Dilemma of enforced incentives for jerks in the current economy

Last updated on Oct 18, 2008

Posted on Oct 18, 2008

World is in a bad recession and financial turmoil.  Roubini, Professor of Economics at Stern School of Business in NY acknowledges this fact and in fact goes further to say that we may be looking at a Global Depression.  Here are some of his suggestions on how to tackle this situation:

–  another rapid round of interest-rate cuts of at least 150 basis points on average globally;
–  a temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut down are distinguished from distressed but solvent institutions that must be partially nationalised and given injections of public capital;
–  a rapid reduction of insolvent households’ debt burden, preceded by a  temporary freeze on all foreclosures;
–  massive and unlimited provision of liquidity to solvent financial institutions;
–  public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
–  a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments;
–  an agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors’ surpluses to avoid disorderly adjustment of such imbalances.

While his suggestions are pointed and useful.. and use empirical evidence from 1930s etc to fight this time of uncertainty but it also presents some issues.

The other day a friend called me and asked me – in all seriousness – “Are you still paying your mortgage?”.  I must admit I was taken aback.  I said YES.  Why not?  He then said many are saying that we should stop paying the mortgage and since all those who dont pay mortgage will be bailed out anyways.. we will be too.. so we can own the home without having to pay for it!!

Now, THAT is a pretty dangerous situation.. and a possibility that is VERY conceivable!  The system of “reform” from this situation actually has the potential of being broken down by the inconsistencies that it inherently introduces within the society.  Why should someone who acted like a COMPLETE JERK be allowed to not only default but also keep his/her house now?

Is the society going to be made to pay for being “Honest” and having commonsense?  While the greed and idiocy is rewarded?  Should I have been a jerk as well and bought a house worth a few million?

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