PIMCO on the bailout: "A handout to the fool"

If you're up for some pragmatic, pro-bailout, big-picture thinking, check out this interview with PIMCO economist Paul McCulley. I'll summarize and highlight, but encourage you to read it for yourself.

McCulley's take on real estate right now is that no-money-down, underwater homeowners are making a rational business decision by walking away from their mortgages (where have we heard that before? From readers of this blog).  "When you have no skin in the game ...  it’s eminently rational to go into early payment default."  This, McCulley argues, is creating a deflationary spiral in home prices.

One problem with a deflationary spiral like this, he argues, is that smart buyers (of homes) refuse to buy into it. Who wants to catch a falling knife? So prices continue to fall. But won't investors buy the homes as rental properties at some point? McCulley says prices are so far above that point that the decline would be hellish: "That would conceptually be your floor, but that is so far away from here that the economy would have to go through absolute hell to reach that point."

The solution? Like many others, McCulley looks favorably on the Barney Frank proposal, in which banks would write down problem loans rather than foreclose, and then the government would guarantee new loans at lower amounts, in hopes of keeping underwater buyers from walking away. Is it a bailout? McCulley says it is -- it puts taxpayers are risk in the likely case that the re-written loans go bad. McCulley: ".. The inequities smell to high heaven, and that is one of the huge problems in dealing with it. It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer."

Thoughts? Comments? Email story tips to peter.viles@latimes.com.
Hat Tip: TW

Comments

[puckhead]

Laker,

I don’t think the govt is as evil as some may seem. I agree they can be shortsighted, but not inherently evil.

You contend that poor people are subsidizing the people that can afford mortgages. Truly poor and low income people in this country pay very little if any tax. Tax rates for the higher incomes are always higher than lower incomes. My wife and I are fortunate in that we both do well at work. We have three kids and we BOTH claim Single 0 dependants on our W-2’s. Even with the large bite that the tax man takes out of each paycheck and all of our housing related deductions, every year we write a big fat check to Uncle Sam on April 15. No one can say that I’m “undertaxed”.

You contend that the govt wants us to all be in debt. If this was true, then they WOULD NOT have phased out the deduction for credit cards. Hell, they should allow us to deduct the interest for auto loans and paying for college if that was the intent of govt because while it’s relatively easy to avoid a mortgage, it’s virtually impossible to avoid auto and college loans.

In my opinion, the govt does not have a “revenue” ie tax problem, it has a spending problem from the local level right up to the federal govt. We’re trying to support a population where the newest “immigrants” have an underground economy out of the reach of Uncle Sam or earn so little that it’s barely taxable while the people that do take part in the taxable economy get shafted every April 15. As April 15 gets closer, the PO’d I get.

[Michael Snyder]

Laker,
Spoken like a true? I just don't know. But I do know you're myopically reaching into the wrong pockets. Somehow you've got anyone who earns more than you wired as "rich" and therefore eligible for a tax you won't have to pay. Sadly your position is typical of most Americans and it provides a convenient handle for politicians to lead you around with.
The real drains on the American economy are; oil, over leveraged credit positions and a tax system weighted towards placing the greatest burden on the middle class. While the robber barons of Wall St. are taxed at 15% (capital gains rate) on their lotto sized pay checks which the then "write down" to almost zero; you'd have folks who are taxed at over 30% on their five digit incomes give up one of their few remaining tax deductions to bail out who?
It doesn't matter how you choose to pay for your housing, mortgages are just a symptom of a much larger financial crisis. Remember we've yet to see the inevitable consumer credit defaults that will follow in the wake of these foreclosures. Then there's that 47 million people without health care. But soaking your next door neighbor is going to stimulate the economy? That's like suggesting a dose of gout as a training regimen for a marathon.

[calrenter]

Laker is absolutely correct that tax rebates for homeowners are a form bailout. Allowing this rebate has two affects:
1. The "amount of house" that people can afford is artificially inflated by the tax rebate and figured into the loan calculation - hence instant house price inflation.
2. If a "debt owner" is unfortunate enough to lose their job then their mortgage repayment effectively increases by the tax rebate amount - adding insult ot injury.

Also debtowners don't use their reduced taxes to maintain their homes or buy girl scout cookies - they use it to pay their inflated mortgage!

[Michael Snyder]

calrenter
Seems like you need to join Laker and invest in real estate in Havana. That way you can find plenty of agreement for your socialist stupidity. Since when does penalizing someone for making progress in their life create a benefit for you? Are you so ignorant as to believe your landlord's property taxes are not amortized into the cost of your rent? Do you really think the hole country would be better off if we just gave up and became good little socialist worker bees like you? I will give both of you this though, you've bought into the "he's got more than me, so take it from him & give it to me" plan that drives out tax system. That's also why you can't afford to save a down payment. Every time you've increased your income, the government increases your taxes and they've convinced you that somehow this is an equitable solution for funding the government. But wait! If you're earning over seven digits a year you're suddenly paying less in taxes than someone who's earning 10% of that. I'm sure that's no concern for you as you'll never earn that kind of money; but don't you need a bail-out?
So you'll just muddle along, maybe take the bus to work & complain about how all those people driving are ruining your planet. after all, according to you they all should be on a bus. The fact that they're carrying tools and materials for their job, or the bus isn't going to where they are is of no consequence. You're on the bus so everybody else should be on the bus too.
Our "progressive income tax" system is designed to keep the peons (that would be us) down. Any opportunity for folks to give less to the government is a good thing. Please note almost none of that money ever goes to what we'd want it to go for anyway.

[houserenterinLA]

I agree with Laker, Michael Snyder, calrenter and puckhead. You guys are just arguing in circles. The solution is to provide incentives for renters to deduct their rent as well. This way, it puts money in their pockets and increases their real estate purchasing power. This subsequently will help the housing market with a "softer" landing. This bailout doesn't benefit ANY of the guilty parties that inflated the housing bubble in the first place.

[Laker]

Michael Snyder,
My friend, i tend to agree with you on most, but on this one, you so wrong!
First, I'm able to save for down payment, and i don't take the bus, actually i never use them after the age of 18.
I'm not suggesting increase in taxes, but a decrease. Most of our taxes go to pay for services for the poor that pay nothing in taxes (many illegals). We are already socialist country on the way to Havanna, Cuba. I think you refer to the 15% capital gains tax for the people with 7 digit income versus 38% income tax on the 6 figure w2 incomes...I agree, the tax rate should be the same in both cases! Make it 30% for both.
Please don't call me socialist, because I'm the opposite.
I still can't understand how an intelligent person like you does not agree on the point that eliminating the deduction will reduce house price and make it more affordable.
Another mistake that you carry involves " invest in real estate".
You see, if you spend millions in building Mcmansion, it does not provide nothing to the economy other than employing the builders to build it, designers to design it, and all other stuff around it. If we would rather invest the money in technology, machinery, infrastructures, that would benefit the economy 100 times more than building houses. Don't take me wrong here, building houses is a great business that makes tons of money, but it does not benefit the economy like the other well deserved investments.
If you don't repel the mortgage deduction then renters should get similar tax break on their rent money!
But if you think about it, if you eliminate it, you will wash, and simplify the tax reporting system substantially.