As a follow-up to the prior post, I have a simple question for those who are against allowing mortgage cram-downs during bankruptcy:

Do you approve of TARP, TALF, and the various other backstops that protect the bondholders of insolvent banks at the expense of the taxpayer?

I believe the standard conservative answer would be a resounding "Hell, no."

So, please stop and think for a minute, because these two positions are incompatible.  We have a huge amount of excess debt in the system, debt that is worth far far less than par based on today's asset prices and ability to service that debt.  This debt is going to be unwound, one way or another.  And no matter which way we do it, it won't be pretty.

In my opinion, we must minimize moral hazard, and keep taxpayer expenses to a minimum.  All the various government programs so far, uinder Paulson and continuing under Geithner, have backstopped the management and bondholders on Wall Street at the expense of the taxpayer.  I think most conservatives would agree.

How is an opposition to mortgage cram-downs any different?  Fine, you can force Joe Blow into foreclosure and he'll lose his house, if that makes you feel better.  However, instead of bothering to file for bankruptcy, he'll just mail in the keys (which is his right under a non-recourse loan), leave no forwarding address and change his phone number to try to dodge the credit-card collection system, and work to rebuild his life from scratch.

Meanwhile, the bank now has the same overpriced asset on their books that they can't write down for fear of their own bankruptcy, and because they're still too big to fail, the next round of government support will simply take more money out of the taxpayer to keep the zombie bank running.

There are plenty of other long-term consequences from this course of action, but I think I've made my point.  Put aside partisanship and emotion, think through the broader economic consequences, and realize that the source of an idea isn't what's important, it's the idea itself.

One final note:  Never, ever, ever, ever, ever read the comments to an economic post on a political website.  You'll be both much dumber and much more aggravated than you would otherwise be, if you had just thought the issue through yourself.  I've known this for ages, but damn, that seems to be one of those lessons I have to relearn twice a year.

Posted by: Hermit Dave at 07:48 PM | No Comments | Add Comment
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