Monday, February 23, 2009

Economic justice first...

In a wonderful dinner conversation with old friends this weekend, I found an edge to some opinions that surprised me.  These are folks I admire and deeply respect.  To some extent, the feelings (more than their thoughts) are partially captured by this post on Andrew Sullivan:
A reader writes:
I live in Santa Cruz California where the median home price shot up close to $900,000 at the peak of the real estate boom. My wife & I realized that there was no way that we could afford to buy a home responsibly, so we reluctantly decided to rent forever. Many of our friends who are financially reckless decided to buy condos with no money down adjustable rate interest only loans.
I don't understand why the government should bail these people out. If I had known that reckless financial behavior was going to be bailed out I would have bought one of these homes. I know that we need to fix the economy, but I feel like we are going to be punished for being responsible.
I understand the systemic dangers of letting a wave of foreclosures trigger another wave of collapsing demand. But I also know that I never took out risky loans, diligently paid back three separate mortgages, saved for my retirement, and now pay more than half my income to the government ... to give to those who gave in to greed, wishful thinking and recklessness. Another reader adds:
No one is talking about MEWs (mortgage-equity withdrawals), so it must be the elephant in the room. What really frosts people is not that their neighbors bought "too much house," because often it's the same as their house --- simply purchased at a much higher price. Rather, it's the Toyota Highlander Hybrid in the driveway, purchased with money from a MEW (via a cash-out refi), that pits neighbor against neighbor.  The responsible neighbor is reminded EVERY DAY that he is paying for the irresponsible neighbor's Highlander, and probably the deck and the big TV as well. 
Until there's a plan that deals with this inequity, the anger will not go away.
Nor should it.
[Link]  [My apology for excerpting the whole post]
Andrew is not given to high dudgeon and calls for retribution, so his reply caught me off guard as well. And heaven knows the sentiments expressed by his reader are quite common.

But if it is important to not reward/excuse/compensate for bad decisions, do we truly believe it will end there? I agree it is not fair, and has no justification in our American economic system, but my question is how do we prevent their just consequences from spreading to the "righteous"?  In short, if we simply let the housing market find a bottom on its own, is there not a significant chance we will in the process drag underwater folks who saved for a 20% downpayment and affordable payments as well?

Many of these comments seem to come from folks who have been in homes (and seemingly safe jobs, to boot) since before the great run-up, and it will take at least a few more years to destroy their equity.   But is the point that people who were given a promotion and moved to the Los Angeles office in 2007 should have sought out what few wretched houses a sensible price would buy (if any) instead of using realized gains from their sale in Topeka to buy stay within very conservative underwriting/appraisal standards?  That would have required an amazingly dour outlook.

When house prices drop by 50%, it's not only the wastrels they describe who lose, but folks who simply did not have the good fortune to have geographically fixed employment.  I can see the point of outrage in helping bad actors, although the statements about current taxpayers having to pay is nonsense.  Taxes are being cut - for crying out loud!  Any pain we will feel will be in the future, so unless critics are suffering pre-emptive financial agony, that complaint rings hollow.

Worse still, most economists see little hope of reversing the deflationary spiral until housing prices at least stabilize.  We have lost unstable demand from home-equity withdrawals to be sure, but that demand for goods and services was nonetheless real demand which produced real GDP.  I suspect few of the bailout critics have beeen laid off, but my sad estimate is a majority of Americans will experience some employement crisis before this is over, whether by actually being laid off, lower salaries, loss of advancement due to superiors who can no longer retire, lower commissions, loss of investment income - [insert your personal money headche here].

Is punishing the foolish an open-ended exercise to be continued until the collateral damage stops just short of your own door?

As well, too many who scorn the idea of helping the foolish sadly will be victims of simple bad luck as their own income casualties suddenly makes their mortgage too much.  It will be interesting to note if there is a tipping point for home/asset devaluation and job losses where the combined effects moves public opinion to look beyond the desire for justice for free spenders.  My guess would be 50% and 9%, respectively

Given the linkage we now have to each other, watching others fall off the cliff because they walked too close to the edge and remarking matter-of-factly they deserved it ignores the ropes that tie us all together.

Permit this analogy to the banking crisis that now, I think, applies to all of us.

The credit crisis as Antarctic expedition from Marketplace on Vimeo.

The same perhaps instinctive desire for "getting what they deserve" pops up in our sector among those who refused to pay high land prices and rents.  This is one reason I have been surprised at the gullibility that variable rate cash rents will protect us from predatory risk-taking competitors.  Hasn't it occurred to variable-raters that those bids can be escalated as well?

At church on Sunday, I heard a new one. A landowner was asking a reasonable-but-not-cheap cash rent PLUS  1/3 of the crop.  When it comes to competition for land, you can run, but you can't hide.

And if grain prices [continue to] tank, doubtless there will be louder cries for making sure high-rollers suffer the consequences, but in a similar way, that will come back to bite many of us, I'm willing to bet. 

I also bet many farmers who rail against bailing our homeowners will have no qualms about lobbying to raise the mandate or other ag bailouts.

Some time ago, I would have agreed more with justice-seekers.  Two factors have altered my position: 1) I have found it a cheerless result; 2) I become more convinced every day much of what I claim as the product of great decsions and hard work is actually luckThere but for the Grace of God, etc.

Most importantly, in this economic crisis, demand for economic penance may border on self-destructive. 

1 comment:

Anonymous said...

Great post John