What We Don't Understand About Debt and the Force of Government

On CNN's website Paul Steinhauser posted a blog entry about polling regarding fairness and approval of the bailout plan for people who can't afford to pay their mortgages.

Poll: Majority say Obama mortgage plan is unfair

In the commetns, Michele wrote:

March 4th, 2009 6:18 pm ET

My husband and I have a mortgage. We bought our house when we got married 3 years ago. We made a decent household income ($75,000) and could easily afford our $153,000 home with a payment of $875 a month. We had savings, paid down our student loans, and began to plan for retirement (we are now 29). Then, my husband's company closed, due to the onwer's extramarital affair and ensuing divorce (easier to close the company than fight over it in court, I guess). There went $50,000 a year - 2/3 of our income. I take home $1,200 a month as a Catholic school teacher. We also have $300 in student loans. My husband has been looking for a job- any job. Our savings will help us for a while, but not forever. We've done everything right, as far as contacting all our creditors and explaining the situation to them. Most are willing to work with us, but not all. We've never been late on a bill and are current on our mortgage, but are terrified how long we can go on like this. The irony is that even if we wanted to sell our house, it wouldn't help us since our home is only "worth" $125,000 in the current market. We'd still owe almost $25,000 if we sold it now. This is so sad. We NEVER spent beyond our means, and it is heartbreaking for people to think because we might lose our home that we were somehow irresponsible. Things happen. Not everyone with mortgage problems is to blame. I wouldn't wish this on anyone, but you do have to be in the situation to understand it.

This seems to be an example everyone who supports the mortgage bailout would have us see as an example of who should be "helped out." A family with $75,000 in income was working to pay off a $153,000 home. In terms of mortgages, this doesn't seem to be an example of overstretching of personal finances, right? Even with their student loans, their total loan payments are close to $1,200 a month. With a $75,000/year income, this is pretty manageable, right? How many of us would see that situation as one which we would volunteer to find ourselves in? I would.

There is, however, a couple points which Michele writes which are not true, but seem to be part of the conventional knowledge about debt held by Americans these days. Michele states that, "it is heartbreaking for people to think because we might lose our home that we were somehow irresponsible," and, "We NEVER spent beyond our means." Both of these statements are based on at least one of a few assumptions:

1. It is normal and appropriate for anyone to have a mortgage which they can plausibly pay back with their current financial status.
2. Spending more money than you have on a home is not spending beyond one's means, but responsible.
3. Everyone has a right to a house.
4. The risk associated with debt is only unfair when one cannot afford their payments.

Debt has become such a ubiquitous normalcy in the United States that it is no longer perceived as anything other than par for the course let alone dangerous. Due to car loans, mortgages, credit cards upon credit cards, student loans, etc.; the average American has a net negative value. That this is not dangerous cannot be further from the truth. For any loan, mortgage, or line of credit; you must be able to predict the future for there to be no risk. If you cannot, debt really shouldn't be used. Otherwise, you and only you assume the consequences if something should occur which causes you to become insolvent.

Michele, if you buy a house with a mortgage, YOU ARE SPENDING BEYOND YOUR MEANS! If you cannot repay the mortgage you willingly signed up for, YOU HAVE IRRESPONSIBLY ACQUIRED A MORTGAGE YOU CANNOT PAY FOR.

Let's not forget that government is force. If you support the bailout of anyone, regardless of how good it makes you feel to do so, you support the theft of property at the point of a gun. To illustrate this I'll propose a hypothetical situation. I, in response to the mortgage bailout, decide that I do not want to subsidize everyone's mortgage payments. So, I refuse to pay the taxes associated with the portion of your mortgage you are trying to force me to pay. The IRS eventually finds out about it, and begins to take action. They try to seize my property to pay the taxes and penalties and have me brought up on charges of tax evasion. An officer comes to my home and says that I have to give over my property and accompany him to the local jail. I refuse on the principal that I am not responsible for the contracts of which I am not a party. The authorities would no doubt try to use some tool, whether gas or other non-lethal use of force, to incapacitate me or make my resistance to jail and seizure of property less comfortable than surrender. If I continued my resistance, the authorities would then attempt to physically force me to leave my home. At this point, there are two outcomes assuming I continue my refusal to pay your bills: I with use of my own weapons repel the authorities, or the authorities with the use of their weapons force me to comply. Ultimately, I could be killed for refusing to pay for your mortgage. If you support bailouts whether corporate or personal, you condone this situation. There is no other stance.

I do not believe that the correct government's role is one of by use of force to have one person pay for another's bills. But what recourse do we have? First, we have go abandon the debt culture. If America were to pay down their debt and increase savings, there would be no need for mortgage bailouts. If you have a mortgage which you can't afford, sell it even if it is at a loss, and begin to dig yourself out. It may take a while, but you will not put others at the end of a gun as to steal the benefits of their proper financial decision making.

Second if you either work yourself out of the hole or aren't in a debt hole to begin with, start small. Spend within your means. If you don't have $200,000 for the home you want but do have $60,000 in savings, buy a $55,000 home. It might not be where you want to be; but remember, this is temporary. This will give you a base of operations (you actually own by the way) and you still have capital left over! While you are in your temporary home, save with vigor. In Michele's case, their income was $75,000 a year. If you lived on $30,000 (which can be done, many survive on much less), it would leave $45,000 each year to go toward a future home. You could purchase a $200,000 home in under four and a half years. In addition to this, YOU DON'T PAY INTEREST!! If you mortgage a $200,000 home at 6.5% for fifteen years, you will pay $313,598.65 (mortgagecalculator.org). Buying cash saves you $113,598.65! $113,598.65!!! This is not even including PMI. Including PMI, you would save an additional 15,000 making the total savings for buying cash $128,598.65!! If we approach our own finances in a responsible manner, not only do we spare our neighbors of subsidizing our irresponsible behavior but it's cheeper!

Remember Michele we talked about earlier? She and her husband bought their house 3 years ago. They have had 3 years to pay down on this mortgage. If they had followed what I proposed, they would have bought a small home in about the first year of their marriage (assuming no savings on the date of their marriage). That leaves two years for saving at $45,000 a year. They would have $90,000 of savings toward their home. That is only $35,000 less than the home they are struggling to pay for right now! They would be able to purchase with cash and own their home this year! Even if her husband lost her job, they still have $90,000 on hand. In this situation, they prosper! Eventually her husband will find another job. They will be back on course for buying there home soon. Not only that, but they won't send the government to point a gun in my face to force me to pay for a mortgage they don't need and shouldn't have! Now, tell me which situation you would rather have.

$25,000/year income, a mortgage you can't afford plus student loans, the ability to make $75,000/year;

or,

$25,000/year income, no mortgage, some student loans, a home you own, $90,000 in savings, and the ability to make $75,000/year.

I don't know about you, but I'll take the latter.

Really agree with what you read? Really disagree? Somewhere in the middle?....Let yourself be heard in the comments!
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