Thursday, December 06, 2007

"Bad Financial Choices," They Say

WaPo today reports that the government has brokered an agreement to freeze interest rates for those homeowners who risk foreclosure under the whole sub-prime mortgage crisis.

Proponents argue that this is a great idea, and would stave off tons of foreclosures. Critics -- labeled "conservative" by WaPo -- say the plan "amounts to a bailout of people who made bad financial decisions."

On some level, I can understand the criticism: people bought their houses knowing their payments would balloon after a certain amount of time; they took that risk; it's tough cookies that they can't now afford it. It's not much different from getting a fixed-rate mortgage knowing that your income stream was going to severely plummet a few years down the road.

But where I hit a philosophical problem is this: these people are in trouble, and these conservative critics would just as soon toss these people out on their butts than do anything to help them. Where are these people supposed to live? Do you really think apartments will be willing to rent to them if their credit history reflects a foreclosure?

More importantly, the critics here cite "bad financial decisions" on the part of the owners and would just as soon leave them to their own devices. But then I end up asking the same question I'd ask of conservatives who advocate for privatizing Social Security: what happens to those among us who make bad decisions?

Social Security was meant to be a safety net, allowing people at least some amount of money upon retirement (admittedly, not a whole lot). Privatizing Social Security -- under this whole "it's my money, dammit!" rubric -- means that instead of people putting into the system and getting back something come retirement time, people would keep their money and "invest" it.

But what of people who "invest" the money unwisely? Sounds like we'd find conservatives saying to their 68-year-old grandparents, "hey, you stopped contributing to SS taxes long ago. That money didn't grow for you? Too damn bad."

You know we as a society would never do that. We'd have to provide them with assistance. So again, really, we'd be "bailing out people who made bad financial choices."

And if the solution to this apparent conflict is pointing to the fact that even privatizing Social Security provides a floor so that seniors can't squander all their money, then... well, why is that any different from Social Security in the first place?


Pissed off Democrat said...

Social Security prevents people from gambling with their lives during retirement -- the time when they have zero future opportunities. On the other hand, "homeowners" ending up in rentals still have options. And yes, they will find rentals, just in less desirable neighborhoods.

But sure, let's scrap property law, jack up state taxes (assistance bonds WILL be issued), reward those who recklessly loaded up on debt they couldn't afford and helped inflate the bubble, punish those who lived within their means, add "government involvement" risk factor to landing industry (thereby increasing the cost of credit to future homeowners), and prolong market correction from 1-2 years time frame to 5-10. No, we aren't going to see Japanese style deflation...

Bill Woessner said...

Your analogy is seriously flawed precisely because Social Security is NOT a safety net; it's a defined benefit plan. That's immediately obvious when you consider that Warren Buffett collects a Social Security check. In fact, he collects quite a bit in Social Security benefits (more than I pay in, and I pay the maximum).

Dennis! said...

Hm. Yeah, I think both of you missed my point. I'd guess it's because I didn't express it clearly. Let me try again.

The subprime mortgage situation shows us something: it shows us that people, given the opportunity, can and will make bad decisions which look attractive in the short term without regard to the consequences of the long term. People took advantage of these loan rates, I would argue, without even considering that X years down the road their payments would triple, and they wouldn't be able to afford that.

So why then would anyone consider the privatization of Social Security a good idea? What would happen if we did that? "Here, Joe Taxpayer, here's your money back. Invest it and save up for your own retirement." Give Joe Taxpayer a few extra bucks and let me tell you, a great many people won't take it and put them into smart investments that will grow over time and get them ready for retirement. Instead, they'll either blow it on material immediate gratification, or they'll invest in get-rich-quick investments which will then tank, again leaving them with nothing.

The fact that Warren Buffet receives Social Security checks means nothing. He's a smart investor. I'm talking about Ordinary Joe here. Let's face it, if everyone had long-term planning and insight skills, no one would have bought into this subprime market.

And if Social Security were privatized and these people find that, upon reach age 69, they don't have enough to retire... well, what politician is going to stand up and say "tough cookies on you, old man." Seems to me we're going to end up having to bail them out anyway -- i.e., give them what the SS benefit would have been... except that he would not have been paying into the system during his earning years.

Bill Woessner said...

The subprime mortgage situation shows us something: it shows us that people, given the opportunity, can and will make bad decisions which look attractive in the short term without regard to the consequences of the long term.

But that's not just true with mortgages or retirement planning. That's true for everything. Should people be allowed to buy and eat HoHos? That's a bad decision which looks attractive in the short term but has bad long term consequences.

If you follow your argument to its logical conclusion, you end up with fascism. There will always be people who, given the opportunity, will make bad decisions. The only way around that is to remove all decision making from the people and place it with the government. Of course, then you have to rely on the government to make good decisions which, given the track record of the federal government, is far from a sure thing.

It's like Jesus said, "For you always have the poor with you." No amount of government control is going to get rid of the poor. If we truly want to help the poor, then we need a system that's designed to help the poor. That's not Social Security. There's no reason Warren Buffett should be receiving a check from a system designed to help the poor.