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Free Lunches for Everybody!!!

Posted By Conn Carroll On October 31, 2008 @ 4:37 pm In Economics | Comments Disabled

Reporting on the latest incarnation of the Wall Street Bailout, The New York Times [1] managed to discover the concept of moral hazard today:

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

Yes, why should the rest of Americans who prudently avoided buying more house than they could afford keep making their mortgage payments if the government is offering to pick up the tab? This is the problem with any bailout scheme that tries to put a floor on housing prices by stopping foreclosures: once the government starts rewarding people who made bad decisions, more bad decisions are destined to happen. Or as Pimco partner Paul McCulley told the NYT: “If the lunch truly is free, the demand for free lunches will be large.”


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[1] The New York Times: http://www.nytimes.com/2008/10/31/business/31bailout.html?partner=rssnyt&emc=rss

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