An Honorable Man Pays His Debts

Megan McArdle provides an analogy to the current writings of some, who claim that some homeowners aren’t morally obligated to pay back their mortgages simply because their house has fallen in value:

Four weeks ago, I bought a grill on my credit card.  It was not the best grill Home Depot had–indeed, because I am cheap, and also have never longed to rotisserie in my very own back yard, it was the cheapest grill they had in stock, except for tiny tabletop camping models.

It’s a nice grill.  But I’ve since realized that our landlords have an old, broken grill that we might have been able to repair with enough duct tape, saving me almost $200.  Meanwhile, I’ve discovered that I can’t sell the grill for a profit, because Home Depot seems to have a large number of very similar grills in stock which they are willing to offer to buyers for a mere $200.  For that matter, I can’t even sell it for the value of the loan with which I financed it.  The equity in my grill has dropped by about 50%.  Given all that, I don’t see why I should be required to pay back the credit card company.  After all, they knew when they loaned me the money that I might not pay it back, and I suspect they also knew that I might not like my grill as much as I expected to.  Hell, the dirty bastards may well have known that I was going to end up underwater on my grill loan.  I don’t see why I have any obligation to repay them.

This seems to me to be approximately the logic behind the people saying that folks who took out stupid loans don’t have any sort of moral obligation whatsoever to make good their debts.  The loan company didn’t have your best interest at heart, the logic goes, so why should you take care of them at any cost to yourself?

Well, imagine you’re the one I borrowed the grill money from.  I doubt almost anyone reading this would be plunged into bankruptcy by the loss of $200.  So why should I pay it, when you knew just as well as I did that the grill would depreciate and I might be better off without it?

Call me bourgeois, but I think that when you sign your name to a document promising to repay money you’ve borrowed, you have an obligation to repay the money you’ve borrowed.

On the Blind Questioning the Blind

From today’s Senate hearing on AIG:

In prepared testimony, one official, Eric R. Dinallo, superintendent of the New York State Insurance Department, denied that his agency was the primary regulator of the insurance giant and maintained that he oversaw only a small portion of A.I.G.’s business — a handful of its insurance companies that are based in New York. The primary source of the crisis at A.I.G., he said, was its financial products division, which handled credit-default swaps, derivatives and futures totaling an estimated $2.7 trillion.

“A.I.G. Financial Products is not a licensed insurance company,” he said. “It was not regulated by New York State or any other state.”

“We were not responsible for the whole securities lending program,” Mr. Dinallo added.

But Richard C. Shelby, Republican of Alabama and a ranking member of the committee, repeatedly needled Mr. Dinallo.

“Are you trying to evade your responsibility?” he asked. “You can claim here today that you have little responsibility if any for all these problems?”

If I may respond on behalf of Mr. Dinallo:  “Senator, if you are asking whether I failed to violate the statutory limitations on my authority, then yes sir, I failed.  I failed miserably.  As I’m sure you’re aware the organization you belong to — Congress — makes laws that regulators like me enforce.  And if I may, I’d like to be so bold as to apologize on your behalf for failing to put in place the legal and regulatory structure that would have prevented this from happening.”

Some more confidence inspiring rhetoric:

Senator after senator complained that the bailout of A.I.G. had effectively bailed out A.I.G.’s many counterparties, and that the Fed had refused to reveal who they were. Senator James Bunning, Republican of Kentucky, predicted that before long the Fed would come back to Congress, seeking more money to help A.I.G.

“You will get the biggest ’No’ you ever got,” Mr. Bunning warned. “I will hold up the bill. I will stop you from wasting the taxpayers’ money on a lost cause, because that’s what A.I.G. is, a lost cause.”

Self Righteous Indignation

The day after I wrote my post below on nationalizing the banks, I opened the Wall Street Journal to discover an op-ed piece by William M. Isaac, former chairman of the FDIC.  Isaac starts:

People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization — government seizing control of ownership and operations of a company — is not a viable option.

Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country’s seventh largest bank.

Quite frankly, I’m not sure what to make of his piece.  For the former chairman of the FDIC, the agency that has so much experience in bank nationalization, to come out against this solution carries much weight.  In the very least, it shows that my self righteous final paragraph was a bit over the top.

When it comes to bank nationalization, though, Krugman and his friends on the left aren’t alone in calling for such a step.  The Wall Street Journal, in the process of thrashing the Obama administration, arrives at the same conclusion as Krugman:

Amid the continuing gloom, the message that investors hear when all five regulators line up as a phalanx is: Uh, oh, things must be worse than we thought. All the more so when those same regulators still aren’t offering any specific plans for moving ahead, much less any vision for where they want the financial system to end up.

One result of this uncertainty is that the Obama team has failed to stem a damaging public debate over “nationalization.” We think the debate is mostly beside the point, or should be. Some financial institutions — perhaps many — will have too little capital to absorb their current and future losses, and will end up being taken over by the Federal Deposit Insurance Corp. The FDIC has been doing this for decades, and in fact is now doing it nearly every week with smaller banks.

The agency protects insured depositors and then sells or otherwise disposes of the bank’s assets. This is precisely the kind of failing-bank resolution that we scored the Bush Treasury for not being prepared for, going back more than a year ago. We guess this is a form of “nationalization,” but it’s hardly new and it need not and should not require permanent government ownership.

The Economist has similarly lined up in favor of bank nationalization, not as the centerpiece of any policy, but as the natural outcome of a balanced approach to dealing with the banks.  The Economist is similarly hard on the Obama administration, and is especially critical of Geithner’s vague Feb 10 speech:

More worrying still is the chance that Mr Geithner’s vagueness comes from doubt about what to do, a reluctance to take tough decisions, and a timidity about asking Congress for enough cash. That is an alarming prospect. “Banksters” may be loathed everywhere, but more money will surely be needed to clean up America’s banks and administer the financial fix the economy needs. That, as this newspaper has argued before, means both some form of “bad bank” for toxic loans (with temporary nationalisation part of that cleansing process, if necessary) and guarantees to cover catastrophic losses in the “good” banks that remain. Mr Obama’s team must recognise this or they, like their predecessors, will come to be seen as part of the problem, not the solution.