2. Some of the problems peole are having in refinancing are due to their (potential) new loans having less than 20% equity. Of course, many of their curent loans STARTED at way less than 20% and the decline in values have put them even further down. Still, as Fannie nd Freddie have had to tighten their policies, there MAY be creditable borrowers who could handle a refinanced loan at, say, 90/10 and current interest rates, whereas with the current ARM they cannot keep up. If they could re-fi into a 30-yr fixed at current rates, they would be OK, but they don’t have 20% equity.
Maybe I’m being influenced by my current reading: Lords of Finance, about the role of the key central banks (the Fed, Bank of England, Bangue de france and Reichsbank) in leading to the Great Depression. Specifically, 2 things:
1. Coolidge’s expression of the US opinion on war debts: “They hired the money, didn’t they?” Factually true, morally true in a narrow sense, tho ignoring the huge sacrifices in blood by France and England, and wholly beside the point of how to structure international fiannce in the 1920s. US insisted on collecting its war debts, so France and Britain had to insist on collecting reparations from Germany, and, not to put too fine a point on it, the world gor a Depression and Hitler.
2. In dealing with potential bank failures, they followed Bagehot’s principles laid out in “Lombard Street,” that ina panic the central banks have to open the liquidity floodgates, with the sole exception of NOT doing so for banks that are actually insolvent. Morally sensible, but ignorant of depositor psychology and the fact that the solvent institutions can be brought down by a run that starts with an insolvent one.
I am frustrated as hell that the taxes of prudent people are going to help teh imprudent, but we face the world as it is, not as we wish it was, and have to proceed from there. Not to say I like everything about the announced plan, I think it is too open to helping out those who aren’t “deserving,” and I would rather have had no stimuus bill than the one we got. I also recognize and am very concerned about moral hazard.
Still, I think the issue is far more complex than “They hired the money, didn’t they?”
Rick’s Rant: http://www.cnbc.com/id/15840232?video=1039849853
Marty,
I think the idea that the treaty of Versailles led to the rise of Hitler has pretty much been demonstrated to be a myth. The obligations imposed by the treaty were less proportionately onerous than those imposed by the Prussians on the French after the Franco Prussian War. The Great Inflation ended in 1923 and the period of 1923-1929 was one of peace an prosperity. Indeed, some call it the German Golden age. Under the Dawes plan of 1923, the U.S. loaned Germany the money to pay off her war debts which meant that France and England stood liable for only the interest on their loans.
So the idea that Germany was crushed under cruel victors is pretty much a myth. Germany’s main problem was political discord driven largely by red socialist. It was the U.S. government’s response to the minor setback of 1929 that created the great depression and that in turn led to social and political upheaval in Germany and elsewhere. Fear of red socialist caused the German people to back National Socialism as the only apparent recourse.
We got in this mess by the government creating a huge moral hazard in the real estate mortgage market. I don’t think we’ll get out of it by creating another larger moral hazard. I have no confidence that the government can direct money to a few key institutions or borrowers to stop a positive feedback loop in the financial system. Instead, the cry went up, “they’re bailing them out why won’t they bail us out?” and everyone piles on for a piece of the pie.
In order to give money to spendthrifts, the government has to take money from the thrifty. Eventually, people will just stop saving at all and instead try to secure their economic future solely with political power.
Shannon,
Read “Lords of Finance”… or any good study of the rise of the Nazis in the 1920s. I daresay your description of the 1920s is very high-school social studies-ish. The world was much more complicated and the issues between the various central banks, their respective treasuty or finance ministries, and the “real” economies every bit as messy as what we now face. I am expressing that, not regurgitating Keynes’s “Economic Consequences of the Peace”. Hardly any reparations were actually paid, but the only way the Brits and French could afford to pay their war debt to the US without inflating their currencies far beyond what their governments or publics would accept, was to collect reparations from Germany and pass them thru. Germany’s ability to pay was always a big question and I don’t know if it was ever ‘solved’, but the fact was Germany just wasn’t going to pay anything like what the UK and FR needed to cover their war debt to the US, but FR and the UK, especially, couldn’t afford to pay the war debt any other way. If the US had forgiven most of the war debts, it could have been part of a package deal to reduce reparations and rebalance the world financial system—Hoover tried this in the crisis of 1931 but everything was already too far gone. It was the overhanging threat of reparations and French re-entering the Ruhr, and FR and UK seizing the Reichsbank gold in their physical possession, that created and sustained the circumstances of the German Depression (which preceded ours by a year or 2) and Hitler’s electoral surge. The fears of the Communists to which you refer were based on the economic turmoil, and were only a part of Hitler’s appeal. A larger part of Hitler’s appeal was his apparent willingness to renounce reparations–an issue that could have been off the table if the US had forgiven the FR/UK war debts, plus the German economy would have been in better shape, reducing Hitler’s direct appeal as well as fears of a Red revolution.
But my point in bringing it up was not to rehash what happened 80 years ago, but to say that Coolidge’s comment, “They hired the money, didn’t they?” (or to say of Germany, “They signed the Treaty, didn’t they?”) is exactly parallel to us saying of underwater mortgagees that they willingly signed the notes, and in terms of sound economic or financial policy, about as relevant… which is to say, somewhat. Morally unassailable, but is it a sound basis for policy, to the exclusion of all other considerations?
Notwithstanding the morality of keeping promises (contracts, treaties), there is good reason to suspect the world would have been a lot happier in the 1930s and 1940s if the US had not insisted on the sanctity of its war debts from FR and UK, and FR and UK had in turn cut the Germans more slack on reparations. It’s not as if, in the end, the US got repaid very much on the war debt, or the Allies collected much in reparations, but we all got to spend 15 years dealing with a huge Deptression and Hitler.
And doubly so regarding the example of dealing with insolvent banks at the time Bank of United States started the bank panic in the US.
I would never suggest that morality not be a consideration, but ultimately the policy makers have to deal with very messy situations where the challenge is to find the least bad among a lot of bad options. I think the foreclosure mess is such a problem; none of teh options are good, but soem may be worse than others and the policy makers have to pick something, with non-action one of the choices.
I thought I made it clear that moral hazard worries me a great deal, but imho moral hazard is only part of the nest of problems to be addressed, and focusing on it to the exclusion of everything else is not a sound way to make policy.
The moral hazard could have been addressed by including “appreciation rights” as part of any housing bailouts…ie, people receiving benefits in form of interest or principal reduction (or stretch-out) would agree to give up part of their future price appreciation (if any) in exchange. Based on very cursory impressions, I don’t think anything like that was included.
It would have probably been difficult to administer, but still should have been done.
Could also have made any re-fi under the program be a loan with full recourse–i.e., in case of default the creditor could go after other assets of the borrower, such as bank or broker accounts, cars, other property if not pledged against a mortgage or other loan, even future income (most mortgages in this country are non-recourse, the only thing at risk is the property, itself). That would make people think twice and try harder.
Not a bad idea in general, if in place at the time it would certainly have curbed some of the more spectacular risky behavior of 2005-6-7. Some European countries do this, I understand, and they don’t have anything near our problems with mortgage defaults and foreclosures. Might even lower the costs of getting a mortgage (for teh truly credit-worthy) as it would shift some financial risk from lender to borrower.
This would have been easy to include–might have required some states to change their laws, but that would be their choice if they want their residents to be eligible to participate.
Marty,
I daresay your description of the 1920s is very high-school social studies-ish.
Well, I disagree since the idea that war reparations caused the rise of Hitler was in fact the story I was taught in high school. I don’t think it holds up well as an explanation of WWII. The Germans were spoiling for a fight and they probably would have gotten it at some point. It certainly would have been generous for the U.S. to forgive the loan but that would have involved levying a tax on U.S. citizens to pay off European debts. That wasn’t going to happen in the 1920’s. Given the degree to which tariffs contributed to federal revenues of eras, it might have even backfired if tariffs were raised to pay for the write off.
… but imho moral hazard is only part of the nest of problems to be addressed, and focusing on it to the exclusion of everything else is not a sound way to make policy.
I remain unconvinced that two moral hazards make a right.
The fundamental problem with the residential housing market is that people own houses whose mortgages require a larger percentage of their income than they can or will devote to housing. Taking money from others to alter the conditions of the mortgages does not change the fundamental fact that the houses are intense luxury items that have little intrinsic value. By hurting prudent people we don’t address that fundamental problem.
Worthwhile thoughts from John Hussman.
Shannon,
I agree, forgiving the war debts was a political impossibility in the 1920s United States. But, we learned something and didn’t try to reclaim all our Lend-Lease aid (which was just lent or leased, and by legal rights we could have insisted on its return) to UK, USSR and others in 1945, did we? And one has to accept that 1945-1970 for all its problems was better than 1918-1945, despite the malign presence of the USSR and Stalin athwart half of Europe in 1945, doesn’t one?
Some Germans were spoiling for a fight, and Hitler was their champion, but a big reason they were spoiling for a fight was they felt they had agreed only to an Armistice in November 1918, with a peace treaty to be based on the 14 Points, and they were then disarmed, ocupied, continud to be bvlockaded and starved, and then presented with an ultimatum that was much harsher than they had any reason to expect in 11-1918. And reparations were a part of that.
But a lot of Germans WEREN’T spoiling for a fight, they might have been disappointed, even angry, but they didn’t want another war–Berlin was almost morgue-like on Sept. 3, 1939, contrast to August 3, 1914.
We can certainly disagree about what to do, and I’m pissed as hell at my money being used to bail out people who lied to get their NINJA loans, but if I was looking at three foreclosures on my block right when I wanted to sell and retire to Arizona, I might say, hell, try to do something to keep those foreclosures from destroying my equity.
The moral hazard issue is a very tough one and we can disagree about what is the right balance, I’m just sayin’ there IS a balance to be struck
Shannon: “By hurting prudent people we don’t address that fundamental problem.”
The thrust of the plan is not, I believe, to hurt prudent people or (as we’re told) to help keep people in their houses. I believe it is meant to prop up the failing financial system, the failed banks and bankers.
It is pretty bizarre that, with housing being overpriced, the government would try to support overpricing which, if it were successful, would leave us with the very same problem we have been having all along. As Shannon said, it won’t be successful, and the best such a plan can do is delay the time when housing
returns to affordable levels and contribute only a little bit to general inflation. The worst it can do is beyond me.
Just read the Hussman link and I think he makes a lot of sense—can’t say he’s right, but he’s not as wrong as what is coming out of the govt.
the ants are not enslaved to the grasshoppers, they are being fed to them. Once the mountain of debt is finally addressed the ants will bear the brunt of that. At the same the foreclosures devalued our houses, our bigest asset, our 401k is bleeding value faster than our houses, and the tax burden is growing so fast our employers are laying us off to shed it.
I think it’s time they stopped drinking our water and carried their own. I didn’t win life’s lottery I earned every penny the old fashioned way, by working my little ant tail off for it.
The subject of moral hazard bears on the emergence of the “chavs” in Britain, as described in Verity’s post below.
If one buys moral hazard by the tank car load, and sprays it around a country for a couple of generations, one is going to get a pretty good crop of chavs.
What cheers me are rumors and early reports of energy sources with potential – ones cheap & close. I’m also cheered (a bit perversely) knowing California could profit by drilling (if it had any sense of a commitment to, say, the people who overpaid their California taxes). And my faith lies in our tinker tradition – its combination of energy & imagination.
What depresses me is that rolling back the achievements of welfare reform and education reform of the last few years will promote a disproportionately illegitimate & passive, bitter & sullen, poorly educated & defensive dependent class growing Alfies by the nursery fulls. Stupid economic engineering is most destructive when it tries (or ignores its complicity in) social engineering.
David Brooks, conservative, has this to say in The NY Times today:
“Personally, I hate the idea of 10 guys sitting around in the White House trying to redesign huge swaths of the U.S. economy on legal pads.
But at least they seem to be driven by a spirit of moderation and restraint. They seem to be trying to keep as many market structures in place as possible so things can return to normal relatively smoothly.
And they seem to understand the big thing. The nation’s economy is not just the sum of its individuals. It is an interwoven context that we all share. To stabilize that communal landscape, sometimes you have to shower money upon those who have been foolish or self-indulgent. The greedy idiots may be greedy idiots, but they are our countrymen. And at some level, we’re all in this together. If their lives don’t stabilize, then our lives don’t stabilize. “
What do you mean eventually?
William Windsor,
If their lives don’t stabilize, then our lives don’t stabilize
The problem is we can’t stabilized the value of houses at an artificially high level. A lot of these houses are in California where they had small bungalows tricked out with luxury finishings and selling for $800,000-$1,00,000. Nobody is ever going to pay that much for those houses. We can’t stabilize the value of the these upmarket (really overmarket) houses by pumping more money into inflated values. The only thing to do is let the values drop to something that people will pay for.
One thing that needs to be remembered is that high house prices aren’t of value to everybody. If you’re a 25-year-old looking to buy your first home, prices at the level they’ve been for the last few years are pretty much a disaster.
Also, excessive belief in the investment value of housing has surely pulled investment dollars away from more economically-productive sectors.
David Foster,
One thing that needs to be remembered is that high house prices aren’t of value to everybody.
Especially since most of the unrealistic home prices are concentrated in a few geographical areas such as costal California and southern Florida.
Just read up some on the foreclosure plan and decided I’m opposed because it does not test the applicants to be sure their original mortgage applications (the ones to be re-financed) were truthful as to income, assets, debts and employment.
I can swallow hard and accept giving $$$ to someone who doesn’t really deserve it, if doing so increases societal well-being enough, but rewarding criminal fraud is a bridge too far for me.
Marty says: “I agree, forgiving the war debts was a political impossibility in the 1920s United States.”
It may have been a political impossibility, but it happened in part (except for Finland). This is from Martin Gilbert’s Atlas of American History:
“War debts were payable to the U. S. over 62 years at an interest rate of just over 2%. Armenia never came into existence as an independent state, and thus none of the debt was paid. Finland alone of 19 nations paid her debt in full by 1965. In 1925 the United States cancelled 80% of the Italian debt. In 1926 60% of the French debt was cancelled. The Bolshevik Government of Russia rejected the demands that it honour Tsarist debts.” (p. 77)
Some of the 19 nations’ debts were extremely large. Britain owed the US 4.3 billion, France 3.4 billion, and Italy, 1.6 billion.
(Incidentally, the little Gilbert atlas has much in it, including some things that were new to me. I suspect, for instance, that you can surprise at least 95 percent of your friends with this gem.)
Jim Miller–
It was a political impossibility to foregive the war debts, but a practical impossibility to collect them. It all tied into the impossibility of collecting reparations from Germany, at least as far as the debts of the UK and France. In hindsight, would have been better to have just foregiven them and let the world get on with its business, but no one had that crystal ball (tho some people, notably Keynes, noted the connections between reparations, war debt and weak economies).
And the whole clusterf**k was part of what led to the Great Depression and inter alia, Hitler and WW2.
My only reason in bringing it up was that most Americans viewed the war debts as a solemn debt (which it was) and that moral commitment to the exclusion of other considerations led to some very bad policy, and there may be some lessons there for today’s world.
In my opinion, it is a mistake to say that something is “impossible” if it has already happened. But that’s just me.
Jim Miller–
“impossible” to take the overt political step at the time.