By Adam Baumli, J.D.Several days after the Obama press conference disclosing the Mortgage Recovery plan, 1 thing is clear, this plan isn't the right plan. After working in the world of bankruptcy and reading several statistics, I have concluded that the downfall of this irresponsible order is inevitable.
First, let's look at the idea of saving those who are in mortgage crisis mode. Roughly 92%
of those who have mortgages are paying them on time. Obama's announcement said, sorry to
the responsible even those of you who are sacrificing, but the government is not going to help you out. To the other 8%, those who aren't making mortgage payments, the government will help you remedy your mistake, because you can't help yourself. Obama had the message, "we all need to be responsible and live within our means." This quote is an oxymoron to Obama's actions. His actions say, "those of you who weren't responsible, you are going to reward you. Those of you who were responsible, you are S.O.L." Some news commentators state that Obama's plan increase the incentive to be fiscally irresponsible, that is a bit of an overstatement. What his plan does is decreases the incentive to be responsible. It sounds the same, but it really isn't. In other words, people don't want to be bad more, they just want less to be good. Let's shine light on this with some analogies. It's basically like decreasing the penalties for armed robbery. Instead of it being 10 years in jail, it is now 1 year. If Obama made that announcement, what do you think would happen? Armed robberies would go up. Based on the logic of this analogy, what should happen to foreclosures? They will probably go up in the future. The only incentive that we as home buyers have to pay our mortgages on time is the risk of losing our home in foreclosure. Reduce our incentive, then we as home buyers have less motivation. It is illogical to assume that more people will live within their means if there is less motivation to do so. It is irresponsible to spend other people's money on this horrible assumption. We all mock and shout from the roof tops about these idiotic CEOs who made bad decisions, yet we fail to acknowledge that we may have elected someone more irresponsible then all of them. This is a bad decision, which would bankrupt a major company. In this case, the company is the United States Treasury.
Now, how will this order affect the market? In short, the market will be more volatile and unpredictable. A free market runs with the incentive of money. Money has been shown over time to be the universal motivator. It motivates all of us to some extent. How do we determine the value of money, the market shows how people value things. If people value something more than it costs, then there are many purchases and the price rises accordingly. Supply and Demand, that is how the market works. Now, Obama's plan throws a wrench into the free market and creates unpredictability. The market becomes volatile when it becomes unpredictable.
Let's try to illustrate this with an example, I have a house valued at $200,000. Let's say that I am behind on my mortgage, but because of the Obama's plan, I make payments and extend my mortgage. Currently, the market had situated itself for my house to go on the market,
but now, my house isn't going on the market. However in 5 years or so, it is 50% likely that I will end up foreclosing anyways. In bankruptcies, statistics have shown that those who have done a plan similarly to Obama's still end up foreclosing 50% of the time. Now, the market will try to predict when these foreclosures will happen, but with complete uncertainty. The market is no longer controlled by everyone's value, but the actions of 8% of these people who have shown that they are very undependable already. The market's reaction to complete unpredictability is complete volatility. Complete volatility results in fear in the market, which results in a sinking market. I sound like Yoda. Undependability; Unpredictability; Volatility; Fear; Sinking; Suffering. If the government interferes and reduces these interest rates (which the market determined are correct), the results will be catastrophic. It would be the same as the government saying that Insurance companies have to lower their premiums for people who are overweight, smoke, and drink all the time, basically unhealthy. What would happen, these insurance companies would go under, just like these mortgage companies will.
Over time, outside influence in a free market has never ended with an overall positive effect. Actually, the more outside influence, the worse and more unpredictable the market becomes. A free market always corrects itself because it is run by majority values, supply and demand. This order is trying to artificially reduce supply, which artificially increases value. The only way that this doesn't end up in a swift downfall when the value drops back to reality is if the government keeps up with this artificial interference. Can we as a country afford sustaining this over a long period of time, forever? In short, NO. Especially since, remember decreasing the incentive, increases failures. Overtime, failures would keep rising. This is a recipe for how to bankrupt the United States.
I can't just complain and not offer my own possible solution. These foreclosures are bad, I understand that. There are those who didn't deserve what is happening to them. That is true. They probably make up about 5-10% of those in this problem. Those people who had an unexpected surgery or just plain bad luck and weren't able to plan ahead, but at least tried. However, the expansion of this pool of people cannot keep expanding, if it does, we all drown.
I would say that if the government wants to invest money into the economy, then do it wisely. Do it like a Broker with a PHD in Economics from the University of Chicago would do. Create a diversified portfolio where your low risk investments potential outweigh the possible losses from the high risk investments. It is obvious that the 8% are high risk investments. If it is not obvious to you as a reader, then stop reading and put all your money in a savings account, because you would be the world's worst investor. The government just needs to make sure that if it wants to invest in these people, that it invests more money in safer, low risk investments. As an investor, you wouldn't dare put all your savings in a high risk stock? You would have more chance of success in going to the casino and putting it all on black.
Back to what to do; a recent CNBC commentator said invest in the young as low risk investments. The young have more years to work in order for you to reclaim what you invested before they retire. Invest in education whether through reducing student debt or educational funding. Overtime, education has shown to be the best investment that increases success for a better return. I say at the very least, divide the money accordingly to the population. Give 92% of the money to those who pay their mortgages on time. Those people would now have extra money and have shown the responsibility to spend it wisely, invest it. Their investments should usurp the losses that you can expect from the high risk of the 8%. To those of the 5% who didn't deserve what happened to them, there already is a government program to help you out. It is called bankruptcy. I don't like bankruptcy personally because it is another interference in the free market, but it already exists, so use it. Bankruptcy is looked down upon, but guess what, receiving this money from the government is the exact same thing. Maybe the government should change the name of bankruptcy to government forgiveness. Bankruptcy is designed to help you save your house by forgiving all your other debt. Then, lenders won't lend you money. Guess what, they shouldn't lend you money. You were a high risk and have shown failure, but through bankruptcy now, you can be forgiven and start your path to correcting your credit. After a second chance and starting over, there are those who can and will succeed. Giving them money while they are in financial disarray is only delaying the inevitable. We have all heard the phrase, "Give a man a fish, feed him for a day, teach a man to fish, feed him for life." Obama's plan is giving out fish, at least bankruptcy is more in the direction of the latter. With my plan, those who fail will be taught, somewhat, and those who succeed (the other 92%) should cover the cost of the failures. Also, at least the pain of going through the bankruptcy process, it is hard and a pain, will lessen the blow to the overall incentive. If I had my wish, I would invest all the money in contracts to private companies to improve things that the government controls that would benefit everyone, roads, ports, municipality development, energy development, etc. I would not have these contracts government controlled, but private entity controlled.
Lastly, I have to discuss a free market economy. In a capitalistic free market economy, recessions are supposed to happen, that's the norm. The prices and income can't always rise, it goes up and down just like supply and demand. And recessions suck, they really do. Recessions are almost like a weed-out system where those who prepare survive and succeed and those who don't, flounder. That's what you want, the strong/smart surviving. For the most part, this roller coaster ride can be gentle and only hurt few people. What has been shown over time is when artificial interference happens, the roller coaster is much more severe with large climbs and huge drops. The other thing is that the roller coaster moves faster as well. I love roller coasters, the more speed, the better, but society doesn't love them, in fact fears them. Obama, stop interfering let this roller coaster right itself.
The American Dream is that those who work hard will succeed, not those who work are entitled success. That is how the American Dream is supposed to work. It's not entitlement, it's desire, ambition, determination, and execution that are rewarded. If you want to only wear 15 pieces of flare and do the bare minimum, then you shouldn't be rewarded with the American Dream. If you want to wear 35 pieces of flare and work harder, then you should be promoted, that's how the system is supposed to work. Over time using that system it has worked and made the United States the most successful country in the world. We need to get back to that.
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