Does this term ring a bell? It should, because our Government is in the process of creating a significant moral hazard. Namely: bailing out homeowners to lower their monthly payments and giving the power to judges to reduce mortgage principal on loans (i.e. private contracts are now open to revision by judges, as they see fit).
This is not good for the economy in the long run. Yes, we feel empathy for the financial situation that many, many people find themselves in as a result of taking mortgage offers that appeared too good to be true. But, no, it is not our responsibility to pay for their mistakes. Our system rewards (or used to) sound decision-making and sometimes punishes those who take higher risks. Push more chips into the center of the table and you risk losing those chips. You could also win, but that choice that is up to you. The old Risk-Reward Model we learned about on Day One of college Economics.
The unintended consequences of removing (or mitigating) the risk are, well, unknown right now. But one thing is for sure . . . they aren't good for our broader society in the long run. We may be better off letting the proverbial train hit the wall then trying to cushion it. Yes, that means more people will face foreclosure. But, that does not mean those people will be rendered homeless. There are options for people who can not afford to own their homes. Renting comes to mind. Living with relatives also comes to mind. Are those as gratifying as owning your own home? No, they are not. People could also buy smaller, more affordable, houses. There are options for people who can not afford to live in their current houses besides re-writing private contracts and taking away the risk side of the equation.
Do I sound like a Republican? I voted for Obama, for crying out loud!!! But, I am also a University of Chicago trained lawyer and at U of C (which is where Obama taught, by the way), we learned about things like moral hazard.
Finally, allowing real estate values to naturally descend to the point where the value proposition becomes compelling to investors is the best way out of this mess. That very thing is starting to happen in markets across the country. Artificially propping up the residential real estate market by re-writing mortgages en masse will just prolong the agony we are going through and in the end, we will all be worse off.
But, no one wants to hear this view right now. It is out of style. Because it is perceived as too risky. One question: how is Obama's direction working out for us so far? "Nicht so gutte", if you judge based on stock market reaction.
Pay me now, or pay me later. I would rather get it over with, personally.
All for now . . .
And, then there's the question no one wants to talk about . . . where is the money going to come from to pay for all these renegotiations and mortgage principal reductions? From other taxpayers, that's where. From the people who did not reach past their financial wherewithal to purchase homes. From the people who acted conservatively. Those people are going to get really whacked by all this, in the form of higher taxes (yes, Virginia, even the Middle Class will soon join the ranks of those that have received tax increases), and surging deficits that will someday need to be repaid.
Is this how our system is supposed to work?
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So many layers of moral hazard, so little time. People lie on their credit app to buy homes they couldn't afford to begin with and take mortgages that will float ad certainly be even further beyond reach. Who bails them out? The taxpayer. The banks who made these insane loan let them do it with 0 equity to cushion the impact of a bad loan decision. Who bails them out? The taxpayer. These banks sold a lot of these loans to government-sponsored public corporations (fnm and fre)who took these insane loans on their books and backed them resulting in hundreds of billions in losses. Who bailed them out? the taxpayer.
ReplyDeleteNow, in order to "stimulate" the economy is incentive being given to the creators, the innovators, the productive, and the forward thinking who will need to hire in order to carry out this productvity? No, it is actually being taken from them (by force, not by charitable decision) to be given to the least successful, the least productive, and the least innovative portion of the economy thinking those people will spend it and spread the wealth upward. And who pays for it? You know the answer.
Moral hazard indeed.
While I generally agree with you here, I am not so sure the market is actually functioning at the moment. People are realizing that not only has their largest asset fallen in value, but it cannot not even be sold in this environment.
ReplyDeleteMoral risk is a valid concern...for tomorrow. The problem, of course, it getting there.
Is anyone else out there?