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Subsidizing Bad Decisions


Now that the federal government has decided to bail out homeowners in trouble, with mortgage loans up to $729,000, that raises some questions that ought to be asked, but are seldom being asked.

Since the average American never took out a mortgage loan as big as seven hundred grand— for the very good reason that he could not afford it— why should he be forced as a taxpayer to subsidize someone else who apparently couldn't afford it either, but who got in over his head anyway?

Why should taxpayers who live in apartments, perhaps because they did not feel that they could afford to buy a house, be forced to subsidize other people who could not afford to buy a house, but who went ahead and bought one anyway?

We hear a lot of talk in some quarters about how any one of us could be in the same financial trouble that many homeowners are in if we lost our job or had some other misfortune. The pat phrase is that we are all just a few paydays away from being in the same predicament.

Another way of saying the same thing is that some people live high enough on the hog that any of the common misfortunes of life can ruin them.

Who hasn't been out of work at some time or other, or had an illness or accident that created unexpected expenses? The old and trite notion of "saving for a rainy day" is old and trite precisely because this has been a common experience for a very long time.

What is new is the current notion of indulging people who refused to save for a rainy day or to live within their means. In politics, it is called "compassion"— which comes in both the standard liberal version and "compassionate conservatism."

The one person toward whom there is no compassion is the taxpayer.

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue— and as if the people facing foreclosures are the only people that matter.

What if the foreclosures are not stopped?

Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices— prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling.

How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit.

Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

Study after study, not only here but in other countries, show that the most affordable housing is where there has been the least government interference with the market— contrary to rhetoric.

When new occupants of foreclosed housing find it more affordable, will the previous occupants all become homeless? Or are they more likely to move into homes or apartments that they can afford? They will of course be sadder— but perhaps wiser as well.

The old and trite phrase "sadder but wiser" is old and trite for the same reason that "saving for a rainy day" is old and trite. It reflects an all too common human experience.

Even in an era of much-ballyhooed "change," the government cannot eliminate sadness. What it can do is transfer that sadness from those who made risky and unwise decisions to the taxpayers who had nothing to do with their decisions.

Worse, the subsidizing of bad decisions destroys one of the most effective sources of better decisions— namely, paying the consequences of bad decisions.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing. It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page at Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His Web site is



4 Comments | Post Comment
Anyone who takes bailout money for a $729,000 house should be required to set aside one bedroom and one bathroom for public use. I should be able to sign up somewhere to use that bedroom and bathroom if I am vacationing in that area.

I still think one day per week of indentured servitude should also be a requirement. Joseph set aside the harvests of the plenteous years against the seven years of famine. But they didn't give it away. As payment they took money, they took cattle, then land, and at the last people became servants in exchange for food.
Comment: #1
Posted by: Jeff Roberts
Tue Mar 10, 2009 10:18 AM
Who To Blame For Economy Meltdown

Above is an excellent summary and timeline of this issue and 1 tape does include Barney Frank rejecting the need for Fannie and Freddie regulations because he felt Fannie and Freddie had no safety or soundness problems.

Note: Since I first watched the above clip C-Span has removed 29 minutes of (2:55 – 3:24) that included Barney Frank saying that there is no safety or soundness problem with Freddie Mack or Fannie Mae.

The above link has a number of informative quotes by Obama, Clinton, and Frank proving they are the primary causes of the current economic meltdown.

In 1995 the Clinton administration changed the Community Reinvestment Act to permit sub-prime loans to be resold by the nominally private Fannie and Freddie to global banks and investment institutions. The government made trillions of dollars available to Fannie and Freddie at sub-prime loan rates. ACORN and the government then pushed Fannie and Freddie hard to boost the lending to low income households. Fannie and Freddie used this new government leverage and “encouragement” to buy these trillions of dollars of sub-prime money from the government, packaged them as low interest adjustable loans for low income households, and resold them on the market to global banks and investment institutions. Ironically, the banks and financial institutions that are being targeted today with nearly $1 trillion in government bailout money were “pressured” by Acorn and Washington to boost their lending to high risk low income households.

In 2001, sub-prime loans totaled $330 billion, or about 15% of all loans. By 2006, they had reached $1.4 trillion, or 48%. Fannie and Freddie owned or guaranteed more than half of the nations $12 trillion in home mortgages. They were near monopolies.

For 35 years, the home ownership rate had hovered around 64% which is about where it stood in 1995. By 2005 it reached near 70% - a record. But it came at a price. When the Fed raised the rates from 2004 to 2006, adjustable mortgage rates increased exponentially, low income homeowners couldn't make their adjustable mortgage payments, the housing industry fell apart, and many banks were left holding billions in underwater mortgages. Home prices fell, and homeowners suddenly found themselves with no equity to borrow on. The low income homeowners that paid “little to nothing down” had no downside risk to walking and the resulting foreclosure.

Lack of effective regulatory requirements by the government with Fannie and Freddie are the cause and major reason why we are in the recession we're in. Understand that with receipt of these trillions of dollars from the government Fannie and Freddie are now government owned institutions. The governments failure to implement adequate Fannie and Freddie regulatory requirements led to home foreclosures, which led to bank cash flow problems, which led to banks freezing all loans, which led to business cash flow problems, which led to layoffs, which led to more foreclosures, which led to more banks freezing loans, which led to more business cash flow problems, which led to more layoffs, which will lead to more foreclosures, etc………

Who is responsible for causing the worldwide economic meltdown? The US government is mostly to blame. Many of the same politicians, Barney Frank (rejecting Freddie and Fannie regulatory changes), Bill Clinton (changing Community Reinvestment Act) and Barack Obama (ACORN/President) are the politicians responsible for empowering themselves to make new laws, exert pressure on Fannie, Freddie and private industry, and covering-up their mess with depression producing bailouts.

As for solutions; replace income tax system with spending tax system, eliminate adjustable mortgage/loans, require at minimum 10% down to qualify for home loans, tax cuts for small businesses, more severe penalties for white collar crimes, eliminate spending earmarks, eliminate the Federal Reserve practice of printing non-secured money, all spending must be accompanied by a work plan that includes justification/payback/accountability.
Comment: #2
Posted by: Duane
Tue Mar 10, 2009 6:29 PM
There is a consequence to everything we do. It's not just unqualified home buyers. The decision to repeal the Glass Steagall Act is now being debated as the root cause of the current recession. I believe that the repeal resulted in the unintended consequences that have brought the world to the brink of depression. Mr. Sowell's free market views were the same as those who pushed the repeal of laws that control banks, insurance companies, and Wall Street.
Comment: #3
Posted by: Don Evans
Tue Mar 10, 2009 9:28 PM
Fed Chairman, Ben Bernanke, stated and I'm quoting ‘We really had no choice in bailout of
AIG!' Yes, Mr. Bernanke, you did have a choice! When AIG received first bailout, why
weren't strict guidelines imposed on them; such as, NO MORE BONUSES, cut ‘CEO fat cat'
salaries, freebies, and retirements to maximum $25,000.00 year. Older employees, offer
them an early retirement package! All other salaries to be cut by at least one-quarter, as a
slice of the pie is better than no slice at all! Mr. Bernanke this includes you and the rest of
politicians! The other option would have been to let AIG file bankruptcy so they could start
over, and maybe this time they would be more concerned and knowledgeable of what it
takes to run a company by tightening their pocketbooks! You see, Mr. Bernanke, bad
choices is what's put America into Bankruptcy and borrowing money from foreign
countries that we can't pay the interest on! Where's the common sense in these matters?

Taxpayers understand Bay of Thailand is buying AIG Retail Bank Company and deal is to
be completed April 2009. Since this is really Taxpayers money, will you and rest of
politicians make sure AIG pay off the trillions of dollars borrowed, without Taxpayers'
consent, to foreign countries?

That brings Taxpayers to the latest for AIG's bonuses and the statement “If we don't pay
them big bonues, they'll sue us!” How dumb you are? It's Taxpayers' money, not yours to
give! It's time for for AIG, Freddie, Fannie, Banks, Automakers and anyone else standing in
line taking Taxpayers money to immediately file Bankruptcy! Enough is Enough!

President Obama's top economic advisers vigorously defends his 3.6 trillion budget! News
flash for you -- “Taxpayers don't defend this nor any of the so-called put people back to
work programs, called infrastructures. I just left a meeting in which one of the ‘economic
advisers' from a bank stated he'd been in DC for a week!” I asked him why he thought
America needed infrastructures if we didn't bring textile and furniture manufacturing jobs
back to America? He stated ‘they' didn't discuss this, just infrastructures! Remember, these
large banks like Citicorp, Wachovia, etc. were bailed out! Taxpayers wonder why we're
bailing them out if politicians continue allowing the ‘economic' idiots to advise them. He
had no answers! Guess what, Mr. Economic Adviser was hoping the floor would open up
and I'd fall through it! You see, all the expert politicians and economists know as much
about ‘thrifty management' as a newborn and this, folks, is the reason for Change and not
Obama's change methods, either!

There seems to be a lot of ‘experts' in government and financial institutions with no
common sense. It's time to run America like a private business; meaning, President, Vice-
President, Secretary, and Treasurer. All these cabinet members collecting huge salaries
and benefits will have to come to an end. Taxpayers know it's time to cut salaries to
$12,000.00 yearly for all politicians. After all, these Public Servant jobs give less than 30
days of service and, in today's world of mismanagement, deceit and greed, so this is more
money than they deserve.

Why aren't we prosecuting the people handing out Taxpayers monies and the people
who's receiving it? The reasons being very clear-who's collecting and benefiting!

Comment: #4
Posted by: Shirley deLong
Sun Mar 15, 2009 3:57 PM
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