I just read the NY Times article on a proposed “HomeOwner Rescue Plan” for people who’s houses are now worth less than their mortgages. In the both the article and the comments there are a number of people who say that unless this bailout happens, then millions of people could lose their homes or have to severely curtail their lifestyles and that this is un-acceptable in America. The main rationale seems to be that if some people bear economic pain then it could hurt everyone else. Some of the proposals include forgiving mortgage amounts that are above the current value of the house. The last time I checked the only people offering “pay what you can afford” plan are charities. If we start forgiving debts and freezing ARMs then we’re letting the US government into the business of re-writing private sector contracts. When Hugo Chavez in Venezuela nationalizes Exxon assets - he gets demonized…but if the US Nationalizes the debt of people who bought houses they can’t afford that’s saving the country?

There is and will be a lot of economic pain as a result of this mess, but it’s better that the economic pain is born by the people who made the bad decisions versus people who made good decisions and lived within their means. People who make good economic decisions tend to use resouces efficiently - if the US wants to maintain its position in the world, then we need to use our resources efficiently. It should be a net positive if we reward (or don’t punish) people who’s values and actions are aligned with prudent decision making and efficiency vs. the “I need it now” mentality that has been at the fore until recently.

Reminder to self - blog on the Marshmallow Test in the near future

There are plenty of people in the US that used the loose credit environment to take on debt that they could not afford, so that they could live an unsustainable lifestyle. That’s their decision - but I shouldn’t have to pay higher taxes, so to pay off their new Lexus or whatever lifestyle choice they made. If someone didn’t take the time to understand the loan they were getting - well - tough cookies - hopefully they’ll learn a lesson and won’t make the same mistake next time.

Let’s not forget that the vast majority of people out there are not going to lose their homes. If some people lose their houses - well there are lots of renters out there that I’m sure would be happy to buy them up at rational prices. If housing prices come down - well then more people can afford to buy houses. There are plenty of people out there who have been waiting to buy houses at prices that won’t keep them in debt the rest of their lives - just because some people decided they couldn’t wait that doesn’t mean I want to pay for their house/car/RV/Vegas vacation/etc.

It’s better for us to clear out this mess all at once - if the government tries to bail out homeowners - it will just extend the period of pain before this is worked through and re-direct the resources of the productive prudent people in this country to subsidize people who paid irrational prices for their houses.

Below an interesting chart to put housing prices in perspective.