Pretend like the last time I was in an economics classroom was Spring of 2001, and that I've since filled my head with a lot of other stuff.
Can someone please explain to me why anyone would be so against Federal intervention as proposed by Klinton or Obama in the wake of the downturn and subprime business?
Is it just the same old "I want lower taxes, and smaller government, but I would like a check?" Or is there actually something to McLoin's objections?
I think I already know the disappointing truth, that the people against "unwieldy Federal intervention" to help Americans that got hurt by predatory lending are the same ones who are always really excited about massive Federal intervention when it's abroad and entails spending millions bombing the shit out of foreigners.
But another take, and one with more economics sagesse, would be nice to hear.
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I think it's more a warped sense of "just desserts" than an economic policy argument. The only economic argument for not intervening in the face of systemic financial risk is the olde "moral hazard" argument. The argument is that individual economic actors, knowing that they will be shielded from some of the downside risk they take on in the event of a meltdown, will be more likely to make excessively risky investment and/or borrowing decisions. I, for one, think this argument is silly because most home purchasers and commercial lenders do not seriously factor in the possibility of a government "bailout" into their workaday borrowing and lending decisions.
ReplyDeleteBut I don't think this is the where the pop culture aversion to a "bailout" comes from. I think a lot of people like to think, "I watched my money, reigned in my spending, saved up to make a full down payment, and bought a house I could afford. Why should someone who didn't do these things be protected, through the use of my tax money, from the consequences of their bad decisions and financial imprudence?" At least that's how I read the anti-"bailout" argument.
Of course this argument totally ignores the years of predatory and simply imprudent lending practices, low interest rates, general financial illiteracy of homeowners (especially when it comes to exotic and tricky mortgage products like ARMs and balloon mortgages), and the unforeseeability (for the average Joe) of a general housing price meltdown (not to mention the tax subsidies that helped encourage a housing bubble in the first place). But that's cool.
It also ignores the idea that the same argument should apply to investment houses like Bear Stearns. I haven't heard much outrage over major loan guarantees, etc. to these companies.
ReplyDeleteIt's the same way Donald Trump can afford to take such huge risks. He's at a point where nobody is going to let him go under, so he can risk the farm, reap huge rewards, and know that he will likely be able to write-off a lot of his losses if the gamble pays off.
I think I read something about this on the NY Times website, or maybe at slate. I can remember, but I'll look.
It's a complete double standard. When wealthy bankers have a lot of money, and fuller information about an investment, they can take a gamble and we'll help when they lose. But when poorer families are tricked, or coerced into making a modest purchase to finally become homeowners, we scold them for their wasteful ways.
I remember what I read now. It's the link I posted in another blog entry here. The link for the editorial again is: http://www.nytimes.com/2008/03/21/opinion/21fri1.html?_r=1&hp&oref=slogin
ReplyDeleteThanks guys.
ReplyDeleteThe double standard and lack of concern for the little guy is disheartening. It sometimes even comes from little-er guys, as Finley mentioned with the "I saved and was good, why should I have to bail the other guy out for being irresponsible" argument.
At least in terms of upper middle class types that spout off like that, chances are they've had the opportunity to secure a much better grasp of what is and what isn't a sound investment. Thus, after a while, it's hard to empathize with people making unsound decisions out of desperation or ignorance. You just can't remember a time when you didn't know any better.
This explains why reasonably well-off people living in Wyomissing, PA don't seem to favor measures that would help struggling homeowners in East Baltimore.
At least it's an explanation that attempts to go beyond simply labelling it selfishness, thereby hoping for their sake that Dante was wrong about how hot their afterlife will be.