Would Bailouts Change Anything?

by JT McGee

It’s interesting how things change. A few years ago if I told someone I were majoring in finance, it was no big deal. Today, when I tell someone the same thing, I get a speech about greed, housing bubbles, derivatives, and corruption.

(Sidebar: there are countless people who know that derivatives are evil, but who do not know what derivatives are. Makes me laugh.)

So, recently, it seems that people are of the opinion that if Wall Street gets a bailout, then Main Street should too. The common suggestion is something of a nationalization of the American public’s debt to allow the government (read: taxpayers) carry the burden of too much leverage.

A Good Idea?

Now I’m no fan of bailouts. And I put corporate welfare on a lower level than social welfare programs. Take care of people before businesses, basically.

So obviously I can see where people have a problem with corporate bailouts when the public doesn’t get the same reward. In effect, the rich got richer while the poor were left to be poor. There’s obviously a problem there.

But I wonder what the true effect of an Average Joe bailout would be. If we were to nationalize some or all of American mortgage and student loan debt, do you think it would have a substantial impact on those who face financial hardship?

If we were to take everyone with a negative net worth to a net worth of zero, how many do you think would manage to maintain a positive net worth?

What if we just reset everyone’s negative wealth to zero? Do you think the people in financial pain now (from any cause) would stay out of harm’s way?

I’m curious if this thought is only prominent among college-aged kids.

{ 10 comments… read them below or add one }

Jonathan June 11, 2012 at 10:27

I’m 6 years out of college, and a bit cynical, but I absolutely believe that anyone who’s into their 40s with a negative net worth lacks either the sense, self discipline, or ability to build wealth. I can give people in their 20s a pass because they aren’t wise, and people in their 30s if and only if they are on an upward net worth trajectory. But by your 40s you should both be positive and growing.

I know this was just a thought exercise but once all the people with negative net worths have their debt forgiven back to neutral, how would all the people feel who have positive net worth but still lots of debt liability on their balance sheet? Under this plan these “rich” get nothing. Reminds me of people who diligently save for their child’s education and as a result are shut out of financial aid in favor of the spendthrifts.

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JT McGee June 11, 2012 at 18:44

What makes 20-somethings unwise by default? Curious as to what you meant.

Yeah, it sounds exactly like education. That makes an interesting point for the purposes of discussion. There’s some point at which you basically have to save for school, but any point below it is a level where you do not benefit at all by saving.

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Jonathan June 11, 2012 at 19:41

Well I didn’t mean to imply all 20-somethings were unwise. I meant that many are (financially speaking, at least), and I don’t blame them at that stage of life. They probably had poor financial role models, or were never taught the consequences of their actions, or whatever. However, I expect that at some point these people will “grow up” and recognize that their own actions control their own destiny (or, at the least they can point themselves in the right direction, insomuch as bad may play a factor). So I’m saying that if a person has NOT figured out how to have a positive net worth trajectory by the time they’re in their 30s, regardless of past circumstances/education/role models/etc., I don’t hold out much hope that they’d suddenly pull it together if the debt slate were wiped clean.

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Todd June 11, 2012 at 11:17

It would change everything. Student loans and mortgages are hurting the middle class.

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JT McGee June 11, 2012 at 18:44

Mortgages are cheaper than renting in many places.

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American Debt Project June 11, 2012 at 11:46

There are definitely people out there who would take something like this and change their lives completely, having been given a gift of no longer having student loan debt or being underwater on a mortgage. But I can see that doing anything with a blanket policy (all student loans forgiven!) would allow a lot of irresponsible people to ride the wave as well. I know of a friend who is in $80K of student loan debt for a master’s degree from an OK university, and even more debt from undergrad, maybe $20K. A lot of that debt funded nice dinners and fancy clothes and trips to Europe because those were her “living expenses”. I would be pissed if she got the same treatment as someone who had worked really hard in college and taken out the bare minimum in loans to pay tuition fees only and was now working hard to pay that back. Maybe student loan forgiveness equal to the amounts you paid for tuition only, or something like that.

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JT McGee June 11, 2012 at 18:47

Hmm…that’s an interesting idea: forgive only the balances from tuition. I’m thinking that even tuition forgiveness wouldn’t begin to make a dent in most people’s balances. Seems like college costs are mostly from 4 years of lost wages plus living expenses, but I have no way to test that idea.

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funancials June 11, 2012 at 12:53

Very interesting thought. I think the common reaction of the indebted would be “shew, now I babe more money to spend.” I think the debt would again accumulate. Of course there are some people who would embrace the second chance and really make a change but if we re talking averages, no chance. Whenever I feel confident about our consumer intelligence, I go to the mall to observe people and my confidence is shattered.

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JT McGee June 11, 2012 at 18:49

Heh, malls…the place where you can get everything 48 hours earlier than you could with Amazon at a price 25% higher. Proof of outrageous consumption? Maybe.

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Jacob @ iheartbudgets June 14, 2012 at 12:11

I have a negative net worth because my house value dropped in the last two years, but I don’t want a bailout. EVER. Handouts don’t produce responsible citizens. Dealing with the consequences of your actions does. Entitlement breeds laziness and I don’t believe that bailing out those in debt will help anyone prosper. Just check the statistics on lottery winners: Most of them are broke in 5 years because their problem wasn’t that they needed more money, but they needed to learn how to handle the money they did have. I think financial education will have a much better ROI than free money.

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