Krugman Argues Against Big-Government Bailout for Wall Streeters Losing $ via Mortgage Crisis

It's tiresome watching some of the same people who bash "big government" and "welfare" turn around and beg the government to spend tax dollars bailing them out of jams that they, themselves, had created. But here they go again, this time over the sub-prime mortgage crisis that has scared   many Wall Streeters to the point of soiling themselves.

They donate millions to politicians who trumpet about keeping government's nose out of Wall Street.  They profess what sounds like idealistic love for the survival-of-the-fittest notion that drives the so-called "free market" -- until it threatens to eliminate their unfit butts. 

If it weren't so habitual, the hypocrisy would be astounding.

Economist Paul Krugman suggests that instead of bailing out the very people who created the sub-prime mortgage crisis, the government should help ordinary Americans facing mortgage foreclosures to work their way out of their default status. Krugman wrote:

"Many on Wall Street are clamoring for a bailout - for Fannie Mae or the  Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron  or WorldCom when they went bust - it would be saving bad actors from the consequences of their misdeeds....

"Yet our desire to avoid letting bad actors off the hook shouldn't prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

"Most of the proposals I've seen for dealing with the problems of subprime borrowers are of the locking-the-barn-door-after-the-horse-is-gone variety: they would curb abusive lending practices - which would have been very useful three years ago - but they wouldn't help much now. What we need at this point is a policy to deal with the consequences of the housing bust....

"Consider a borrower who can't meet his or her mortgage payments and is facing foreclosure. In the past, as Gretchen Morgenson recently pointed out in The Times, the bank that made the loan would often have been willing to offer a workout, modifying the loan's terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home....

"The federal government shouldn't be providing bailouts, but it should be helping to arrange workouts.

"And we've done this sort of thing before - for third-world countries, not for U.S. citizens.... Both the debtors, who escaped the shadow of default, and the creditors, who got most of their money, benefited." (New York Times/Truthout)

For an easy-to-follow explanation of the sub-prime mortgage crisis (or crunch or scandal), see James Livingston's post at Politics and Letters. Livingston's take on a solution:

"if you don’t let the market cleanse itself of imprudent investors, mere speculators, and the like—you have validated precisely what the market should be punishing. You have not let the market do its anonymously moral work of enforcing a transparent relation between honest effort and legitimate reward."

I don't know the answer, but Livingston has a point: enabling bad behavior does tend to have bad long-term consequences. The Heterodox Economist commented:

"I don't know what percent of holders of risky mortgages today should be given a break if the housing market collapses. But I do know that lumping all holders of risky mortgages together on the basis of some simplistic ethical perspective isn't right."

Also Worth a Look:  L.A. Land compares Krugman's assessment of the crisis to that of Lou Barnes.

Comments

[John]

Although it may seem as though the bank would actively want to pursue the foreclosure and get it off the books, so to speak, many large lenders are working on hundreds or thousands of foreclosed properties. Many of the owners will simply give up on the home or be too frightened to ask for more time. The ones that are seriously looking into ways to stop foreclosure, though, will be able to convince the bank that they deserve more time. The bank would willingly offer more time to solve the problem, and it is easy enough to postpone the foreclosure auction. The extra fees and interest will just be added to the balance in the end, anyway, and be counted as an even larger tax deduction for the lender.
http://www.thejohnbeck.tv

[D. Cupples]

You make some good points. Thanks for sharing.