Most of us know by now that a lot of toxic debt has been filling up the balance sheets of our financial institutions creating one heck of a financial meltdown. What we do not know is what the solutions to those problems are going to create in terms of human emotion.
Everywhere you turn these days you hear cries of "we have to save the homeowners; we must lower their payments and keep them in their homes." Why? Why do we have to save these people? Why should someone get to have a home that they can only keep if others help pay for it? Why do we have to save the institutions that lent to them? "They" say they need one trillion dollars or more of my money to bail out a lot of people. Why on earth do I have to give my hard-earned money to irresponsible people? The thought is making me very angry.
Several years ago I bought a house. I had an option for the financing; I could take a rather high interest rate (for the time) that was fixed or I could put nothing down and pay nearly nothing for an adjustable rate mortgage. I decided not to gamble. I knew interest rates can and do rise. I opted to pay a lot more for my house and to have the security of a fixed rate loan. That decision cost me a lot of money over the past five years, but it was supposed to save me money when the tide turned.
Now, I am paying for that decision. I am paying for my neighbor's house down the road who did not want to pay more at the time. I am paying so that my neighbor and yours, who took out a mortgage with no down payment and paid next to nothing for the past five years, can get his mortgage reduced with my money. How is that fair?
My next-door neighbor decided to take out a huge chunk of change by refinancing when housing prices were high. He spent nearly a hundred thousand dollars fixing up his home and buying new cars and boats. He has a lovely new kitchen and a bathroom to die for. Now he will be bailed out by the government because his house is in foreclosure. He will get a new loan, a nice low fixed rate (even lower than mine) and he will have a significant chunk of his principle reduced. Who pays for that? Me. Why? Because the government doesn't have a dime and all money it gives to Mr. Smith it must take from Mr. Jones. (You and I are Mr. Jones in this example.)
Now I am living in a house that is not fixed up. I have the same kitchen I had when I moved in. My shower leaks in my outdated bathroom. I have a twelve-year-old car. I do not have a boat, but I will have to pay for all those toys my neighbor now has. I find myself looking at all my neighbors and wondering which of them are taking my money and I am angry.
I am not the first to figure out that I am paying for other's extravagances.
The government just decided to hand one trillion dollars of Mr. Jones' (the people's) money to a ton of Mr. Smiths. The final bill may end up looking more like five trillion dollars. Who benefits? Not me. All my stocks have taken a huge hit and my IRA looks more like a piggy bank. What did I get out of this? Certainly not a $440,000 vacation.
Again, I am not the first to figure this out.
All around me I see people who are growing increasingly angry. I see people seething when someone says that irresponsible homeowners should be bailed out. Don't get me wrong, I feel bad that people are losing their homes, but should I have to pay their mortgage? I see people wanting to start a witch hunt for those government officials that created the incentives for this to happen. People want to hang those on Wall Street that created these toxic mortgage swaps effectively gambling without a dime in their pocket. An unprecedented number of people called Congress at a 100 to 1 ratio and begged their "representatives" not to bail out these crooks. Instead, they were terrorized by the chief ruler of this country who told them the sky would fall if they didn't let this theft happen to try to force them to change their minds. The people spoke and Washington answered: la la la la la la la, I can't hear you with my fingers in my ears.
Both men running to be the next ruler of this country promised that they would not allow business as usual to take place in D.C. Both promised to make changes. Both said they would not allow bills that contained expensive pork. Well, the campaign is not even over and they have both lied already. McCain and Obama happily signed the second bailout bill that contained an additional $150,000,000,000 worth of pork barrel spending. They can't even get through a few weeks of campaigning without breaking their promises. The people are looking at their "choices" and they are angry because they know there will be no change. Many are angry because the one hope we had — Ron Paul — was stolen from us by a foolish media who now seek out interviews with him like he is a financial rock star. (Please forgive my slight against third-party candidates by insinuating that only two men are running for President.)
If the people in charge of our money would just listen to Ron Paul for once, we would all stand a chance. He knows the cure for our economic ills. He knew this was coming; he has been warning Congress for years. Better yet, he knows how to fix this mess. Moreover, Dr. Paul knows that stealing from the poor to give to the rich is bad for our morality. We need to leave the markets alone to let them work. We need to let bad companies fail. We will have a bad recession that will probably last a year rather than what could be decades of financial disaster. We could have hope, but that seems unlikely. The odds are slim that the Secretary of the Treasury or any other politician in Washington will listen to Dr. Paul no matter how much the markets drop. They will keep inflating to prop up a failing system and we face the awful possibility of hyperinflation. People are angry that we have a solution but it is being ignored.
The people of this country are beginning to realize that the irresponsible get rewarded while the hard working stiffs get the shaft. They are seeing that no matter how loudly they scream, they have no voice in our government. They taught their children to be responsible and to live within their means, but the folks with six-figure credit card debt and homes they cannot afford are getting all the goodies. The companies with the worst managers, who took the greatest risks, are getting handed multi-billion dollar checks, while the rest of us cannot afford groceries. The hardest-working folks, the ones who saved for their future are now realizing that our government can and will take it all away from them in a second. And guess what, they are angry: Very, very angry.
Guess what else people are figuring out? If they are upside down on their home loan — in other words — they owe more than their house is now worth — it makes economic sense not to pay your mortgage. As soon as you go into foreclosure you will likely get your principle reduced and your interest rate lowered. Once the word gets out, many will decide not to pay their mortgage. Now that is a great incentive to get the housing market back on its feet! Instead of letting housing prices fall for a short time and then rebound, the government has inadvertently set up a situation where houses will continue to go into foreclosure, banks will have to get more money from us to stay in business and we are all in a dangerous downward spiral.
Knowing what I do about Austrian Economics, I know that printing money cannot make a country wealthy. I am not sure what this toxic anger will do to the country. We will all end up paying a lot to bail out a lot of irresponsible people and we will not be happy about it.
I am reminded of a scene from Atlas Shrugged by Ayn Rand. (I highly recommend the book to anyone who has not read it yet.) In that book, she talks about a company that decided the best way to exist was to take from each according to his ability to give to each according to their need. Eventually, everyone ending up needing a whole lot and no one was too keen to be productive.
I worry that we will see something similar in this country. What are we learning from all of this? What lessons are we teaching our children? Are we telling them that those that fail the hardest get to steal the most from those that do the best? You don't have to be too bright to decide which side of that equation you want to be on. Charity used to be something you gave freely and felt good about doing. Charity at the point of a gun is not done freely and no one feels good about it. Those that are taken from are furious and those that receive are not grateful; instead, they feel entitled and ask for more. Nothing could be worse for us morally as a people. Forget about the toxic debt, what will we do with all this toxic anger?
October 22, 2008