There Has to be a Twist

I came across this provocative (in the good sense of the term) piece from the NYT Magazine, and it reminded me of a quip I've heard a lot in the last year or so.

Me: We do a lot of work on financial literacy for clients like Citi and Wachovia/Wells.

Quip from other person: Clearly, your clients didn't use the resources you developed for them!

Yes, yes ... some painful truth is contained in the quip. If individuals took the equivalent risks that many financial institutions took, those individuals would've been poster children of financially illiterate behavior.

In "Walk Away From Your Mortgage," Roger Lowenstein (NYTimes Magazine, 1/7/10) prompts you to think about some of the double standards applied to businesses that are "underwater" vs. individuals who are underwater in their mortgages. Shuttering a failing factory (i.e., walking away from it) often makes economic sense and is even applauded for its pragmatism. Certainly, people make an economic and moral argument against the move, citing the ripple effect in a local economy and/or the need to demonstrate loyalty to employees and communities. Those arguments, however, tend to be dismissed and ignored.

This paragraph from Lowenstein's essay about "strategic defaults" (i.e., instances when people who could conceivably make mortgage payments decide not to, thereby defaulting) particularly struck me:

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

Are we really economic pinballs? With apologies to Pete Townshend ... there has to be a twist. I'd like to think that there is more at play than the whims of survival of the fittest and that just because something can generate short-term profits doesn't mean that it's the right thing to do. And if businesses operate simply on how something affects the bottom line, why shouldn't we expect individuals to take the same tack and walk away from their mortgages?