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America faces tough decisions

Updated: May 3, 2013 12:14PM

The American economy has pulled through some tough times before. But until now, we were almost always pulling together, even though only some of our citizens were directly affected by recession or economic transition.

This time around it's different because we have two huge segments of the population directly opposed to each other -- and fully aware of the very high stakes if one gets bailed out at the expense of the other.

Homeowners are squaring off against ordinary investors in this mortgage crisis. And since both sides command a lot of votes, this has become more than a financial crisis. It's growing into a political divide that will be the first of many, now that we live in an era when government has dwindling resources to solve problems.

On one side we have more than 2.64 million homeowners who are behind on their mortgage payments. We have 53,609 homeowners who lost their homes in October. We have another 224,451 homeowners who received news from their lenders in October that foreclosure proceedings have started against them. And we have another 1.5 million Americans with adjustable-rate mortgages who will start re-setting to higher monthly payment in January, 2008.

All that pain gives the television cameras -- and the politicians -- some strong incentives to demand that the government "bail out" these unfortunate folks. After all, it's not just the homeowners (voters) who are suffering; it's their neighbors who watch the lawns un-mowed and the snow un-shoveled who are impacted. In fact, it's the entire economy now beginning to suffer a crisis of confidence as the foreclosure problem grows.

On the other side, we have real people losing money, too. It's not just the "big banks" that backed the loans that are taking the hit. (It's hard to feel sorry for the top execs who have been fired but walk away with millions in severance and retirement pay.)

But a good portion of these mortgages wound up in mortgage-backed securities that were purchased by mutual funds and pension funds that are supposed to provide retirement security for millions of ordinary Americans.

If a plan to help homeowners freezes interest rates on their mortgage payments, these mortgage-backed securities lose value, and won't provide the income promised to retirees.

Of course, many of these securities have already lost market value because they hold defaulted mortgages. Now the investors and fund shareholders figure they should get bailed out of their losses, too!

The new "voluntary" mortgage bailout plan won't help all those distressed homeowners, and it might only partially help banks avoid taking a hit to their balance sheets. There's hope that delaying the pain of higher payments for borrowers will maintain some of the value of those mortgage securities. But delaying recognition of the problem is not a solution. Sooner or later the markets will have to resolve the losses. And the markets are a much better place to apportion those losses than the politicians' offices.

There's more than money at stake in this issue. And there's more than politics, too. What's really at stake is the American dream, which can only be sustained if we're willing to face reality.

From now on, the decisions about which promises to keep are going to get very tough -- whether it's about financial contracts or medical care or social services or even about fighting a war. We can't afford to do everything we want to do. And we can no longer either borrow the money or "print" it -- because we're already so far in debt and our creditors won't allow it.

In the 19th century, Americans were shocked to learn that the West, the "frontier," no longer existed. It was a major cultural and economic turning point for our country.

Now in the 21st century, Americans are receiving a similar shock, a recognition that our resources are not unlimited, and that we'll be forced to make tough choices about how we allocate the resources we have. That's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate

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