Robert Reich has a column in The American Prospect arguing that “tough love” from the government is only for the little people. When it looked like the mortgage failures were mostly just grinding up middle and low income borrowers, the Bush administration basically said, “tough, you shouldn’t have signed up for the loan if you couldn’t afford it.”
Letting children bear the consequences of their risky behavior – what some parents call “tough love” — is equally applicable adults, and conservatives have made something of a fetish out of it.
Months ago, when the president announced a paltry plan to help out a few of the millions of homeowners who got caught in the sub-prime loan mess, he reiterated the credo: “It’s not government’s job to bail out … those who made the decision to buy a home they knew they could not afford.” Days ago, when he endorsed the giant Fed bailout of Wall Street, the president signaled it was government’s job to bail out big bankers who had made decisions to buy and sell risky securities they knew (or should have known) they could not afford.
It’s true that people tend to be less cautious when they know they’ll be bailed out. Economists call this “moral hazard.” But even when they’re being reasonably careful, people cannot always assess risks accurately. Many of the mostly poor home buyers who got into trouble did NOT in fact know they couldn’t afford the mortgage payments they were signing on to. The banks and mortgage lenders that pulled out all the stops to persuade them to the contrary were in a far better position to know; after all, they had lots of experience at this game. So did the credit-rating agencies that gave these loans solid credit ratings, as did the financiers who bundled them with less-risky loans and sold them to other financial institutions, and the hedge fund managers who quietly tucked them into their portfolios.
When it looked like a bunch of Wall Street types were about to take it in the shorts, however, it was time for a bailout; something that’s certainly not unique in this country: See, e.g., Chrysler-1979, Savings & Loan-1989; LTCM-1998; Airlines-2001. I like to call it socializing the costs and privatizing the profits.
Government exists to soften the edges of a world that, in its absence, would lead to lives that are solitary, poor, nasty, brutish, and short. There is a good argument to be made that these sorts of bailouts, even if they do directly benefit the well-to-do, prevent market collapses that would ultimately be disastrous for people who are less well-off. But, if we accept this argument for policy purposes, at the least we should disregard those who get sanctimonious about the unalloyed glories of the free market and the infallibility of the invisible hand.
I agree that we should either bail out or not bail out, for everyone. I lean more to the “not bail out” side, but for it to work it must be for both the bankers and the people.
If done properly, the risk should be even between both sides. If the deal goes south, then the borrower can declare bankruptcy if they really need to and have a chance to get on their feet.
The lender then has to make sure they’re not making a business that would cause a great many of their borrowers to go into bankruptcy. If so, they no longer have a business as all of their assets are gone.
If the so-called “little guy” losing his home would lead to potential economic collapse, then I’d be all for your apparent support for failed socialist ideas.
C’mon Doug, you are smarter than this. Socialism is a failed idea, and has been proven as such for decades, though someone doesn’t seem to have filled in the Democrat__ party on that.
I assume you don’t approve of these that Doug lists either?:
Looks like socialism for Businesses to me.
Socialism for me, but not for thee is the Wall Street mantra.
Just to elaborate a little bit, I think you need to put more meat on the bones of exactly what is meant by “socialism.” If we just mean that government is used as a means by which one group of citizens subsidizes another group; we’re a socialist country and have been for quite some time. The question is not “whether socialism” but simply “to what ends and how much.”
Exactly. Using the broad definition of socialism like that make almost every government socialist.
Government is often pro-business rather than pro-market.
Government rarely does much for the working poor who are not connected to an interest group.
The idea of a bailout of either the banks or borrowers ticks me off. If Hillary gets her idea to freeze ARMs at the lower rate for an additional five years or whatever, I will be one of the losers in this deal. I signed a mortgage for a thirty year fixed rate. I could have easily done the 7/1 ARM, but I figured that even though I could likely pay my house off within seven years, things happen. As such, I used my brain and took the safe 30 year fixed. In addition, I purchased just enough house that would be big enough for two adults and two kids. I know that we would likely need more home later on, but there was no reason to over purchase. Now I find out that I was a damn fool if there is a bailout. I could have purchased the max or gotten an interest only ARM and had my mortgage paid for by the US Government.
Things like this are why I support people getting side jobs working for cash and not paying one dime in taxes. I would never rat anyone out for not paying “their fair share.” Your “fair share” is only going to bailout big banks, oil companies, or your fellow citizens who are idiots.
The rhetoric is already being set in stone for the Fall campaign,which I’m assuming will be Obama vs McCain. Whatever Obama outlines in programs,especially desperately needed government regulations to assure more equitable performance of public money , the response will always be ‘typical tax and spend liberal with more soicalism, case closed,next issue please’ more Obama proposals to follow with same retorts… ..can’t wait..
I ‘hate’ it when slogans are considered insight.
Punish the lenders, not the borrowers… as Reich said, the banks, mortgage companies, and builders that allowed these people to borrow this money are at fault, and we rode that wave of massive housing starts until it crashed. Maybe next time the fatcats will think twice before loaning $120,000 to my neighbor across the street who’s a single mother of two working cheap labor with an endless stream of boyfriends helping to pay the mortgage while they’re living there.
It was less her fault that she took the loan than it was her lender’s fault to tell her she’s preapproved for more than she could afford and the builder leaving advertisements on her doorstep that her mortgage would be cheaper than her rent. Maybe we need a good recession to flush these trash lenders out of the gutter.
I’m all for personal accountability as much as anyone else, but when the lender tells you and advises you professionally that you can borrow more than you can afford, that is THEIR problem and their dereliction of duty.
. . .
and please ignore that $30 billion Bear Stearns bail out sitting in the corner.
The reason anyone ‘has to be punished’ is that there are no rules,so setting any rules punishes those who have had the advantage,and these are the ones who have the clout.It’s going to be a tough sell to get anything done that ‘equalizes risk'( for lack of a better term).
( I learned this concept by being a HS teacher:woe to the one who sets rules in a classroom where the standards had been set by the lowest common denominator of those assembled))
Well sure it happens this way. When government is in position to give unearned benefits, it hears from the loudest voice. The roar of the masses? Those could be farts, especially when compared with campaign contributions, well-compensated appointments to boards for relatives or the lawmakers themselves, etc. So, big business tends to get its way with big government. The best way to eliminate the problem of inequity is to eliminate all bailouts.
It isn’t ‘tough love’ though. It’s more putting an end to a poisonous enabler. One who learns that he pays no price (or worse, is bailed out) for taking reckless risks on bad investments learns hurts everyone but him. If he can sleep with that, he’ll do it again many times. As will the borrower, for that matter.
Both committed knowing frauds- the borrower knew the loan was too great, too precarious; the lender knew the same thing. Both parties are greedy, avaricious, and immoral. I can’t comprehend backing either side, really.
Bail out no loan!
I think the borrowers are probably a mixed bag. Many, I’m sure, should have known better. Either they did know better and borrowed the money anyway, or they could have known better had they put some work into understanding what they were getting into.
But, it sounds like there were also plenty who relied on representations of those who should have known better. I’m pretty quick to point out that oral promises aren’t worth the paper they’re written on, but seems like there is lesser culpability where, for example, your realtor or loan agent is telling you that it’s routine and easy to refinance at the end of an ARM introductory period, or whatever.
On the other hand, being the sort of person who locked into a 30 year fixed on a fairly moderate house compared to my financial condition, I’m not eager to subsidize those who decided to enjoy themselves a little more.
Sadly, Doug, my guess is that you have an appropriate house for your financial position, and it is most everyone else that is over-spending on how big of a house / car / etc they buy.
I wish a recession would go ahead and come to correct all of this. Add together the fact that everyone has been getting into more debt and growth in many areas has been good so far, and that equals a recession at some point.
Sooner or later, people are going to have to switch from adding debt to buying less and paying debt off. During that time, we will have a recession or depression.
Hopefully, we’ll learn from this, like those that went through the depression before. Even better, we’ll teach our children’s children how to avoid it as well.
I’m a collection attorney, so maybe I’ll be able to afford a bigger house soon. :)