“U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes” Senate Banking Committee Chairman Christopher Dodd said on March 13th.
So let’s get this straight –taxpayers who did not over extend themselves in the housing bubble or who even remained on the sidelines and rented, will now have to subsidize those whose borrowed in imprudent ways.
Consider two households. One household consists of a family who could not afford to buy the $500,000 home that was $300,000 before the housing bubble began. They are renting a townhome and waiting for housing prices to fall. The second household borrowed more than they could afford and “owns” the $500,000 home. They have borrowed what little equity they may have built up to buy a new car and take vacations.
What happens if the second family is subsidized by government and bailed out? They are able to retain their home. Compassionate? Think before you answer. Where is the money coming from to pay for the bailout? From taxpayers, including the first family who is still renting.
But there is a double whammy on those who were frugal. Subsidies will prevent housing prices from falling. Those who are renting will be forced to remain as renters. Under normal circumstances the bursting of the housing bubble will transfer ownership from those who were imprudent to those who are best able to manage their assets. This is good for all.
But there is an even bigger issue with the bailout that Dodd is proposing. At its core, Dodd’s proposal is an attack on the “rule of law.” At the heart of the “rule of law” is the idea that government shall not play favorites.
When someone takes out a mortgage for more than they can afford, they must bear the consequences. Compassion must be limited to voluntary assistance from their friends, family, church or perhaps Chris Dodd himself. When compassion is coerced we all lose.
At the heart of contract law is the belief that almost all will abide by the terms of the contracts we sign. Our economy runs and trust and not on the courts. When we begin to violate contracts and then expect the government to bail us out, we are beginning a slide down a slippery slope toward the ending of the market economy upon which modern civilization is based.