August 29, 2007
Some Reflections on the Bailout Debate
Posted by Lisa Fairfax

On Monday Maryland held a panel discussion on the current credit/housing crisis. The discussion sparked debate about responses to the crisis and potential bailout solutions that are similar to those occurring in Congress. As far as I can tell, views about bailout options fell into three categories:

First were those who believed that we should not engage in any form of bailout. The rationale for such a view was that we should not be in the business of helping people who gambled and loss. Those who held this position, however, appeared to recognize that a total “hands off” approach may not be feasible given the potential for significant foreclosures and their impact on the housing market and the economy in general. However, it was clear that people in this first category would like any bailout solution to be as limited as possible.

Second were those who believed that any solution should distinguish between borrowers, allowing some relief for low-income borrowers, but not for others. I got the sense that this solution was premised on two notions. First was the notion that low-income borrowers have fewer resources to help themselves, and hence the risk of foreclosure in their cases was more severe. Moreover, the impact of that foreclosure would be more severe—that is, if such borrowers were to lose their current houses, they may have relatively few housing options, raising the specter of not just increased foreclosures, but also increased homelessness. It seemed that people in this category also believed that low-income borrowers were less blameworthy. That is low-income borrowers may have been more susceptible to hard-sale tactics, that—while falling short of fraud—may have nevertheless been objectionable. In contrast, people in this category viewed middle-income borrowers with less sympathy. This is not only because such borrowers were perceived to have more resources, but also because such borrowers were perceived as having the educational background that should have made them less susceptible to unfair lending tactics. In this regard, these middle-income borrowers appeared to be more at fault for their current situation, and thus less deserving of rescue.

Finally were those who believed that we should have a bailout solution that encompassed everyone. For these people, the subprime and near-prime lending industry had created a climate pursuant to which many homeowners had been talked into houses that they could not afford. People in this category believed that the crux of the problem was not borrowers’ conduct, but the failure to effectively regulate the industry. Moreover, people in this category shunned the effort to draft a solution based on the relative blame of borrowers.

The panel and ensuing discussion was fascinating because there was disagreement not only about the extent of the problem, but also about the feasibility of any solution. At core, however, people’s disagreement centered around their views of the market as well as their views about whether borrowers were “to blame” for their current situation and whether such blame should matter.

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