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A Plea, Part 2
Tyler Cowen stops short of calling the mortgage-freeze plan a bailout, so he's exempt from the last plea. But this kind of thing is still very annoying:
There are two main arguments for breaking the loan contracts. The first is that we could limit human suffering. The second is that we could forestall macroeconomic catastrophe. Put together, these arguments have captured many hearts and minds, but neither is very strong on its own.
There are three reasons this is annoying. The first is that there's no strong evidence that anybody is breaking loan contracts – indeed, Tyler himself quotes Tanta to the effect that the plan is carefully constructed not to break loan contracts.
The second reason is that Tyler misses out the single biggest reason to break a loan contract, if a loan contract is being broken: that both the lender and the borrower end up with more money that way – or at least the lender ends up with more money while the borrower doesn't lose his house.
And the third reason is that it's unclear from Tyler's post whether he thinks he's referring to Bush's mortgage-freeze plan or not. I think he thinks that he is, but he does confuse matters by his reference to a debt jubilee.
When Tyler talks about "having the federal government arbitrarily rewrite legally binding loan contracts," then, he's constructing a classic straw man. The federal government is doing no such thing, and no one near the federal government has proposed doing any such thing. It would be great if the commentary surrounding this plan stayed in the realm of reality, rather than criticizing some other hypothetical plan which isn't going to happen.
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