Sunday, April 25, 2010


A short fable is instructive:
Mr. Ant and Mr. Grasshopper have identical jobs. They buy identical houses for identical prices. The only difference is that Mr. Ant uses his savings to make a 50% down payment; Mr. Grasshopper gets a mortgage from a bank for 100% of the purchase price. The value of their homes goes down 50%. Mr. Ant has lost the equity in his house (his savings); Mr. Grasshopper has lost – nothing.

The Obama solution to adjust Mr. Grasshopper’s loan so he is no longer underwater. Mr. Grasshopper has not lost any of his own money; Mr. Ant’s savings have been wiped out. But the plan assists Mr. Grasshopper while Mr. Ant gets - nothing. Besides helping the wrong guy, he does not explain how encouraging behavior that should not be repeated assists in the economic recovery. It does transfer wealth to people who do the wrong thing. So, the more money people saved to make a down, the less likely they are to be underwater and so would be ineligible for this program.

After lowering the mortgage for Mr. Grasshopper, the value of the home increases as it eventually will (we hope). In our fable, it goes up 25%. Mr. Grasshopper – who started with nothing invested - now has 25% equity in his home. The government creates wealth for the first time! But Mr. Ant has now lost only 50% of his savings. This makes sense to the economic wizards supporting it

The President does not even propose that this would help that housing market; nor does he suggest that it would free up credit. In fact, it would restrict the availability of credit. Invalidating lending contracts will not encourage more lending; nor will destroying the value of contracts help businesses recover. Again, it does transfer wealth to people

The program does not ask about the down payment? Or if there was a cash-out refinance (where is that money?) It just gives out money.

President Obama said multiple times during the campaign that he was going to redistribute wealth. He is honoring that pledge.

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