The morality of bailouts: A solution?

Lately, there has been a lot of discussion of the moral aspect of anti-crisis measures that, in effect, allow people to get away with bad or at least irresponsible behavior — specifically, bailing out homeowners who took out mortage loans they couldn’t realistically afford.  Today’s New York Times has letters in response to a David Brooks column on the topic.  Says Brooks:

The financial bailouts reward bankers who took insane risks. The auto bailouts subsidize companies and unions that made self-indulgent decisions a few decades ago that drove their industry into the ground. The stimulus package handed tens of billions of dollars to states that spent profligately during the prosperity years. The Obama housing plan will force people who bought sensible homes to subsidize the mortgages of people who bought houses they could not afford. It will almost certainly force people who were honest on their loan forms to subsidize people who were dishonest on theirs.

Unfair?  Maybe, says, Brooks, but necessary for the greater good of all:

[G]overnment isn’t fundamentally in the Last Judgment business, making sure everybody serves penance for their sins. In times like these, government is fundamentally in the business of stabilizing the economic system as a whole. … Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate. It makes sense for the government to intervene to try to reduce the oscillation. It makes sense for government to try to restore some communal order.  …

…. To stabilize that communal landscape, sometimes you have to shower money upon those who have been foolish or self-indulgent. The greedy idiots may be greedy idiots, but they are our countrymen. And at some level, we’re all in this together. If their lives don’t stabilize, then our lives don’t stabilize.

A letter-writer from Iowa agrees:

Many of us have done nothing wrong. Some are still renting because we were too responsible to buy a house we could not afford while others struggle to faithfully pay for ones they could.

The foolish should not have taken on mortgages they had no realistic possibility of paying. But reality is not what should have been, nor is it what we wish for. Reality is only what currently is.

If the foolish go under in droves, the wise and responsible will quickly follow. In saving them, we also save ourselves.

True enough.  The purely libertarian/Ayn Randian solution of leaving everyone to face the consequences of their  poor choices runs into several major obstacles.  One is that, as Brooks argues, because the economy makes us all interdependent, the innocent would sink along with the guilty.  (And that’s not even to mention people — including children — who will suffer for bad or foolish choices made by a family member.)    Another is that standing by while large numbers of people “sink” for their reckless or self-indulgent decisions (again, often along with innocent family members) will either severely demoralize society or breed callousness.

There is, however, an alternative to letting the foolish and reckless go under — taking a few of the wise and responsible down with them — or forcing other, more responsible people to pay for their folly.

Provide the assistance — but in the form of loans. Let the people, companies, and states on the receiving end of taxpayer-funded rescue repay the money later, when they’re back on their feet.  At low interest.  Or even zero interest.   But there should be no such thing as a free bailout.

(Cross-posted to RealClearPolitics.com.)

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6 Comments

Filed under economy, moral issues

6 responses to “The morality of bailouts: A solution?

  1. jerry

    I am not sure why we are asking the CEO’s if they would like a bailout. We should be asking the stockholders if they would like a bailout. It’s the stockholders’ decision, not the CEO’s.

    A) Would you like a bailout that needs to be repaid and requires you toss out your CEO?

    B) No is a completely acceptable answer.

    Who cares what the CEO’s think except for the stockholders?

  2. Pingback: Alas, a blog » Blog Archive » Are loans a better idea than Obama’s housing plan?

  3. Revenant

    I can see the argument that we have to bail out the financial industry, since pretty much the entire rest of our economy relies on it. I have a much harder time seeing the necessity of helping people stay in “their” houses by cramming down mortgage values, but it is possible to make an argument that a wave of foreclosures would hurt normal Americans, too.

    But I don’t see any argument at all for the Big Three automakers being essential to our economy. Our economy can’t be based on producing cars people don’t want to buy.

  4. I don’t think anyone outside of Detroit would say that the Big Three AMs are essential to our economy. I do think, however, that there’s an argument that we don’t want them to fail right now, because our economy isn’t able to absorb all those extra job-seekers who would become unemployed. It may make more sense to keep them afloat (perhaps with loans) for another couple of years, and after that let them sink or swim.

  5. Jack in TX

    Good Lord.

    There is nothing more frightening than people who use “The Greater Good” or “For Your Own Good”.

    Save me from people who think they’re saving me.

  6. Revenant

    I do think, however, that there’s an argument that we don’t want them to fail right now, because our economy isn’t able to absorb all those extra job-seekers who would become unemployed.

    Our economy would absorb it just fine. The Big Three’s current contribution to the economy is negative. That’s why they need a bailout. Their workers are consuming more wealth than they produce.

    It would cost the *government* a lot of money, because they’d have to pick up unemployment benefits. But since the bailout is costing the government something like five to ten thousand dollars per month for each job “saved”, they’d probably be better off if the workers went on the dole instead.

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