Moral Hazard Comes Home to Roost

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Back in the days of the bailout, there was a lot of talk of "moral hazard" – – that is, by bailing out investment banks that had taken oversized risks, the federal government was simply encouraging them to do the exact same thing in the future since there was no real consequence to their action. The government went ahead and bailed almost everyone out anyway, as the notion of moral hazard was brushed aside as a nettlesome, academic inconvenience.

But moral hazard is real; we humans tend to notice social norms, be they right or wrong, and ape them ourselves.

I was reminded of this yesterday when reading this article from the New York Times. It discusses how the vast majority (like 95%) of people badly underwater on their home equity lines of credit are simply choosing to walk away from these obligations.

Now I realize there are a few bad apples in every barrel, but what shocked even me about this article was how universally shameless the Americans were in the article. It stated that in the rare instances that a lender bothers to take legal action, they can get about ten cents on the dollar (if that), and that a firm which buys loans from lenders is paying about $500 each, irrespective of the size of the loan ("Anything over $15,000 to $20,000 is not collectible…..Americans seem to believe that anything they can get away with is OK.")

Why do the borrowers…….people who supposedly signed their good name to a stack of papers committing them to an obligation……..feel it's OK to dismiss these obligations?

+ "They are simply rebuilding their ravaged lives";

+ "Banks were predatory in making loans";

+ "Banks were bailed out";

+ "I am not going to be a slave to the bank…….maybe (the loan) will just go away"

And, my favorite…….

+ Since the lender made a bad loan…a 10 percent settlement would be reasonable. "It's not the homeowner's fault that the value of the collateral drops."

Read that again. Read it a few times. It's not……..his………fault.

So let me get in touch with the douche they quoted and borrow $100,000 to buy a speculative stock. If it soars in value, I'll return his $100k. And if it collapses……..well……….it's not Tim Knight's fault that the collateral dropped, is it?

Well, is it?

I must say, I'm disappointed in my fellow countrymen. This is just wrong.