The Great Debate 08, Pt. 2

I had two head-snap-back moments in the debates recently. The first came in the vice presidential debate, during which Joe "Zoom! Teeth Whitening System" Biden said that Obama wants to make it possible for bankruptcy judges to alter not just the interest rate on mortgages of those filing bankruptcy but also the principal. The second came last night, when John "My Friends" McCain said that he wants to enable the Treasury Secretary to buy up mortgages and bargain the principal down to the amount the house is actually worth, not the amount of the mortgage. (Side note: As Glenn Beck has mentioned, this may be a moot point - the bailout bill may already grant the Treasury Secretary this power, among others. In fact, I would like to propose a resolution that from henceforth, the Treasury Secretary shall be known to all and sundry as He Who Controls The Wind and The Seas.)

My friends... have we lost our collective marbles? I know times are tough. I know a lot of us are concerned about where we're going from here on out. I'm less worried about myself - God willing, I have a couple of productive decades left before I have to look into the possibility of taking a job as a Walmart greeter - than for my parents and their generation, for whom retirement may be nearly impossible at this point. In fact, I think any honest investment advisor, when asked what one should do with one's savings in today's environment, would shake his head and say, "Dunno. Have you looked at investing in rocks? Because I hear they're the next big thing."

And I know - boy, do I know - that a lot of us bought houses at the top of the market and are having trouble affording and/or selling them now. But here's the thing: once you start giving judges or the legislature the power to renegotiate private contracts, you are on your way to one of a few things, none of which are desirable and some of which are horrifying. Socialism is one - or more specifically, a system of government in which the power to govern is not granted to the state by the people but is granted by the state to the people. A terrible credit market is another - yes, worse than the one we have now, if that's possible. What bank in its right mind will want to lend money to you if you can turn around a few years later and say, "You know, I don't think I should pay you the whole $100,000. I think my house is only worth $90,000. So I'll pay you that." And if you can get a judge or a government agency to agree with you, the bank has to eat $10,000, on top of attorney's fees and all kinds of other expenses.

I humbly submit that if we go this route, mortgages for first-time homebuyers will be nearly impossible to obtain. After all, almost all first-timers have to purchase mortgage insurance - a policy against the buyer's default on the mortgage. The price on that will go through the roof and become almost unobtainable if the chances and consequences of default go up. Banks - who have to make money somehow - will raise interest rates, charge more fees... that is, do anything within the law to ensure that if you do run crying to the judge, they're still going to emerge from the deal ahead. And the government, whose intention was always to get more and more people into their own homes rather than leases, consequences be dammed, will see our population returning to apartments in droves.

Set aside for a moment whether that's actually a bad thing, and whether anyone who has a mortgage actually owns their home or not. (Anyone with a passing knowledge of real estate law will tell you that you only own part of the title to your home, but we can discuss Norman legal concepts another day.) The larger problem with all the talk about bailouts and afforability and decreasing equity and Wall Street greed is that it ignores a basic point - any contract you make is both a gamble and a tradeoff. When you sign a contract to buy a house or a car, you're gambling that you will like the house or car just as much in five years as you do today; that it will meet your needs; and that its value to you approaches the price you've agreed to pay. You're trading off the assurance inherent in agreeing on a price for the fact that if you waited a month or two more the price could go down (but it could go up). You make that gamble aware of the tradeoff and having satisfied yourself that it's worth it - that you're getting something at least approaching equal to what you're giving up.

If the government can then step in and tell you that, in fact, what you gave up is not equal to what you got - not even close - are you ever going to be willing to gamble? Will anyone be? Will our system be able to handle it?

Here's the thing: fair market value is a simple concept but a powerful one. It's just what a willing buyer will pay and a willing seller will accept in an open market. If I bought my house for $100,000 a year ago, and it's worth $50,000 now, I hate to admit it, but, absent fraud, my house was worth $100,000 a year ago and is worth $50,000 now. Because a year ago, the guy I bought my house from could have sold it to someone else for $100,000. So the only arguments you can make, given this, that we should be rescued from making the gamble we made are: (1) we were too stupid to recognize that we were getting ripped off, or (2) the concept of fair market value doesn't work. If we're willing to retain capitalism and the free market as the basis for the American economic system, I think we have to reject (2), so we're stuck with (1). (Rejecting our current economic system is a question for another time.)

So I ask you - are you happy to be told that you're stupid? Because honestly, that's what both parties are saying right now. You're too dumb to know what's good for you, so we have to step in and fix this problem for you. Never mind that the cure may kill you.

Americans, let's man up. We got the mortgages we have because we wanted extra money to rehab the house. Or we wanted to live in a certain area. Because we believed that we could afford the monthly payments, as long as the interest rate didn't change and we kept our jobs and kept getting raises and didn't need to buy a car or a washing machine or a furnace in the next five years. We made a gamble. Believe me, I've been there. I've made that calculation. Sometimes I came out on the right side. Sometimes I had to pay, and pay dearly, for making a bad one. But we all have to pay. So let's suck it up, admit that greed doesn't begin and end on Wall Street, and keep making our payments. As Polonius said, "Neither a borrower nor a lender be." (Never mind what happened to Polonius. Just don't hide behind the curtains when the homocidally insane son of the dead king is around.)