Wednesday, April 02, 2008

Why the Bailout Is Bad

Robert Samuelson gets the problems with Rep. Barney Frank's (D-MA) -- and for that matter, President George W. Bush's -- proposed bailout of troubled homeowners exactly right:

About 50 million homeowners have mortgages. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other "needy" homeowners.

The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders -- aggravating the "credit crunch" -- and postpone a revival in home buying and building. This gets the economics backward. From 2000 to 2006, home prices rose 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices should fall to bring buyers back into the market and to reassure lenders that they're not lending on inflated properties.

Those supporting the bailout reply that the federal government helped out a huge corporation -- Bear Stearns -- and, thus, should aid individuals, as well. Indeed, unless the Chicken Little scenarios suggesting that the failure of Bear Stearns might lead to a larger economic collapse were correct, that decision was likely wrongheaded, too.

Our society, including our political culture, seems to be at a point where it is incapable of enduring short term sacrifice -- see the complete incapacity to deal with the impending crisis of Social Security and Medicare. The long term consequences of that failure could be enormous.

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