It turns out Republicans don’t favor free markets at all. Only they could come up with a legislation like this one.
On Strategic Default
Basically, they are trying to punish borrowers who, while being deeply underwater, are defaulting strategically – that is stop paying mortgage while staying in the house and spend money on other things. Things like going out to the restaurants, shopping, investing money in their small businesses, etc. You know, the normal things that help the economy rebound and keep the Republicans happy. I must also add and this is important – that while doing it, home borrowers are not actually breaking any contractual obligations. Default is an option. It’s the ultimate free market at work, just like the founding fathers have prescribed. But Republicans are not happy.
Frankly, it’s hard for me to guess why they are upset, because here we have people making rational economic decisions, which leaves me with only one option – they are upset with immoral behavior. Which they in turn seek to legislate. I can not put it better that this University of Arizona law professor.
I wonder if Congress might consider a similar measure mandating that any corporation or bank that strategically defaults on a contractual obligation is not entitled to any tax breaks or other government assistance, including any future financial bailout. The point is, of course, that business and banks strategically default all the time when it is in their economic interest to do so.
Why no similar move by the House to punish strategic default by banks and corporations? It is interesting that House Republicans are generally opposed to most regulation of corporate activities—preferring to leave the market to self-regulate—but have acted with House Democrats to regulate the economic activities of average Americans. This is yet another example of the double standard in America—one set of rules for Wall Street and another for Main Street—but this time the House is actually codifying this double standard.
Unfortunately, this kind of moralistic grandstanding by the House does nothing to help the millions of struggling underwater homeowners who have seen their retirement security disappear. Instead, it worsens the impact of the best bad choice they have to save themselves from financial ruin, which is to strategically default and let the banks have their homes—which, by the way, is a perfectly legitimate option under the terms of the mortgage contract.
The Left customarily criticizes conservatives for being too beholden to raw capitalism to the detriment of society as a whole. They are approaching it from the wrong end. They should criticize the self-proclaimed “capitalists” for not being capitalist enough. Because, (and it’s becoming a tired adage) it’s socialism for corporations and capitalism for the little guy.
However, it feels like Republicans didn’t just do it on their own accord. It does feel like it has an imprint of an invisible hand of Wall Street. The whole situation has a flavor of a strong player at the poker table losing a big pot to some schmuck who doesn’t know how to play and instead of saying ‘nice hand’ and moving on, he’s calling for a floor manager. Think about it – the big wigs on Wall Street got beaten in their own game and by who! To put it simply the scammers were being scammed, and they didn’t like it. The other team played dirty for once and won. But I thought it was understood among the players that it’s part of the business, a so-called leakage. That’s why I am very surprised to find moralists on Wall Street – out of all places, for Christ sake! Now I’m truly expecting the next logical move by Republicans – putting equal penalties for default on corporations.