Principle over Principal, An Unblinking View From the Rabbit Hole

In a sign of how perilous the national economy is, The New York Times favors broadly reducing principal on underwater residential mortgages (“Not much relief”, July 5, 2009). “Everybody wins” according to the Times by resolving the collateral damage of a speculator-driven economy. Taxpayers win because they will not be required to dole out additional billions when the economy is dragged down further the rabbit hole.

But here is who doesn’t win: responsible homeowners who did not buy a bigger mortgage than they could reasonably afford, or, citizens who could have bought but rented or who otherwise remained on the sidelines during the speculative frenzy that turned home mortgages into gambling chips to enhance their standard of living. Why should these heroes be forced to pay?

The New York City residential real estate market is one of the most inflated in the world. That is the result, mainly, of the Wall Street juggernaut built on confections of debt. Now that markets for fraudulent debt has cratered and Wall Street is shriveling, inflated values for condominiums, apartments, and houses are collapsing, too.

The Times’ view is that reducing principal will establish a basement for the depression in residential real estate. But the tidal wave of foreclosures has already radically changed market values.

It is principle, not principal, that needs protecting. The buck has to stop somewhere.

As a card-carrying member of the hero class of homeowners, I ask: why should responsible taxpayers who violated no standards of fiduciary responsibility be forced to underwrite those who did? I was a refusenik. I did not buy into the housing market bubble or the culture of greed and speculation that plunged the US economy into the worst economic crisis since the Depression. Why should I pay, again and again and again?

Of course, all US taxpayers are all paying– hugely– for miscalculations of risk that passed as sound public policy by elected officials, Democrats and Republicans alike. All those business school degrees in high places didn’t add up to a hill of beans. The Alan Greenspans and Robert Rubins of the world have no place in the public realm. But in addition to their banishment on an Isle of Elba or Alcatraz, I have a counter-proposal on behalf of the hero class: if Congress and the Obama administration approves reducing principal for homeowner mortgages that are underwater, then home owners who did not chase the fireflies of unsustainable personal debt or do not benefit from their own TARP should be compensated.

Give the hero class, his or her due: a 30 year income tax holiday equivalent to the average amount of forgiveness of mortgages for the top bracket of income earners, compounded annually. Allow individuals to trade these hero class tax credits to profitable corporations for cash. Why the upper bracket and not the average of home values of reduced principal? Because the upper bracket of wage earners benefited mostly from and contributed to the speculative fever that is now destroying the national treasury.

This suggestion is only half in jest. If you weren’t part of the culture of greed and excess that marked the past decade, if you weren’t bailed out and haven’t been able to get your 100 cents on the dollar like Goldman Sachs, you don’t even have a party favor to remind you of what you missed. Welcome aboard.

My keyhole view into the operations of the US Treasury is from a low level of ordinary interest. I don’t know how much future national pain could be avoided by reducing principal of underwater mortgages today. Clearly, the New York Times has data that is not being reported. But I do know that reducing some principal on mortgages– self selected by past mistakes–, when neighbors aren’t given the same opportunity to profit, makes a mockery of contracts and is theft by any other name.

The bottom line: speculators who continue to agitate for the next bubble in the US economy need to be wrung from the system. Their bankrupt behavior and preferences wrecked the economy. Tragically, their interests are still represented in Washington more than mine and yours, notwithstanding “change we can believe in”.


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