Is Greg getting bailed out by his rich uncle?

I have an old friend, and he probably won’t mind I am telling you this, but for sake of anonymity, I will just call him Greg. He has had some economic difficulties recently, but his family has stepped in at different points. This, I thought, was great for Greg, but the whole sequence of events has led to a lot of animosity within Greg’s family. Even though I am biased, since Greg is my friend, I still can’t help thinking that he somewhat has to blame himself. But I’ll let you be the judge.

The background is that Greg and his family found their dream house some years ago, and Greg took out a mortgage. Everything went fine for a while. Greg had a well-paid job, and every quarter he could honor the agreed mortgage payments as well as providing for his family. Then bad luck struck: Greg lost his job, and his unemployment benefits could only just about cover the costs of taking care of the family. It became impossible for him to make the mortgage payments. You might say he was in a “debt crisis”.

He was obviously in distress, but Greg has an uncle who is incredible well-to-do, and he stepped in and covered the mortgage payments for the entire year Greg was unemployed. Greg got a new job, and things lightened up for a while. But the family relations had suffered. Greg’s uncle began to talk less favorable about Greg. Apparently, he was annoyed that Greg never thanked him for the economic help he received during the unemployment spell. I couldn’t believe what I heard, and thought that the uncle was probably being unfair. But one evening I was out with Greg and two of his new friends (let’s just call them Paul and Joe), and we came to talk about the recent events. Paul and Joe made it quite clear that they didn’t think Greg owed his uncle any thanks. Their argument was that the uncle hadn’t helped Greg by paying his mortgages, but merely had helped the mortgage company. And since it was a big corporation that didn’t really needed the money anyway, there was no need to thank.

I decided not to play the “I am an economist” card. Not only because it never brings me anywhere, but we were having a nice evening, so I didn’t want to ruin it. I just thought for myself that the net effect of the uncle’s action had been to essentially provide housing utility for Greg and his family in a year. Yes, the money went to the mortgage company, but in effect Greg (and his family) could stay in the house uninterrupted. I actually thought that the uncle helped Greg. But I could feel this was not considered politically correct.

The rest of Greg’s family did not get involved too heavily until last year, when Greg unfortunately lost his job again. Greg’s uncle immediately offered to step in and cover Greg’s mortgages, but this time he would only do so if Greg agreed to pay him back when he got a job again. Greg refused and got mad at him, and the whole situation has now split the family into two equally furious parts. One who thinks that Greg’s uncle is a no-good, money-loving capitalist kicking a man lying down, and one who thinks basically the same but that Greg should swallow his pride and succumb to the uncle’s threat for the sake of the well being of his family.

I am torn here. I somehow do not think the uncle is the bad guy. From an economists’ point of view, he tries to help Greg smooth consumption over time. But those arguments don’t fly with Paul and Joe, who think he should cut any connections to his uncle as they believe he has been exploiting Greg all along.

What do you think?

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7 Responses to Is Greg getting bailed out by his rich uncle?

  1. Nibs says:

    You omit to mention that Greg’s uncle actually owns the bank which accorded Greg his mortgage in the first place, designed the system which pushed Greg to take on more and more debt !!
    Now Uncle is becoming uppity because Greg didn’t turn out to be a totally safe bet on which he could make decent profits to keep him in his old age.
    Uncle Richard (Rich for short) now obliges his nephew to live a life of the hair shirt and misery, just to teach him (and his young family) a lesson !!
    He may even throw Greg out of the family despite having benefitted himself through owning the very bank and designing the very system which made Rich rich and Greg dirt poor….

    This is like the Bible.

  2. Benoit Essiambre says:

    What you are missing is that the uncle owns the bank that made the original mortgage and that Greg didn’t lose his job through “bad luck” but because the bank started asking all customers to make payments more quickly lately, so quickly that a lot of people and businesses, including Greg’s employer, had to sell the tools that allowed work to be performed thus making people jobless, poor and even less able to pay back their debt.

  3. Nibs says:

    bien vu Benoit, mais je vous ai battu par 10 minutes !

  4. Nibs says:

    Also, Greg’s father Dimitrios 50 years ago accorded to his brother Rich a massive debt exoneration, but nonetheless Rich seems to want to punish his brother’s son for this humiliation !!

    Rich is a bit of a bastard in fact.

  5. I am not sure about how Greg’s uncle got rich, but let us assume that he owns the mortgage company for argument’s sake.

    During Greg’s first unemployment spell, Greg’s uncle would then of course be paying to himself. That may not seem very admirable, but in consolidated terms he lost one year’s of interest and whatever reduction in the principal that was agreed upon. Greg, on the other hand, lived in the house for free in a year. I still have this eerie feeling that the deal was quite good for Greg, and not too good for the uncle.

    The second case, where the uncle demands repayment of whatever he covers for Greg, will imply that the uncle will not lose anything in present value terms (assuming he charges Greg the same interest as the mortgage company). So by not losing anything, he may not be in for a humanitarian award. What about Greg? He essentially gets his mortgage put on hold (at interest), while keeping himself and family in the house during his unemployment spell. He will clearly have to cut back a bit on other expenditures, but the uncle’s offer allows him to smooth out the adverse effects of the unemployment spell. I see that as a gain for Greg.

    But Greg is stubborn and is not speaking to his uncle anymore. And he and his family is now about to be kicked out of their home. He has reached out to me, but I can’t house them. I suggested that he contacted his new friends Paul and Joe to see if they could help (after all, they strongly supported him in cutting the ties to the uncle). But they had suddenly moved on to other things. (I have recently heard that both are quite smart guys who have received prestigious awards within their profession, but now just use their reputations to earn fat fees giving advice about almost everything to anyone who needs some confirmation from reputable persons.)

  6. Jakob Søgaard says:

    Hey Hernik

    There is on thing that I think you are missing from the story. Greg did not have a well paying job to beginning with. He had a low paying job and was actually planning to retire early. Yet he decided to take out a big mortgage loan and the mortgage company decided to give it to him.

    It later turned out the Greg had been cheating a little bit about the information that he had given the mortgage company, but still, the mortgage company seems to have been very optimistic about Gregs ability to pay them back. Perhaps they thought that Greg would get a better job later or that somebody else would step in and pay the loan.

    Now the questions is whether Greg is the only one to blame for the situation. I would say no. It takes two to make a loan contract and a loaner can default if he is willing to take the consequences. I think the problem is that Greg has sad himself between to chairs. He has not defaulted right away, but neither has he done a real effort to increase his earning potential (like postponing retirement). In stead he has be forced by the mortgage company to cut back on more essential things, which has actually lowered his earnings potential.

  7. Sure, you are right, it takes two to tango. But whatever happened, happened. I am more interested in the issue of whether the Uncle is helping Greg or not.