Strategic default: a soldier’s perspective

Commenter “Indy” offered the following in response to the previous post on strategic default by underwater homeowners. I think it’s worth a read:

This is an issue I’ve been thinking about for over a year now. I recently returned to my Law / Economics student life from a deployment to Afghanistan with an Army Military Intelligence unit. Prior to the deployment, several of the other officers had been stationed at the height of the housing bubble at facilities located near D.C. in Northern Virginia. They lived in very modest homes which were removed from their workplaces by substantial driving distances, but these homes were nevertheless particularly pricey for someone with a family and on a military salary. The humble homes ate significant chunks out of those salaries as the commutes did to the (already scarce) time these men had to spend with their families.

Such are among the many sacrifices of military life even in peacetime. There are, it seems, a multitude of wealthy lawyers inhabiting the good neighborhoods in the concentric circles of significance around the capitol. There is real irony is how their bidding up of the prices of real estate in order to achieve influence over power has muscled out the very men who are entrusted by the nation to wield it.

Despite the high prices that dominated before the crash, when my friends had reported to their new posts they found the local branches of the nation’s largest bank chains exceedingly eager to “serve” them. The companies offered to loan them (well, “originate”) up to 100% of the asking price plus costs with a minimum of fuss, delay, paperwork, or any other prudent diligence. I had a similar, “Really, is that it? That can’t be right. Are you sure that’s all you need?” experience when I received my mortgage in 2005 from Countrywide. Those were the days.

The officers were also heavily encouraged to dabble in those now infamous Option-ARMs and other dangerous financial “innovations”. The temptation must have been intense, but the men were skeptical, conservative types, and they opted for traditional fixed-rate mortgages. The Army is a place where an officer is busy with planning half of the time and busy ignoring those plans the other half because all one can do is a kind of ad hoc improvisation and adaptation to constantly changing circumstances. In few other places will one learn more about the limits, almost futility, of planning for an unknowable future full of unforeseeable and defined by unintended consequences. The Army depends and thrives on the bravery of the Soldiers and the caution of their superiors. “Safety” is akin to an ideology and a way of life. Likewise, these were brave and safe men who chose safe mortgages that were “safe as houses”.

While we were away, about halfway through our deployment, the crash began and something mysterious had gone horribly wrong with the machinery of America. The small equity positions these men has invested in their respective residences were wiped out in a matter of months. By the time they were close to returning to these homes the men were all badly underwater by over one hundred thousand dollars and, what was worse, the Army had reassigned them. They would be required to move promptly upon redeployment. They were simply not in a position to hold out, wait for prices to go back up in the long term, and continue making monthly payments. Unfortunate professional timing had compelled them to buy at the top and sell at the “bottom”. Wasn’t the avoidance of precisely this “fire sale” scenario the purported rationale for the bailouts of the financial institutions? But no extension for families, it seemed.

So, as the depth of the murky trouble in which they were finding themselves became increasingly clear they all found themselves perplexed as to what to do. Their uncertainty had two dimensions – (1) technical and (2) moral. They asked for my assistance and I tried to explain the little information I had learned about short-sales, negotiated settlements, and other ways of dealing with their banks to offload their properties and debt obligations (Virginia is non-recourse). I explained what I knew about what the various consequences – for example to their credit scores – would likely be.

When they were presented with these various options one course of action usually stood out as an obvious winner when measured purely in terms of their financial self-interest. However, they still wondered which fork in the road was the right one ethically. They had each accumulated a small life’s savings over the course of their careers, and they could decide to hand over the entire family education and retirement fund to the bank or choose one of the legal options that would let them try and keep it. What was the right thing to do? Were their wives and children the “shareholders” of the family, the welfare (to include the financial well-being) of which the preservation constituted the highest ethical goal?

With these men, and with many others I would estimate, they sense a moral dimension that should be addressed in their decision-making but they don’t know how to conduct the ethical analysis. They look for guidance and advice in the words of their acquaintances and the acts of their community and national leaders.

Their instinct was that if they had borrowed money from a friend or a neighbor they would feel a deep, almost sacred, obligation to make good on their debt and pay it off in full plus interest as soon as they could manage it. It would be wrong to stiff the guy next door even if you were in trouble and the law would let you get away with it. Their first impulse was to extend the principle to all debts, including the one on their house. That was, after all, the “right thing to do” as they had been taught by their parents and grandparents.

But then the bailouts with taxpayer money started. The “too big to fail” talk began, and then the wave of foreclosures and layoffs and emerging scandals of the unjust excesses of the financial industry, and so on. And these men began to feel that from the personal scale of their little world, their family was also perhaps “too big to fail” by the forfeit of their hard-won life’s savings.

They also started to question how the bailouts could make sense without some of the benefits flowing to innocent and responsible men such as themselves. They all knew some reckless nut next door who lied on his applications and bought six houses to “flip”, each of which more than double what he could conceivably afford. How could this crazy man be permitted to just abandon ship and mail the keys to the banks? And what about all the people who were getting the “shadow bailout” by “strategically defaulting” and purposefully living rent-free until the day of eviction, sometimes a year later? How is it just that these frauds would be the primary beneficiary of the foreclosure delay acts of the state legislatures? All of sudden, what had seemed moral now appeared foolish, even stupid.

And then it never seemed to end — bailouts for the car makers, countless earmarks, and a thousand inexplicable giveaways in the “stimulus”. And these gentlemen are not economists or political scientists and must distill the message of these actions through our hysterical and hyperbolic press which tells these stories in a way so as to make us terrified and irate.

And the point of all of this is that even the meekest law of real estate finance can have a profound effect on our cultural values. The whole moral universe, in regards to debt, has been overthrown for these good and righteous men with whom I went to war. They started out with an inclination as to what the right thing to do was, and then they were unsure. Then they questioned whether they were just being “suckers” and if there really was any kind of moral question at all given what was happening in the world around them.

I wonder what new moral lessons these men, indeed our whole generation, will now teach our children and grandchildren. I’ll guess that the content of these lessons will not include much sense of moral obligation or sympathy towards banks. Perhaps that’s for the best, moral intuitions being supportive of certain beneficial survival instincts in the modern dog-eat-dog financial world where ordinary folks need be constantly on their guard. I hope it doesn’t spillover, baby-with-the-bath-water-like, and create a generational animosity for a free market economy and open society in general. I also hope they find a way to preserve some space for social interactions involving money that aren’t “just business” and where, indeed, it’s sometimes worthwhile to make an non-mandatory personal sacrifice for no other reason than because its the “right thing to do”.

 
 

28 Responses to “Strategic default: a soldier’s perspective”

  1. zanon writes:

    Great post.

    Megan’s position on strategic default is bizarre. The banks made the loans not because they expected to be paid back, but because they either did not care about being paid back, or they were betting on house prices going up forever.

    Since the bank never had the expectation of being paid back when it made the loan, what moral onus is there on the borrower to pay them back when the bank’s own expectations were confounded?

    The social mores that say you must pay back your debt are coupled with economic mores that say banks should make loans that will get paid back. The latter have been completely severed thanks to the Obama administration. There is no reason a sane or moral person would support the former over his or her own family.

  2. someone writes:

    what has been the morality of states during periods of high inflation when those who depended on their old day savings have been expropriated??

  3. Kid Dynamite writes:

    isn’t there another lesson here? the one that if you’re in a highly mobile job where you can be forced to move at any time, then you shouldn’t be buying a house – you should be renting!

    i don’t want to sound unsympathetic to the plight of these soldiers, because i value their actions very much – but the real problem is that if you’re constantly getting re-deployed around the country or the globe, you shouldn’t lock yourself into owning a home where you could have your equity wiped out and be forced to sell at a loss…

  4. q writes:

    Also, don’t feel too sorry for the soldiers and those military salaries. Officers in particular are quite well paid. They just don’t realize it due to the structure of military pay. For example, ask an O-3 (basically someone with a degree and as little as 4 years of service) in the DC area what they make and they might say something on the order of $70-80k. However, when you factor in the tax-free benefits of the military pay allowances for subsistence and housing, as well as free health care, that O-3 would have to make just over $100k outside the military to take home the same amount. Factor in contributions to get an equivalent pension and their pay is nearing $120k. Then consider that due to state tax laws it is quite likely they do not pay state taxes; and that while deployed their entire monthly pay is exempt from federal income taxes and that they are likely receiving hazard pay…

    Do not interpret this as a lack of appreciation for what soldiers do. It’s just an analysis of the factors that determine their pay. I was in the military myself for 4 years, and I ran these numbers when I separated because I needed to know what salary to ask for to take home roughly the same amount. No one else I’ve talked to has ever done the same analysis to this degree, so most soldiers leaving the military vastly underestimate what they are truly being paid.

  5. TA writes:

    They could have rented.

  6. q writes:

    the q above is not the same as the q who has been posting on other sites as q, or on the last post as q, but whatever. i was going to say something in the same direction but different. there is absolutely no good reason for the military to get the level of funding — all from the taxpayer — that it does. individuals in the military are the direct beneficiary of lobbyists and special interest groups and political ideologues that funnel taxpayer money into the military. so to claim that you are not receiving taxpayer support is incorrect at best.

  7. Indy writes:

    Kid Dynamite and TA: That lesson was not lost on my friends, believe me! They were all cursing themselves repeatedly for the “blind and naive” decisions they had made and they are all confirmed renters today. They all readily conceded that, at the time, like a lot of Americans including myself, they were caught up in the dream-cult of home-ownership. “Sleepwalking” was how they aptly described it. Dreams and Debts are Drugs. Sometimes I think China is fighting the Opium war in reverse by feeding us an addition to easy money.

    At any rate, it was just too easy for an ordinary person to believe, even without good foundation, that selling would always be quick and easy if one had to make a move. This indeed was the case for a few years, and it’s easy in hindsight to say “What a silly and reckless risk for a Soldier!” but, in their defense, the common experience of most of my colleagues in the boom years seemed to provide the basis for the opposite view – that it wouldn’t be any trouble at all. They also thought that, sure, house prices had gone up like crazy, but “everybody knows” that they never go down (let alone crash) and instead would just level off someday. I think these guys can be forgiven for accepting passively what, apparently, the most sophisticated investment bankers also concluded – to the detriment of us all.

    But the post is not really about lessons, or making you feel sorry or sympathetic for my friends (they’ll be fine) as it is about the phenomenon of people having moral feelings towards concepts like debt, and how they can change depending on the circumstances, the law, and the behavior of those around them. I think the American population has gone through several of these moral cycles as times go from boom to bust and back again.

    qLooks like we’re quantitative soul-mates. When I was in the Service I routinely did accounting-style present-value analysis of my real compensation for fun, and tried to figure out which assumptions made it worthwhile to stay in or try the private sector. Most servicemen get paid much more than they see in their paychecks or in their current spending power, but it’s mostly deferred gratification and it takes a certain perspective to appreciate it, especially if you’re 19.

    Actually, the Army does hand out this page every year that tries to explain to soldiers what the value of their various benefits are, and that really they were getting paid far more than they realize! Most of them, if they looked at this sheet at all, just scoffed with disbelief and tossed it. Part of the problem is that the numbers are averages, and the single private seems to get the same health care benefit as the 45-year-old married colonel with 7 kids, which is of course absurd.

    What I like to do now, especially since I’ve finished my Federal Income Tax class and can do it with a higher level of sophistication, is try to figure out the true equivalent pay – that is – if I were privately employed, paid entirely in cash and no benefits, how much would I have to make in the next 15-years (until retirement eligibility) to come out even with the Army. It’s true the tax-advantages help out a lot, but like with most government workers – the real shadow compensation prize is the health-care and education benefits, and especially the pension.

    Here’s a quick calculation for you. If I retire in 2026 as a Lieutenant Colonel with (inflation-adjusted!) half-pay, I could be pulling in $4,000 a month in 2010 dollars for the rest of my life. Assuming I live another forty years (God willing), how much extra would I have had to have made for each of 15 years in a private job to have accumulated a large-enough pile of savings to guarantee that kind of stream of income? Let’s assume the extra pay is before taxes, the interest also does not accrue sheltered from taxes (i.e. is not in an IRA or other qualified tax-deferred retirement savings account), the real interest rate above inflation is 3%, and a marginal tax rate of 30% (if we’re lucky!).

    I get a figure of about an extra $100,000 a year. Yes, really. Not too shabby! If I ever live to see it, I’ll have to thank my Uncle Sugar who I’ve unfairly cursed too many times. Think about that the next time someone says “fiscal unsustainability”, or “the wealth of society captured by the government bureaucracy” because, yeah, it’s true – just like with the nomenklatura. And even if I don’t retire, hey, the GI Bill’s still paying my way right now. I put in $1,800, and when I’m done I’ll get out about $45,000 – not a bad return on my investment!

  8. q too writes:

    Eh, when using just a letter as a pseudonym, can’t really expect that you’ll be the only one… :)

  9. Arjun writes:

    I read this piece and the previous one with interest. Still, I don’t understand why so many words are necessary on this topic.

    A non-recourse loan is a non-recourse loan. It is the responsibility of both parties to understand the contract they are signing. End of story.

  10. q one writes:

    Indy: Interesting…here are the assumptions I used when running the analysis a couple years ago…implies the military retirement is worth roughly an extra $10k per year. Of course, the investment earnings assumptions seem unlikely now, which would make the military pension even more valuable. I also did not factor in inflation-adjusted increases into the annuity I used to calculate retirement pay; that would definitely increase the military retirement value significantly! (When I said O-3 pay was effectively just over $100k before, the number was $106k and pushing $120k was actually $116k. I didn’t have my spreadsheet when I wrote the comment, so I was working from a two year old memory…)

    1 – Retirement Assumptions. Military retirement benefit based on High 3 model. 20 years of service, High 3 years were served as an O-5, approximate retirement benefit of $3500 per month. Military retirement age of 40. Average male life expectancy of 80 years. 5% earnings on investments during retirement payouts, 8% earnings on investments prior to payouts.

    2 – Retirement Calculations. Annuity equivalent to military retirement benefit: 40 years of payouts at $3500/month earning 5% requires $755,000 to start. Equivalent payout requires two accounts, one taxable and one tax-deferred, to compensate for tax accounting differences prior to age 65. Taxable account: Payout $3500 for 25 years earning 5% requires $620,000 to start. To save $620,000 in 20 years, earning 8%, requires monthly contributions of $1,375. Tax-deferred account: Payout $3500 for 15 years earning 5% requires $460,000 to start. To save $460,000 over 45 years, earning 8%, requires monthly contributions of $100 until retirement age of 40, then account can grow on interest alone until withdrawals begin at age 65. After 65, calculations assume 5% interest rate earnings.

  11. Don the libertarian Democrat writes:

    “Those who made the laws have apparently supposed, that every deficiency of payment is the crime of the debtor. But the truth is, that the creditor always shares the act, and often more than shares the guilt, of improper trust. It seldom happens that any man imprisons another but for debts which he suffered to be contracted in hope of advantage to himself, and for bargains in which proportioned his own profit to his own opinion of the hazard; and there is no reason, why one should punish the other for a contract in which both concurred.”
    Johnson: Idler #22 (September 16, 1758)

  12. Noni Mausa writes:

    It was Mark Twain who commented: “History does not repeat itself, but it does rhyme.”

    The housing and investment scam and crash, and the opinion of the elites that of course, honest Americans should pay their debts, rhymes quite nicely with the last 30 years of employers requiring from their employees loyalty, tolerance of wage and benefit cuts and co-operation even unto training their own replacements — while in return offering no loyalty and an increasingly serpent-like skill at wiggling out of obligations.

    A few years of watching the econ blogs has convinced me that “every graph changes direction either in the mid-70s, or at the 1981 coronation of Reagan.”

    There are some earlier hints of the change in direction. One symbol of that change was the opening of the first US food bank, the St. Mary’s Food Bank, started in 1967 in Phoenix, Arizona. They grew slowly, but now, two generations later, they’re as common as dandelions, and serving lots of working people, not just the jobless.

    Business has succeeded in convincing people that businesses are the source of wealth and all good things, whereas mere people are disposable suppliants. (See the video “Where’s My Cheese” if you want to see this idea in its full creepiness.)

    The true case is exactly the opposite. If some factor turns people against a business, the business dries up as fast as a wet footprint on a blacktop road in July. This is as it should be, I wish more of us knew it.

    Noni

  13. [...] Steve Randy Waldman already did the heavy lifting: several of the other officers had been stationed at the height of the housing bubble at facilities [...]

  14. HD writes:

    Sorry, it’s more complicated than that.

    For decades, military personnel had been transferred into high cost areas where it wasn’t possible to even rent under their salaries. In time, the military recognized this was unsustainable, so they disbursed accurate (almost generous) basic allowances for housing – which essentially allowed military personnel to easily live within the highest cost areas of the country. These stipends were pegged to local average *rents*, and it was assumed that this mobile workforce would never dare to accept the extreme round trip transaction costs of home ownership – or the investment risk.

    They were wrong. Real estate mania swept through the armed services…and *many* leveraged to the hilt. Some purchased multiple homes on speculation. It was not unusual to see soldiers with $40,000 nominal incomes buying $300,000+ homes since their stipend carried all mortgage costs, and that mortgage payemt effectively reduced their income taxes to zero.

    You won’t find such stories in the media, presumably because it has severe implications for national security. Many of these people are now on the ropes. Remember the Walker spy scandal?
    This is not something the military wishes to become public.

    Those now underwater simply blew it. Can’t blame the giftgiver (the government) on this one.

  15. Santa writes:

    I believe the monetary authorities of the world are engineering a gigantic debt jubilee via rampant worldwide inflation that will result from galloping money creation.

    Of course, this will be a familiar set-up for the financial elite. They can lever up and make a killing as underwater properties are unloaded onto the market in the final phase of the debt deflation, to come within a few years, I’d guess. And then there will be another collapse, sort of like the pulsating big bang theories of the physicists.

    The game is rigged. Play at your own risk. There is no morality involved, and there won’t be until people enter into a new social contract that will involve removing the present government and making new laws and sound money and a new government from scratch.

  16. rapier writes:

    The lesson is to attach yourself to a corporation. For the business corporation is the worlds ascendant institution now. The right would have that the government is taking over ‘private’ corporations and the left would have that ‘private’ corporations are taking over government but they can both be right. It’s a complex partnership.

    Of course this story pertains to military people. The military being the vessel of all concepts of nationhood now. (Noting that corporations really have no state or nation, except by convenience) The military will be used by politicians as a staged backdrop for their own patriotism and belief in the great nation and corporations will use it for business.

    Citizens nor solders don’t make much difference. In the sweep of history they often don’t. Still, the politics of militarism cannot exist easily with the politics of corporate growth. The one ace in the hole the corporatists vis a vis the military is that both distrust, or worse, liberalism. They really should learn how to give deference to soldiers.

  17. rapier writes:

    Addendum to #18

    Happily a soldier can resolve the problem of serving the nation and his own self interest now by becoming a contract soldier. If you must be a soldier then that is the way to go.

  18. [...] Strategic default: a soldier’s perspective Steve Waldman (hat tip reader Lambert Strether) [...]

  19. DownSouth writes:

    Indy,

    Classical economic theory assumes that people make rational decisions based on what serves their own self-interest best.

    Much recent research shows that this is not the case at all. Quite the contrary, most people make decisions based on other factors, morality perhaps being the most important of these, and then only later apply “rationality” to try to justify the decisions that have already been made.

    For more on this I suggest the following column by Jonathan Haidt:

    http://www.edge.org/3rd_culture/haidt07/haidt07_index.html

  20. JKH writes:

    SRW,

    Your previous post linked to a post by Felix Salmon, who linked to a paper written by Brent White of the University of Arizona law school. I found that paper to be extraordinarily enlightening. Indy’s comment here fits in that context as well as that of your own post. The paper includes numerous anecdotal references to similar behavioural dilemmas regarding potential negative equity walk away/foreclosure decisions.

    The “guilt trip” as described by Salmon is only part of the problem outlined in White’s paper. The most interesting aspect is one that you and Felix didn’t focus on so much, which is the problem of fear, more or less as a subset of additional behavioural and actual economics.

    The overarching point in the paper and your post is the idea of behavioural norm asymmetry between borrower and lender. The ultimate result is that mortgagors with negative equity resist exercising in the money options for a great variety of reasons, including guilt and shame, as well as additional economics, including fear, all of which are understandable. There is currently a huge asymmetry between the legal right of option exercise and the full moral, emotional, and economic consequences of doing so.

    As a result, the effective economic value of the option is greatly reduced when considering all the other factors from a total utility perspective. These factors erode the utility of the moneyness of the put option that is otherwise implied by legal non-recourse. Thus, the legality (with implied economic advantage) of non-recourse option exercise is an illusion and a sham from a total utility perspective.

    Of all the dynamics in play, the most toxic may be a broad institutional sham regarding the current “emotional and economic feasibility” of exercise of the legal right of non recourse. This is behind the existence of legitimately legal, broadly distributed in the money put options, whose exercise is dissuaded by the credit industry itself as writer of those options, due to the asymmetry between that legality of that exercise versus the fear of further economic consequences of exercise. Government and industry have effectively marketed the legality of an economic put option while at the same time invoking the expectation of moral and economic punishment for the exercise of that same put option, offsetting the economic gain that is otherwise available.

    In particular, the expectation of negative credit rating consequences is fully aligned with the softer factors of guilt and shame and moral right versus wrong. It is a punishment or expectation of such punishment that reinforces these other factors.

    Here are some of the more powerful outtakes from the paper along these lines:

    “This power to threaten borrowers means that though mortgage agreements in non-recourse states contain an implied put option, or contractual option to default and transfer ownership of the home to the lender, the law plays a subordinate role in lender-borrower relations. A borrower might in fact walk without legal penalty, but the lender holds the borrower’s human worth as collateral – and will likely trash it in retaliation for the borrower’s exercise of their contractual right to default. The credit reporting system thus subordinates the law to social norms, and makes it impossible for a strategic defaulter to avoid the reputational penalty of default, – even by packing up and moving across the country… The point is that the credit reporting system operates in conjunction with other economic, political and social institutions as means of social control by increasing the emotional cost of default…

    …Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations, including the borrower’s right to exercise the put option. This imbalance is exaggerated by the credit reporting system, which gives lenders the power to threaten borrowers’ human worth and social status by damaging their credit scores – scores that serve as much as grades for moral character as they do for creditworthiness. The result is a predictable imbalance in which individual homeowners have born a huge and disproportionate burden of the housing collapse…

    … In the case of underwater mortgages, however, the portion of the mortgage above the home’s present value essentially becomes unsecured. Lenders compensate for this by holding the borrowers’ credit score, and thus their human worth, as collateral – thereby altering the underlining agreement that the home serves as the sole collateral. As a consequence, lenders are often able to reap the benefit, but escape the costs, of their bargain.”

    And here is a very interesting recommendation for consideration:

    “Preventing lenders from reporting mortgage defaults to credit rating agencies would, as a practical matter, eliminate lenders’ ability to hold borrowers’ human worth as collateral. Such a change would also serve as an important signal from the government – sending the message that a borrower who exercises a contractual right to default should not be viewed as immoral or irresponsible. It would thus help considerably in levelling the playing field between lenders and borrowers. With the threat of damage to the borrower’s credit score removed, the borrower could more credibly threaten to walk absent a principal reduction.

    … Moreover, barring the reporting of mortgage defaults could have positive effects on future lender behaviour. This is because in the case of a home mortgage, the lender has the ability to ensure that the collateral is sufficient to create the proper economic incentives for borrowers not to default. In other words, they need not rely upon credit scores to control their risk, but can instead ensure that the purchase price of the financed home in is line with historically sustainable price-to-rent ratios, demand sufficient down payment and eschew interest-only and negative amortization loans. Lenders would be more inclined to take these sensible precautions if borrowers were empowered to behave according to the same market norms as lenders and breach when it is efficient to do so. This added caution by lenders might in turn help avoid a repeat of the current housing crisis.”

    That last part makes an interesting connection between creditors’ existing ability to “neutralize” the value of the put option, and the way in which that has contributed to truly appalling risk management by the financial industry, which I still think in general is at the heart of the entire crisis.

  21. DownSouth writes:

    Also Indy,

    Along these same lines, you might also find this post at Naked Capitalism germane:

    http://www.nakedcapitalism.com/2009/12/keynes-rap-with-lord-skidelsky-in-a-non-singing-role.html

    From the video, the conservative Roberts asserts that “markets punish you,” and the more liberal Skidelsky responds that:

    They actually punish millions of people for the mistakes of quite a few people. And no government, no democratic government is going to allow that level of punishment… There are lots of companies who are not making mistakes, they’re just affected by the people who have made the mistakes.

    Also along similar lines is this from Bill Moyers:

    http://www.pbs.org/moyers/journal/12182009/watch2.html

    STEVE MEACHAM: A lot of what we do when people are coming in, is create the moral space for people to feel like they have the right to resist (foreclosure and eviction), because they’re told by almost everybody that they don’t…

    One of the unheralded things about this crisis right now is that there’s an awful lot of owners who come to us who cannot afford their home at the inflated value, at the adjustable rate mortgage price. But they have plenty of income to afford their home at the real value at a 30-year fixed. And so why not just give them the property back at that amount? If they’re foreclosed on, the best the bank that can do is sell the property at the real value. By definition, that is the absolute best.

    If Deutsche Bank forecloses on Joe Schmoe the best they can do is to sell that property at real value. So if Joe Schmoe can afford the property at real value, why not sell it back to him? But the only reason the banks aren’t doing that is because of what they call moral hazard. They say basically that homeowners should be punished because they signed these loan documents.

    These are the same guys who have run our entire economy into the ground and who have been rewarded with billions in taxpayer bailouts and have used billions of that money to give bonuses to the very executives that drove their companies and the whole economy into the ground. And they are citing moral hazard as the reason why they can’t resell that property to the existing homeowners at the real value. That is disgusting and hypocritical and in the extreme.

    Meacham points out that in 95% of the cases they take on, when people decide to fight the banks, that they prevail and that the banks eventually concede to some sort of compromise.

    Despite the moral fiction that the banks try to create and enforce, they are in reality deeply mired in moral quicksand, with public sentiment almost unanimously opposed to them, and they know this.

  22. DownSouth writes:

    Indy,

    Just one more quote from the Christian theologian Reinhold Niebuhr that helps frame the banks vs. the people debate:

    When power is robbed of the shining armor of political, moral and philosophical theories, by which it defends itself, it will fight on without armor; but it will be more vulnerable, and the strength of its enemies increased.
    –Reinhold Niebuhr, Moral Man & Immoral Society

  23. [...] What lessons is the next generationgoing take away from the age of bailouts?  (Interfluidity) [...]

  24. jedwards writes:

    Please do not mix “morality” with a business contract.

    If you are engaging in a business contract, every term is spelled out to you. With a mortgage, the bank agrees to lend you money to purchase a house, and you agree to pay back this loan with interest. If you decide to no longer honor this contract, then the terms of the contract are such that the bank can take back the house.

    That’s it. There is no “morality” issues to repay debt. This is a business decision. This isn’t a verbal agreement to “pay the debt no matter what” to a friend. The bank knew the risks of lending money to a person, which is why they created the consequences which would occur if the debt was not repaid. So, you are fulfilling the agreement by letting them foreclose on the house. What you are doing is not immoral if it is spelled out in the terms of the contract.

    Don’t mix morality with business. Morgan Stanley walked way from 5 entire office buildings in San Francisco last week. This is a “strategic default”. Why should businesses like Morgan Stanley that has billions of dollars be held to a lower standard than regular people on Main Street? It’s a business decision, and we on Main Street should think of it the same way.

  25. Ed Giardina writes:

    While I do not worship at the altar of the great god FICO, I was a little perturbed when I started a new job and one of the forms I was required to fill out as part of the new hire packet was a credit reporting release. I have cut up my credit cards, gotten out of all debt except my mortgage; but imagine if a good credit score is required to have a job, and not the other way around. Blows my mind.

  26. [...] regional prices as given. Certainly the momentum of home prices affected Joe Sixpack’s (or G.I. Joe’s) buy vs. rent decision. Nevertheless, this group had the least culpability for the malfunctions of [...]

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  28. K Ackermann writes:

    We’ll sacrifice ourselves for a variety of reasons. They all ultimately boil down to heeding the highest goal, and that is to thrive.

    We sacrifice ourselves, not our children. Someone can keep their boot on my neck if it keeps my kids alive. The moment my kids suffer, you’re done for. No law, rule, or norm is above my moral authority to keep my tribe secure. Every once in a while, society has to re-learn that lesson.