Bailouts Aren't What They Used to Be

Late last week, I began reading a news story on MSNBC that centered on Bush’s “bailout” of those individuals who were losing their homes in the current mortgage crisis.  Before getting very far into the story, my attention was drawn to a link for a reader discussion entitled, “Should U.S. bail out subprime borrowers?”   Arriving at the discussion, I found page after page of angry notes, furious citizens fuming about how unfair a “bailout” would be.  The logic, which I’m completely sympathetic with, went something like this:  “I pay my bills; I only buy what I can afford.  I’ll be mad as hell if Bush bails out those people by paying their mortgage.”

The problem is, and this may well ultimately haunt Democrats as well (and it should bother all of us), the term “bailout” is misleading in this circumstance.  While Bush has proposed a number of ways to help keep borrowers lenders in their homes, most of these ideas seem ultimately aimed at allowing a refinancing of the loan—it’ll still have to be paid, but the time will be extended, different terms introduced or so forth.  Yes, in some ways, it’s a slight change in the rules, but the policies don’t carry the force that the term “bailout” implies.

If asked if subprime borrowers who are now defaulting on loans should be “bailed out,” my immediate knee jerk response would be an angry and emphatic “no,” a response similar to that of those on the MSNBC discussion board.  While I understand that the issue is complicated and that massive loan defaults would encourage a general recession that would “cripple the economy” and housing market (in turn hurting my own financial interests), I nonetheless experience a gut level response of: “Hey. I played by the rules and have saved and didn’t go outside my means.  It’s simply not fair now to help those who didn’t play by the rules, even when they should have known better.” 

It’s similar to the feelings one has about bankruptcy:  the fact that someone can (or used to be able to) wipe away their debts and start over is frustrating for anyone who has worked hard to fully pay one’s bills throughout a life time.  Even knowing that people with good intentions have unexpected problems, and even knowing that bankruptcy isn’t a completely clean slate doesn’t make the sense of “unfair play” all that much lessened.

The problem is, what Bush is proposing doesn’t fit the colloquial sense of “bailout.” If you read the discussion board, you’ll see that the anger is coming from folks who think that debts are being forgiven, or wiped out in some way.  On those discussion boards, you can almost hear the anger of people who are thinking, “I knew they couldn’t afford those houses.  Now, it’s my turn to feel like I did the right thing.  You better not let them escape the punishment they deserve.” The anger is directed at direct payouts, and that’s clearly not on Bush’s agenda.   

Ultimately, the concerns I have are twofold.  First, on the level of partisan politics, given that the Democrats have reportedly “made proposals that go beyond what Bush announced Friday, aiming to help repair the damage done by years of reckless lending, outright fraud and borrowers taking on more debt than they could afford,” aren’t they setting themselves up for a political loss on this one?  That is, given that the term “bailout” has been articulated onto this collection of policies, aren’t the Democrats better off rearticulating what they are doing rather than trying to outflank Bush on a policy that is being discussed as a bailout?

Secondly, and ultimately more importantly, this is one of those moments when I hope all citizens will be critically reflective about the language we use, especially when we simply repeat the terms we hear on the news, on talk shows, or in the blogosphere.  We clearly need government policy that will tweak the economic environment somewhat to help ease this mortgage crisis—that’s important for everyone.  However, if we allow all such policies to be placed under the umbrella term “bailout,” we will collectively discourage creative policies on this issue.

Finally, I was going to post this on Saturday, but I thought ASU's victory deserved at least two more days as a XARK headline.

Comments

[Heather]

I heard an announcement of the proposal and I admit to not having researched it, but I believe it was designed to help those with lower incomes and not for speculators or those with jumbo loans.

From other sources I have heard the low income portion of the housing problem is nearly insignificant when it comes to economic impact. Although the social impact of the move may be large.

If I'm off on a tangent forgive me... the baby was up all night and coherency is eluding me.

[Daniel]

And another thing: The immediate issue that affects all of us, regardless of your current mortgage status, is the health of various financial sectors. Clearly something went wrong in the mortgage industry (I haven't read enough to render an opinion on that), but if anything is getting some kind of a bail-out, it's the industry, not the individual homeowners. Nobody cares about the individual homeowner who can't make a mortgage payment: the concern is what happens to the banking and housing sectors if the sub-prime problem turns into a reactor meltdown.

So it's misleading on two counts: first as a "bail out," second as being focused on the homeowners (even though they would benefit). Or am I missing something here?

[Huffman]

If I understand Bush's proposal, it's for low-income homeowners with good credit who can no longer afford their house payments because the teaser rates have expired.

This actually seems pretty reasonable to me. In general, I think a contract is a contract, and both parties should be held to it. But mortgages are complicated, and I suspect the sub-prime lenders knew full well what was going on, but the borrowers did not.

Whether or not Bush's proposal is a good thing (and I think it is), Harvard economist David Laibson has an interesting proposal so we don't get into this mess again: make all mortgages prepayable with no penalty. If that were the case, no financial institution would think of offering a low interest teaser rate to someone would could refinance when the rate expires.

I'm sure there are problems with it. For instance, if they can't afford the higher rate, can they afford the fixed costs of refinancing, which generally run into four figures? Still, it's worth considering.

[Daniel]

FWIW, Forbes called it a Labor Day gift to Wall Street."