It's Time To Pay The Bills

By David Ignatius
Thursday, January 1, 2009

The Great Depression seared some life lessons into my parents' generation. My father hasn't had a mortgage in decades, even though his children keep telling him about the tax advantages. He buys store-label brands, clips the "sale" coupons out of the newspaper and wears well-mended suits he bought 50 years ago.

Frugality is a lifestyle for his generation. Their pleasure isn't in consuming, but in creating and saving. And their abiding conviction is that you have to take care of yourself, because no one else is going to bail you out.

What lessons, I wonder, will the great downturn of 2008 teach our children? Obviously, the answer depends on how bad things get. This is a global cataclysm that's more vivid in the headlines than in most people's pocketbooks. Unemployment remains below 7 percent, and gas prices and mortgage rates are down. The crisis is still more like a dark thundercloud than a pelting hurricane.

So let's assume, first, that the bailout actually works. Under that strategy, Ben Bernanke and Henry Paulson have, in essence, offered free credit to anyone who can use it. Name the economic sector, and they're prepared to rescue it from its own mismanagement. After spending the first nine months of the year hosing Wall Street with cash, they are now turning the spigot toward Main Street.

Weirdly, the sharpest criticism of Bernanke and Paulson is that they let Lehman Brothers fail, without understanding the cascade effect this would have as financial institutions realized they, too, could be liable for the toxic paper on their books. Paulson & Co. scrambled to pretend this wasn't so, with ever-changing offers to provide capital for banks or buy up assets, or whatever -- but the frozen credit markets showed the level of panic.

But what if the bailout policy "works," and prevents the deep global depression that many analysts had feared? In recent days, even super-bear Nouriel Roubini has seemed hopeful that the worst outcomes can be avoided. What would be the lessons of such a "near-miss" world?

The first precept would be that bad behavior brings a rescue. If Wall Street investment banks can get away with it, why not auto companies? And if auto companies, why not the guy who bought a house he couldn't afford, or who maxed out his credit cards without a hope of repaying the debt? What the heck? We're all living in bailout nation. As a prominent foreign investor observes: "In America, loans have gone from 'something to be repaid' to 'something to be refinanced.' "

A banker friend decided it was time to quit the business a few months ago when borrowers with enough money to cover their mortgage payments were defaulting on their loans anyway. I shudder to think about a world where it's assumed that people will walk away from bad debts and get away with it. The returns to capital, let alone hard work, would be puny.

A second course, and to me, this seems more likely, is that the bailout that's now in place won't work -- and that a major new recovery program will be needed from the Obama administration. And here is the chance to shape the lessons for our children in a positive way.

A cornerstone of Obama's rescue policy is likely to be reinvestment. That will cover infrastructure projects, to be sure, but the power boost will be new technologies to retool the failing auto industry and dozens of others. Visit universities around the country, and you realize that there is a wealth of new ideas ready to be put to work -- in every aspect of energy creation and consumption, and in most other sectors of manufacturing and distribution.

Thanks to my parents, I grew up with an idea of FDR's New Deal as a golden age of American togetherness. You'd travel across the bridges that ribbed the country and look for the date they were constructed, and it always seemed to be in the 1930s. The defining images were of a country down on its luck but always pulling together.

That's what I hope Obama will teach our kids in this new year: talking not of rescue, but of shared sacrifice; reminding us that bills come due and have to be paid; ending the bizarre period of national denial that is Bailout America.

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