Tuesday, April 7, 2009

Who takes the housing hit?

This is the central question; the answer will directly affect the lives of many and will shape our society far into the future. As I suggested yesterday, we can help each other, but when someone loses their job and can't make their house payment helping them come up with the cash is beyond the ability of most of us. It could be done by taking up a collection if there were small numbers of these cases, but what if this happens to 25 percent of the population? At this point there are several alternatives:

1. the homeowner loses the house (the homeowner takes the hit, this is what normally happens.)

2. the government helps the homeowner make the payments in some way, either through some sort of loan or by giving the homeowner a job (the government/taxpayer takes the hit.)

3. the homeowner is allowed to stay in their house even though they can't make the payments, maybe with some provision that they resume payments when they are employed (the bank takes the hit).

The first possibility creates great problems if it happens to very many people at once. If a large number of people suddenly have no place to live, we must immediately find somewhere for them to stay. The most efficient way would be to just keep them where they are, which choices 2 and 3 accomplish.

The second alternative solves the homeless homeowner problem but will fairly quickly cause the U.S. to default on it's national debt because of the large sums borrowed for this purpose.

The third choice is the most direct, simply let the homeowner keep their house. This will destroy our banking and lending systems, probably requiring a permanent nationalization of these, and will create the immediate perverse incentive for people to stop making their house payments while having long term destructive effects on any economy because it casts doubt on the validity of all future contracts and transactions.

From a political standpoint, I think the second choice is the only possibility.

I would argue for the third choice, in spite of the economic fallout. I think it has the benefit of transparency since you directly do what you intend to accomplish. I also think the economic consequences could be mitigated in a future society that emphasized fairness and opportunity for everyone. I believe people have a much greater capacity to cooperate for the common good than we give them credit for.

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