Student Blog: Law, Markets, & The Role Of The State
RESPONSIBLE AMERICANS: THE REAL VICTIMS OF THE HOUSING CRASH
The great stock market crash of 1929 precipitated one of the worst economic depressions in United States history. In the ensuing aftermath of substantially reduced investment and spending, everyday Americans who did not speculate in the market were forced to endure a nearly decade long period of deflation and steady erosion of their assets and spending power.
Jump 80 years to the present. Does the situation seem eerily reminiscent of 1929? Americans who borrowed responsibly and continued to make their monthly mortgage payments are now dealing with a significant loss of equity in their homes. Furthermore, responsible Americans who were encouraged to maximize their retirement savings into 401k or IRA accounts have seen the value of those accounts drop significantly. Being responsible doesn't sound very rewarding, does it?
To add insult to injury, the Obama administration's $75 billion dollar Loan Modification Plan asks taxpayers to shoulder the high costs of helping irresponsible homeowners who can't afford their mortgages keep their homes. Obama's plan calls for incentivizing lenders to dramatically lower interest rates on troubled mortgages through government subsidies. A noble plan, but one for which responsible borrowers don't qualify for. This may be all well and good for the lending banks, for stabilizing home prices, and for the economy as a whole but what kind of message does it send to the public?
The health and well being of our economic system at a micro level works on the fundamental principle of allowing individuals to reap the benefits of their successes while paying the price for their failures. When this principle is so recklessly discarded it disincentivizes responsible economic behavior and encourages speculative behavior with potentially dangerous and lasting consequences for us all. Instead of subsidizing irresponsible borrowers and speculators, there can be no better way to avoid a repetition of past failures and speed economic recovery than to recognize and reward responsible economic behavior.
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