Mises Wire

Bush to Provide for the New Socialist Man

Bush to Provide for the New Socialist Man

The media is reporting that George Bush has ruled out a government bailout of mortgage lenders, but instead, the Bush package is sure to provide indirect bailouts for homeowners in debt up to their eyeballs. This is from the Financial Times:

“A federal bail-out of lenders would only encourage a recurrence of the problem,” he said. “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford.”

 Mr Bush said lenders had “a responsibility” to help people keep their homes by renegotiating mortgages. “There are many American homeowners who can get through this difficult time with a little flexibility from their lenders or a little help from their government,” he said. “So I strongly urge lenders to work with homeowners to adjust their mortgages.”

So the government won’t directly bail out irresponsible homeowners by dropping cash in their personal stash, but instead the Bush administration is going to force — or aggressively persuade — lenders to “adjust” their mortgage contracts with those facing bankruptcy or financial stress. So the government’s plan for the mandatory renogotiation of private contracts is not a bailout? Bush’s plan would include an expansion of the Federal Housing Administration (FHA) for the purpose of refinancing more subprime mortgages. One pundit says this plan resembles a nationalization of the housing market. So the message is that when irresponsible people make the choice to purchase homes that are beyond their means, and indulge in irresponsibly “creative” means of financing in order to afford their speculative endeavors, they should be rewarded with a) an expansion of current government programs to help stem the tide of fear and calm and/or rally the markets in their favor, and b) the “adjustment” and renegotiation of a signed contract allowing them a more affordable means of maintaining their currently unaffordable lifestyle that was the result of reckless choices. Also,

Democrats on Capitol Hill and on the presidential campaign trail have called for government support for subprime borrowers and a clampdown on rogue lenders.

I understand and agree as to the irresponsibility of “bad lenders” — the financial contracts they are peddling are obscene. However, as I wrote here (See “Will the Federal Reserve Create the New Socialist Man?”), it is the government and the Federal Reserve who have contrived this whole mess in the first place. And individuals make the choice to drown themselves in debt for the sake of living a lifestyle they want but cannot finance. It is the debtors that agreed to and signed the contracts because they were void of self-control. They were not forced — via the threat of violence — to buy houses and indulge in a lifestyle which they likely couldn’t maintain in the long term.

Lastly, another look at why the financial markets are anything but free market: “Credit markets initially rallied as investors anticipated Mr Bush’s initiative would reduce the number of loan portfolios going bad.”

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