The end of consequences

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WINEX_IHB

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http://www.minyanville.com/articles/index/a/15167











Thanks to Prof. Sedacca for his piece yesterday on <a href="http://www.minyanville.com/articles/fre-fnm-xom-SLB-Ginnie-Mae/index/a/15157">bailouts and moral hazards</a>.





As a result of my values and life experiences, I chose conservative personal finances. Due to my preference for security and prudence, I forgo the opportunity for larger gains and windfalls in exchange for the lower risk and security. It used to be that I could live with this trade-off. However, the last decade (and last few years in particular) have made this choice increasingly difficult. Not only have risky investments been deliberately supported by government policy, but less risky paths have been infected by overspill from the risk-taking activities; worse yet, my very own government is treating me as a sucker. I mean openly, which is kind of new.





The increasing role of federal intervention in stimulating certain segments of the economy and bailing out risk-takers has made it increasingly clear that the choice to be a conservative investor was not only foolish, but is being deliberately singled out for punishment by our own government. The flogging of the prudent investor has moved from sublime to ridiculous, as government officials blatantly enter a mode of panicked bailout of preferred gamblers and spreading misinformation about the situation.





Not to be too dramatic, but I am left wondering how to explain this to my children. I was ready to explain risky versus conservative financial preferences. As some of my friends and neighbors seemed to prosper without end in reward for their doubling-down of high personal leverage and asset concentration, I began to wonder how to explain to my children why their dad was such a, well, loser. I kept telling myself that the once-a-generation correction (the same one that stung my grandparents in the 1930s, and my parents in the 1970s) would eventually validate my own choices as a reasonable personal strategy. Now I wonder.





The net effect of these bailout activities is to reward the people who took wild risk and ignored generations of wisdom about debt and gambling. It leaves me trying to explain why I chose a higher-rate fixed mortgage and a modest house and modest consumer debt, with a higher proportion of my investment in low yield supposedly "safe" mutual funds. I am left now, perhaps always on the sidelines, too late to enjoy those low rate ARMs and to jump on the leveraged house purchase bandwagon, watching as my government actively turns the knife in my back.





Dramatic? Perhaps. But I would argue that we are witnessing a very dramatic episode in US economic history. The "end of consequences" and the era of overt elite market socialism? I don’t know yet what I will tell my kids. Something along the lines of: go ahead and be reckless; someone will save your butt – so long as that butt is aligned with the chosen elite butts.





“Never bet against the house”. I get that now.





Thanks,


Minyan Malcolm
 
<p>Except the chosen elites are getting their butts kicked now.</p>

<p>Stay the course. . .hold on. . . you will prevail and you will be seen to prevail.</p>
 
Are they?





You can see people in this very forum that are preparing to walk out on their obligations. What's even worse is that some people are encouraging them. Take the person with 2 houses and about 500k in mortgages who is underwater and trying to do a short sale even though they have about 300k liquid outside of their houses.





If they succeed, it is clear that we are all suckers for playing by the rules.
 
<p>You wait, Winex. Yeah, some will walk, but the institutions who did all this will suffer, and bonus employees at GS and elsewhere who engineered this mess will lose jobs and bonuses.</p>

<p>Malcolm will have his modest house, long after the speculators are gone, and people who overbought would be out and some, even, living on the street.</p>

<p>Partial justice will prevail, but that's all you ever get anyway.</p>
 
<p>Liz, </p>

<p> While I WANT to agree with you, I somehow feel that these people will get <em>YET ANOTHER</em> handout. It disgusts me that this is happening. When are people going to tighten their belts and do the right thing. </p>

<p>My feeling though is that banks will have a VERY long memory of what is happening and weither people like it or not they will have a bad credit stigma follow them for quite a long time. </p>

<p>It is disheartening though to do the right thing and be though less of.</p>

<p>good luck</p>

<p>-bix</p>
 
WINEX....isn't that impossible to have 300K liquid and get approved for short-sells? I always thought that the banks did a very thorough audit of you financials.
 
<p>Mino, </p>

<p> One can only <em>assume </em>that there is something in their background that they are not talking about.... But you never know, banks may have rules against any short sales unless absolutely necessary. Don't know though</p>

<p>-bix</p>
 
You know there was a time when you went to your bank to apply for a home loan. You hope and prayed that you qualify. Once you got the good news. You're ecstatic and elated to move into your new home. You had a sense of moral obligation that since the bank was nice enough to let you borrow. Then you reciprocate in good faith by working your butts off to repay that loan. I guess time have changed.
 
<p>I keep reading this..."Should I walk?" And yes, while there are those unfortunate few whom had run into hard time. Like losing a job, a divorce, etc. In other word, an unforseen financial hurdle that forces that borrower to have no choice but "walk". And I can understand that.</p>

<p>But what's with this. Oh, my home is losing equity so I am going to "walk" attitude? </p>

<p>It kind of reminds me of this analogy: A college student decides to apply for a student loan. After a few semesters. He doesn't do well. Or figure college is just not for him. So what does he do? He "walks" and not pay the loan back. </p>
 
<em>"But what's with this. Oh, my home is losing equity so I am going to "walk" attitude?"





</em>100% financing is what is with this. If people had 20% skin in the game, there would not be this "going to walk attitude" Once the banks go back to 20% down, normalcy will be restored and then we can all sleep comfortably at night. I actually sleep pretty comfortably right now in my nice IAC rental.
 
<p>qwerty,</p>

<p>I agree. Even with 100% financing. I still think people should still have a moral obligation to honor what they have signed. Oh, well. I guess I am just old fashion.</p>
 
<p>Call me cynical, but I think that these kind of interventions will become the norm for this reason: tax revenue. The federal government depends on taxes for it's existence and if the economy were to contract in a deep recession/depression the resulting decline in tax revenue would mean either massive deficit spending or a reduction in the size and scope of the federal government. Since we are already running huge deficits in all areas, I think all branches of the Federal government will do everything in it's power to avoid being starved to death, even if it means institutionalizing moral hazard. Their only other choice would be to raise taxes to cover the shortfall; maybe we'll finally get a real world, full scale test of the Laffer Curve.</p>

<p>The banks that are in trouble stand to lose massive amounts of money, and while they may be forced into FDIC control, they still retain enough capital wealth to pay off the depositors. So I don't really understand why bailouts are being discussed unless it is simply to keep them from realizing losses that will drastically reduce wealth, and therefore the taxes collected on that wealth.</p>

<p>The homeowners that are facing or have been through foreclosure aren't being helped in large enough numbers to make a difference in the size of the losses, nor are they adding to the demand on public services in massive homeless camps. So I don't really see any reason for the Federal governement to be helping them avoid the consequences of their actions unless it is to prevent them from passing a loss onto their mortgage holder, in which case see the above.</p>

<p>Now the Executive branch has shot it's wad, but with MLEC and HOPE NOW making it clear that this (or any, for that matter) administration doesn't have the power to make the problem go away, I fully expect the Legislative branch to come up with a creative way to "save people from losing their homes" that in reality adds up to saving the trillions of dollars in created wealth that currently only exists on a balance sheet. Given the size of the current deficit, the amount of the National Debt, and the imbalance between imports and exports, the government really doesn't have any choice but to intervene and negate the losses if it wants to maintain it's current size and scope.</p>
 
LawyerLiz, I certainly hope you are right. But even if you aren't, it's a nice thought to have at this time of year. Though I obviously C&Ped the article at the start of this thread, I agree with the sentiment. However, unlike the author of the thread, despite what I see around me, I still have to do what I know is right.
 
MINO2126, sorry but you are asking the wrong person. I do not work, not have I ever worked in the real estate, or mortgage lending sectors. I don't have any personal experience with short sales either.





But if you look at the Florida Sinkholes thread (http://forums.irvinehousingblog.com/discussion/1305/), you will see what I am referring to. My details were a little off. The person in question has about $200k in the bank and earns $170k a year. They own 2 houses in Florida that were purchased for a total of $475k with 10% put down. The houses are underwater, and the rent doesn't cover the mortgage payments.





Rather than sucking it up, they are interested in walking without paying the price for a bad investment decision.





While I am sure that it sucks to be them, I simply don't see a hardship that necessitates not living up to your word. Investments can lose money. If you aren't prepared to live with that reality, then you should put your money in T-Bills and nothing but T-Bills.
 
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