This question was prompted by today’s Wall Street Journal story with the biased headline “Some Buy a New Home to Bail on the Old” (click through to read the article).
It’s an interesting question. As long as it doesn’t violate the terms of any contract, my initial thought is that it’s perfectly ok, indeed a rational economic decision that maximizes individual self interest, which is the system in the USA.
That last part raises another question: Should the focus be on maximizing individual self interest or collective self interest? That is, of course, the topic of many a book and debate.
In a nutshell, the Adam Smith / USA argument is that the way to maximize the collective good is for each individual to maximize his individual good. Some people agree with this, others not so much (or only partially and/or with conditions or tweaks). I suspect that many people, at least secretly, prefer it one way when it benefits them and the other way when it doesn’t. Sounds like that is the case with these lenders and investors who now want to change the rules halfway through the game (see article, below).
It’s fascinating for me, an old USA finance guy who worked at a relatively ruthless investment firm, which by the way appears to be in a death spiral right now (I bailed and sold all my stock as fast as I could in 2003). On Wall Street, “Ruthless” is a compliment in many circles because it just means “hard-nosed deal making and the expectation that the other guy is a big boy and if he gets into the ring then he knows what he is doing and it is up to him to protect and maximize his self interest.” That works fine when both parties are equally matched, but breaks down when information and positioning are asymmetrical, indeed when a lamb goes into the arena with a lion.
Now I live in Sweden, a country that values the collective good over the individual good. It’s great to get such a close look at the other side of the capitalism/socialism coin. Neither system is perfect, of course, but if I were to design a new system from scratch it would incorporate aspects from both.
Now on to the article: