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 they are 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 is becoming 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 the government has fewer and fewer resources to solve such problems.

Taking Sides

On the one side we have more than 2.64 million homeowners who are behind on their mortgage payments. We have 53,609 families who actually lost their homes in the month of October. We have another 224,451 families 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 that will start resetting to higher monthly payment in January 2008.

All that pain gives the television commentators -- 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 unmowed and the snow unshoveled who are affected. In fact, the entire economy is 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 who walk away with millions in severance and retirement pay.)

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 the Bush administration's plan to help homeowners freezes the 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 may 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 -- as the Japanese banks found out in the 1990s. 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.

Making Tough Choices

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 be sustained only 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.

Mortgage Rates in Selected Cities
City Term Rate
Boston 30-year fixed 6.5%
New York 30-year fixed 5.875%
Miami 30-year fixed 5.79%
Chicago 30-year fixed 5.98%
Minneapolis 30-year fixed 6%
Source: BankingMyWay.com
--no origination fee / 20% down payment / excludes Internet banks / excludes credit unions / loans under $417,000
For more rates, see BankingMyWay.com

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. And 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 an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

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