Arnold Kling  

The Pity Fund

It's Small Business, Stupid... My Talking Points...

Maybe some distressed borrowers should have known better, and maybe some were innocent victims. I think it's impossible to generalize.

I think that whether an individual home owner or home borrower was a victim is something that ought to be judged on a case by case basis. As a thought-experiment, consider doing that with a jury system.

Set up a pity fund, and let anyone who thinks they were hurt by the mortgage crisis apply for a gift from the fund of, say, $20,000. The decision would be made by a jury consisting of ordinary citizens.

The jury would begin by selecting a default charity. Any money they don't give to the applicant would go to the default charity. This would serve as an indication of opportunity cost.

After hearing the applicant's case, the jury could decide to award all, some, or none of the money to the applicant. The remainder would go to the default charity.

The advantages of the pity fund over a government program include:

--judgment based, rather than rule based
--clear understanding of opportunity cost
--democratization, in that spending decisions would be made by average citizens rather than by central authorities

I'm not saying that this is a practical proposal. But I think that giving it thought and consideration would lead you to insights about how government might be improved.

Comments and Sharing

CATEGORIES: Income Distribution

COMMENTS (2 to date)
Scott Wentland writes:

Hindsight bias makes any case by case judgment (esp. involving risk and probability) extraordinarily difficult.

cent21 writes:

Like the saw about it being a recession or a depression, it's bad judgment when someone across town bought a house that lost value and had an low teaser rate adjustable mortgage get reset, and hard times when it's your house.

Given the estimates for worst case in Califorina of over a 50% price decline, and the fact that the Federal Reserve chairman advised people to get into adjustable rate mortgages at precisely the worst time in history to do so, I think it's reasonable to give many people who bought in the wrong time and wrong place under the wrong terms the benefit of the doubt, if only in the interest of keeping the homes occupied and protecting the property tax base, as well perhaps as cutting off the price decline before it overshoots to ... well, your own neighborhood.

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