Proposed Housing-Market Rescues

All of the leading presidential aspirants are engaged in a bidding war for votes. Each of them promises to bail out the unfortunates who cannot meet their mortgage obligations and stand to “lose their homes” (which, properly speaking, were never theirs in the first place, since they put little or no money of their own into buying them). Although this display of surface kind-heartedness makes political sense, it promises only economically adverse effects on the wider economy in the longer run.

Market economies do not work well when people do not honor their contractual obligations. If deadbeat borrowers can expect to be bailed out at public expense, then more deadbeats will arise, and lenders will be less careful about screening out borrowers whose situations and backgrounds do not augur well for the repayment of loans. The long-run effect of such bailouts is heightened uncertainty in the market for loanable funds and a transfer of income from responsible parties to irresponsible parties.

Moreover, the crocodile tears that politicians are now publicly shedding for the “little people” who cannot make their agreed mortgage payments are themselves a fraud. The real concern is for the big boys who now find themselves holding mortgage-backed assets of questionable value on their balance sheets and who sooner or later must recognize the loss of value these assets have sustained since the housing bust got under way. Like so many other ostensibly kind-hearted government measures, the promised bailouts will have the net effect of transferring money from taxpayers in general to financial fat cats. This scheme is no doubt an example of “democracy in action,” but it is economically and morally rotten.

Wall Street billionaires don’t rush to help me when I am in financial straits. Why should I, or anyone else, be forced to help them? They made their bad-investment beds; now they should have to sleep in them. Bankruptcies are not the worst thing imaginable, and moving assets through receivership from bad managers to good ones has much to be said in its favor.