Ant and the Grasshopper

It has been interesting to watch the reaction to Obama's mortgage-holder bailout.  Certainly the plan is expensive, likely largely ineffective, and has terrible long-term impacts on incentives.   To my libertarian eyes the plan is awful, but no more awful, and actually less expensive (incredibly!) than other bailouts and legislation pouring out of Washington of late.  Like everything else we are seeing, it is a hair-of-the-dog plan:  fix government over-promotion of home ownership with more government promotion of home ownership;  Fix the fact that individuals are over-leveraged by trying to keep them in their mortgages.

But this issue changes the political map to some extent.  The usual rhetoric about milking one group to help another who are "on the outs by no fault of their own" is just stretched past credulity on this one.  Sure, there are enough folks who were really tricked or scammed in their mortgages to fill up any length of a news segment with tearful anecdotes.  But the 50% of the country that rents or the large percentage of homeowners that didn't chase around after zero-down house-flipping deals don't seem to be buying that their tax money is now flowing to innocent victims.

Postscript:  I know there is a tendency to leap onto this "fraud" excuse to help assuage one's ego.  Yeah, I wasn't stupid, I was tricked!  Well, I am in some financial tough times, and I will declare it here publicly:  It is all my fault.   I got overly exuberant in expanding the business, and doubled down on my mistake by agreeing to a large financial commitment based on a bank's loan commitment letter, rather than an actual loan (a commitment letter that was pretty much worthless as the bank went into FDIC receivership).   I have found, by the way, that my banks have been very reasonable about restructuring commitments as long as I come to the table with a plan showing how I intend to pay them back every cent that is theirs  (yes, I said it, it is theirs -- it is their money) though just with altered terms and timing.  The good news is that a ebbing tide reveals a lot of rocks, and the business has been vastly improved by the thorough review and restructuring we have put it through of late.


  1. Jeff:

    I'm in the middle of refinancing my home. It will be a good deal for my family because it lowers my rate to 5% on a 30 year fixed, and we can close it because we have over 20% equity, good income, lots of cash in the bank, and almost no debt.

    But people who bought too much house, took out home equity loans, and can't pay their mortgage are going to get a rate LOWER than mine. Plus, my tax dollars will guarantee their loan.

    I'm pissed.


  2. morganovich:

    i find the cries of "predatory lending" to be laughable. might some people have entered into contract that they did not understand? of course. but consider:

    it is their job to understand. who in their right mind would sign a document for the largest investment in their life if they did not understand it in great detail? entering into a $400k deal you don't understand and then whining about the consequences would be laughable were it not playing so well in washington.

    i have frequently heard the retort that "not every one is sophisticated with contracts, they can't all be expected to understand it all".

    the response to this seems blindingly obvious. hire someone who does understand. for about the price of a pest report, you can have a lawyer read the contracts and go over them with you. it's not as though this is esoteric technology. if you are too lazy and irresponsible to get some very straightforward help on a major financial commitment, is it surprising that it might not work out as you hoped?

    the reason you have seen so few lawsuits about "predatory lending" is that the preponderance of lying was on the other side. it was the borrowers who "stated" their income etc. lenders could never require you to do anything that wasn't in the contract, but if all the information you gave them inaccurate, you really don;t have much of a leg to stand on.

  3. Shenpen:

    "I know there is a tendency to leap onto this “fraud” excuse to help assuage one’s ego. Yeah, I wasn’t stupid, I was tricked! Well, I am in some financial tough times, and I will declare it here publicly: It is all my fault."

    You are up to something very important here. But first some explanation: I don't really believe in the Libertarian-Statist dichotomy, I mean in the phenomenon yes, but I don't like these words. I think on one side there Conservatism-In-The-Old-Sense as basically skepticism (Vico, Oakeshott, Burke, Hume, these thinkers) vs. Progressivism, while emphasizing that those who are using the Conservative label aren't, they are simply Older Progressives. On one side, the heritage of the whole culture and philosophy of Western Civ, on the other side, largely bullshit.

    In this scale I consider you Libertarians as Conservatives-In-The-Old-Sense, skeptical, cautious people who are deeply rooted in the philosophical traditions of the West.

    And now comes the important point: the core idea of this tradition, the most important thing everything else was built on in the past is: having a big ego isn't a good idea. Small ego = good and happy life, well-functioning society, and ethical behaviour. Doesn't work any other way.

    Thus, it's not a coincidence that you defeated your ego here: you are a Libertarian (Conservative-In-The-Old-Sense in my vocabulary) _because_ you have a small ego, there is a very-very clear causality here. Progressivism is largely self-importance or vanity: big egos. This is all it is really about, small vs. big egos.

    This is the core of everything. I suggest to apply this model to your favourite ideas (posts) and see how predictive it is. I think it is very predictive.

  4. Beth Haynes:

    Personal responsibility should always be insisted upon, however, I think the interesting and essential question is "Why the cluster of errors?" Why did so many people take on too much debt and risk, all at the same time?

    I think the fundamental answer lies in the distorted price signals caused by the easy money policy of the Federal Reserve. The specific form in which those distortions emerged was promoted by government's active subsidizing of home ownership (loan subsidies, Fannie/Freddie policies, CRA, tax breaks for mortgage interest, active encouragement for banks to lower lending standards, etc.)
    But the ultimate cause is the artificially low interest rates created through the expansion of the money supply by the Fed. Low interest rates imply high savings and the ability to take increased risk and incur long term-debt. But the real savings did not exist. Eventually this reality caught up with the malinvestments, and the house of cards crashed.
    Some of the responsibility is on the individual debtors, but it is impossible to make proper economic plans when free market signals do not exist.
    Most people were (are) not as foolish or irresponsible as the Grasshopper. Most are diligent Ants basing their decisions on government-manipulated price signals.
    Sorry if you have stated this elsewhere on your blog. I have just discovered it and only read a few posts.

  5. Jim Thompson:

    > I’m pissed.

    Consider, for a moment, the societal benefits of increased home ownership and/or a lower mortgague default rate.

    Perhaps you'll be less pissed then.

  6. fiona:

    Not likely to be less pissed. I know some of the potential beneficiaries of this program. They have DELIBERATELY stopped paying a mortgage that they can well afford in the hope of benefiting from government programs. Most don't believe that their credit rating will be harmed, because the government will "make" the credit agencies go easy on them. They successfully gamed the system once, so they think it will be easy to do it again. Meanwhile, THEY are pissed because the government has allowed them to lose money on a surefire investment and owes them recompense.

  7. anna: