Friday, February 20, 2009

Some Reactions to the Obama Housing Plan

Truth on the Market:

First, Peter Klein:

I am bewildered. But, more than that, I am angry. I can’t count how many news accounts I’ve seen about the poor, struggling homeowners who can’t make the monthly mortgage payment, are about to be foreclosed, and risk losing the family home, yard, white picket fence, and piece of the American Dream. But I haven’t heard one word about the poor, struggling renters, the ones who scrimped and saved and put money away each month towards a down payment, who kept the credit cards paid off, stayed out of trouble, and lived modestly, and thought that maybe, just maybe, the fall in housing prices meant that they, finally, could afford a house — maybe one of those foreclosed units down the street. These people are Bastiat’s unseen. For them, Obama’s housing plan is a giant slap in the face. To hell with the prudent. Party on, profligate! Now that’s what I call moral hazard.

Here’s Tyler Cowen (with lots of other links to other economists’ reactions — some much more favorable):

We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.) I don’t feel moral outrage (although it is morally outrageous), I just don’t think it is a good use of money. I also wonder how it works when your income is quite variable year to year. Are they sure there is no way to game this? It will in the short run prevent some (enough to matter?) foreclosures. But it won’t keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity. It adjusts interest rates on the payments, not principal on the loans (thank goodness). Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.

As both an economist and as a long-term renter, I have to agree -- I'm a little steamed by much of this. I never bought a home in part because I: a) didn't have 20% saved up for a down payment and didn't want to expose myself to downside risk; b) didn't want to live beyond my means while pursuing other financial goals; and c) don't believe in speculative investing to try to get rich quick.

I've tried to be financially responsible and as a result, I haven't gotten any of the tax breaks homeowners get and now have to help bailout many of the people who have been irresponsible in managing their money. This is a bad way to incentivize responsible behavior and further distorts an already messed-up housing market.


thinking said...

First, there are many people genuinely hurting economically who are struggling to make their mortgage payments, who are not financially irresponsible, and who would benefit from this help. In fact, the plan seems to try to help responsible home owners and not speculators.

So it's not at all a case of just helping out those who were irresponsible or "profligate." That's a myth.

Second, many of these people to be assisted are and have been taxpayers, so it's not like this is all a case of those without mortgage difficulty totally subsidizing those who have such problems.

Third, the alternative is to allow millions more to lose their homes and go into foreclosure. Granted, it's not fun being the taxpayer who foots the bill, but imagine nothing is done. Then what are the consequences for everyone else? Well, those who own homes see the value of their homes decline even further. Also, the economy in general declines even further, again, taking a toll on everyone else.

So their is a cost to everyone else in allowing these homes to go into foreclosure. In a zeal to punish those who made poor decisions, one can take himself down as well.

Finally, there is the philosophical point of what's fair and not. But imagine a person who goes into the ER having a heart attack, perhaps even because they are obese. The person has no health insurance but the ER saves the person's life the cost of those who do pay. Would you rather have the person die? Perhaps save his life and then throw him in debtor's prison?

I mean I work hard to have health insurance, so why should some poor slob who has a health problem get treated at my expense? It's the same line of reasoning.

If we are going to punish everyone who ever made a bad economic decision, then we would all be in trouble. We all exist in a situation of grace...much of what we have is only due to the work and blessings of others.

In war, one speaks of "collateral damage" whereby some innocents are hurt. In helping people, there is always "collateral benefit" whereby some reap rewards that are not deserved.

Churches help people everyday...some are taking advantage of their church. Would one stop beneficence programs because of that? Does that mean that beneficence programs do not help anyone legitimately?

We are way passed the point where the best option is available. At this point the question is how to work out a solution that minimizes the pain and gets us out of this crisis.

And once again, I say it is incumbent on the critics to suggest an alternative.

thinking said...

Here's the bottom line:
Any solution to a problem inevitably brings its own set of new problems.

Indeed, this is what political opposition feeds off of...the fact that no matter how great the plan, one can always find ways to criticize.

I could come up with the cure for cancer and the common cold, and yet one could find a line of criticism to that.

Inevitably this housing plan is flawed; inevitably this plan will produce some negative side effects. But the real question is whether the new set of problems would be preferable to the current ones.