A Fair Bailout?

Saturday, April 12, 2008

POLITICAL momentum in favor of a larger federal housing bailout appears to be growing. In the past week, President Bush broadened access to "FHASecure," his Federal Housing Administration program that helps subprime borrowers refinance into government-guaranteed mortgages. And on Friday, the presumptive Republican presidential nominee, Sen. John McCain (Ariz.), who had earlier hewed to a free-market line, proposed a government refinancing plan of his own. Both men seemed to be playing defense against the Democrats, who are calling for broader remedies this election year.

We get the politics. But what's the moral argument for a bailout? For every troubled subprime borrower, there are several struggling but paid-up homeowners wondering why they should foot the bill -- in higher taxes, increased government financial risk, eventual inflation, or all three -- to rescue those who took on more debt than they could handle. In a recent interview on public radio in Boston, Rep. Barney Frank (D-Mass.), who is sponsoring a leading mortgage-relief bill, said this: "There are people who are working and have their jobs, and then there are other people who've lost their jobs and we pay them unemployment compensation. There are people who buy all their own food, but there are other people for whom we buy food stamps. We have said, I think correctly, in this society, that if you find yourself in economic distress, within reason, we'll try to help you out."

Fair enough. But unemployment insurance is a time-limited benefit, paid for through a dedicated employer payroll tax. Food stamps go only to the verifiably poor. Except for during the Great Depression -- and we're not back there yet -- American society has never offered wholesale federal relief from unpayable home loans. Before the recent crisis, hundreds of thousands of people went into foreclosure each year and got no help from Uncle Sam.

The clearest moral argument is that made on behalf of subprime borrowers who were sold those loans without being told about alternatives that were more affordable. But however large that group is -- and no one can specify its size -- such deception probably accounts for a minority of mortgages in which the homeowner could actually keep up a federally fixed mortgage. The fact is that any program, Republican or Democratic, that mobilizes any amount of federal resources to save distressed homeowners will create perverse incentives and arguable inequities, one of which is that it may take from some people who are less well-off than those to whom it gives. Subprime-heavy states such as California, Florida and Nevada would be subsidized by the rest of the country. And so on.

However unevenly distributed the costs and benefits of a housing bailout, they might be smaller, and more equitably distributed, than would be the costs of mass unemployment and hollowed-out neighborhoods. This is an argument about "systemic risk" -- similar to Federal Reserve Board Chairman Ben S. Bernanke's defense of his decision to help J.P. Morgan Chase buy Bear Stearns. And it's the strongest point in favor of a government housing rescue. But, just as the Bear Stearns bailout can ultimately be justified only if it helps restore lasting confidence in financial institutions, so must the various housing plans stem the decline in home prices. And that is something for which there can be no government guarantee.

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