The Ethics of Bailouts

Regular readers of this space will remember back in June when I mentioned a bailout package that was expected to pass in Congress, effectively offering $4 billion in aid to people being foreclosed out of their homes. This has now happened; the bill passed today, and the President is expected to sign it quickly now that his domestic policy advisors have found a way to blame the delay on Democratic leadership in Congress stonewalling for six years (even though they’ve only had control of Congress for 19 months at this point). We’ve already covered the ethical issues inherent in the bailout, in the sense that it provides wildcat speculators and unscrupulous lenders with as much relief as it does legitimate homeowners and innocent people hurt by the mortgage crisis. But the current set of legislation brings up an even thornier issue…

As noted in an article posted today by the Associated Press, two of the big winners in this maneuver are going to be Fannie Mae and Freddie Mac, the giant mortgage companies threatened by the ongoing crisis. Instead of having an additional wave of foreclosures wipe out their assets (and stick them with real estate they can never recover their losses on), the new bill will allow millions of borrowers to refinance their loans, in many cases receiving better offerings from the Federal Housing Administration. This will, in turn, save thousands of jobs, calm housing and money markets (foreign and domestic), and prevent additional ripples in the economy. All of this is to the good, but critics of the measure have been pointing out that Fannie and Freddie have made (and continue to make) huge profits when real estate markets are good, and have used their money (and political clout) to resist the sort of government regulation and oversight that would have prevented the mortgage crisis in the first place…

Which brings us to our ethical conundrum: if these companies not only fell victims to a crisis they helped to create (by precipitating the mortgage crisis with sub-prime loans) but also helped to undermine, prevent or destroy the Federal regulations that would have prevented the crisis in the first place (with lobbying and other political maneuvering), does the government now have an ethical responsibility to bail them out of their own folly? Even granted that the over-all effects will serve the short-term interests of the country, is it worth the potential long-term risks of large companies doing asinine things, blithely certain that if they manage to create an international financial crisis, the U.S. government will jump in and bail them out?

The problem with most preventative measures is that while the potential risk of harm in the future is not known, the definite harm of spending large amounts of money in the future to prevent that risk IS known. Thus, many people will choose to gamble on a future disaster not happening so that they can spend money on other things in the present. If our government routinely steps in to prevent those disasters from ever coming home to roost, then why should any business venture spent its own money in the present to prevent a potential crisis in the first place?

Of course, the concrete side of this issue is that the bill in question will prevent thousands of people from losing their jobs, millions of people from losing their houses, and (at least potentially) all of the rest of us from having the current recession get even worse. The question is, if the people who caused this mess effectively dug their own pit and willfully jumped into it, do we have an ethical responsibility to make sure they don’t do it again? Or should we just take care of all of the ordinary people threatened by the crisis and not worry about the future?

It’s worth thinking about…