The federal government is rewarding irresponsible people who chose to live for the moment, on borrowed time. It is planning to bail out people who used adjustable-rate mortgages to buy homes bigger than they needed or could afford, in the myopic belief that interest rates would never rise.
When I obtained a home mortgage in March 2004, I had a choice between a fixed interest-rate mortgage with a 5 percent interest rate that would never rise, and an adjustable-rate mortgage that would start at well under 5 percent but might rise considerably if interest rates rose in the future. I knew interest rates would rise, so I got the fixed-rate mortgage. I was planning for the long term, and was willing to pay more in the short-run to ensure lower payments in the long run. To afford those payments, I bought a little two-bedroom house that I could afford even on a fixed-interest rate.
But many other people chose to buy bigger, more expensive houses than they needed or could afford, and did so by getting an adjustable rate mortgage that they would be unable to pay if interest rates rose, gambling that rates would never arise, and that their low introductory interest rate would be the rate they always would be.
Interest rates then rose considerably. Now, the government is pressuring the lenders to not do what their mortgage contract said they could do, raise interest rates, because that could lead to borrowers defaulting and getting foreclosed on. The government knows that if borrowers get foreclosed on, they may take it out on incumbent politicians.
So California’s governor pressured lenders into not raising interest rates for borrowers with adjustable rate mortgages, reaching an agreement with lenders to that effect last week.
And now the Treasury Department is trying to orchestrate a similar deal with lenders nationally.
The government is bailing out people who were too short-sighted to see that interest rates would inevitably rise by keeping their interest rates low.
And it is punishing me for my foresight. I paid more in the short-run, knowing interest rates would rise in the long-run. I am not getting back any of the additional money I paid in short-term interest. Instead, I will pay, directly or indirectly, to bail out the people with adjustable-rate mortgages they should have known they couldn’t afford.
I am already getting less interest on my savings accounts, as the federal government floods the market with cheap money to drive down short-term interest rates. (The government lacks the ability to cut long-term interest rates, such as fixed-rate mortgage rates, by much, but it is busy distorting the interest-rate yield-curve by keeping short-term rates artificially low, to delay the inevitable day of economic reckoning).
The parable of the grasshopper and the ant is being rewritten, for the worse. In it, the thrifty, industrious ant who saves up food for the winter lives while the lazy, irresponsible grasshopper starves in the winter. But in our warped political culture, the grasshoppers outnumber the ant, and politicians favor the grasshopper as a result. I, the ant, am being robbed to feed the grasshoppers.