Until I live in your house, I’m not responsible for your mortgage.

I, like you, am going to be at least indirectly hit by the current “liquidity crisis” mortgage bubble, even though I had enough sense to contract for a fixed-rate mortgage when I bought my house. (The wisdom of buying when I did, on the other hand…) That’s just the cumulative reality of living in a capitalist system. Some people will make stupid, avoidable mistakes, but the overall economy can absorb it and survive. Scott Adams talked about this wonderful reality of capitalism today:

This story made me think about one of the great wonders of capitalism: It is driven by morons who are circling the drain, and yet. . . it works!


I’d planned to write up this short-sighted essay that calls for a bail-out of homeowners.

The ultimate solution must not emanate from the Fed but from the White House. Fiscal, not monetary, policy should be the preferred remedy. In the early 1990s the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers yet 2 million homeowners must be thrown to the wolves today? If we can bail out Chrysler, why can’t we support American homeowners?

That’s nonsense, of course. Kip beat me to it and said everything necessary. Particularly, this:

…(Again, and this is important: The spike in foreclosures is not Mr. & Mrs. Bluecollar being kicked out of their single-family home; it’s Mrs. & Mr. Infomercial failing to flip their 20 “no money down” speculative properties. That’s one investor, twenty foreclosures, zero homelessness.)

If there are anecdotal cases of institutions engaging in false advertising, deceptive accounting, manipulating the legally incompetent, then fine — pursue them with the full force of the law. But the mere fact that many otherwise competent people, including financial professionals, happened to make very bad decisions is no claim check on the Fed, Congress, or taxpayers’ wallets.

Issuing that claim check would indeed induce an eventual moral hazard, even though “there’s never been a problem in terms of national housing price [sic] bubbles until recently”. If we assume that this price mortgage bubble is a one-off and won’t happen again, the pattern still exists for bailing individuals out of their mistakes. In the essay, we’re supposed to understand that such rescues work, thanks to the examples of Chrysler and the S&L mess. (The author doesn’t mention deposit insurance. Quite disappointing.) Yet, the presence of that pattern doesn’t constitute an incentive to behave badly? Really?

The government should not bail out people who made bad choices just because they made bad choices. Leave individuals and businesses to experience the consequences (and successes) of their actions when the consequences are merit-based. (Luck, in this context, is merit-based.) That’s the only way to build discipline in financial transactions. Intervention only negates the need to develop those skills.

One thought on “Until I live in your house, I’m not responsible for your mortgage.”

  1. (The author doesn’t mention deposit insurance. Quite disappointing.)
    People love to analogize the PBGC to the FDIC. But nobody analogizes it to the FSLIC, which would be more accurate — and more dire.
    Go figure.

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