August 03, 2007
Mortgages and Sauerkraut
American Home Mortgage is going out of business quickly now. Like their subprime customers, they can't meet their debt obligations.
Are we Americans just nuts for taking on all this debt? Or is it rational?
A Free Kraut Story
The food stand near our local Costco used to put an open bucket of free sauerkraut near the ketchup and the relish. It was designed to make it a little easier and cheaper to get a deluxe hot dog with all the goodies. But they don't do it anymore - instead an hourly worker gets paid to dispense the kraut on your behalf.
What happened was that cheapskate Asians like my family would say "ooh, free food!" and fill up the little plastic condiment cups with pickled cabbage goodness, and then sit and have saurkraut for lunch, sans hot dog.
No matter that the kraut was supposed to be for a hot dog. No matter that it wasn't intended to be eaten on its own and would give us a stomach ache afterwards. It was free, and so we'd do all sorts of unnatural things to take advantage of it.
"Only With a Hot Dog"
When a sign appeared that said "sauerkraut only with a hot dog," it just made things worse. Now we could assuage our guilt by buying a little $1 hot dog for the kids and then getting a huge drink cup to fill with $5 of free sauerkraut.
See, sauerkraut is sort of like discount kimchee. A lot of Asians eat pickled vegatables as a meal. And if you're a real cheapskate - well - we Costco members can smell a good deal from a mile away.
The problem with free sauerkraut is that, for a lot of people, free sauerkraut has nothing to do with hot dogs.
Houses are Hot Dogs
The mortgage tax deduction is a great American tradition because it gives people a discount on buying that first house that they can't really afford in cash. Just as Costco wants all its customers to enjoy tasty hot dogs, we Americans want our citizens to be proud homeowners. And so it really does make sense to give first time homebuyers a handout.
But somehow we messed up when designing the tax break. The deduction is a discount on the loan, not the house! I have no idea how that screw-up happened, but I guess that it's just like how it didn't occur to Costco that some people might want the sauerkraut more than the dog.
Giving away free stuff is a good way to discover what people are willing to consume.
And so over the decades we have discovered that Americans are quite happy to load up on discount debt. Even if the loans they get are not very good. Even if the end result is a lot of borrowed-money for shoes and cars and vacations and a foreclosed-on house.
It is not really about the house is it?
With an open-ended discount on mortgages, is it any surprise that people seem to be getting more debt with less house? Collecting free stuff from the government is a big industry, especially since every citizen can play. Bad credit? No worry - the more expensive the loan, the bigger the tax break.
Pass a bigger cup, and pile up on that saurkraut.
I have written about this before. We would all be better off if we got rid of this mortgage deduction. I wonder if the current mortgage meltdown will give us an opportunity to pull the trigger.Posted by David at August 3, 2007 06:41 PM
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