Personal vs. Social Responsibility

I’ve mostly been able to ignore the subprime mortgage mess. I don’t work in finance (although several of my classmates at Columbia are walking on eggshells), and my investments are mostly long term so the volatility in the markets doesn’t really concern me. But then I read the following paragraph in The Economist:

The boldest suggestion has come from Sheila Bair, chairman of the Federal Deposit Insurance Corporation, a guarantor and supervisor. The crisis is so grave, she argues, that most borrowers who are facing resets but still paying their dues should be given the chance by servicers to switch into fixed-rate loans at the starter rate for the full 30 years.

I’ve since seen other articles indicating that the government is seriously considering plans to freeze these loans at the introductory rate for at least five years. And I’m furious.

When I bought my condo, I looked into adjustable-rate mortgages. They started off at a lower interest rate than a fixed rate, but then would be released to the market rate after the introductory period. I did my research (i.e. I asked my parents) and determined that interest rates were as low as they’d been for decades, so the market rate would almost certainly be higher after the introductory period. With that in mind, I went with the fixed-rate mortgage, despite the initially higher interest rate.

And now I’m being penalized for being fiscally prudent. If they freeze the loans at the introductory rates, then people who made bad decisions are being rewarded by getting to keep their low interest rates, while people like me who made good decisions are penalized with higher interest rates than we otherwise would have had. That doesn’t feel right.

At the same time, I understand the social issues at play here. Having to foreclose on people’s homes doesn’t help anybody – the bank is left with an asset it can’t sell to cover the loan because the housing market has been weakened, and the people lose their home. The government is intervening because the economy is being damaged by the housing market decline. I get all that. But I still can’t get over my initial angry reaction.

Where does social responsibility end and personal responsibility begin? I believe that we should have a social safety net, but I also believe there has to be consequences to actions or the same mistakes will continue to be made. I don’t understand the people who said they didn’t understand what they were getting into and they were misled by evil mean brokers who said they could afford these big loans. Regardless of what they were told, they were the ones signing a contract, and they were the ones responsible for fulfilling the terms of that contract. If they got suckered by a seller in a flea market, we would have no sympathy for them, but because it’s their house, they expect to be bailed out.

There’s been an infantilization of society where people expect that they can make stupid decisions and somebody else will have to deal with the consequences. This has been happening because it removes responsibility from people, and also because institutions benefit by exerting more control over people’s lives (the MIT Freshmen on Campus decision comes to mind). But being an adult and a citizen means taking responsibility for the consequences of one’s actions. It means admitting mistakes and trying to fix those mistakes.

I wonder what can be done to instill that attitude in our citizens moving forward, and how to remove the temptation from institutions to increase their control. That would be the socially responsible initiative, encouraging people to learn from their mistakes rather than seeking to shield them from the consequences of those mistakes.

8 thoughts on “Personal vs. Social Responsibility

  1. I suppose it’s the financial parallel to using insurance and disaster aid to prevent people from thinking cautiously about where to locate their houses. It would be awful to leave people homeless, but don’t we have to let reality intrude somehow?

  2. James Howard Kunstler had an interesting aspect to point out on his blog. If the government freezes the interest rates on these adjustable rate loans, they have basically changed the contract/terms of the bonds issued based on these adjustable rate mortgages. As he writes:

    Once contract law goes out the window, so does the faith of parties with reserve capital in lending out capital at interest. If the interest rate can be changed arbitrarily or capriciously by third parties, then those with capital would be better off buying gold or impressionist paintings or Manhattan apartments or private armies for protecting their Hampton estates, than lending money at interest established by contract.

    Kunstler also posits that this is all really meant as a holding action, to keep the economy functioning through Christmas. Overpredicting? Perhaps….dunno.

  3. “There’s been an infantilization of society where people expect that they can make stupid decisions and somebody else will have to deal with the consequences.”

    Has there really been, though? Or is it that routine life is more likely than it used to be to have risks that experts know about but that are hard for lay citizens to predict?

    “If they got suckered by a seller in a flea market, we would have no sympathy for them, but because it’s their house, they expect to be bailed out.”

    Well, no. First off, they could sue for fraud. Second, nearly no one invests in a flea market chotchke as their primary wealth-storing asset, and it is reasonable to have sympathy for someone losing basically all their savings. Third, a bank has WAY more credibility to a reasonable citizen than does a flea market vendor. And fourth, the banks already asked for and got the irresponsibility-rewarding, poster-child-for-moral-hazard bailout first:

    Yes, helping people learn to take initiative and control and responsibility for/of their own lives is a Great Work. To what extent are the people whose life savings hang in the balance people for whom that disaster would be worth it, because of the value of that school-of-hard-knocks experience?

    Oh, but externalities, and precedent-setting. Argh.

  4. I think there is a typical tendency to assume that “harsh, hard-knocks, no-way-out-rules” have more power than they actually do, to affect people’s judgments about how to spend their money, etc. Most people assume “THAT won’t be ME”, first of all (thieves don’t expect to get caught, either), they have cognitive biases that keep them from really seeing/believing the risk, the expected value, of what they are doing, and, above all… there are many powerful ways in which advertising, “expertise” and other forms of legitimation prey on outright ignorance, desperation, or even illiteracy. I think the answer is neither after the fact bailouts, nor harsh deal-with-it rules that fall hardest on those least able to prevent the situations they end up in. I think we need to focus more on prevention — on what banks are ALLOWED to offer, to whom, on what terms. Protect the ignorant, in a complex society, up front, not afterward.

    An article you might be interested in:

    “How do you know if that loan is safe?”

    “Interest-only, adjustable-rate mortgages sold to subprime borrowers are the financial equivalent of lead-painted toys. But while the Consumer Products Safety Commission (CPSC) regularly issues recalls of dangerous or defective products, when it comes to increasingly complex financial products, consumers are left to fend for themselves…It may be time for the financial services equivalent of the CPSC, as suggested by Harvard law professor Elizabeth Warren. We need the financial services sector to continue to innovate, but we also need to give consumers the tools to navigate these increasingly complex and potentially hazardous matters without degrees in law and accounting.”

  5. The same paternalistic pattern of behavior occurs in health: Motivation needed to cure lifestyle diseases. Here is a snippet:

    However, today’s lifestyle-related diseases, such as obesity, type-2 diabetes mellitus and cardiovascular disease, are different. They develop slowly, in response to chronic food intoxication and lack of exercise, causing a long-lasting imbalance between excess energy intake and insufficient energy expenditure. And they require a different approach.

    Paternalistic health-care systems will be of little avail because they fail to activate the individual’s motivation to care continuously for his or her own health, which is necessary for success.

  6. I’d like to follow this thread up in more detail, but it’ll have to be after Saturday when I finish my presentation.

    I think the difficulty with both the links that Sumana and Meredith offer is that the problem was that the banks offering the loans were not the ones taking the risk. The risk was immediately packaged up into a tranche of a CDO, and so somebody else took responsibility for the risk, but they weren’t doing adequate checking.

    I agree that hard knocks isn’t the right answer. I’m inclined to follow Bruce Schneier’s lead, where he points out that the way to solve this is to make the financial institutions directly responsible for the losses they incur. I don’t think the answer is regulation, except possibly of the sort that Schneier cites for credit cards – consumers are only liable for the first $50 of fraud on their card, so the credit card companies found all sorts of ways to detect fraud to protect themselves financially. If the banks were responsible for bad loans without the bailout option of foreclosure, maybe they’d be more likely to do their homework up front.

  7. I’m late to the party here, but I think the same thing when I come out of the gym, see some out of shape guy coming out of McDonald’s with a 64 pack of McNuggets, and then I go pay my healthcare bill.

    I’m pissed.

    But, what’s the deal? Do we just let this tub pass out of a heart attack in the street and let him die there?

    Sorry buddy… this ambulance is for treadmill runners only. You’re over your McNugget limit for bypass surgery.

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