Monday, March 09, 2009

A National Grill Rescue Plan

As usual, Megan cuts right through the argument for a mortgage bailout plan, and with appropriate panache and snarkiness:
Four weeks ago, I bought a grill on my credit card.

...I've since realized that our landlords have an old, broken grill that we might have been able to repair ...Meanwhile, I've discovered that
I can't sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200. For that matter, I can't even sell it for the value of the loan with which I financed it. The equity in my grill has dropped by about 50%. Given all that, I don't see why I should be required to pay back the credit card company...Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan. I don't see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans
don't have any sort of moral obligation whatsoever to make good their debts. The loan company didn't have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?


Erik said...

It's hardly an analogous situation though. The housing "culture" is much different than the grill "culture" (is there one?). The government still hands out huge benefits to folks that buy houses, not so with grills. There's the stigma of the American dream with houses, grills are just a subparagraph of that same dream. (Along with apple pie, hmmmm, pie...). The grill industry doesn't aggressively play off this stigma to sell more grills; nor do they promise that your value will go up or at least stay the same. One can get by without a grill and still raise a large, healthy family (another American dream), the same thing is hard to say for a house; where else can one have the 2.5 kids, dog, cat and two car garage for two working parents? The credit card company in no way encouraged the holder to make a bunch of purchases the way a mortgage salesperson makes bold statements to gain more customers.

The housing market is a very unique market. There are laws against predatory lending in many states, but not against predatory grill salesmanship. There's a reason for that. I'm certainly not excusing mortgage owners for getting in over their head, but they are not so stupid as Megan McArdle and her poor grill buying practices. They were taken for a ride and promised the world, not a way to make a tasty (veggie) burger in the summer. Should they have seen it was too good to be true? Perhaps, but it's hard to look that level of a gift horse in the mouth. If we are going to bail out the folks that partook of the very questionable lending tactics, why are we so hesitant to bailout the folks that were hood-winked by them?

Saxdrop said...

"New bill promote good grill buying habits."

Well, not really, but point taken. Yes, politicians of both parties (administrations mostly) have been pushing homeownership like bipartisan dope-boys slinging drugs. They just chose different drugs. In that you're right, and so they're not analogous.

But the point Megan is trying to make is one of the credit-pushers, and not the home-suppliers (sorry to stay in the drug trade simile). In that way, they're the same just on different scales.

"There are laws against predatory lending but not...grills [sales]."
True. But there are laws governing credit cards, and we observe many of the same enticing offers on credit cards as we saw on mortgages (0% teaser rates, prepayment penalties, etc.). The key relationship is the cost of credit relative to the asset, and on this i think Megan is correct.

To me it also gets back to the issue (although not addressed by MM), of housing as both consumption and investment. As an investment the loan was from inception probably a poor idea the way it was structured (based on risk and likely return), but is this true for the consumption portion of the house? We assume when we buy a house that it'll go up in value, and in that way the mortgage is basically a "call option." But that really shouldn't matter -- if housing was treated like grills, we would only buy as much house as it makes sense to in terms of how much we enjoy it given cost. Housing is durable (we hope) so of course it is not like buying, say, a cheesecake, where past the first couple slices we dont really need anymore, and of course there's no secondary market in cheesecakes.

That's a long-winded way of saying, Megan hits upon the core difference between grills and houses. But grills too are durable, so in some sense they shouldn't be treated differently by consumers at all.

Erik said...

I think you very much hit on the fundamental difference, saxdrop. That home ownership is looked at as both a purchase and an investment. And that is the real problem here is that folks were told that homes don't cost money they make money (ala the salesman that got poor Homer Simpson in the plow business). No one is trying to convince people that anything purchased with a credit card is an investment, it's money spent and debt created, not money earned (even with neat point systems that let you get a free snow globe or mini-cooler).

And in fact you're probably right, homes should be seen purely as purchases in the same way a grill is, without a sweet plan to have the ability to some day sell it; and if that's the case are the partakers in over their head mortgages more foolish or mislead by supposed experts? There's not a Target employee in the world that would tell me to pick up a grill with the added bonus of being able to sell it for little loss or even a profit, but almost all buyers of homes are told they can do that with their home by lenders, bankers and other folks they turn to advice.

Rob said...

The days of "investing" in a house may well be over and done with, and that may be just fine. But I'm still not sure where McArdle gets the tone of high moral dudgeon directed at screwed homeowners.

Our society and its laws are already structured in such a way as to heavily favor the moral view McArdle favors, which is that you should pay back what you owe. That's good, that should be the way it is.

But the situation described in the Felix Salmon post -- in which walking away or defaulting becomes a legitimate option on the table -- what the extraordinary collapse in home values has wrought. That values have fallen so far so fast mucks up the cost/benefit analysis we'd usually apply.

If you really broke it down and figured out the consequences of not paying your credit card for the grill, you'd almost certainly pay for the grill. But with Felix's mortgage, and by implication thousands of other mortgages, it's not so obvious that this is the most beneficial route.

So, what's left? Only the moral argument -- and this may be the reason that McArdle (and CNBC and others sympathetic to the creditors) become so agitated. You have to do this because you just have to. It's wrong to assess your own self-interest, just plain morally wrong. Not very convincing, though is it? And not really how the humans I know usually make up their minds...

Saxdrop said...

you both have very much helped me think through this important conundrum, and i think we're largely in agreement on my core point.

In the absence of a mortgage rescue plan, i guess it does come down to the moral argument, which comes off as so much high-mindedness from the creditor-sympathetic crowd.

But this is relevant because we're facing a housing rescue plan that is essentially trying to bribe homeowners to stay in a house that they rationally would be walking away from. However Rob, you rightly point out that the recent precipitous drop in prices has completely mucked things up and i think you're inferring (again rightly) that the same moral calculus may not apply in a time of topsy-turvy marginal calculations.

And Erik, i think the relevant counterpart to the mortgage salesman is not the snow plan salesman, but Lyle Lanley selling Springfield the Monorail.

Erik said...

This sounds more like a Shelbyville idea...

Rob said...

"Essentially trying to bribe homeowners to stay in a house that they rationally would be walking away from."

Depressing when put that way... But listen, in my book the moral argument for paying one's debts doesn't have no weight, it's just... complicated. Felix is an extreme case, but presumably there are people who are less-screwed-than-that, but who are also in trouble and who really want to keep their houses. The way for this mortgage plan to work has got to be in its ability to target the right people. Not sure if it will be able to do that or not but it seems to me that that is the trick.

Saxdrop said...

I guess we could start by restricting help (at least at first) to people who are close to default (or recently defaulted) because of an income event, rather than a price event.

That is, if you lost your job within 12 months of missing a payment, or suffered a sudden, unexpected increase in debt/costs (like health care, death of an income-earner, etc.), you would qualify, but if your home value simply went down and rising interest rates makes it less attractive to pay you would not qualify.

Yes, I acknowledge it's a coarse gradient by which to separate Type I and Type II errors.

Erik said...

Not to beat a dead horse, but a comment from Obama's appearance on Jay Leno's show last night really rang true for a lot of what we're talking about here, especially in terms of the difference between a consumer product like a grill and a financial product like debt or a mortgage:

Skip out to the 6:50 mark and he'll start talking about credit cards versus toasters.