Page 1 of 2 Iceland points to the future By Julian Delasantellis
When I was a young, nerdy little thing, the 1972 World Chess Championships
between Russian communist Boris Spassky and American psychotic Bobby Fischer
excited me far more than any traditional American sporting event. Particularly
thrilling to me was the exotic and cosmopolitan venue for the contest,
Reykjavik. I was crushed when I read some wag's justification of the Icelandic
capital as the Coliseum of these mental gladiatorial games - that the city was
so boring as to not tempt the players with unfortunate distractions.
About 10 years ago, Icelandic Airways offered US flyers departing from
northeast airports a really cheap - under US$100 - weekend round trip to
Reykjavik. My wife and I were going to go, but then
one of her co-workers from Norway told us of the city's main, and basically
only tourist attraction.
"Well, if you've got a nice hotel room you can drink all through the weekend in
it." We passed.
Lately, the place seems to have gotten much more exciting. They seem to be well
on the way to finding a way to take money from people, promise to give it back
with interest, and then keep it, as if the waiter was going to bring you back
$10 million in change for your vodka tonic.
Nice work if you can get it - unfortunately, it seems like you have to be
Icelandic to get this to work right.
In case you haven't noticed it yet, this is a column of economics, not
morality. If you want to figure out how to save a baht or a buck read here; if
it's your soul that needs some, or a lot of, salvation, you probably should
first look elsewhere.
Questions in economics are usually couched in terms of maximizing, or even
assigning, some sort of numerical, marginal monetary value, or utility, to
different policy actions under consideration. An example of this would be how
much economic growth will x stimulus engender, or is it worth losing y number
of jobs for a z reduction in atmospheric carbon.
A noted exception to this approach is taken by University of California at
Berkeley economist Brad DeLong, an influential and informed voice in the
macroeconomic debates to get the national economy moving again, but perhaps
even wider known for his fairly quixotic attempt to deny George W Bush Justice
Department official and torture defender, John Yoo, a comfortable return to his
teaching sinecure at Boalt Hall School of Law at Berkeley.
Whether they wanted to admit it or not, both major current world economic
systems - free-market capitalism and what's left of state socialism - recognize
as part of their own moral code the absolute centrality of private property in
the economic and social affairs of the human race. Socialist systems recognize
and respect private property by stealing it from its rightful owners and making
it public property; in the capitalist world, private property is so sacrosanct
that for at least the past 3,600 years it would be codified into its faith's
most sacred, metaphysical guidance - the eighth of the 10 Mosaic commandments
that "thou shalt not steal".
Yet, just as parents scare children with the prospect of a howling bogeyman
should they ever stray, is the command not to steal a real moral prohibition of
the human race, or just one more "do as I say, not as I do" privilege that
society's powerful reserve for themselves?
This issue is taking on particular urgency. In the United States and elsewhere,
millions of Americans and huge numbers of Britons, Irish, Spanish and others
who drank from the poisoned chalice of financial deregulation these past 10
years are being, or soon will be, faced with a decision of massive financial
and apparently moral import, whether to "walk away" from the homes and the
attendant loans they used to purchase or refinance their properties.
It was not supposed to be like this. No more than five or seven years ago,
these homeowners willingly loaded up on huge mortgages, many with payment
schedules that required gargantuan increases in the required monthly payment,
the deadly so called "Option Arm" loans. This they did in order to possess a
ticket to the hottest game in town, the great real estate frenzy and bubble of
the last decade, the one that promised boundless riches flowing like blessed
manna from heaven - but only to those that had that ticket.
For most people, the issue of whether to stay and keep making mortgage payments
on a property whose current mortgage balance exceeds its market value starts as
an economic, personal finance question, and then gets grimmer from there.
In most cases, it costs more to make a mortgage payment on a house than a
rental payment, for a significant portion of that mortgage payment always
includes a paydown on the actual remaining ownership cost of the property,
otherwise known as the "principle". When a principle exceeds the market price
of a house, it means that the market value has plunged so far and so fast, in a
relatively short amount of time, to put the homeowner in great distress.
An example of this would be a homeowner who bought a $500,000 house, putting 5%
($25,000) down. When, say two years later, the house value has declined by 40%,
it is now worth $300,000, but the homeowner may then only have paid down
another 5% of the mortgage, meaning that he still owes $400,000 on the loan.
Without coming up with that extra $100,000 in some manner, the homeowner will
not be able to sell the house and move; the mortgage must first be paid off.
Also, there's no guarantee that the house will not keep declining in value. If
the investment continues to perform badly, many people would be hard-pressed to
come up with further reasons to keep funding it and not fulfill the requirement
of roof and shelter through renting a residence at a cheaper price.
Not that this is going to be easy. Defaulting on a home mortgage places a black
mark as dark as that suffered by Nathaniel Hawthorne's Hester Prynne in his
novel, The Scarlet Letter, on your credit for seven long years. This,
essentially being cast out of the credit economy to live in the dark domain of
cash, could complicate one's ability to get a future job, apartment, rental car
or hotel room - you can forget about trying to get a credit card.
It is here, with the homeowner judging the desirability of the competing
prospects of financial exile versus financial exsanguination, that the
guardians of the current moral order open up with the guns of guilt. Isn't
"render unto Caesar what is Caesar's", from Mark 12:17, a fairly explicit
command to pay back earthly debts before expecting a return in the next world,
as is the prohibition against stealing? On a Christian personal finance web
site, the commandment to stay in a bad mortgage is equated with something seen
equally rarely these days, the need to stay in a bad marriage:
The way
I see it is that when you borrow money from the bank, or anyone, you agree to
pay it back. It isn't a conditional agreement that lets us off the hook if
things are working out for our benefit. Just like with a marriage, raising
kids, or serving God, it isn't always easy, and sometimes it feels like we are
getting the short end of the stick, but we made a commitment, so we should
stick with it! We are living in a world that is forgetting what personal
responsibility is. The government and big corporations aren't setting much of
an example for us either - but just because someone else is doing it, doesn't
make it right!
Now that the fear of default leading to a
roasting upon the Devil's horns has been sufficiently inculcated into the
middle classes, you'd think that similar sentiments would be seen in the upper
classes, where most of the economy's actual borrowing and lending occurs.
That's not happening; it appears that all too few whose blood flows that royal
blue are taking the time to attend to the message now being heard down there in
the pew.
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