The moral hazard fallacy

[onwards]

I just posted this to my blog... thought folks here might be interested and maybe want to comment. I haven't seen this said anywhere else yet.

[DeadManCrawling]

Thanks, I am reading it now, but want to post another item regarding this. It is a LONG piece that is clear and concise. Rather than trashing your thread with it, I will post it in another thread, but here is the link, for anyone interested.

Moral hazard? Only if it applies to Regular Joe, not the banks . . .

http://mandelman.ml-implode.com/2010/01/strategic-default-is-a-moral-dilemma-that’s-simply-adorable-dont-you-think/

[DeadManCrawling]

I am in agreement with much of your post, but I am leaning toward taking it further, actually.

Why not just nationalize the whole damn industry? Any further bailouts or mandated write-down of principal is guaranteed to carry a heavy burden for the taxpayer.

We already own (effectively) most of the mortgages in the country, through our conservatorship of Fannie and Freddie. Let's finish this deal and make it so.

Instead of repacking all the loans and pushing things further down the road to our kids and grandkids, make all payments reset to current market value. Then, make the government collect on these loans, at an interest rate tied to inflation, and no profit. We could have already achieved this, had someone in DC had the guts to propose this and carry it through, with JUST the money involved in the bailout and the ongoing cheap money loans given to the TARP banks. Many people don't realize it, but these banks, with their miracle turnaround and record earnings, are STILL riding on the taxpayers backs with ZERO interest loans for as long as they want them. Courtesy of the US Government. This is AFTER the much ballyhooed TARP payback.

Yes, even though they exclaim loudly, "We PAID IT BACK!! We should be able to give whatever bonuses we damn well want!" They are still taking zero percent loans up to 800 billion dollars. Then, reloaning the money for 3.5%. On a billion bucks or more, per loan, that adds up fast. We are socializing their loans and letting them keep the profits from this taxpayer funded profit margin.

Truly, take THEM all over and take the profits, since we are bound and determined to take the risk.

Thank you for your thoughtful blog post. We need to, as a nation, wake up to the hypocrisy and double-dealing, double-standards that pervade our system. And it all happens in front of us. Most of us, though, either do not care or do not understand.

Best,

-dmc

[SweetGeorgia]

onward, great post and I think you made a point that has been willfully obscured by the industry and policy-makers. I think another reason for wholesale principal reductions is to restore mobility. Make it possible to sell!

My neighbor has been talked into trying a short sale by a real estate agent. (I...wish him luck with that, but think it's unlikely). He's underwater by about 25%, or $30,000. A loan modification could lower his payments by lowering his interest rate, extending the term, etc.

But he still couldn't SELL THE HOUSE without a significant principal reduction.

[onwards]

onward, great post and I think you made a point that has been willfully obscured by the industry and policy-makers. I think another reason for wholesale principal reductions is to restore mobility. Make it possible to sell!

Excellent point. One of the things that has always helped the US economy to stay resilient is job mobility; in these times, we can hardly effort putting further obstacles in front of people who are looking for work.