Let People (and companies) Fail!

July 28, 2008

When my wife and I bought our house nearly nine years ago, we made sure to buy a house we could afford. No, it wasn’t our dreamhouse. In fact, we drove by it several times before we decided to give it a look. It needed tons of updating, which we could not afford to do right off the bat. But, we bought it anyway. Why? Because it was the house we could AFFORD!

We were “informed” that we could afford a much larger mortgage than the one we needed but the thought of spending more just because our mortgage broker told us we could afford more, was just stupid. So, we bought our house and lived in it for years before we started making it into the house we wanted. In other words, we practiced PATIENCE!

So, as a responsible, tax-paying citizen of the United States of America, I find it offensive that our goverment is bending over backwards to keep irresponsible people in houses they can’t afford. Our government’s actions are a slap in the face of every responsible citizen who did things the right way.

Seriously, what kind of fairyland do we live in when a person can take out a mortgage on a piece of property and then when things turn sour, get ANOTHER smaller more-favorable loan on that same property? Besides, who’s to say that these borrowers will be able to afford even these new loans? What then? Just give them the house?

Where does it end?

My solution will hurt but it’s what’s best in the long run:

LET PEOPLE (and companies) FAIL! Let people lose their homes. They can rent an apartment for a few years until they can get back on their feet. Let those who actually practiced prudence and saved their money for a house while living in an apartment buy these foreclosed properties. Eventually the prices will come down enough to attract buyers.

When companies fail because of stupidity, go after their executives and take everything from them. An executive of a failed company should not be allowed to keep his spoils. Allowing them to do so, just sets a precident for everyone else to beg for government intervention. Executives and companies should not be allowed to ride the coattails of capitalism when it favors them and then request taxpayer help when things turn sour.

Maybe we need a new political party called The Responsibility Party!

36 responses to Let People (and companies) Fail!

  1. I couldn’t agree more!

    Of course it should hurt – hard lessons often hurt, but that’s the only way some people learn. With this bail out, the only thing people learn is that they can be reckless with their finances and the government will bail them out. These are the same kinds of people who think the government has its own money, and don’t realize that it’s actually money taken from their fellow Americans in the form of taxes, or leveraged against them in the form of debt.

    How many would feel comfortable knocking on their neighbor’s door and asking them to pay their mortgage for them? It’s insane.

    Sadly, a Responsibility Party would have to do a LOT of education before people would stop thinking of the Government as their mom and dad, and stop looking for handouts.

  2. Joe @ Simple Debt-Free Finance

    SimpleDebtFreeFinance@gmail.com

    I couldn’t agree more!

    Of course it should hurt – hard lessons often hurt, but that’s the only way some people learn. With this bail out, the only thing people learn is that they can be reckless with their finances and the government will bail them out. These are the same kinds of people who think the government has its own money, and don’t realize that it’s actually money taken from their fellow Americans in the form of taxes, or leveraged against them in the form of debt.

    How many would feel comfortable knocking on their neighbor’s door and asking them to pay their mortgage for them? It’s insane.

    Sadly, a Responsibility Party would have to do a LOT of education before people would stop thinking of the Government as their mom and dad, and stop looking for handouts.

  3. I couldn’t agree more too – probably in large part because we did exactly what you did. We took a hard look at our finances and decided what WE were comfortable paying for a mortgage, not what some company said we could afford. It definitely wasn’t our dream house, but we prioritized what was important to us: price, location, then size. We gave up on size and got a house in our price range in the location we wanted, but much smaller than we had hoped for.

    And you know what? We’re really happy in our house, and the mortgage causes us absolutely zero stress. We not only stayed within our conservative price range, we also thought things through. We didn’t think it was likely we would be able to afford a nicer house in the same area in the near future, so we went with a 30-year fixed, not one of the low-interest ARMs that were hugely popular at the time.

    It drives me nuts that people who decided to take risks are being bailed out instead of being held accountable for their bad choices. I do realize that some people are just vulnerable to companies that prey upon them, but I have a hard believing that the vast majority of people saved by the bailout fall into that category. Unless there was outright fraud committed, both the lenders and borrowers should be forced to suffer the consequences of their actions.

  4. I’m 100% in agreement. I have to believe that most tax paying Americans are. So, how are these politicians getting this garbage pushed through – WITH OUR MONEY!?

    It really upsets me. The lenders and the borrowers should be the only ones involved. They should sit down together, like the adults they weren’t, and work through the mess. Both sides need to feel the financial punch.

    Welcome to life boys and girls.

    The government didn’t step in and help me when I got divorced, didn’t get child support and fell behind on my payments. I had to get my tush up, get more work and get the bills paid.

    Lesson Learned.

  5. I have really mixed feelings about the whole crisis and the intended bail-out. I was one of the responsible people you’re talking about. I bought less house than the mortgage broker said I could afford and saved for the down payment and refinanced when rates were low and locked in a 30 year rate. I didn’t take an ARM and then freak out when the rate adjusted. I paid for it myself and make my payments. So I hate the idea that people who didn’t do all that will get a free ride.

    On the other hand, I also wonder if my home value will plummet when so many people are foreclosed on and their houses go on the market and no one is able to buy them and supply >>>>> demand etc. The whole thing is a stupid example of people wanting something (a great deal on a mortgage and a huge house) for nothing.

  6. PREACH ON! I am glad I am not the only person out offended by peoples lack of responsibility.

    I second the creation of a political party called The Responsibility Party. I fear however, we will not be very popular with the people who are continually looking for handouts which in my opinion outnumber us.

  7. I completely agree!

  8. Debra,

    I understand your point and it is highly likely that prices will continue to fall. However, in the long run, prices will stabilize and people who were previously sitting out, will become homebuyers.

    Besides, I see no reason why a bailout is going to help prop up prices if people are refinancing their homes at new lower valuations.

  9. I suppose I am one of the irresponsible home buyers. I purchased my home 3 years ago (at the high) I now realize I payed too much, because the value has come down. I also have a 3 year ARM with IndyMac which is due to reset soon. So, being able to refinance with the governments help is essential. For the past year I have been trying to refinance my home into a conventional 30 year. It has been impossible because the 20% I put down has disappeared. Actually my home value is down close to 25%. No bank wants to touch me. I am one of the homeowners with an upside down mortgage. I obviously regret not getting a conventional loan in the first place. But I can’t second guess myself now. What I need to do is refinance and the government is making it affordable for me to do just that.
    For those who say to just let people lose their homes are not thinking ahead. Do you realize how many more homes will be on the market. Prices will absolutely drop even more.
    I truly believe people are not in this housing predicament because they are reckless with their financing.
    I for one pay all my bills and will continue to do so. I intend to continue to stay in my home with the help of the government. That is what our government is for. I have paid into the system for the past 20 years, my hard earned tax dollars are finally helping me. I will not regret it one bit.

  10. Irina wrote, “I intend to continue to stay in my home with the help of the government. That is what our government is for. I have paid into the system for the past 20 years, my hard earned tax dollars are finally helping me. I will not regret it one bit.”

    This is so ridiculous it’s embarrassing. Glad to know my tax dollars are helping people like you out. NOT!

  11. It’s quite lame. No one takes responsibility for their actions and why would they when the government will bail them out- Socialism at its best!

  12. “When companies fail because of stupidity, go after their executives and take everything from them.”
    Wish it were the case. Unfortunately, when a company fails, the executive gets a “golden parachute” and a lot of employees who had nothing to do with loan decisions – from IT personnel to tellers – are losing their jobs.

    I am a bit ambivalent about the whole thing. I certainly don’t want my tax dollars to go to people who bought bigger houses that they could afford. At the same time, I think we’ll pay one way or another because of the way the whole thing affects the economy.

  13. Nice post. I agree. Government is getting its hand in far too many things. Power breeds only a desire for more power. Given the actions of both parties over the past several years, I’m pretty sure I’m a Libertarian.

  14. I agree. Especially on the executives part.

    They should all be lined up in the public square and given 200 strokes of the cane.

    Then all their pictures should be on a “rouges gallery” web site for everyone to see.

    There should be no exceptions. Everyone above a certain rank in any corporation should take this risk. If they were too dumb not to know what was going on, sorry for them.

    I feel so strongly about this. In my country we often have scandals of immense financial value, and those guilty get away. And the guy who stole a pair of shoes gets a court hearing and 8 months!

  15. Great post. In fact, in light of Merrill Lynch’s recent announcement, I draw a similar conclusion in <a href=”http://www.thorntonwealth.com/how-merrill-lynch-our-government-are-alike/”this recent post

  16. Sorry about that busted link. Hopefully this one will work:
    How Merrill Lynch & Our Government Are Alike

  17. Great post and I gree as do most of the comments. We need to take our country back and stop this kind of nonsense.

  18. VOTE LIBERTARIAN…that is about as close as it is going to get to a “Responsibility Party” in the next 100 years or so…(if we are still around after Obama gets done with us). Just keep talking it up and vote vote vote for the LIBERTARIAN PARTY. They will not likely win this election, but the numbers will speak for themselves at the end of it. And people will slowly take notice and the party will gain more interest. It doesn’t take more than a few discussions to turn people onto the LIBERTARIAN core values.

    Irina, your reasoning and justification blows hard. I imagine you haven’t learned a damn thing from this…and I can’t blame you since the government feels its job has expanded into “protecting people from making horrible decisions”.

    Its scary how the American populations just takes it on the chin OVER AND OVER AND OVER…for freakin DECADES. Sad. Ashamed. Disappointed. Embarrassed.

  19. >>When companies fail because of stupidity, go >>after their executives and take everything from >>them. An executive of a failed company should >>not be allowed to keep his spoils.

    So, you’re in favor of letting the free market work by rewarding and penalizing companies and individuals so long as there isn’t an “executive” that you can pin all the blame on? When a company fails, we should direct our government to confiscate all the executive’s assets? The failure of companies is an important part of capitalism, just as allowing investors to lose money is important, as is forcing consumers to live with decisions they make on home loans and the like.

    This recent populist rallying against “greedy corporate executives” is absurd. Sure, some are complete jerks who do all the wrong things for all the wrong reasons. The answer is to demand more transparency. Public companies can be forced to be more transparent through regulation. People and institutions that invest in private companies can demand more transparency as a condition of investment. Directing the government to: 1) Determine when a company has failed because of “stupidity” and 2) seize the property of the executives of these “stupid” companies brings us dangerously close to a centrally planned economy.

    The time to worry about if an executive of a failed company can “keep his spoils” is when the compensation with the said executive is being negotiated, just as the time to worry about if a family or individual can afford the house they are buying is before the house is purchased and a mortgage is agreed to. Asking the government to take action against executives of failed companies (unless the said executive is responsible for breaking the law) is the same as asking the government to help homeowners who bought too much house or chose to take out a terrible mortgage.

    We should let the market work in all areas of capitalism, with appropriate policies to encourage more efficient and more perfect markets.

  20. Greg,

    Explain to me how it’s capitalism at work when an executive makes millions (even hundreds of millions) and keeps all those millions while his company fails. Capitalism is about taking risk. There’s no risk involved if there’s little chance that the executive will lose his shirt if he does a crappy job.

    If I decide to open an ice cream store with my own money and then the ice cream store fails, who’s assets should be on the line? Mine! Why should it be any different for a corporate executive?

  21. The worst part of this whole bill is not the bailout to me. The absolute worse is that people get their mortgage reduced. Upon selling 5-10 years from now, they can actually MAKE money even if their house sells for less then their original agreed to mortgage.

    In my rational opinion, people who receive these benefits should not be allowed to receive funds upon selling their home, UNLESS the sell price exceeds the ORIGINAL loan amount. And then they should only receive the surplus from the original amount. Staying in their house and affording the payment is one thing. But providing them a method to earn money through houses re-gaining their value is insane.

    Will the government also write me a check for the money I’ve lost in the stock market the past 6 months? And then let me keep it once they rebound?

  22. The capitalism took place when the owners of the company agreed to a compensation package with the executive that allowed him/her to make millions with no risk. Granted, individual shareholders don’t have any input in the immediate term about how an executive is compensated but instead have to rely on the board of directors. But, an individual shareholder can sell his/her shares if dissatisfied with the method or amount of compensation. Likewise, employees who work for a company that is being run “stupidly” can seek work elsewhere.

    It stinks to see a failed executive continue to live a life of luxury when many employees and small investors struggle to recover. But, long before the company failed, employees and investors were free to take their talents and money elsewhere.

    My fear is that in our mob-mentality persecution of executives, we distort the market and abdicate our individual responsibilities to make good decisions to the government. It is my responsibility to see that I am investing in and being employed by responsibly led companies. If I fail at this, I shouldn’t be looking for the government for help any more than I should expect the government to force my mortgage company to renegotiate my loan. (Illegal actions by a company are a different story,)

    And the idea that the government would be in a position to decide which companies are stupidly run and which fail for other reasons scares the hell out of me. Let the shareholders vote with their wallets, the employees vote with their feet, and the market vote with its purchases.

  23. By the time shareholders vote by selling their stock, it’s too late. The value of the company goes down and the CEO escapes with his golden parachute. He gets rewarded whether the stock goes up or down. Shareholders are essentially pawns.

    Mostly, CEO compensation packages are set by his friends or other lackies he has hand picked on his board of directors. They are beholden to him for their positions and consequently reward him appropriately. What a system! I wish I could get in on it. If this is capitalism, then capitalism stinks.

  24. I agree with you–NO BAILOUT! We under-bought our home like you did, and each month put $ away to perform updates badly needed. No one is bailing out the numerous people loosing $ in their retirement accounts, no compassion for those people loosing $ in the stock market for bad decisions. Too bad for these homeowners, I view it as a financial learning experience. Live and learn from your mistakes, but don’t make other tax payers pay for their mistakes. That is what family members are for–bet there are many people loosing their homes whose family has more then enough $ to bail them out.

  25. I agree with the no bailout policy.

    But let’s also be clear that this will impact more than just those who bought/sold poor loans. This will impact everyone, as this increases the lack of credit necessary for banks to loan money to companies and people. There are quite a few companies who cannot afford to expand/continune operations because they depend of easy credit. So we will see a few more business go away, and a few more jobs go away because of the lack of “cheap” loans.

    For better or worse, our economy is built on cheap loans. I do believe this is the time to pay the reaper. I worry that for every rescue we permit, we’re actually enforcing behaviour that will lead to even more spectacular failures in the future.

    RE: punishing the execs — I would agree Greg, the exec is not the scapegoat here. They did what they were supposed to do, they cranked up the value for shareholders. The did what the market asked of them. If you REALLY want to punish someone, why not pick on the congressional representatives who relaxed the laws we had in place to prevent these types of measures in the first place. The last time we allowed mortgage brokers to make these kinds of deals was the Great Depression. There was a VERY good reason why the laws that enforced giving people loans appropriate to their creditworthyness.

  26. Hey Folks wake up. There is no such thing as a completely free market. Once we became a nation our founding fathers agreed to work together for the common good. We are a country of laws which dictate the market. Why isn’t cocaine allowed to be sold. Why isn’t prostitution allowed. For a society to function there is and must be a degree of “socialism”. While All the CEO’s/ boards of directors/ executive committees and politicians are stealing, its only a tiny drop in the bucket that is going to bailout families who bought homes they couldn’t afford. Most of te money will be going to the companies who gave the loans and bought the loans. By the way why did these homes all of a sudden become unaffordable. didn’t it have something to do with rising rates???? which I believe was caused by the feds deliberately. Correct me if i am wrong but the feds created this mess. everything was fine until the feds jacked up the rates to control inflation/cool the economy. they just overshot and now they are trying to remedy the situation.

  27. All you people complaining that you bought only what you could afford and are whining about the bailout. Stop belly-aching. Mommy, why does he get all your love.. whaaaaa. Do you really want to trade places with people that are facing foreclosure just so you take a handout from the government? I’d rather my tax dollars were spent on keeping someone in their home than a damn turnip museum in Iowa.

  28. All you whiners (whaaaaaa bailout) I’ll bet when the guys house next door gets flooded you just sit and watch him loose his house instead of giving him a hand.This is the same thing as giving him a hand only done on a much larger more productive scale.

  29. No Mike, it’s not the same thing. The guy who’s house got flooded did not have anything to do with the flood. It was out of his control. Most, if not all, of the people in the housing mess are in the situation out of their own free will. Sure, they did not want to lose their houses but they went into the contract with their eyes wide open (and if they failed to do so, again, it’s their fault for not educating themselve). I see no reason to penalise the taxpayers and take money away from essential services such as schools, hospitals and emergency services to fund other people’s stupidity. I do hope that my government (no, I do not live in the US) has the sense to let people and companies FAIL.

  30. I grew up living in apartments, understood little to nothing about finances and house purchases, etc. Then at 23 (15 years ago), fresh out of college, got my first job offer, and then purchased a house with someone else. Despite the fact that I’d had very little financial experience, I did figure out that not being able to support a mortgage payment was not a good thing, and even worse, was getting into an ARM. I bought what I could afford, and that included enough to pay the remaining bills, not just the mortgage. So it really blows me away when all of these people who are going to depend on this bailout couldn’t figure out what I did when I was young and naive. I find it hard to believe they didn’t know what they were getting into. They don’t deserve this support. If they do, then I want compensation for our second mortgage, because we can’t sell that house because of what all these bailout-dependents have done to the housing market.

    One last thing, I find it highly interesting that our govt manages to come up with money to assist these people, but can’t find the funding for our kids’ schools and education? Talk about top priorities.

  31. In 100% agreement with JLP. Most of these people got into mortgages and homes above their means because everyone held the fantasy land belief that home prices would continue to rise indefinitely, and they’d cash in. So what if you bought a house above your means, or took out equity loans on it? It would continue to go up in value and it didn’t matter that you couldn’t afford it or took out second mortgages, because you’d be able to sell it for more than you paid for it. What happened is when the dot-coms crashed, all the money and absurdity funneled into real estate.

    Real estate will continue to decline for years to the tune of 50% – 80%….watch.

  32. I honestly agree with most of what’s been said. a government bail-out is just the lazy man’s solution. if people were smart, and planned ahead of time, they wouldn’t be in this predicament. MOST people aren’t going to take up a loan to get a super expensive car, so why do it with a house, when you can get one that’s affordable. you don’t need a BIG house. what use are you going to have of an empty room? just go and put your computer or whatever in your bedroom. you don’t need a seperate room for EVERYTHING.

  33. I think the bail-out is giving people who bought homes they couldn’t afford, the ability to keep them. People like myself, who saved money and had enough intellegance to do the math before buying a home will be the ones to pay for this bail-out. It is the most unfair thing I have ever heard of. If people would have bought what they could have afford, instead of trying, not only to keep up with the Jones, but to be better than the Jones, they would not need our help.Let them foreclose. Teach them a lesson.Next they will want us to pay off their credit cards and car payments that I’m sure they have to go with their house payment. They should look at their debt, let go of all the extras they can live without and make a choice to keep their homes or rent.

  34. I want this andI want that, however I can’t afford it. I pay my taxes, I pay my bills, and I don’t owe anybody anything. I put my 3 kids through college (paid for) Each1 has a 4 year degree. I will never have a lot money and I worked all my life.