Friday, January 8, 2010

Walking Away

There has been much discussion around the blogosphere about the issue of homeowners walking away from badly underwater mortgages. Megan McCardle had an opinion (surprise surprise!) and Steve Randy Waldman at interfluidity had a response

There is no doubt that I agree with Mr Waldman and respectfully call BULLSHIT on Ms McCardle. Libertarians are the last group of people I will take any moralizing comments from since they tend to be the group of people who will defend their right to do as they please the most emphatically. Of course Ms McCardles concern is for "business" interests in this case or more probably the "engine" of capitalism. She couches her argument in "social contract" type language but is ultimately disgusted by people who "game" the system. This gaming of the system is exactly the type of behavior her "brand" of capitalism breeds. It cannot run without it. The amount of outside (government) intervention necessary to prevent this would probably make society unlivable in her view. Of course the legislation she referred to was decidedly one sided in limiting the consumer from exercising options at the discretion of businesses at any moment.

At this very moment there is case before our supreme court which is trying to decide if there should be any limits to how corporations can operate in the political sphere. Laws regarding donating to political causes has made some distinctions between people and corporations mainly because corporations have so much more financial weight at their disposal. It seems likely that THIS supreme court will side with corporations and rule that they have the same right as individuals regarding expressing their political desires with campaign funding. The question needs to be asked; If they have individual rights do they also have individual responsibilities? I doubt you will find corporations suddenly willing to subject them selves to moralizing about the "common good" and the "fabric of society" when their self serving actions are exposed.

The following post I found this morning sums it up pretty well for me. It was at Greed Greens and Grains

Mortgage walkaways, good or bad?
We economists are indoctrinated into thinking first in positive rather than normative terms. That is, how DO people and markets behave, not how SHOULD they behave.

So. Should you walk away from your underwater mortgage?

I don't know. All I know is that if you're a rational economic agent you WILL walk away from your mortgage if the benefits outweigh the costs.

Or maybe not...

You see, the mortgage business seems to be counting hard on the idea that maybe you won't walk away from your mortgage even if you're hundreds of thousands underwater and it is in your material self interest to walk away. Not walking away saves the investment banks tons of money if you valiantly pay you mortgage even though it serves their profits over your economic interest. These are the same banks (and mortgage-backed securities holders, including the Fed) that took huge risks in lending to you in the first place, and had assumed you would walk away if things got as ugly as they currently are. Oh, did I mention those guys are still making gazillions?

It's kinda funny how the financial business plays the morality card when it suits their pocketbooks, no?

Anyway. I think it is true that many people go on paying their mortgage even when it is not in their material self interest. People do this mainly because they feel it is morally correct to do so. It's a little like taxes: cheating on taxes would pay for many people but they don't, just because they think it's the wrong thing to do.

What I'm really wondering is whether this phenomenon of people sticking it out with an underwater mortgage is is a good thing or a bad thing for broader economic recovery. You see, I think many banks are reticent to workout mortgages for people who are underwater and struggling because they feel if they lower the principal for some it will weaken the moral suasion they currently have over underwater mortgage holders who can go on paying, but probably shouldn't. This general reticence then keeps lots of people underwater and, more importantly, stuck in homes that are suboptimal for their particular circumstances. And this helps to keep the economy generally stuck in a rut. People simply cannot move to the locations, living situations and jobs that align best with their current circumstances.

Without attaching any morality to the situation, it seems to me that the general situation where people are unwilling to walk away from mortgages is slowing general economic recovery. It is adding a lot of nominal rigidity that we really could do without.

Like always, if I'm wrong about this someone please tell me why I'm wrong

Businesses are feeding off our morality and profiting from it. Cynically they have bet that we will all be suckers and continue to do irrational things. Irrational from a business standpoint. If corporations want individuals and corporations to lack distinction they certainly should not protest when individuals act in kind.

I think this is a perfect demonstration of the modern day American "hypercapitalists" being completely ignorant of the consequences of their ideology. Running around and labeling as a communist or socialist everyone who wishes some sanity in our economy even if it results in some added costs (taxes) or restricted freedoms (legislation) has brought us where we are today. Since the Reagan revolution we have had to endure one liners like "Greed is good" or "The government cant do ANYTHING right". People mindlessly parrot this bullshit and never actually think what kinds of decisions have been historically made that brought us where we are today. I work with women making mid six figure salaries exactly equal to their male counterparts who parrot the right wing talking points while enjoying their guaranteed eight week paid time off when they get pregnant. Who do they think guaranteed this for them? The corporate titans? Do they think that these guys went to Washington and asked that they be made to pay their female workers on par with their male cohorts and also pay them for eight weeks and hold their position while they sat out with their new babies? The amount of "freedom" they enjoy at their jobs was ONLY guaranteed by a "big government". This why I "walk away" when any of these people open their mouths about politics, government and economics.

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