Tuesday, February 14, 2012

Celebrating Perversity: Rewarding Waste and Dissolution

Risk is a necessary part of life. Risk and scarcity are the challenges that cause animals to develop shrewd and wise strategies of survival.

You cannot remove risk from the world, but you can obscure it, or shift it from one person to another, or from one group to another. If you force persons of thrift and wisdom to bear the burdens of those who are prodigal and shortsighted, you will certainly grow a large new crop of fools and wastrels.

It almost seems as if modern public policy is designed to accomplish exactly that.
... the federal government has chosen to side with the wasteful, unprincipled and debauched who borrowed what they couldn't pay back, all at the expense of the good and moral. You can't make things like this up, and sadly this is not a dream. The federal government has sanctified promiscuous activity with the money of others through a $25 billion settlement foisted on banks that "will provide financial relief to an estimated one million at risk borrowers." The message: go heavily into debt, claim some lender abused you, then wait for the government (meaning all of us whose tax dollars support Leviathan) to compassionately save you.

The economic argument behind this most shameful of settlements predictably defies basic logic. Though economies work best when prices reflect market realities, housing to the political class is sacred such that a true correction whereby those who overextended themselves vacate their houses on the way to a market bottom won't be allowed to happen.

The broad economy will of course suffer this governmental error. For one, an investment in housing, quite unlike capital committed to technology or medicine, will not cure cancer or make us more efficient. A true bottom that releases investment capital from this dead money sector would on its own prove an economic positive.

Second, as evidenced by the inability of certain homeowners to make their mortgage payments, they're likely in many instances to live in depressed parts of the United States. Not only would putting their houses back on the market happily move the cost of housing down (that's the government's stated goal after all), it would also release these individuals from the ball-and-chain of quazi ownership such that they're free to pursue the best economic opportunities around the country irrespective of locale.

Third, if mortgage holders are to get relief, then someone, somewhere is by definition getting ripped off. Savers are society's ultimate benefactors for savings paying the freight for our economic advancement, but here savers will suffer a haircut so that the ghastly errors of borrowers can be excused. The message to savers is to not bother delaying consumption so that future innovators can access capital; instead, spend with abandon with an eye on borrowing excessively knowing full well that the government (again, meaning us) will underwrite your mistakes too.

Particularly offensive within this sad exercise is the notion that we must backstop the borrowing mistakes of the housing greedy because their mortgages are "underwater." Specifically, due to a shift in market sentiment that has made the mortgages for some more expensive than the house they're in, we're expected to cushion that blow. The next time investors in the stock market buy shares on the margin that plummet in value, will we cover those errors too? _RCM

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