Is Turnabout Really Fair Play?

Speculation and disagreement are abound when it comes to the billions of dollars being tossed around the by Federal Government. No one knows whether any of the programs will work but no one says they won’t. Fiscal conservatives are beating their drums, progressives are keeping their fingers crossed, and the rest of us are hoping something happens to get our economy moving again.

The administration is bent on the theory that doing anything right now is better than nothing. Opponents of the recent recovery packages believe the market will make the necessary corrections. Unfortunately both philosophies have some bad downsides for all of us on Main Street. Letting the market correct itself might work faster but millions of people will be thrown into poverty. On the other hand we could be facing crushing deficits that may ultimately limit growth.

Everyone, from CEO’s down to day laborers must decide each day what actions to take. How those decisions are made, and viewed by society, are very different depending on one’s position on the socio-economic ladder.

For instance, a bank that is losing billions needs cash. The Federal Reserves stands ready to inject cash that may or may not save the bank. This is not a new policy.  It is, and has been, standard operating procedure for a long time. So, one would think the bank’s management would make whatever changes necessary and pinch every penny until it could pay back the Treasury. That appears to be the diametric opposite of what actually happens.

Contrast this with how that same bank treats a borrower. The borrower is laid off and is in a negative cash flow position. In other words, just like the bank, the borrower is losing money. Our borrower calls the bank and says he needs a temporary loan to help him through this tough time. The exact same type of help the bank just got from the Federal Reserve. In this case however, the bank finds 53 reasons why it can’t help the borrower. Interestingly, the money the bank received from the Federal Reserve will be paid by taxpayers just like our borrower.

What is good for the goose is evidently not good for the gander. Let’s apply business thinking to a residential home owner and see how it comes out. We’ve already established that big business does whatever is in its own economic interest with little concern for how that may affect others.

In our scenario the homeowner owes more on his house than it is worth and his insurance premiums are due. In scenario A our homeowner pays his insurance and keeps current on his mortgage. He has called his bank to ask for some relief but they tell him there is nothing they can do because he pays on time.

Interestingly enough, when he pays his insurance premium it’s questionable whether he’ll ever see a benefit from it. Scenario A is following the rules and doing the “right” thing as defined by our society.

In scenario B, our borrower takes his own economic interest into consideration. What are the upsides of paying the mortgage and the insurance? For one, his credit score will not be negatively affected. Second, he’ll be covered by insurance in case of a disaster.

What are the downsides of paying the mortgage and insurance premiums? First, he’ll continue to fall behind on all his other obligations. Second; can he really count on insurance if a disaster occurs?

What should he do? The unfortunate truth is he probably won’t be foreclosed on for at least a year. If the mortgage payment is $2,000 a month, he would save $24,000 in the 12 months it takes to foreclose. If his insurance premiums total $6,000, that’s a total of $30,000 he could apply to other obligations before he lost the house. The bank will force place insurance if our borrower doesn’t pay for his own. It won’t cover the borrower, but it will pay off the mortgage should something happen.

Does this sound like a good idea? In a big boardroom somewhere on Wall Street it’s a no-brainer. But it goes against everything we all believe to be fair and just. However, if big corporations subscribe to this philosophy and we subsidize it by following a different set of rules, we’re simply being patsies! Plus, we’re watching these big banks take our future tax dollars and make very few, if any, of the required changes. Maybe it’s time the big banks got a taste of what would happen if the rest of us did only what served us economically without consideration for anything or anyone else.

I am NOT encouraging or recommending that anyone stop paying their mortgage or their insurance premiums. Everyone’s situation is different and the results vary as well. Furthermore, when I refer to “big banks” I’m talking about the big ones, not our fine local banks. If you’re having trouble meeting your obligations call your creditors, seek out a qualified credit counseling company, or speak to an attorney specializing in debt-related problems.

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