The Free Lunch Approach to Finance
Over the last week, the media has been abuzz with numerous bailout plans to help homeowners in danger of losing their homes. The New York Times reports there are at least four plans in the works.
The problem with virtually all of these plans is that they punish the prudent and reward the… Honestly it’s hard to phrase this appropriately. The American dream to a large extent entails homeownership. The problem with Dreams — American or otherwise — is that they’re not based in reality. We’ve now got a situation in which millions of Americans are living in homes they cannot afford. Many of them have simply stopped making mortgage payments and are essentially squatting.
Banks which are already broke and don’t need to spend the extra money filling out foreclosure paperwork have helped facilitate this. The most recent example is JPMorgan, which just announced it will freeze foreclosures on $70 billion worth of mortgages for up to 90 days (three months). Other banks have implemented similar schemes.
But what about the people who saved their money and only bought homes they could afford? Those who exhibited prudence and lived responsibly now look like fools making mortgage payments while their neighbors squat for free.
To me, all of these issues hinge on the fact that we’re talking about homes. If this issue was related to cars — minimum wage employees started buying Ferraris or Porsches — or jewelry — high school teens started buying Tiffany’s diamonds using their allowance — there would be no debate here. The powers that be would simply say, “these people lived excessively and have dug themselves into a ditch. It’s their problem, not ours.”
However, because we’re talking about homes, everyone is uncomfortable saying anything like this. No one wants to be seen as the guy who throws his fellow Americans into the streets. But the reality is that the US left reality and entered fantasyland about five years ago when people who would never have been able to afford a home previously started buying houses.
I realize that the story is more complicated than this. There were predatory lending practices, complicated mortgage structures that hid the real monthly payments from the financially unsophisticated, and more. But the fact remains that for whatever reason, there are now millions of folks living in homes they cannot afford. And the Feds and banks are now doing what they can to keep these people in these homes. Doing this has multiple implications. It provides plenty of incentive for folks who CAN afford their mortgages to simply stop paying, which not only increases the problem but will end up costing Americans more money in the end as we pay off these future nationalized debts over the next couple of generations.
It also opens the door for lax rulings on other debt markets, most notably credit cards. It’s not a huge jump to go from writing off homeowner debt to writing off credit card debt. Indeed, several large banks have grouped together to ask the government to allow portions of consumer credit card debt to be forgiven. The pilot program could affect as many as 50,000 people and could forgive as much as 40% of an individual’s credit card debt depending on his or her financial situation.
What’s next, car loan forgiveness? Student loan forgiveness? It’s getting to the point where there’s no real reason to work hard or make money: Your bills could potentially only be food, clothing and energy. I’m not saying that facetiously. If credit card and mortgage debt are forgiven, the monthly household bills drop big time.
Is this the new American retirement program — Forget about savings and working hard, just stop paying debts and bills, squat in your home, and earn enough to pay for the groceries and heating bill?
Has the formerly impossible “free lunch” begun to exist in America?
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This article has 21 comments:
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KSengineer
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11 Comments
Nov 05 04:31 PMOh, I just figured out the problem ... our public schools aren't getting enough money. Ya, that's gotta be it.
America, what's happened to ya?
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valueinvestor123
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109 Comments
Nov 05 04:45 PM-
phdinsuntanning
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433 Comments
My Website
Nov 05 05:01 PM-
Damian
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4 Comments
Nov 05 05:15 PMThose of us in the middle -- who make enough money to pay their bills, but who aren't rich -- are being screwed six ways to Sunday. Basically, we lose in the market (the real world), decreasing our assets, and then we are forced to give a higher share of those assets in taxes to bail out the Wall Street elites, on the one hand, and the irresponsible consumer, on the other.
Many readers of this article are probably in similar situations, so they may find this example unremarkable, but my wife and I worked our tails off to pay off all of our consumer debt during our first few years after getting out of school. We didn't take vacations, and I sold assets and put huge chunks of my money toward it (it was left over from college and law school). Our goal was to be financially secure before having children and to establish college funds, a nice start on retirement planning, and all the other stuff that constitutes the "right thing" to do.
Now, with our first child on the way, our equity holdings have been hammered by between 40-50%, our house has decreased in value by about 25%, and all of my taxes are going up and have done so over the past year. The little credit card debt that we have certainly isn't going to be written off, because I am a "rich" attorney who makes a decent 6-figure salary in an expensive city, but I get to take it in the shorts in the market, in the lost value of my house, in interest charges on my credit cards, in increased rates on loans due to bank hoarding, in increased cap gains taxes if I ever actually sell any of these investments for a profit, in higher fees and charges from banks in order to finance their irresponsibility (and that of many of their loan customers), and in increased taxes, borne by my children and I, for the bailout so that Goldman Sachs partners can use bailout funds for $3m bonuses.
Further, if I sell any stocks in the future at a profit, I'll pay more taxes on them still.
I also get to hear about how I am "rich" and how it has come time for me to pay the piper. Well sorry, but I paid my own way through public schools, earning scholarships and taking out loans.
I'm tired of getting screwed over. It's enough to want to max out the $150,000 or so that I have in available credit on gold and in cash advances, to rathole those assets, and then to piss and moan about the unbearable credit card debt until it is borne at others' expense. I won't do that, but many others have done so -- although they bought Fubu jackets, motorcycles, and gold wheels, not gold -- and many, many, MANY others will do so once the word of any kind of credit card amnesty gets out.
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gps_geek
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10 Comments
Nov 05 05:26 PMThe American dream is to be able to AFFORD a house...
That means putting down enough to keep the payments affordable and
buying only enough house that you actually need. Somewhere, getting a bigger house was equated to having more wealth.
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eternitus
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52 Comments
Nov 05 05:33 PMThis really comes down to people trying to prop up the value of their own homes. Prudent homeowners can gain at least by having home values higher than they otherwise would be. Savers and renters are really getting the shaft.
I'm tired of politicians giving lip service to affordable housing and then doing everything in their power to make housing more expensive. I can at least take solace in the fact that even the federal government can only effectively bring a garden hose to a forest fire because the housing market is so huge. I'll just have to wait a little longer until the property bubble deflates all the way (and I mean all the way), just like in Japan.
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bricki
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81 Comments
Nov 05 05:40 PMThe financial guys have figured out that if you package this as relief to homeowners and consumers they will have a far greater likelihood of success. That is true, up until the point where people see through their game.
Say NO to corporate bailouts.
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moonbat1775
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707 Comments
My Website
Nov 05 07:12 PMThe population at large was cheated when the loans were made via inflation. Either prices rose or failed to fall as they would have without fractional reserve banking.
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hswalj
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8 Comments
Nov 05 08:06 PM-
dw57
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82 Comments
Nov 05 08:08 PM-
chug4fun1@yahoo.com
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1 Comment
Nov 05 08:12 PM-
R0B50
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8 Comments
Nov 05 08:56 PMI don't know if I should be disgusted by your post, or congratulate you for getting it done before the banks stopped making the loans for the most part.
Now, whether or not they do any due diligence, they are too afraid to make a decision so we are not able to follow your system of how to scam the system decade after decade.
I suppose I should be happy for you, but to tell the truth I can't keep down dinner even thinking about it.
Some of us actually pay our bills...You just move.
That's one hell of a ethic lesson you demonstrate.
Oh and I am so sorry your mortgage jumped from $700 to $3500 (Which I find hard to beleive but even so how smart is it to get into that kind of a loan? Stupidest terms I have heard of.), of course the question has to be asked...
Did you even read the documents, or are you really trying to say you have no fault in this because some salesman told you to buy.
I think I understand this more now.
The prudent and smart consumers are being shafted by the idiots (who far outnumber us) that can't manage to act like adults and have to buy every item on the commercials because the TV told them to do it.
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junkinthesack
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5 Comments
Nov 05 10:07 PM-
WhynoT
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18 Comments
Nov 05 10:28 PMImmediately solve 2 problems...
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User 118015
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309 Comments
Nov 05 10:43 PM-
JE
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125 Comments
Nov 06 08:45 AMGoldman and Citi are failed banks without taxpayer support. They have announced the termination of 12,000 employees together and in the same breath they talk of their bonuses being reduced to a mere $20 million.
Why am I the only one that is outraged at any bonuses being taken by anyone on the Street as long as they are still owing the FED.
I don't think we can talk about individual capacity being the force behind the bonuses because anyone from Manpower could have achieved their results.
Why is this subject taboo? If anyone is to believe that governmental oversight has any teeth the bunuses have to be zero until the FED money is restored.
Talk about disgusting - this should have people marching in the street.
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vanyali
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12 Comments
Nov 06 10:32 AMThe bigger question is what the ultimate results will be. Ask yourself who is going to lend money going forward if they don't think it's going to get paid back? That is the real problem. This isn't theoretical -- in the 1930's, the government created a debt-forgiveness scheme to help farmers. The result was that it became harder and more expensive for farmers to borrow, and without credit, a lot of them lost their ability to operate.
Credit is useful. You don't realize just HOW useful until it's gone.
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vanyali
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12 Comments
Nov 06 10:38 AMAnd on banker bonus pools -- in the financial sector, a major part of your compensation is paid as an end of year bonus. Even little nothings, like law-firm associates, get huge chunks of their compensation in the form of an end-of-year-bonus, which you give up if you quit or lose your job before the bonus hits your bank account. t's true that some people in banks in good times get really big bonuses, and that's what you hear about, but for most of the grunts, the bonus isn't an extra reward that you just get in a good year -- it's not a "bonus" -- it's your due.
On Nov 06 08:45 AM User 52095 wrote:
> You hear so much about irresponsible buyers and the absolute disgust
> for them getting any sort of help. Why shouldn't they get help? Look
> at Goldman and Citi - talk about irresponsible (criminal)!
>
> Goldman and Citi are failed banks without taxpayer support. They
> have announced the termination of 12,000 employees together and in
> the same breath they talk of their bonuses being reduced to a mere
> $20 million.
>
> Why am I the only one that is outraged at any bonuses being taken
> by anyone on the Street as long as they are still owing the FED.
>
>
> I don't think we can talk about individual capacity being the force
> behind the bonuses because anyone from Manpower could have achieved
> their results.
>
> Why is this subject taboo? If anyone is to believe that governmental
> oversight has any teeth the bunuses have to be zero until the FED
> money is restored.
>
> Talk about disgusting - this should have people marching in the street.
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vanyali
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12 Comments
Nov 06 10:40 AMOn Nov 05 10:28 PM WhynoT? wrote:
> Idea: Use remaining TARP monies to directly purchase foreclosed and
> soon to be foreclosed homes. Give these homes to Iraq war veterans...
>
>
> Immediately solve 2 problems...
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I pay my bills!
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1 Comment
Nov 06 12:04 PMIt comes down to personal accountability. You idiots knew you shouldn't have bought the homes and cars and ran up the credit cards when you did it. If you didn't, like the person said above, you're too damn stupid to own a home in the first place!
All of you greedy idiots that have your homes you can't afford, your Hummers, your Cadillacs, and your Mercedes, you better find a way to hold on to them because you will NEVER get another one!!!!
Unless you learn how to work for it! You don't deserve it! The world owes you nothing!!!!!!!!!
I pay my bills!!!
a.k.a. Now I'm paying yours!!!
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wildhawk
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6 Comments
Nov 10 01:52 PM