Stuck on Stupid

Hillary Clinton has come out in favor of bailing out the little guy who was stupid just like the big Wall Street financial firms.

Interviewed on Tuesday morning on CBS’s “The Early Show,” she said she agrees that the situation is critical and that something must be done quickly. She said, “the house is on fire and we’ve got to call the fire department and put the fire out.” But Clinton also said that Congress should not “give the Treasury a blank check” to straighten out the problem.

“What we also have to do is make sure that homeowners get some relief, that it’s not just for the banks and the lenders,” she said. Clinton added that “we also must begin to look at the root cause of this, which is these mortgages that people cannot afford.”

So I refinance my house twice. Each time to take advantage of low interest rates and move higher interest rate debt into lower interest rate debt and lock in a nice low fixed rate. I didn’t go out and buy tons of crap with the equity in my house. I didn’t move to a larger house with an adjustable rate that I wont be able to afford. My wife and I didn’t run up credit card debt. Yet we are no supposed to help out the people who did all of these irresponsible things?

Lets think about this kind of policy that the Senator from New York is trying to foist on us. It basically says, “Here, we will help you out for being a complete dumbass. And you, the household that made wise and responsible decisions…we are going to screw you till it hurts.”

Thanks Hillary. With friends like you who needs enemies.

FILED UNDER: Campaign 2008, Economics and Business, Government, Politicians, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. She is arguing that as a matter of public policy if you are going to bail anyone out, it ought to be the homeowners.

    Frankly, I’d rather not bail anyone out, but I am not sure that is possible given the state of capital markets.

    But at this point, giving a $700b subsidy directly to banks and then foreclosing on the homeowners strikes me as problematic.

    Both the lenders and the borrowers behaved recklessly. Shouldn’t both the pain and relief be equally shared between them?

  2. Steve, spot on. Making people who didn’t run up big debts and who didn’t get over their heads with too much house feel like suckers whose reward is to now pay for the irresponsibility of others so they can keep their larger houses or excuse their debt is just so goddamned wrong as to destroy the last few remaining shreds of idealism I have left.

    The irresponsible borrowers should pay for their mistakes. The irresponsible lenders should pay for their mistakes. Instead, what I am getting is that I should pay for their mistakes.

    Enough.

  3. Steve Verdon says:

    Bernard,

    What Charles said. No matter how you spin it, it punishes the responsible and reward the irresponsible.

    It. Is. Bad. Policy.

    HTH & HAND

  4. Dave Schuler says:

    Steve, you ain’t seen nothing yet. We’re going to see a similar battle as pension funds default: taxpayers without company-paid pensions will be paying for the retirements of those whose company-paid pensions have defaulted.

  5. Were the banks responsible or not? I am confused here.

    Look, you can either gamble that the system can absorb the collapse of dozens of banks and other large financial institutions, or you can agree to some sort of bailout. And if you agree to a bailout, I can’t see how to justify taking bad loans off the bank’s books without taking some off the bad debt off the hands of the borrowers as well.

    The question isn’t really about whether we are going to punish the responsible or not. We are. Those of us who lived within our means are going to get screwed. But if some of the irresponsible parties are going to be bailed out, it might as well be the people who are going to lose their homes otherwise rather than financial executives looking to protect their bonus pools.

  6. Steve Verdon says:

    Yes Barnard we know you are confused.

    No, many of the financial institutions were not responsible.

    Many homeowners were not responsible.

    Those who were responsible are going to have to take care of those who weren’t. Problem is I don’t get any of the neat toys or big house the irresponsible are going to get to enjoy. If I have to bail out my neighbor for his irresponsible behavior I want his car and his home entertainment system.

    Being irresponsible/stupid needs to hurt.

  7. Don’t call me Barney. I have been perfectly polite to you. You can return the favor.

    I agree with your point about ideally punishing the irresponsible and not rewarding their behavior. I just don’t understand what you are proposing. Do you think you could simply state it without making fun of my name?

    Do you oppose any bailout? And if so, what do you expect will happen to capital markets as a result.

    If you support a bailout, then how should it be accomplished in way that manages to punish irresponsible behavior while still preventing a meltdown.

    Really, I don’t think I am asking too much, nor am I trying to score partisan points. You’ve posted several times on this issue, but I still don’t know what you propose. Enlighten me.

  8. Brett says:

    Keep in mind that the bailout by and large isn’t being done because people are sympathetic to idiotic homeowners – it’s being done because the whole mess of subprime mortgages has caused credit nation-wide to contract, making it harder for everybody (including people with reliable credit, presumably including you Steve) to get it.

    In other words, while it sucks to bait the moral hazard involved in bailing them out, it would suck worse to let them simply take the pain, since it comes back and bites everyone in the ass.

  9. If you want more of something, subsidize it.

  10. One more thing, when you consider how badly credit has been used and abused, maybe it does not to be a little bit tighter until risk stops being devalued or ignored because Nanny State will pick up the pieces so you can get the home/loan/car/bonus/return/perk you deserve!

  11. Jeffrey W. Baker says:

    If helping out the borrowers takes the form of cramming down the mortgage principle to the level where the owner can keep making the monthly payments, then it’s a very good idea. It serves a useful price-finding function, resets the underlying asset (the house) to a reasonable price, and forces the mortgage lender to recognize the real value and loss immediately. It serves the same function as a foreclosure, without the foreclosure, and it costs the taxpayer nothing.

    I don’t know what Verdon is so upset about here. All Clinton is talking about is a law that allows bankruptcy courts to cram down mortgages. This punishes the bank and costs the public nothing.

  12. Steve Verdon says:

    Don’t call me Barney. I have been perfectly polite to you. You can return the favor.

    Christ, I don’t even know why or how that happened. Honest, call it a Homer Simpson moment, “Oooh look something shiney….what was I writing….?”. I’ve changed that part of the post.

    I agree with your point about ideally punishing the irresponsible and not rewarding their behavior. I just don’t understand what you are proposing. Do you think you could simply state it without making fun of my name?

    I’m in favor of doing as little as possible upto doing nothing. Trying to prevent a market correction is likely going to just put off the pain and possibly make it worse. We saw something similar in 1929.

    Not long after the market crashed to 199 from its 381 high at the end of the summer of 1929, President Herbert Hoover turned on short sellers. Like our SEC, he demanded a curb on short sales. “Bear raids” or “bear parties” were to be stopped; the blame for the crash all belonged to “certain gentlemen.”

    Then, as now, there was a lengthy discourse on the difference between “normal” short sales and “naked” ones. New York Stock Exchange President Richard Whitney argued that curtailing such sales postponed unavoidable pain — or even made it greater.

    It was wrong, he said, to vilify shorts. “Such a contract to deliver something in the future which a person does not own is common to many types of business,” Whitney carefully spelled out in layman’s language. “When a builder contracts to build a skyscraper he is literally short of every bit of material.” Yet the anti-short and anti-Street mood grew. In a spirit every bit as zealous as Sen. McCain, lawmakers assigned attorney Ferdinand Pecora to lead a commission hunting for wrongdoing on Wall Street.
    Amity Shlaes
    Ms. Shlaes, a senior fellow at the Council on Foreign Relations, is author of “The Forgotten Man: A New History of the Great Depression” (HarperCollins, 2007).
    (Link)

    There is more in that article as well. For example,

    Such an office can shorten a crisis — the Resolution Trust Corporation, created to deal with the 1980s Savings and Loan debacle did.

    There is one difference though, the RTC took over loans from failed S&Ls and sorted the wheat from the chaffe. The proposed bailout mechanism today will go around to still operating banks and buy their chaffe and let them keep the wheat.

    From a moral hazard perspective this is a potential disaster. It allows good risks and their profits to remain private, but makes bad risks and their losses public. Here is the analogy.

    We go to Las Vegas. I have a bank roll of $2000. You tell me, “Steve I’ll cover your losses and you keep your winnings.” What happens? I leave with at least $2000 and you are out who knows how much. Sound like a good plan? Good policy?

    If you support a bailout, then how should it be accomplished in way that manages to punish irresponsible behavior while still preventing a meltdown.

    If there is going to be a bailout I want some sort of super-majority clause in there so that the next bailout is going to be damn hard to come by. Something like 75% of both houses of Congress and the President signing off on it. Hopefully that would send a signal not to get too giddy with the current bailout and to keep things in perspective. And I’d like to see it like the RTC where they take over all the loans and sell them all off vs. taking just the crap.

  13. Steve Verdon says:

    I don’t know what Verdon is so upset about here. All Clinton is talking about is a law that allows bankruptcy courts to cram down mortgages. This punishes the bank and costs the public nothing.

    And what does that do to the price of houses for people who aren’t in trouble with their mortgages? What are the wider market effects? If it lowers the prices of other houses in the market it is lowering the price of my house, i.e. an asset I own. Or to put it more simply it is really no different than taking the equity in my house and transfering it to other homeowners who made bad decisions.

    In other words, while it sucks to bait the moral hazard involved in bailing them out, it would suck worse to let them simply take the pain, since it comes back and bites everyone in the ass.

    Yes, it would be painful, but this solution doesn’t spare any pain, it merely spreads it around more evenly. It is unfair and makes people more likely to engage in foolish behavior than less. So it is bad policy on a number of levels. I doubt it would suck worse for the people who didn’t behave foolishly.

  14. Wha? says:

    So its always the buyers fault? No one scammed them or used smoke and mirrors to convey the comfort of credibility?

    While I agree we shouldn’t bail anyone out, your arrogance is downright disturbing in regards to the common people.

  15. Steve Verdon says:

    So its always the buyers fault? No one scammed them or used smoke and mirrors to convey the comfort of credibility?

    I still classify that as being foolish.

    While I agree we shouldn’t bail anyone out, your arrogance is downright disturbing in regards to the common people.

    Look, either your an adult and you act like one. That means you take responsibility for your screw ups. Or you are not and you need to move back into your parents basement and do what they tell you to do until you finally decide to grow up. Pretty simple really.

    And no, you can’t move into my basement.

  16. Steve:

    I agree with all of that. I think the best solution is: Let them fail. The sooner the better. Have the USG buy up banks out of bankruptcy. You’re still going to need to cram down the mortgages, unless you want (a) the USG to become a mass landlord to the middle class or (b) dump the properties onto the market, killing home values, or (c) simply accepting non-payment without foreclosure.

    The problem is this. There is no way to protect our home values. I only paid as much as I could afford, but my home value is down and will continue to decline, my taxes are high and likely to increase. It sucks.

    In the long-run, if the USG gets equity in return for its capital infusions and if they carefully manage the mortgage write-downs, we’ll do okay on all of this. But I just don’t see how to really punish the irresponsible here without the rest of us suffering as a result. We may be in a cut off your nose to spite your face situation.

    That said, it makes me very, very, very, very nervous to see the USG owning so many formerly private assets. Even if the goal is ultimately to re-privatize them, you can imagine all sort of corruption and shenanigans coming out of that process.

    The other elephant in the room, though, is how you prevent this in the future….

  17. That said, it makes me very, very, very, very nervous to see the USG owning so many formerly private assets.

    Any idea how much land the Federal Government owns?

  18. Bithead says:

    So its always the buyers fault? No one scammed them or used smoke and mirrors to convey the comfort of credibility?

    I still classify that as being foolish.

    Even when it’s the government using smoke and mirrors?

  19. PD Shaw says:

    From an RTC model, what are the assets to be collected? It seems to me that ultimately the assets are the homes (plus where recourse can be had against the borrower, the borrower’s income and assets).

    So if we are going to bail out the financial industry in a way that doesn’t create a Resolution Trust to maximize assets from the borrower, then the borrower is benefiting from the bailout as well. They should get money too? Sheeesh.

  20. Steve Plunk says:

    I doubt many of us want to reward those irresponsible idiots by bailing them out but we also don’t want to further damage the economy and ruin ourselves. I bought a house within my means, refinanced to a lower fixed rate without taking out any cash and shortening the term but if the economy falters my business could suffer and I could suffer. If helping out some of the nincompoops could keep the economy strong I’ll swallow my contempt and look forward, not backward.

    The comparisons to 1929 and the great depression should stop. The economy is very different and the investor class very different. I don’t see how these comparisons help us too much.

    So the balance to be struck is one of punishing the irresponsible, preventing more irresponsibility, and saving the economy. I don’t see how we can accomplish 100% of each of these goals so we better get to some disappointment.

    In the mean time the government could look to oil royalties, timber receipts, federal land sales, and whatever else they can do to generate cash besides raising taxes. Instead of lowering taxes perhaps the government could relax regulations on business, allow drilling to lower oil prices (talk about a stimulus), and reduce spending overseas. There are ways to help the economy without damaging the dollar.

  21. Greg says:

    Tell me something. Why do we allow congressman more than one or two terms? Why do we allow our elected representatives to run for a higher office without first giving up their present position. Why do we allow them to spend Billions of other peoples money to run for an office that when it is over somebody is just finally go back to work. Why do we not have a “National Voting Day”, instead of dragging this on and on and on…. Why does it take two years to campaign for a 4 year job?

    Oh, yeah, why are we bailing out these mortgage companies that are giving their fired CEO’s not just a “Golden Parachute” but a golden street to walk away on?

    Please tell me now for I took the night off from panhandling to find answers to these burning questions. Thanks in Advance.

  22. sam says:

    I’m curious, and am hoping maybe Steve or someone else could answer this question. Could a lot of this mess been avoided if the mortgages had been straight 30-yr/fixed-interest instead of ARMs, interest only, half-only interest, or whatever? I’ve read that some of these mortgages were pretty outre in their terms.

  23. Bithead says:

    Steve;

    This may or may not shock you, butI will say Hillary Clinton is trying to arrange for direct payments to individuals, in the process of trying to negate the obligations they signed for, which is exactly the wrong answer.

    The government didn’t misrepresent itself to these individuals, nor did the Lenders. The government on the other hand misrepresented itself to the lenders, and that’s the issue that needs redress.

  24. Patrick Vashon says:

    This is an opportunity to teach the people of America a great and necessary lesson, there is no free lunch. No Bailout.