Enemies of the ownership society (18 March 2008)

Anger seems to be building about the imminent government bailout of the players and institutions caught up in the burst housing bubble. BusinessWeek's recession roundup piece this week touches on the brewing unrest (though only to make them seem a bit like wild-eyed radicals):

The airwaves and blogosphere are alive with people who say nothing should be done. They argue that intervening now would only delay the inevitable liquidation of credit-fueled excesses. "Under proposed bailouts, responsible people lose and have to give their money to gamblers, liars, and sleazy lenders," says the widely followed Patrick.net housing blog.

This fury makes for the possibility of an otherwise unlikely shift in political orientation for the non-homeowning chumps who are going to end up being punished for their circumspection during the bubble's inflation. Latte-sipping liberals like myself are ordinarily unlikely to pay much attention to the government-hating complaints of libertarians, but this passage from economist Arnold Kling at Econlog seemed to strike a chord with me:

There was some predatory borrowing going on in addition to predatory lending. And the worst lending mistakes were made by the least regulated segment of the market. So you have inexperienced amateur real estate speculators getting financing from Rolex-wearing mortgage brokers who sell the loans to 24-year-old Beamer-driving Wall Street investment bankers. Why can't the rest of us just sit back and watch them all get what they deserve?
Instead, we get the Treasury and Congress coming up with "plans" to rewrite mortgages. These brilliant solutions contribute to making the mortgage securities market totally illiquid, because now nobody has any idea what the cash flows are going be under the (make them up as you go along) rules.

Earlier in this crisis, when the Fed was not handing out billions to investment bankers, I would have scoffed at the phrase predatory borrowing as a conservative sophism designed to conceal how ignorant but hopeful first-time buyers were led into deep water by unscrupulous mortgage brokers. The state, the media, and business all linked arms to tout home ownership as the only legitimate path to bourgeois security and fulfillment of the true American dream (the "ownership society"), and then aflame with that ideology, eventual subprime borrowers scrambled to get themselves some of that sweet home equity. Who could blame them? The abuses of the lending industry were so egregious, it was easy to overlook the overreaching by borrowers who were just trying to live the dream that had been foisted on them.

Seemingly everyone endorsed this program -- the state, the banks, the press, your friends and neighbors -- so now the sentiment appears to be that everyone should pitch in to clean up now that the program has been revealed to be a total mess. The housing bubble was a shared social problem that derived from people with laudable intentions but misguided methods. That's BusinessWeek's view:

There's a social aspect, too. Concentrated foreclosures, voluntary and otherwise, can destroy neighborhoods because abandonment increases decay and crime. And the housing crash undermines the social compact. "Talk about the rich vs. the poor was to some extent buffered by rising house prices. Now all you have to do is stare at your paycheck and your negative home equity," frets University of Chicago Graduate School of Business economist Raghuram G. Rajan.

But I am having a harder and harder time accepting that "social compact", or maintaining sympathy for borrowers in over their heads in homes (which incidentally have destroyed the countryside in which I was raised) that have far more space than they need. They were under ideological pressure to keep up, but somehow I resisted. If the housing problems exacerbates tensions between rich and poor, that might even be a good thing for getting some measures through to ameliorate income inequality in general. But instead we are getting measures that are worsening it.

So I agree with Kling when he writes this:

The people who most deserve to be in homes now are the people who decided in 2005 and 2006 that they could not afford the then-prevailing house prices or who decided to at least wait to accumulate a down payment. If you can sort out the predatory borrowers from the victims of predatory lenders sufficiently well to identify the latter, then the best thing that you can do with taxpayer money is to write checks for those victims.
The way I see it, government has served primarily to prolong and exacerbate the problem.

Sadly, there is little solace at this point in feeling like a smarty-pants for staying out of trouble and being resistant to the dominant ideology, when those in trouble are still getting the love and attention from the government in the form of tax breaks and handouts and, now, most likely, bailouts. It's becoming easier and easier to lump the borrowers in with the brokers and bankers who exploited the dream at the expense, it turns out, of skeptics and habitual rule-followers who thought twice about liar loans or thought it would be insane to expect home prices to continue to double every 18 months. The borrowers fueled the fire that is now burning through my money and the state's diverting it from investments that might help me much more directly.

Yes, preventing the Great Depression II is a worthwhile cause, but one that should have been forestalled by all the regulatory checks and balances in place to manage the economy. Instead, we had a Fed and treasury Department also wrapped up in ideology during the bubble-building years: they refused to regulate the exploding lending industry and kept rates unreasonably low for too long to keep lenders awash in cheap money, which inevitably found its way into hyperinflated home values. And if the expected bailouts come through, moral hazard will reign supreme, as will the underlying fantasia about the importance of owning homes.

In this climate, the Democratic presidential candidates seem to be saying the wrong things and the Republican candidate the apparently sensible thing:

In the Presidential race, Republican Senator John McCain doesn't want to bail out either side, favoring private workouts between borrowers and lenders. Here's how he summed up his feelings on Mar.11: "It is not the government's role to bail out investors...or lending institutions who didn't do their job." Democratic Senators Barack Obama and Hillary Clinton both tilt toward homeowners, but Clinton is more aggressive, calling for a voluntary 5-year freeze on subprime mortgage rates and a 90-day moratorium on foreclosures.

No one likes foreclosures -- everybody involved loses. But no one likes deadbeats either. And no one likes ridiculously unaffordable prices for residential real estate. And homeowners who can't afford the mortgages they signed up for -- credulously or not -- are not automatically victims. The real victims are the renters, who are seeing their rents increase with inflation while jobs become scarcer. That pool includes a lot of urbanites who you'd expect to lean Democratic, and they are probably more vulnerable than they would be ordinarily to some clever rhetoric from the Republicans. But then again, nothing about the current politicos in the G.O.P. leads me to believe that the party has the savvy or the inclination to make the pitch.

So the enemies of the ownership society have no place to turn.