The moral hazard of dropping off the keys

I've written before about ethics of compassionate conservatism and the strange ethical solutions it appears to produce. The goal of the American Dream was owning a home. That leads to a more stable society in many ways. Some (including Bush) have also talked about an ownership society, one in which the average person (at least average middle class) has a stake in the economy both through home and stock investments. Those dreams and that ownership took hits during the dot-com burst and the Enron meltdown. Now we have a house meltdown. Many home buyers were sold interest-only mortgages. If the price of the house rose, the homeowner won. If it fell, the bank lost. Many homeowners were essentially renters, having little or no equity in the place where they lived. They crunch the numbers, see they owe more than the house is now worth, and see there is no way to get back above water. They even see repairs to the house not as improving their asset, but shelling out money -- absorbing costs -- to maintain someone else's property. Their solution: mail the keys to the bank and leave. Some even trash the place on their way out. Actual rent is usually cheaper (though with landlords defaulting and banks kicking out tenants rental properties are getting harder to find). It is better to default on the house then the credit card (that used to be the reverse). Americans are finding the dream betrayed. A candidate who dares to tap into this anger could go a long way this fall. By walking away thwarted homeowners find they may have lost out, but they can take their bank down with them. Those interest-only loans are like loaded weapons left in every house. Banks find it aimed at themselves. The Bushies find the weapon aimed at their buddies and only now must they act.

Bailing out the mortgages creates a moral hazard. Think of it this way: One man dug a hole to capture a second man, then the first man falls in as well. Which do you rescue and why? The Bushies are quite content in rescuing only the first man. The first man is the bank that made a bad loan on risky assumptions. The second man is the average homeowner. The homeowner isn't helped because economists say it is a moral hazard to not pay for the consequences of your risky actions. But with the bailout of Bear Sterns, who engaged in risky behavior as well, they are avoiding the consequences of their risky behavior. Most of the management gets golden parachutes while most of the staff gets a pink slip. No moral hazard here? Any government help of the common man and you get screams of "socialization!" especially in socialized health care. But now we get socialize wealth care -- the transfer of money from the government to select private citizens.