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Why Not Walk Away From Your Mortgage?

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”
John Maynard Keynes

The avoidance of taxes is the only intellectual pursuit that carries any reward.

– John Maynard Keynes

In a time period when we rationalize government bailouts of the world economy with a hat tip to Keynesian economics, I find that quote rather entertaining.  It seems that the citizens, businesses and governments always think that there should be an easy way to get out of trouble.  When the economy sputters, keep interest rates low until the engine starts revving.  When large companies falter, use government funds to bail them out.  When unemployment is high, use government stimulus spending to motivate employers to hire.  When stock markets crash, keep interest rates low to spur growth in asset classes.  When consumers feel short on discretionary income, make it easier for them to borrow.

These are the themes that have brought upon us the largest imbalances in global trade ever experienced in the industrialized world.  I have talked extensively about the moral hazard inherent in bailing out financial institutions and corporations in general.  I have laid out how the actions of the government and the federal reserve have only fueled the bubbles and enslaved us to debt.  The sad follow up is:  Have we learned nothing?

Roger Lowenstein, a respected financial journalist, recently wrote an article for the New York Times in which, when questioning why underwater homeowners do not walk away from there homes,  states:

“Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.”

I do not believe that people who made poor financial decisions such as buying a home with a reverse amortizing loan, with no money down, or naively purchasing a home with the expectation that prices can only go up should ever be able to walk away from their legal commitments without massive financial repercussions.  That being said, I also do not believe that the firms that originated these loans and collapsed under the stress of the crumbling housing market should have survived with the help of taxpayer funds.

This is not a question of individual morality versus that of corporations, this is a fundamental ideology currently ingrained within the American psyche.  The ideology that our mistakes should be someone else’s, that we are entitled to what we want, that any problem can always be postponed, and that things should always work out.  This framework for thinking and acting is pervasive in individuals, corporations and the government.  When rationalizing our actions we merely need to point at some other example of that very behavior.  “I did not create this problem, so why should I have to deal with it?”

Unfortunately, this really is your problem, and eventually you will deal with it…most likely through taxes, inflation, and unemployment.


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3 Responses

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  1. Roderick Beck says

    Moral hazard is a red herring. In the 19th century there were few bailouts and financial crises occurred repeatedly, leading up to the creation of the Federal Reserve in 1907.

    Study economic history and you will find that moral hazard does not explain the bulk of bubbles and financial crises.

  2. SurlyTrader says

    You are truly drawing comparisons that should not be drawn. You cannot compare financial crises during a fiat monetary system with a federal reserve pulling the strings to a non-fiat banking system without a federal reserve. Moral hazard has nothing to do with that differential and it is illogical to make the comparison and then draw a conclusion.

Continuing the Discussion

  1. Millionaires Defaulting on Mortgages | SurlyTrader linked to this post on January 31, 2011

    […] an update to the articles that I wrote about a year ago regarding strategic defaults, it is time to revisit the continued problems with the housing market.    It turns out that one […]



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