I just can't get that excited about the complaint that the Bush administration wants to spend taxpayer money on people with bad mortgages. The government spends amazing amounts of money on amazingly stupid things. Giving money to people who want to own houses seems markedly less outrageous than, say, giving money to people who want to produce sugar in the northern United States.
To be sure, I am not a homeowner, so I do not chafe under the knowledge that irresponsible people are getting a better deal than I did. But it doesn't seem like this is going to affect all that many people--certainly, a lot fewer than the ARM freeze that Hillary was proposing. Besides, as a libertarian, I've had to inure myself to the notion that the government thinks its primary job is to prevent the chickens from coming home to roost. If I let myself get outraged by that sort of thing, I would have had a heart attack the first time we developed a federal jobs program for people who drown campaign volunteers.
What I worry about is whether this creates bad incentives. Will people be encouraged to take on risky loans in the future because of the bailout? Will we be freezing people into homes when they really ought to move? Probably. On the other hand, it's not clear to me that these effects will be extensive enough to worry about.
A system can be set up where there is minimum literacy and intelligence requirements to take out any loan, especially loans that encumber other people (like the greater population) indirectly.
Let's start with the Federal Government, where elected representatives are authorized to run up wild debts on behalf of the country.
Since the sums they are dealing with are so astronomical, it follows that they have to meet the highest standards and also suffer the most severe sanctions should they make a bad call on behalf of their constituents.
Would the death penalty be too mild for elected representatives irresponsibly running up debt? Or should it be something like drawing and quartering?
Megan says . . .
"Besides, as a libertarian, I've had to inure myself to the notion that the government thinks its primary job is to prevent the chickens from coming home to roost."
Finally, the libertarian case for Obama: At least we know that he and his spiritual advisor believe chickens should come home to roost.
Why does being a renter prevent you from chafing at the knowledge of the better deal?
The people who are upside down right now are those who didn’t have much of a down payment, which means their alternative to entering their current bad mortgage was renting. Thus, they should have been renting, like you, but because they made the wrong decision they now get a subsidy. Homeowners get plenty of subsidies already, but this is one directed at those who should never have been homeowners to begin with. The people who are taking it on the chin are those who have been renting for the past several years.
This isn’t intended to be a defense or criticism of the subsidy per se, but rather I’m just pointing out that your basis for not feeling slighted isn’t justified.
Just a quibble--sugar beets grow quite well in the northern U.S. While the government puts a tariff on sugar, it doesn't give payments to sugar beet growers as it does to wheat, corn, cotton, rice, etc.
And in some areas near DC (as my next-door neighbor), the failed homeowners were renting to immigrants--crack down on immigrants, the renters vanish, and so does the ability to pay the mortgage.
My understanding is that while sugar beets do grow quite well in the northern US, they are simply not cost competitive with sugar cane.
Rob, think of it this way: every day they weren't renting a house reduced demand for rental housing, making me better off . . .
"Rob, think of it this way: every day they weren't renting a house reduced demand for rental housing, making me better off . . ."--MM
that's the 'seen' of it..
the 'unseen'?
"Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
1.3
The same thing, of course, is true of health and morals. Often, the sweeter the first fruit of a habit, the more bitter are its later fruits: for example, debauchery, sloth, prodigality. When a man is impressed by the effect that is seen and has not yet learned to discern the effects that are not seen, he indulges in deplorable habits, not only through natural inclination, but deliberately.
1.4
This explains man's necessarily painful evolution. Ignorance surrounds him at his cradle; therefore, he regulates his acts according to their first consequences, the only ones that, in his infancy, he can see. It is only after a long time that he learns to take account of the others.**2 Two very different masters teach him this lesson: experience and foresight. Experience teaches efficaciously but brutally. It instructs us in all the effects of an act by making us feel them, and we cannot fail to learn eventually, from having been burned ourselves, that fire burns. I should prefer, in so far as possible, to replace this rude teacher with one more gentle: foresight. For that reason I shall investigate the consequences of several economic phenomena, contrasting those that are seen with those that are not seen."
http://www.econlib.org/library/Bastiat/basEss1.html
Maybe, but high home prices also increased the demand for condo conversions, which reduces the rental supply. In addition, a home can be sold or rented, so buying does not necessarily free up a rental.
Rental prices have certainly increased in the DC Metro area over the past several years, but I will concede that it is unclear whether they would have been even higher but for irresponsible buyers.
Megan,
Your point about reduced rental demand is fair... and yet as a renter, I still chafe at so many of these moral hazardtastic proposals in a big way.
I consider myself to be a future buyer, so while having been prudent these past years with my finances and having not purchased a home
(and watching prices go sky high), my reward can be a government bailout of those who behaved differently so that home ownership demand can remain artificially high and price levels artificially supported.
At least I get to eat the sugar... and it's quite sweet.
no wonder our Hostess is banging the drum for: "administration wants to spend taxpayer money on people with bad mortgages."
"March 29, 2008
Treasury’s Plan Would Give Fed Wide New Power
By EDMUND L. ANDREWS
WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.
Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused the financial crisis. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.
According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms. ..."
http://www.nytimes.com/2008/03/29/business/29regulate.html?_r=3&hp=&adxnnl=1&oref=slogin&adxnnlx=1206824394-yi4zJg5GcgpEppkRc4LnOw&pagewanted=print
As a renter, I don't like it, either.
I live on one income as a creative type: Writing, ads, freelance reporting, etc. I do fine compared to most in the field, but it's not enough to qualify for a home here in South Florida, ground zero of the housing bubble, on all but the stupidest mortgages.
So when everyone else was buying, I declined, and continued to rent and try to save money for a down payment. Stayed out of debt. Paid cash for the car. Did the right things, by the book.
Home prices have fallen, but they'll have to fall some more to become realistic for people like me. My biggest hope to join the ranks of the landowners was to 'bail out' some speculator or flipper in trouble, or even someone who just had to relocate, and get a reasonable price for the house.
When the government does that for me, though, I get short-circuited out of the market. To add insult to injury, when the government does it, they do it with my tax money. And yet none of the benefits of such ownership will accrue to me.
Instead, they will continue to accrue to the benefit of the irresponsible.
Meanwhile, interest rates are slashed in order to juice the economy and fuel growth. The resulting inflation again accrues to the benefit of those who hold stupid mortgages, while slamming renters who are trying to save depreciating cash. And we get a double whammy, because interest rates on savings to net savers and lenders are very small.
I understand the desire to prevent wholesale dislocation of the economy. But a certain amount of dislocation is overdue. And any bailout of irresponsible buyers (and the dumbasses who lent them money) leaves a very bad taste in my mouth.
For me the entire idea of bailing out homeowners seems preposterous. My wife and I also rented, because we did not want to over-extend ourselves and put ourselves at risk.
Some claim that we need to bail out these homeowners, if only because so many are going to foreclose, that it will ruin the economy. But then isn't the entire issue here one of price vs. wage gaps, resulting in the fact people overextended in the first place?
So then it would seem to me the best medicine is to let these people foreclose, but perhaps shorten the time or provide them with ways to expeditiously get rid of the damage from their credit scores (i.e.- make them pay, but not to the point that they are completely taken out of the existing middle-class consumer population for an extended period of time).
In the meantime, lets take the government money and actually begin to fix our infrastructure. At least then, the entire public benefits, versus subsidizing those with questionable financial decision making abilities.
Finally, we need to fix what has caused this issue in the first place: the growing gap between what we consume and what we produce. What we are seeing now is the giant correction of that very imbalance. As much as Megan claims free-trade is a great thing (her wonderful farmer growing an automobile example), the fact is that free-trade, on the whole, has resulted in a huge reduction in earnings power for the lower-middle class, which is the largest group of consumers.
And Megan: your farmer example highlights the biggest issue with free-trade...concentration of wealth. There are a lot more people impacted by the decline in manufacturing than the increase in agriculture. Unless you want to take a Rober Reich view of the future, where we go along with this mess, but essentially demand all winners to pay 1/2 their earnings to keep the lower and middle classes at their pre-free trade levels, I do not see a bright future for trade.
And I ask anyone here to tell me what the next great American industry/growth vehicle is going to carry us out of this mess?
Seriously, mcmegan gets paid for posts such as this?
Of the thousands of posts on the housing and loan issue I've read in the last years this might be one of the most futile and empty yet.
Talk about filling empty space with vapid pseudo-content.
Why shouldn't the credit scores of irresponsible borrowers be affected? Isn't that the whole POINT of a credit scoring system?
Any lender can look at a credit report and decide for themselves how much weight to put on a foreclosure vs. car payments vs. credit card debts. And the very fact that "a lot of people went into foreclosure at the end of the housing boom" would itself tend to be a mitigating factor with lenders. Maybe they're dealing with the bottom 20% of the risk curve rather than the bottom 3%.
But why shouldn't the responsible among us emerge with a FICO score advantage, when it comest to the next round of lending? Why change the rules in the middle of the game?
"Would the death penalty be too mild for elected representatives irresponsibly running up debt? Or should it be something like drawing and quartering?"
Drawing and quartering is definitely banned by the "cruel and unusual punishment" clause of the Bill of Rights. Damn it. But even "humane" executions would finally get the incumbents out of Congress. The problem is, such a law would have to be voted in by 50% plus one of both houses and signed by the President. How are you going to sneak it into one of those huge omnibus bills that no one actually reads? ;-)
markm,
Actually I am going to line up the most powerful lobbyists to support an obscure clause that is written in such turgid and undecipherable language that no one really understands what it really says until it is passed.
So picture the NRA, AARP, vets, gays, christian fundamentalists, etc. all lobbying for this, handing out lavish campaign contributions, etc.
You can count on the lawmakers to vote for it.
Brad,
Free trade is not the reason the US consumes more than it produces. The problem is too easy credit and a system that punishes saving while subsidizing consumption. If you clamp down on free trade without fixing the credit problem, then you are cutting off your own nose to spite your face.
Re: And I ask anyone here to tell me what the next great American industry/growth vehicle is going to carry us out of this mess?
I've answered this elsewhere, maybe not on Mergan's board though. Some combination of biotech, nanotech and alternative energy will be the growth industry of the next generation. Also, as the days of super-cheap energy draw to a close, shipping costs will increase and we would be buying as much stuff from China or Indonesia as we are now.
Re: But why shouldn't the responsible among us emerge with a FICO score advantage, when it comest to the next round of lending?
Moreover it's not like a bad credit score stays with you for life. Provided you get your act together and go and sin no more after a bankruptcy or foreclosure you can be back up above 700 within a coupel or years.
"Under Frank's proposal, the new loan could be worth no more than 85 percent of the home's current appraised value."
I agree that we should take no action, but if this is part of the bill I don't see this happening. A lot of homes in the bubble markets are under water by 20% or more. Especially in San Diego (where I live) many houses are being sold at 20%-30% off of the loan value. If they were financed at 100%, we're talking about a 40-50% reduction in principle to get to the 85% of current appraised value. Banks may just take their chances foreclosing and a 20%-30% shortsale rather than such a large reduction in principle.
In my opinion, the bigger moral hazard is setting up the expectation that the next housing bubble will be bailed out too.
If so, this will remove a sensible brake on house price speculation.
sorry, what does this mean?
"a federal jobs program for people who drown campaign volunteers."