MAYBE IT WASN’T SUCH A BAD BET AFTER ALL

12/16/07

I sent the following letter to Steve Chapman of the Chicago Tribune in response to his 12/16/07 column on various Democratic schemes to bail lenders out of mortgage loans they can no longer afford. As I have said in the past, Steve is, in my opinion, one of the best, if not the best, political/economic columnist in the country today. Not only does he share my libertarian outlook, he also writes effectively, argues cogently, and defies predictability:

Steve Chapman
Chicago Tribune
435 N. Michigan Avenue
Chicago, IL 60611
schapman@tribune.com

12/16/07

Steve,

You argue in your 12/16/07 column that the Democrats are “having a rollicking good time…doing noble deeds with other people’s money” by cooking ups schemes to fleece the lenders in order to bail out irresponsible lenders. Your description of the situation is deficient only in that it fails to capture the entire scope and audacity of this latest effort by politicians to use other people’s money in order to aid a favored constituency or to be perceived as “doing something.”

The Center for American Progress, a liberal think tank, has proposed creating a new government agency, the Family Foreclosure Rescue Corp., that would buy mortgage backed securities and issue new fixed rate loans for those facing foreclosure. The American Enterprise Institute, a supposedly “free market” think tank, has proposed a rehash of the Home Owners’ Loan Corp. of the 30s, a government agency that bought mortgages and refinanced them on easier terms for borrowers. On Friday, the Senate passed by a vote of 93-1 legislation increasing the amount of loans the FHA can insure to $417,000 from $362,790 so that taxpayers will now be put on the hook for insuring that the comfortably middle class can stay in homes the vast majority of Americans could not dream of affording. The Democratic candidates are proposing that the FHA guarantee loans extended to refinance people who will be unable to make their payments once they adjust to reflect the (contractually stipulated) higher interest rate after the teaser period. Republicans are proposing expanding the conforming limit for loans purchased by Fannie Mae and Freddie Mac beyond $417,000 to at least $600,000. No sense, I guess, letting the free market principles for which the GOP says it stands get in the way of using other people’s money to help out its wealthy constituency.

All these plans have in common putting the taxpayers on the hook to save those who bought more house than they could afford, or who used their homes as piggybanks to finance the purchase of things they couldn’t afford, and to bail out the foolish investors who lent to them.

One can very plausibly argue that the borrowers are at fault here; they simply borrowed more than they could repay and/or bet the wrong way on the real estate market. One can also plausibly argue that the investors are at fault; they bought paper that was riskier than they supposed and were paid far too little for the risk they assumed, relying on now clearly faulty assumptions and risk mitigation schemes promulgated by Wall Street wunderkinds who thought a surfeit of numbers and formulae could compensate for a woeful lack of investment experience and common sense. One can somewhat less plausibly argue that those who originated the loans are at fault because they duped borrowers into loans they couldn’t afford. But as the old saying goes, you only fall for lies and stories when you really want to. In order for one to blame the originator, one has to adhere to the new American motto “It’s not my fault,” to the idea that no one should ever be held responsible for his decisions, unless they turn out wells for him.

No one can plausibly argue, however, that the taxpayers, or at least the financially responsible taxpayers, are somehow at fault for the current mortgage mess. Yet all of the above plans, embraced by politicians across the political spectrum seek to use to coercive power of government to force the financially responsible to bail out the financially irresponsible and fiscally reckless.

As you point out, “a lot of people took a calculated gamble on interest rates and home prices” and lost. That is bad news. But it would be truly tragic if a lot of people instead took a calculated gamble that government would be there to bail them out of their financial idiocy and won.