If nothing else, it appears that Occupy Wall Street, despite the chattering class’ inability to decipher the obvious, has managed to sneak debt relief onto the List of Suitable Topics for Discussion. Steve Randy Waldman, in an interesting post, about fairness and mortgage debt relief argues that debt relief violates notions of fairness (boldface mine):
[Tea Party inspiration Rick] Santelli’s rant, quite legitimately, reflected a fairness concern. The core political issue has never been the quantity of debt the government would incur to mitigate the crisis. It was and remains the fairness of the transfers all that debt would finance. A fact of human affairs that proved unfortunately consequential during the crisis is that people perceive injustice more powerfully on a personal scale than at an institutional level. Bailing out the dude next door who cashed out home equity to build a Jacuzzi is a crime. Bailing out the “financial system” is just a statistic. So the anger Santelli channeled led to economically stupid bail-outs of intermediaries rather than end-debtors…
If the Obama administration, or any administration, decided to encourage principal writedowns by having the government simply cover half the loss, that would be unfair. The Rick Santellis of the world might object more than I would, but that would be to my discredit more than theirs. Fairness should never be a policy afterthought. Widely adhered norms of fair play are among the most valuable public goods a society can hold. A large part of why the financial crisis has been so corrosive is that people understand that major financial institutions violated these norms and got away with it, which leaves all of us uncertain about what our own standards of behavior should be and what we can reasonably expect from others. When policy wonks, however well meaning, treat fairness as a public relations matter, they are corroding social infrastructure that is more important than the particular problems they mean to fix.
Where I disagree with Waldman is his characterization of mortgage cramdown. Most of the plans I read were similar to what I proposed:
We force lenders to readjust the value of the mortgage (both first and second mortgages) to current market prices (and reset them to a reasonable fixed interest rate loan), use the funds from TARP and HAMP to reimburse banks for part of the loss (e.g., fifty percent of the difference; they will have to take a loss), and, if the property gains in value, then the government gets half the profits on sale (we, the people, did help you not become homeless). If you don’t like the deal, you don’t have to enter the program, but millions of people would take it in a heart beat. It would also help lower housing prices, which still needs to happen, as well as take housing stock off the market (and future market).
The key part is the profit-sharing on the house sale, but I’ll get to that in a moment. Under this plan, everyone pays because everyone gains. Banks, by only eating half of the loss, don’t get walloped. The public at large* gains both through increased purchasing power (less money spent on a mortgage can be spent on
porn other consumer goods) and by avoiding the social disruption and public burden from families being uprooted. Obviously, homeowners gain because they get to keep their homes.
Likewise, everybody also pays–no free lunch. Banks do take a haircut. The public pays as tax revenues are diverted to banks (i.e., we cover half of their losses). But bailed out homeowners also pay, just not right now since they can’t afford it. The payment occurs when they sell the house (assuming they do so at a nominal profit). Through what is essentially a 50% housing profit tax, a not-insignificant portion of future profits are destroyed. On the other hand, they did get their mortgage reduced and didn’t lose their home. This is only a delayed penalty.
I’m not familiar enough with the legalities of how such a plan would work, but, counter to what Waldman says, this strikes me as very fair.
*Despite being a full-bore wackaloon MMTer (sorta, anyway), in my personal life, I’m very frugal, and don’t assume any personal debt if I can help it. For the record, I rent, not own, so if anyone could bitch about the unfairness of my proposal, I certainly could.