You didn't have to bail out all home owners for the full amount, you could just give out some small amount that will let those who were almost able to make their payments continue to stay afloat, while letting those who wildly misrepresented their assets and liabilities to go under. This would still ripple through and hit those who bought the most truly bad debt, but that's how it should be.
If you do that some will default (which is the point right?).
But then house prices will fall, the economy will falter and interest rates on loans will go up.
And when that happens people who were previously fine will suddenly start defaulting too.
This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy.
To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.
> But then house prices will fall, the economy will falter
Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent.
Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.
If you let even 1% of people default, that's a huge excess supply and fall in demand (if people sold their houses every 10 years, only 10% of them would be for sale in 1 year, so a 1% repossession increases supply 10% in a given year).
So then what?
You either bail out so many people that fewer than 1% of people default. That's basically a 100% bailout right?
Or you don't and then prices fall.
And as soon as prices fall, suddenly construction stops and more people lose their jobs and people are underwater and consider defaulting strategically even if they don't "have" to.
I really agree about buyers not being innocent. I really do. It's by far the least reformed group in the 2008 shit show of fraud.
But this isn't a moral position. It's a practical one. And you can't punish those people or they'll take their neighbours (and elected officials) down with them...
Falling prices are fine because homes were overvalued virtually by definition of the circumstances at the time. Your argument assumes this would lead to a run away effect rather than it all reaching a fixed point, but this claim isn't justified.
My position isn't that home owners were the worst actors here, but that the bailout should have gone to home owners rather than the banks; the moral hazard argument applies to both, but at least in one arguably most people get to keep their homes and you're not rewarding the people whose professional responsibilities were to assess risk and properly manage financial instruments.
I'm just claiming that this wouldn't have required a full/100% bailout, just like we didn't fully bail out the banks and let some fail.
