Talk is increasing about a government bail-out for home owners who cannot handle the burden of their mortgages. This annoys me no end. My regular readers know that I have previously written strongly in favor of the government bail out of financial institutions. Why then do I object to a bail out for individual home owners and how can I justify this seemingly inconsistent position? Here goes:
No Win for Taxpayers - when bailing out financial institutions, government, for the most part, received an equity stake in the banks or received other assets that once the markets stabilize will become more valuable and may actually provide tax payers with a substantial return on their investment. The proposed bailout of homeowners will not provide tax payers with any upside or assets in return for their gracious intervention. It will simply make the problems of overwhelmed home owners go away by a wave of the magic wand, at our expense.
Picking Winners and Losers - I am a renter. My wife and I made the decision to rent for a combination of reasons, the most important of which is that we simply cannot afford to buy a house in our town, nor did we think that stretching to buy one would be a good or safe investment. On the other hand, many other folks have made a financial bet on the supposedly permanently rising prices of real estate and decided to gamble their life's savings to buy a house.
A specific example I have in mind is one of the people that worked for me in my previous company, who bought a million dollar house in San Jose, California, even though his household income was dramatically lower than mine, and who did so through an aggressive ARM with a 5 year teaser rate.
Why would government take my money, to reward those homeowners who made bad financial decisions? Not only does such a decision hurt me and millions like me directly by wasting our tax dollars, it also penalizes us by artificially putting a price floor under the housing market, thereby keeping houses out of our reach while letting those who made irresponsible decisions reap financial rewards for their financial recklessness.
By bailing out homeowners, government would be making winners out of irresponsible home buyers, and doing so by penalizing responsible renters and (to a lesser degree) responsible home owners.
Moral Hazard Galore - even though we have all taken to calling it a bail-out, financial institutions were not really bailed-out in the common sense of the word. AIG shareholders were completely wiped-out in the government take-over, BearStearns share holders were very nearly wiped-out. Banks who are now receiving equity infusions from the government are receiving this cash infusion in exchange for shares which dilute the value of shares held by other shareholders and which will hopefully yield a profit to tax payers in the long run. What I am trying to say is that the government may have bailed out the financial institutions themselves, but shareholders have been duly penalized.
However, the government is now proposing a true bail-out of homeowners. It is not talking about wiping out the equity of home owners and turning them into renters or of letting them walk away from their loans without going through bankruptcy, it is talking about improving the terms of their loans so that they are better off. Seriously?
The System is not at Stake - With all due respect to home owners, the financial sector was on the verge of complete collapse, one that would surely have dragged down strong industrial companies and small businesses along with it. This was not a question of saving Wall Street, it was a question of saving all of us. The boat was sinking. The same is not true of individual homeowners. Yes, collectively homeowner losses are a drag on the economy, but no one is even claiming that this will bring a complete meltdown of our economic system. The situations are simply not comparable.
Worried about the economy? Let's talk economic stimulus. Let's talk tax cuts, let's talk public works and infrastructure improvements. Hell, let's even talk a second stimulus check to individual tax payers. BUT don't go and reward exactly the sector of the population whose financial irresponsibility and greed is a major reason for the current economic trouble!