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EDITORIAL: Here's Your Bill
(Richmond Times-Dispatch (VA) (KRT) Via Acquire Media NewsEdge) Aug. 17--News stories lately have carried numerous tales indicative of the nature of the housing bubble and its collapse: A woman who sought a special loan, requiring no proof of income or employment, for her boyfriend who was in jail; the mortgage broker cheerfully sent papers to the courthouse. Another couple bought a property for three times its sale price of just a year earlier, and agreed to monthly payments consuming more than 70 percent of their take-home pay. Another borrower juggled two mortgages, a car loan, and a high-interest credit card -- and wound up in a deep hole.
These are tales of woe about people who bit off more than they could chew. The stories elicit sympathy for the benighted. They also elicit anger at the lending institutions that encouraged people to get in over their heads.
In the past few months Washington has engaged in a flurry of bailouts. Bear Stearns, Fannie Mae and Freddie Mac, and hundreds of thousands of homeowners who got in too deep all have benefited -- or stand to benefit -- from Washington's largess. The taxpayers, including millions of responsible Americans who sacrificed luxuries and lived within their means, will pick up the tab.
Generalizations are precarious. Some Americans facing the threat of foreclosure fell victim to economic circumstances through no fault of their own. Others fell prey to rapacious lenders, or to lenders that themselves were under government pressure to make loans to low-income borrowers with less than stellar credit.
But in many cases one moral of the housing meltdown story concerns delayed gratification. Too many lending institutions saw subprime mortgages as the quick route to riches. Too many consumers saw easy credit as the fast alternative to saving for a down payment. (Here's a staggering statistic: The average American now has less money set aside for a rainy day than he did during the Depression. The collective American savings rate is actually negative.) And although the typical American family is 20 percent smaller than it was in 1970, the typical new house being built is more than 40 percent larger.
Another moral of the story concerns risk. Buyers who took out huge loans with high interest rates took a big gamble. So did the banks that lent the money. So did the investment houses that bought mortgage-backed securities. When the gamble doesn't pay off and the government steps in to save the day, it creates another problem that economists call moral hazard. Rescuing people who engage in risky behavior encourages others to engage in risky behavior, too. Think of it this way: If a teen-ager keeps getting arrested for shoplifting and his parents keep bailing him out, then what reason does he have to change his ways?
Risk-taking is central to a market economy. Government should encourage risk-taking by letting entrepreneurs and innovators reap the profits from their efforts. But risk-taking has a downside that also is necessary to make the system work. Freedom to succeed entails the freedom to fail as well. Responsible taxpaying citizens shouldn't be punished for the mistakes of others. Not every borrower or lender deserves to be bailed out. Sometimes the burned hand teaches best.
To bail out or not to bail out? That is no longer the question.
Congress, the White House, the Treasury Department, and the Federal Reserve have each decided that the solution to current economic jitters, housing troubles, and credit scares is simply to bail out virtually everyone. No one has the slightest idea how much these rescue plans will cost. But we all know who will pay the bill: American taxpayers, the vast majority of whom earn a paycheck every week and do whatever's necessary to cover their monthly mortgage or rent.
Responsible people will be forced to foot the bill for irresponsible borrowers, sloppy lenders, greedy investment firms, corrupt government-sponsored entities, and their feckless enablers in the federal government -- especially Congress. Will the price tag be $50 billion? $100 billion? $500 billion? No one has the slightest idea. And those who claim they do are either ignorant or disingenuous or both.
Today's bailouts may have prevented a meltdown of the global financial system. Trouble is, we'll never know what might have happened if the government had not intervened. We do know that the costs imposed by the bailouts, the bad precedents they set, the free rides they offer to Fannie Mae and Freddie Mac, and the opportunities for increased government intervention in the marketplace that they invite will haunt us for many years to come.
Handing profits to the private sector while dumping risks on the public is no way to run a free-market economy.
. . .
What do you think?
Should the government bail out failing banks and investment firms?
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Copyright (c) 2008, Richmond Times-Dispatch, Va.
Distributed by McClatchy-Tribune Information Services.
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