February 27, 2009

Who's Getting Help Anyway?

As I see it, there are three categories of people out there who have suffered losses because of the collapse of the real estate and financial markets.

Category 1 is represented by the green field in my improvised diagram. These are people who, much as I imagine myself, have made reasonable and prudent decisions about how much home to buy, what kind of mortgage to get, and so on. We've lost equity in our homes and a lot of us are probably upside down on them now. My suspicion is that a very large number of people who have been affected by the recession fall into this category.

Category 2 are represented by the yellow field. These are people who made reasonable and prudent financial decisions, but who no longer can meet their obligations due to circumstances beyond their control. Maybe their employers made bad decisions and they lost their jobs. Maybe their employers were overtaken by a stalling economy and had to let them go. Maybe they had financial emergencies like a sudden illness or a death in the family. In other words, these are people who reasonably thought they could keep up with things and, through no fault of their own, now cannot do so. These are the sorts of people that the rest of us who have any compassion in our bones would want to help out if we could do so. They can't keep their homes and we would like to see these people get a chance to get right-side up again to salvage something from their situations.

Category 3 are in the red field. These are people who made bad financial decisions. They overspent their credit and lived beyond their means. They got ARMs instead of real mortgages, or they did stated-income mortgages with no real plan for how to pay for them other than refinancing them later. Even if the markets hadn't collapsed, these folks were headed for trouble sooner or later. These are the sorts of people for whom the problems associated with financial distress are thought to be somewhat deserved. In terms of their home loans, these are people who would not qualify for a home loan today and probably shouldn't have been given a loan in the first place. The big issue with them is that the banks that lent them a bunch of money are going to take it in the shorts if they foreclose on that real estate.

Now, bankruptcy is something that we provide for people in both categories 2 and 3, again because of a degree of compassion on the part of our society and its laws. People in Category 2 we let into bankruptcy so that they can recover from the calamities that got them in trouble in the first place. And People in Category 3 we also allow a chance for a fresh start, in the hopes that when they admit their problem, they will learn from their mistakes and do better in the future. I know it's easy to see bankruptcy as a way for a dishonest person to get a bunch of stuff using other peoples' money, and not have to pay for it and I won't say that bankruptcy is not abused. But we can't stop being compassionate to people who deserve it, or even to people who were once acting badly and now want to reform their ways, simply because there are people who will try to abuse the system. The trick is to set up the system so as to weed out as many people who don't deserve help from the ones who do.

But we aren't talking about bankruptcies much these days. We're talking about the government doing something else, spending a whole lot of money (your kids should not be happy about that, as I note in the post above this one) to do something else to help out those people below the horizontal line in my diagram, who need help to avoid very adverse economic consequences.

Here's my question -- how do we sort out Category 2 people from Category 3 people? Especially given that it's really a continuum, and there's going to be shades of gray (well, orange in my diagram) between them? Does anyone have even the remotest clue about how to go about doing that? No. And this is what is causing a lot people from all over the political continuum to become very concerned that stimulus and bailout money is going to the very people who deserve it least.


Brandon Berg said...

But we can't stop being compassionate to people who deserve it, or even to people who were once acting badly and now want to reform their ways, simply because there are people who will try to abuse the system.

In this case, why not? We're not talking about people who are going to die; we're talking about people who might have to move. It's not like we're averting any great tragedy.

Transplanted Lawyer said...

I've two points to make in response to that before ultimately agreeing with you.

First, it's a little deeper than people having to move; it's people having to move after having lost an asset and after banks have had to absorb a loss. Enough of that will cause further stress on an already-stressed financial system, which could spread the harm around even more.

Second, given that the government is going to step in and help someone out, the question becomes one of who should get that help. I take your question as a criticism of the hypothesis that the government should step in to the picture in the first place.

Which, of course, it doesn't have to. We have the option to stand back and do nothing and see what happens. I am far from convinced that the inevitable result of that course of action would be economic Armageddon. But we'll never be able to say one way or the other, because the Pros from Dover got elected to Congress and the White House and they are convinced that doing nothing is a recipe for creating Great Depression II. We Americans will likely be arguing for the rest of our lives about whether the interventionist policies of 2009 helped, hurt, or did nothing.