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In a breath of fresh air I have heard from few people in Washington, Thomas Sowell takes the idea of mortgage bailouts to task by saying what every sane person is thinking. The article was so good I had to copy/paste it all here for your perusal.
Here’s the brilliance called Subsidizing Bad Decisions, published March 10, 2009:
Now that the federal government has decided to bail out homeowners in trouble, with mortgage loans up to $729,000, that raises some questions that ought to be asked, but are seldom being asked.
Since the average American never took out a mortgage loan as big as seven hundred grand– for the very good reason that he could not afford it– why should he be forced as a taxpayer to subsidize someone else who apparently couldn’t afford it either, but who got in over his head anyway?
Why should taxpayers who live in apartments, perhaps because they did not feel that they could afford to buy a house, be forced to subsidize other people who could not afford to buy a house, but who went ahead and bought one anyway?
We hear a lot of talk in some quarters about how any one of us could be in the same financial trouble that many homeowners are in if we lost our job or had some other misfortune. The pat phrase is that we are all just a few paydays away from being in the same predicament.
Another way of saying the same thing is that some people live high enough on the hog that any of the common misfortunes of life can ruin them.
Who hasn’t been out of work at some time or other, or had an illness or accident that created unexpected expenses? The old and trite notion of “saving for a rainy day” is old and trite precisely because this has been a common experience for a very long time.
What is new is the current notion of indulging people who refused to save for a rainy day or to live within their means. In politics, it is called “compassion”– which comes in both the standard liberal version and “compassionate conservatism.”
The one person toward whom there is no compassion is the taxpayer.
The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue– and as if the people facing foreclosures are the only people that matter.
What if the foreclosures are not stopped?
Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices– prices perhaps more within the means of the new occupants?
The same politicians who have been talking about a need for “affordable housing” for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?
The political meaning of “affordable housing” is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit.
Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.
Study after study, not only here but in other countries, show that the most affordable housing is where there has been the least government interference with the market– contrary to rhetoric.
When new occupants of foreclosed housing find it more affordable, will the previous occupants all become homeless? Or are they more likely to move into homes or apartments that they can afford? They will of course be sadder– but perhaps wiser as well.
The old and trite phrase “sadder but wiser” is old and trite for the same reason that “saving for a rainy day” is old and trite. It reflects an all too common human experience.
Even in an era of much-ballyhooed “change,” the government cannot eliminate sadness. What it can do is transfer that sadness from those who made risky and unwise decisions to the taxpayers who had nothing to do with their decisions.
Worse, the subsidizing of bad decisions destroys one of the most effective sources of better decisions– namely, paying the consequences of bad decisions.
In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from “creative” and risky financing. It is amazing how fast people learn when they are not insulated from the consequences of their decisions.
He is absolutely correct. Obama and the other geniuses running around with our money should take notice of these basic economic principles.
Check out Sowell’s past columns at the TownHall.com Thomas Sowell archive.
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the more homes that forclose does not mean that people are going to be moving into them. First off, Thomas Sowell down plays the amount of homes that would be foreclosed if there were no bailout… Specifically, I am talking about the bailout of the banks.
The numbers I have been reading is that there would be double the amount of foreclosures. Which would lead to a large amount of homes to pop up on the market. Yes, they would be better priced and yes people would look to take advantage of the deals. However, it would be impossible to get a loan if Freddie and Fannie went bankrupt. That is a fact.
So the supposed first time home buyers wouldn’t get approved for the loans to move into those houses. And the slide would continue.
That said, I don’t care but it is ignorant to think that “responsible” home owners wouldn’t be effected because why would I buy their home when I can buy a foreclosed one down the road. Not to mention, new home development.
“the more homes that forclose does not mean that people are going to be moving into them.”
That’s completely untrue and I’ve seen firsthand proof.
Here in Northern Virginia there were a lot of foreclosures, still are in fact. When we moved down we had about 5 townhomes on our street which were foreclosures. People got them with interest-only mortgages and other crap they never should have signed for. The prices in the area were terribly inflated and are now coming back to their correct range.
Since last year, every single one of those homes has been bought, mostly by younger couples who could afford them since the price drop.
So yes, it does mean people will move into them, especially since they’re getting them at lower prices. I’ve seen it and I’m guessing that our street can’t be that different than other areas hit by the mortgage bubble. If you have a decent home in a decent area, chances are it will be in demand.
Sorry but I trust Sowell’s unmatched economic credentials over you, JD.
You missed what I was saying. My point is that if there were no bailout than credit would have frozen so even first time home owners, even if they could afford the foreclosed homes, would not be able to get the loans.
There is no doubt that Sowell has more economic credentials than I but this is much like the global warming issue where there are economist on both sides with equal credentials claiming both sides are true.
Again, the Morgage bank bailout are one of the reason why your young first time home buyers are able to get the houses.
That is a fact.
If the banks had gone under, than so would credit for buying homes and couple that with the fact that small businesses would not be able to cover their start-up\business payrolls and many, many, many more lay offs would have happened.
Again, not only would the first time home buyers not have been able to get the loan but some of them would be out of a job.
So again, you under estimate the effects if the Government had not bailed out the banks.
“We hear a lot of talk in some quarters about how any one of us could be in the same financial trouble that many homeowners are in if we lost our job or had some other misfortune. The pat phrase is that we are all just a few paydays away from being in the same predicament.
Another way of saying the same thing is that some people live high enough on the hog that any of the common misfortunes of life can ruin them.
Even in an era of much-ballyhooed “change,” the government cannot eliminate sadness. What it can do is transfer that sadness from those who made risky and unwise decisions to the taxpayers who had nothing to do with their decisions.”
JD, your problem is you have no principles by which you live. You react on emotion and think it’s fine for the government to be irresponsible with taxpayer money.
There are no reputable economists who think the way the government has handled this economic crisis, Bush or Obama, was the best way. Obama is continuing to make the same failed mistakes.
Thanks Nate. I was thinking the same thing earlier today. I am a total douche bag
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Again, I believe in this case the ends justify the means. Just like you believe the Iraq War justified the means.
However, I am not going to go so far to say that you have no principles.
By the way… the DOW is up again
Hmmmmmmmm…..I don’t mean to be nit-picking BUT I’m looking at http://www.recovery.org and I just can’t seem to find any indication of them monitoring
EVERY DOLLAR OF AIG BONUSES!
“However, it would be impossible to get a loan if Freddie and Fannie went bankrupt. That is a fact.”
That’s also not a fact, JD. Freddie and Fannie are the largest in mortgages, but not the only.
Your theory addresses the symptoms, not the disease. A bail-out is a bandaid to a larger, underlying problem in the housing crisis, and until the disease is addressed, we’ll see this crisis again.
Babs, if you are suggesting that if the two largest mortgage lenders went under, “With Freddie Mac’s $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market”, that it would not effect the others is partially true.
firstly, 1 out of 2 americans would not be able to get a loan. Secondly, Feddie and Fannie buy up loans from the other half which allows frees these banks up with fresh cash for more mortgage lending.
Though I don’t know the exact numbers but I would suspect that 2/3rds of Americans would not be able to get home loans. Assuming that the other banks don’t freeze credit since we all know mortgages are not the only thing they lend for.
Here is a good article on Freddie and Fannie.
http://www.usatoday.com/m.....ddie_N.htm
What I’m suggesting, JD, is that you’re wrong in your statement that if F & F went bankrupt it would be “impossible” to get a home loan. That’s just not true. While half of home loans may originate or wind up with F & F, half don’t. And if they were bankrupt, it would open up a lot of doors in lending from other financial arenas. And that’s why they call it capitalism.