“A people that values its privileges above its principles soon looses both.” – Dwight D. Eisenhower

Apparently our politicans’ behavior is rubbing off on us. Last week, The Wall Street Journal featured an article titled “American Dream 2: Default, Then Rent,” featuring Americans who had decided to stop paying on their mortgages and instead rent a house. This is a trend that is rapidly increasing in frequency across the nation as homeowners are realizing that their house wasn’t a particularly great investment. According to the article, analysts at Deutsche Bank Securities expect 21 million households in the U.S. to owe more than their mortgages are worth by the end of 2010.

With the collapse of American International Group last year, the government has worked feverishly to point their fingers at corporations and executives. Let’s clarify – AIG sold mortgage-backed securities, or investments which relied on the value of mortgages to stay afloat. As homeowners defaulting on their mortgages started to spike, the value of the securities plummeted. AIG suddenly owed far more than it could pay. Ultimately, foreclosed-upon homeowners lost. AIG and its employees and shareholders lost. Innocent American taxpayers lost.

Tragically, from taking out a loan to paying our taxes, we are all funding this behavior. Interest rates in part provide insurance for the lender. There will always be people defaulting on loans – the interest rate then builds in a little extra pad to compensate for those losses, and so we pay more to borrow. Additionally, many loans have been insured by the federal government, and that number is steeply increasing. The Federal Housing Administration now insures tens of millions of mortgages. If a homeowner defaults on an FHA loan, the American taxpayers foot the bill.

Here’s the kicker – AIG used part of its government bailout to award its executives multi-million-dollar bonuses, a luxury that, thanks to our representatives in Washington, was even specifically afforded to them in the bailout deal. We as a people are somehow furious with AIG but much less vocal about the politicians and other individuals who assisted in precipitating this disaster. Schoolteacher Shana Richey’s home in Palmdale, California, is now worth $200,000. Her monthly payment on her $430,000 mortgage was $3,700. Since deciding to default on her home and rent, Ms. Richey has used the extra money to buy season tickets for the family to Disneyland, plan a Carnival Cruise to Mexico, and purchase an $1,800 dining set [1].

Capitalism is a system built on risk-taking. Anyone who believes a commodity can inflate but not deflate is lying to himself. This has been noted by many other pundits, but privatizing reward while socializing risk only encourages more reckless behavior, leaving behind those of us forced to cover those losses. Our founders envisioned a nation based on personal responsibility.

1. “American Dream 2: Default, Then Rent,” The Wall Street Journal, December 10, 2009.