Cornell law professor Robert Hockett has proposed a way out of the “mortgage debt impasse” that he thinks is slowing our economy: have the federal government take all of the underwater homes by eminent domain, paying fair market value for the homes, and then sell the homes, hopefully to the previous buyers. Since the federal government will be able to sell the homes for what it paid for them, it won’t lose money, and fewer residents will lose their homes, so it sounds like a win-win solution.
Although the plan has been endorsed by Yale housing economist Robert Shiller, the Antiplanner is not so enthused. Hockett and Shiller barely hint that it is not exactly a win-win plan, and the big losers will be those who invested in mortgage-backed securities. The forced-sale of the homes backing these securities for less than value of the mortgages means many of these investors will lose their money.
No doubt many will say tough luck. But this attitude has become characteristic of the Obama administration, and it probably threatens our economy more than the “mortgage impasse.”
Recall that in 2009 the federal government took over GM and Chrysler in order to save those companies from bankruptcy. How did it save them? It ordered them both to file for bankruptcy. Only in a normal bankruptcy, investors who loaned the companies money would be first in land to receive any repayment out of corporate assets or income. Instead, Obama gave the investors nothing and instead moved the labor unions, who ordinarily would be ignored by a bankruptcy court, up to first in line.
Now Obama and others fret about our sluggish economy even as they criticize big investors as part of the so-called “1 percent.” But if the administration is going to short investors whenever it tries to deal with an economic sector, those investors are simply going to put their money elsewhere.