Government Bail Outs Get People Talking

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I posted recently on Hillary Clinton’s comments on the mortgage market meltdown and in the meantime it seems every politician has stepped up to the mic to take advantage of the situation to lob a sound-bite in to the fray. The biggest talkers are, of course, the challenging Presidential nominees. Christopher Dodd (D-Connecticut) threw a few choice words out there in the New York Times this week as well: (hat tip: The Housing Bubble Blog)

â??â??I have two public policy goals,â?? said Senator Christopher Dodd, who is a presidential candidate. â??One is to make sure that whatâ??s been going on stops. That is the easier of the two issues to address. And the second is what can we do to keep people in these homes. What if anything can be done to prevent flooding the market with these delinquencies.â??â??

There is a lot of talk about a potential bail-out for these home buyers and lenders and businesses all the way up the food chain to Wall Street. It’s a delicate and complicated debate. Should lenders, who knowingly took credit risks outside of traditional economic credit risk models be rewarded for their audacity? Remember, these lenders made billions of dollars in the last 7 years. Should borrowers, who knowingly lied on their loan applications to falsely state their income and borrower too much money be bailed out with the tax dollars of the rest of the American public who acted much more prudently? Should mortgage brokers, who were merely the conduit of these lender’s over-aggressive loan programs be punished for delivering products to the public that the public wanted and the lenders were willing to sell?

It’s not a black & white issue, and the arguments are many and varied. For me, it comes down to the following: will a meltdown in the subprime mortgage industry adversely affect those outside of it? If the overall threat to the economy and well-being of those who did not participate in the debacle is greater than the cost of bailing out these banks/borrowers then I think a bail out would be in order. If the meltdown just impacts those that were actively a part of the bubble, then it would seem more like a market correction, would not have huge implications on the overall economy and should not be artificially propped up by a government-sponsored bail out.

I’ll be examining a lot more of this in the upcoming weeks – especially as the talking heads on Capital Hill get revved up about this ‘outrage’. Amazing how the politicians, suddenly concerned, sat back, didn’t ask any questions over the last 5 years, as the economy was booming on the back of consumer spending (in a country with a negative savings rate) and yet another excessive asset bubble was built at the hands of Alan Greenspan.