Is The Bailout Of Homeowners Facing Foreclosure Really Immoral?

I know beforehand that I will be a voice in the wilderness. Carnal use of the word aside, I can’t see how “immoral” applies to the effort to try to help a tiny percent of Americans whose only sin was to want to own a home.  This is America.  In America we are threaded together by want.  Want what your neighbor’s got or better.  It is Consumerism in its distilled form.  It is the engine, the soul, that powers Capitalism. 

Let’s see. The last time I looked up the word immoral it meant: corrupt, wicked, evil, unchaste, impure, reprehensible, unworthy and many other synonyms too many to mention here.  But is this effort really immoral because it was so easy to get a mortgage when the market was hot, because we didn’t read the small print, because we weren’t able to foresee the downturn, because we used our equity to buy more stuff that, in turn, kept the engine humming, or because we were plain greedy?  It is the American way.  We were just being ourselves, a country of spendthrifts with a negative saving rate.

I read with dismay that in a recent poll conducted by CNN/Money,  48% of Americans —and the number is still growing — believe that homeowners in trouble should not be bailed out.  Congress is also split on the issue, with most Republicans opposing such legislation and Bush promising to veto it.  In SmartMoney Jonathan Hoenig argues, among many things, that:

“...the real reason to oppose a bailout isn’t that it’s impractical, but that it’s immoral.”

He goes on:

“In America, we have the right to “life, liberty and the pursuit of happiness,” but not the guarantee we can live in the four-bedroom Colonial that’s priced way beyond our means. It might sound cold, but homeowners who can’t pay their mortgages should not expect to be able to keep their homes.”

Well, I agree that it is very American to have free-markets were businesses compete with minimal government  interference, as it is the responsibility of these business to bear the cost of high risk investments gone sour.  While we all embrace the free-market idea, the spirit of Adam Smith is nowhere to be found when it comes to government bailouts. 

Let’s review some of these. In 1971 Congress passed a $250 million loan guarantees to prop Lockheed Martin, which eventually recovered and merged with Martin Marietta in 1995.  Chrysler in 1979 was virtually bankrupted and was rescued by Federal Government Guarantees totaling $1.2 billion.

In the early 1980s the Federal Government bailout of the Savings and Loan industry ultimately cost the taxpayers  $125 billion.  I think we are still paying for this one.

In 1984 the FDIC and the Federal Reserve rescued Continental Illinois Bank.  In 1991 the Bank of New England was quietly funneled a billion dollars  by the U.S. Treasury to boost its liquidity.  In 1998 the Federal Reserve orchestrated a bailout of Long Term Capital Management Hedge Fund at the tune $3.6 billion.

In 1995 President Clinton went to Mexico’s aid after a rapid devaluation of the peso, persuading countries and banks to lend the country $50 billion guaranteed by the U.S.

In 1998 the U.S. and the International Monetary Fund bailed out  South Korea. Total package $57 billion plus an additional $10 billion in emergency aid.

In the days after the attacks in 2001, the airline carriers estimated that losses would come to $24 billion as people elected not to fly. Congress quickly authorized $5 billion in cash infusions to shore up the industry, with the funds apportioned according to each carrier’s size. Then it followed with $10 billion in loan guarantees and set up a government compensation fund for victims of the attacks.

In an opinion column The National Review quotes. Scott Garrett (R-N.J.), one of the very few members of Congress questioning the federal bailout of Bear Stearns:” Government isn’t supposed to be in the business of picking winners and losers,” Garrett remarked in a phone interview while en route to Washington from New York. “But here we are. Hardly anyone seems to mind.”

Given the well documented pattern of moral hazard among corporations, banks and even countries, it is hard to understand the harsh feelings being generated against Lilliputians homeowners in financial distress. There are approximately 102 million homes in the USA and a little over 1.5 million are in trouble with their mortgages. Approximately a third of these are small investors and there will be no help for them. The plan (H.R. 5830: The FHA Housing Stabilization and Homeownership Retention Act) that just passed Congress approval yesterday, will only back loans to re-structure existing loans on principal residences and lenders will have the option to participate.  It is $300 billion in guarantees over the next 4-5  years.  I understand the Congressional Budget Office estimates such a measure would end up insuring approximately 500,000 borrowers. Estimated cost to taxpayers: $2.7 billion!

So what’s the big deal?  Considering the planned $300 billion in subsidies to rich farmers, the annual $8 plus billion in amoral subsidies to oil companies or the $ 50 billion a year we give away to other countries, most of which don’t even like us or the $3 trillion for the war ( 1 trillion still unacounted for), or the crushing national debt at $9.2 trillion, the $2.7 billion over 4 years for helping fellow Americans, is just less than pocket change.