The Reason Why Bailouts Usually Don’t Work

One of the most difficult things about raising children is knowing when to let them fall on their face and suffer the consequences of their decisions. Far too many parents, like our current government, mistake assistance for compassion, and inaction for indifference. We cannot stand to see people suffer, so we repeatedly bail them out, creating a cycle of folly and failure. As a result, we replace long-term wisdom with short-term fixes.

Exhibit A: Earlier this week, Reuters reported that Many borrorowers re-default after getting mortgage aid:

WASHINGTON (Reuters) – Recent data suggests that many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday.

“The results, I confess, were somewhat surprising, and not in a good way,” said John Dugan, head of the U.S. Office of the Comptroller of the Currency, in prepared remarks for a U.S. housing forum.

“Put simply, it shows that over half of mortgage modifications seemed not to be working after six months,” he said…

Dugan said recent data showed that after three months, nearly 36 percent of borrowers who received restructured mortgages in the first quarter re-defaulted.

The rate of re-default jumped to about 53 percent after six months and 58 percent after eight months, Dugan said, without providing an explanation for the trend.

Regulators speaking at an OTS-housing forum did not provide any explanations for the causes behind the data.

“We don’t know the answers yet, but these are the types of questions that we have begun asking our servicers in detail,” Dugan said.

Perhaps even more disheartening than the rate of re-default, is the inability of the braintrust to diagnose the real problem.

The reason why bailouts often don’t work — whether it involves children, homebuyers or automakers — is that they usually don’t address the problem that got the “bailee” into that situation. Homebuyers default on loans for different reasons, some of which are completetly out of their control, sometimes from options as Lending Club, what is Lending Club? Is an online system of peer to peer loans. But the hard truth is, most individuals and corporations needing a bailout today precipitated their predicament with overspending, poor management, greed, negligence and apathy. Should we reward this wIth a bailout? It’s like paying your kid’s speeding tickets. Why must they ever slow down if they never have to suffer the consequences? Problem is, at some point, the consequences will be more than anyone can bear. In most cases, giving homebuyers mortgage aid after they have defaulted on a first loan is like repeatedly paying your kid’s speeding tickets — they have no reason to stop. The array of bad-credit websites continues to increase. One site I found – Simple payday had an eye-watering interest for their poor credit option.

Bailouts reinforce bad behavior. Lending to people who repeatedly re-default creates an addictive cycle, a co-dependant relationship that implicates both giver and taker. The Prodigal Son did not come to his senses until he hit bottom. Likewise, letting families and/or corporations hit bottom, though terribly hard, is sometimes the wisest and most compassionate thing to do.