The Political Class to Prudent Americans: "Drop Dead!"
In an interview years ago, Whit Stillman, arguably the greatest modern director of films sadly never seen by most Americans, was asked about purchasing an apartment in New York City. Though the memory here is hazy, Stillman channeled the vision of the prudent over the decades; that he would wait for a decline in prices before putting in his bid for a Manhattan apartment.
To Stillman perhaps, and presumably millions of other Americans who chose to be responsible during the recessionary rush to housing earlier in the new millennium, the political class has implicitly told them to drop dead. Though home ownership was always vastly overrated, and is particularly problematic in a world of fast-moving capital, those who were wise amid the latest government induced mania will be forced to pay for the mistakes of the profligate.
Think about this: though Fannie Mae and Freddie Mac are blatantly unconstitutional entities on their very best day, and though their stated existence is oxymoronically said to make housing more affordable for the masses, it's at least true that their alleged purpose along with myriad other government housing subsidies is to make housing accessible. If so, why then would the same government tragically eager to make housing a positive right for everyone block a natural correction of home prices lower such that the responsible might more easily be able to purchase a piece of the dream?
Instead, the federal government has chosen to side with the wasteful, unprincipled and debauched who borrowed what they couldn't pay back, all at the expense of the good and moral. You can't make things like this up, and sadly this is not a dream. The federal government has sanctified promiscuous activity with the money of others through a $25 billion settlement foisted on banks that "will provide financial relief to an estimated one million at risk borrowers." The message: go heavily into debt, claim some lender abused you, then wait for the government (meaning all of us whose tax dollars support Leviathan) to compassionately save you.
The economic argument behind this most shameful of settlements predictably defies basic logic. Though economies work best when prices reflect market realities, housing to the political class is sacred such that a true correction whereby those who overextended themselves vacate their houses on the way to a market bottom won't be allowed to happen.
The broad economy will of course suffer this governmental error. For one, an investment in housing, quite unlike capital committed to technology or medicine, will not cure cancer or make us more efficient. A true bottom that releases investment capital from this dead money sector would on its own prove an economic positive.
Second, as evidenced by the inability of certain homeowners to make their mortgage payments, they're likely in many instances to live in depressed parts of the United States. Not only would putting their houses back on the market happily move the cost of housing down (that's the government's stated goal after all), it would also release these individuals from the ball-and-chain of quazi ownership such that they're free to pursue the best economic opportunities around the country irrespective of locale.
Third, if mortgage holders are to get relief, then someone, somewhere is by definition getting ripped off. Savers are society's ultimate benefactors for savings paying the freight for our economic advancement, but here savers will suffer a haircut so that the ghastly errors of borrowers can be excused. The message to savers is to not bother delaying consumption so that future innovators can access capital; instead, spend with abandon with an eye on borrowing excessively knowing full well that the government (again, meaning us) will underwrite your mistakes too.
Particularly offensive within this sad exercise is the notion that we must backstop the borrowing mistakes of the housing greedy because their mortgages are "underwater." Specifically, due to a shift in market sentiment that has made the mortgages for some more expensive than the house they're in, we're expected to cushion that blow. The next time investors in the stock market buy shares on the margin that plummet in value, will we cover those errors too?
As for the banks that will hand over $25 billion to the Feds, it bears asking how they like those bailouts that foretold the settlement. Bailouts are never free, not for the taxpayers who pay for them, nor for the businesses that falsely benefit from them. Politicians always return for their pound of flesh.
After that, we might ask the taxpayers who financed those bailouts how they're enjoying handing over yet another $25 billion to the Feds. Indeed, we shouldn't delude ourselves with the laughable notion that banks will pay for this most vaunted of settlements. More realistically, the banks, given their preferred status within Washington which means they're showered with all manner of subsidies, to some degree owe their existence to the government, which is once again us. And having saved the banks with our money, they're now asking for more of our money back to doubtless pay for other programs that will tautologically weigh on future growth.
Voicing his implicit support for the settlement, Fed Chairman Bernanke drooled last week something along the lines of "the economy can't get moving again absent a healthier housing market." A master of the art of always being wrong, Bernanke predictably got it backwards. Housing's health in a free market is an effect of strong economic growth, not a driver. In that certain sense, the best driver of future growth would be a true housing correction that would bring down home prices such that home buyers would have extra savings to commit to growth initiatives in other parts of the economy. Regarding the absurd Keynesian presumption that rising home prices increase borrowing that is spent in the private economy, for someone to borrow someone else must be saving, thus negating something that was never stimulative to begin with.
To simplify what is very sad, last week the Feds forced a settlement on the taxpayer that will excuse the mistakes of witless borrowers lent to by equally witless banks. Our masters in the government class have elevated profligacy over thrift, and as we're the resources behind this most clueless of governments, they're doing it on our dime. Drop dead, you naively prudent Americans.