Exactly right — and that gets to the crux of the macroeconomic situation here. Problem is, how do we design a system in housing whereby people who are caught up in the debt melt-down don’t lose their homes, but yet we deliver the appropriate losses and pain to unwise speculators?
There aren’t any easy answers here, because as discussed previously, even if you could perfectly determine which borrowers are which and foreclose on the speculators with ruthless free-market efficiency, the dynamics of residential real estate markets will punish the real homeowners by the mere presence of unoccupied houses previously owned by speculators driving down the valuations in entire neighborhoods.
This, I suspect, is why there is anger out there at residential real estate speculators: if you choose to not speculate in stocks, and the stock market crashes, you and your checking/savings accounts are pretty much unaffected. If you own investment grade bonds for the income (as many older folks do) and junk-grade bonds take a crap on a collapse of speculation frenzy, you’ll still clip coupons quite safely for years to come.
But in residential real estate — even if you’re an honest, mortgage-paying homeowner — if there was significant speculation in your neighborhood/development, you’re going to suffer the results of speculator foreclosures and bankruptcies - increased crime, decreased valuations, etc. There was nothing you could do to prevent it, and there’s nothing you can do to hide from it in some places.
This, I believe, has something to do with the anger directed in an unfocused way at “speculators.”
I’m a big fan of the free market, but I think you’ve hit on a key point. If a market melts down due to speculation, everyone suffers. On the other hand, I’m no anarchist, and neither are most Americans. Perhaps this is an area where government regulations need to be changed to #1 force lenders to properly rate the amount of risk and #2 force speculators to put up a greater percentage of their own money/assets. As I recall, some sort of AAA financial devices were involved that essentially hid the risk. I don’t see how a sub-prime mortgage could ever qualify as a low risk investment unless the borrower had on-time payments for years. Did government regulation have a part in this meltdown in the first place?