Bob and Dave make pretty much the same income. They each bought a house for $300,000.
Bob lives paycheck to paycheck, spends big, has the latest electronics, upgraded the kitchen, put an addition on the house, drives nice cars. To finance this lifestyle, he redid his mortgage every time he heard some guy on the radio talking up low rates. He's got a balloon payment due in a few months, his home equity loan is massive, and he's struggling just to cover his credit card debt. He owes more on the mortgage than the house is worth.
Dave lives much more modestly. He not only dutifully pays his mortgage each month, but he puts money away so he'll be able to keep the house if he should lose his job. He still has a 19" TV, no cable, no satellite. His car is a 1995, still runs OK. Since he had an old-style mortgage, he's been paying down principal, so he owes less than the house is worth.
Bill and Frank make pretty much the same income. Both live pretty carefully, with savings and low debt. But both brothers have just been laid off.
Bill bought a house for $300,000. It's nice, but the monthly payments are kind of steep for someone with no job.
Frank bought a primary house for $200,000, and a vacation cabin at the lake for $100,000. He actually pays a little more each month than his brother because he couldn't get quite as favorable terms on the cabin. He's going to have trouble with both of his mortgage payments.
What will the government do for these two sets of brothers? We all contend that it is undesirable to throw people out of their homes, so there is going to be some kind of assistance to those who are having problems.
Bob is going to get major help. By whatever means, we the people are going to do everything we can to assist him. No one wants to live next door to his empty house, and it would be cruel to turn Bob's family out into the street. On the other hand, Dave will get nothing, he's in fine shape. (He might have a little problem later on when taxes go up or inflation hits, the only two ways we have of paying to help out Bob.)
Bill's going to get to keep his nice house, even if his mortgage is under water. Frank will also get help, but less so because he only has a $200K house to preserve. His vacation home - too bad, he'll have to sell that at a big loss or just walk away from the mortgage. No help there.
As many people have pointed out, any large-scale program is going to suffer from problems like these. Some people will be helped who don't need it or don't deserve it, others will fail to get as much help as they require. It's easy to conjure up examples, as I've done here.
Except that these examples are not particularly contrived. They're actually pretty realistic, and, in both of them, there is an arbitrary aspect to the outcome. In the first, one brother has been irresponsible, and that irresponsibility will be rewarded, what we call moral hazard. In the second, each brother has been equally responsible and has made roughly the same choices, with one small difference that will lead to a dramatically different outcome.
There's something larger here, in my view, and let me digress somewhat to make the point. The rich-favoring tax cuts of George W. Bush were not diametrically opposed to our concept of America. They may have been ill-advised, built around a discredited trickle-down model, but they don't violate principles of the American Dream.
Why? Because every American can imagine himself or herself as a wealthy person. We're just one Survivor stint or one lottery ticket away from being a nabob, and we really don't begrudge the wealth of those who have attained it. Cutting taxes disproportionately may seem like a bad thing, but it isn't so bad if it means you'll pay less taxes when you make your millions.
But these bailouts, these series of emergency measures that seem to favor CEOs and auto executives and profligate homeowners, they seem in some real way to violate a sense of Americanism. Too many of us may spend beyond our means, but we really don't admire that; the old virtues of thrift and caution are still an essential part of the way we see ourselves.
And we're rewarding the people who have most offended these virtues. CEOs enrich themselves and send jobs overseas with no concept of community, and we pay to make sure they'll retain their spots. Homeowners treat their homes like piggy banks, and we pat them on the head and tell them it's OK.
I'm neither favoring nor predicting riots in the streets, but I wonder just how long the people will be comfortable with this distortion of what we know America to be. I wonder if we aren't heading for a 1960s-style rebellion in some form or another, one in which some kind of traditional belief structure is reasserted. The danger, of course, is that it will accompany some sort of fundamentalism (not necessarily the religious kind). We might throw away a lot of what constitutes our best chance of progress in a rush to restoration of a semblance of fairness.
Bob lives paycheck to paycheck, spends big, has the latest electronics, upgraded the kitchen, put an addition on the house, drives nice cars. To finance this lifestyle, he redid his mortgage every time he heard some guy on the radio talking up low rates. He's got a balloon payment due in a few months, his home equity loan is massive, and he's struggling just to cover his credit card debt. He owes more on the mortgage than the house is worth.
Dave lives much more modestly. He not only dutifully pays his mortgage each month, but he puts money away so he'll be able to keep the house if he should lose his job. He still has a 19" TV, no cable, no satellite. His car is a 1995, still runs OK. Since he had an old-style mortgage, he's been paying down principal, so he owes less than the house is worth.
Bill and Frank make pretty much the same income. Both live pretty carefully, with savings and low debt. But both brothers have just been laid off.
Bill bought a house for $300,000. It's nice, but the monthly payments are kind of steep for someone with no job.
Frank bought a primary house for $200,000, and a vacation cabin at the lake for $100,000. He actually pays a little more each month than his brother because he couldn't get quite as favorable terms on the cabin. He's going to have trouble with both of his mortgage payments.
What will the government do for these two sets of brothers? We all contend that it is undesirable to throw people out of their homes, so there is going to be some kind of assistance to those who are having problems.
Bob is going to get major help. By whatever means, we the people are going to do everything we can to assist him. No one wants to live next door to his empty house, and it would be cruel to turn Bob's family out into the street. On the other hand, Dave will get nothing, he's in fine shape. (He might have a little problem later on when taxes go up or inflation hits, the only two ways we have of paying to help out Bob.)
Bill's going to get to keep his nice house, even if his mortgage is under water. Frank will also get help, but less so because he only has a $200K house to preserve. His vacation home - too bad, he'll have to sell that at a big loss or just walk away from the mortgage. No help there.
As many people have pointed out, any large-scale program is going to suffer from problems like these. Some people will be helped who don't need it or don't deserve it, others will fail to get as much help as they require. It's easy to conjure up examples, as I've done here.
Except that these examples are not particularly contrived. They're actually pretty realistic, and, in both of them, there is an arbitrary aspect to the outcome. In the first, one brother has been irresponsible, and that irresponsibility will be rewarded, what we call moral hazard. In the second, each brother has been equally responsible and has made roughly the same choices, with one small difference that will lead to a dramatically different outcome.
There's something larger here, in my view, and let me digress somewhat to make the point. The rich-favoring tax cuts of George W. Bush were not diametrically opposed to our concept of America. They may have been ill-advised, built around a discredited trickle-down model, but they don't violate principles of the American Dream.
Why? Because every American can imagine himself or herself as a wealthy person. We're just one Survivor stint or one lottery ticket away from being a nabob, and we really don't begrudge the wealth of those who have attained it. Cutting taxes disproportionately may seem like a bad thing, but it isn't so bad if it means you'll pay less taxes when you make your millions.
But these bailouts, these series of emergency measures that seem to favor CEOs and auto executives and profligate homeowners, they seem in some real way to violate a sense of Americanism. Too many of us may spend beyond our means, but we really don't admire that; the old virtues of thrift and caution are still an essential part of the way we see ourselves.
And we're rewarding the people who have most offended these virtues. CEOs enrich themselves and send jobs overseas with no concept of community, and we pay to make sure they'll retain their spots. Homeowners treat their homes like piggy banks, and we pat them on the head and tell them it's OK.
I'm neither favoring nor predicting riots in the streets, but I wonder just how long the people will be comfortable with this distortion of what we know America to be. I wonder if we aren't heading for a 1960s-style rebellion in some form or another, one in which some kind of traditional belief structure is reasserted. The danger, of course, is that it will accompany some sort of fundamentalism (not necessarily the religious kind). We might throw away a lot of what constitutes our best chance of progress in a rush to restoration of a semblance of fairness.
1 comment:
In your theoretical, what "major help" will Bob get from taxpayers? As I understand it, the new law offers nothing more than a renegotiation on rate, and no debt forgiveness. Frank has bad terms? Presumably if they lead to his insolvency he might also be offered renegotiated terms. Term renegotiation is a much more cost-effective service to communities that frankly applies to a much smaller group of people who are suffering. Most people are underwater, and taxpayers will not help under current law.
- mcfnord
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