Barney Frank’s Lame Excuse for Bailing Out Irresponsible Borrowers

Why on Earth should Congress bail out subprime borrowers who took out bigger mortgages than they could afford (especially since some of them exaggerated their incomes to get those mortgages, or borrowed to live beyond their means so that they could buy big houses and fancy cars)? Yet many in Congress are moving to do just that.

In Sunday’s Washington Post, Congressman Barney Frank (D-Mass.) adds a lame new excuse for his proposal to bail out people who borrowed so much (and made such small down payments) that their mortgages are actually bigger than the current value of their homes. He would reward those borrowers by writing down their mortgages to their homes’ “current market value” (a write-off that by definition would not apply to thriftier, more responsible borrowers who made larger downpayments), even though he admits that for some of them, their plight is the result of “their own irresponsibility.”

Frank’s excuse? To prop up property tax collections by local governments. He complains about “a drop in the tax revenue” in “communities where foreclosures cluster.”

Talk about a lame justification for bailing out irresponsible people. During the real estate bubble, local government revenues increased like crazy as property values — and thus property taxes — skyrocketed. As a result, public employee compensation grew to absurd levels. In New Jersey, many public employees can retire at age 55 for close to their full salary. In Washington, D.C. suburbs like Arlington, Virginia, even teachers — who are far from the best paid public employees — now have generous compensation packages that average over $100,000 annually, including salaries of over $70,000, and pension and other benefits worth around $30,000 annually, far more than most private-sector employees receive.

With a little belt-tightening, local governments could easily make do. But instead, they’re doing just the opposite. Arlington County, Virginia, has adopted a so-called “austerity” budget that increases spending by 5.3 percent! That’s not austerity — it’s profligacy.

The real estate bubble needs to pop. Until it does, the economy will not experience sustained growth. The government should stop trying to artificially prop up home prices, which just delays the inevitable. Doing so encourages sellers to keep their homes on the market for months on end at artificially-inflated prices no buyer will pay for, in the vain hope that the government will come along and buy the home at that inflated price (calls for the government to “stimulate” the economy encourage this mindset).

As George Mason University Law Professor David E. Bernstein notes, some would-be sellers simply refuse to sell their homes at their true current market value, stubbornly insisting instead on receiving the price at which their home was assessed at the height of the real estate bubble.

Bailing out out the irresponsible will encourage people to behave irresponsibly in the future and gamble on home prices rising, by taking out mortgages bigger than they can afford in the belief that the government will bail them out if home prices fall. That’s what economists refer to as a moral hazard.

Eventually, it will also harm responsible borrowers in the future by encouraging lenders to increase interest rates on future loans to hedge against the possibility that the government will come in and force the lender to write off some of the mortgage if home prices fall

In the meantime, American politicians’ support for bailouts that shower money on irresponsible borrowers, and their apparent unwillingness to let borrowers suffer the consequences of their financial irresponsibility, are leading to a loss of confidence in our economy by international investors. That’s driving down the value of our currency and drying up investment, harming our economy.

As a Washington Post columnist who often favors government meddling in the economy concedes, “The United States is throwing money at its economic difficulties because it sees a threat to its prosperity and also to the wider world. For this, the world scorns it. Investors are responding to America’s economic activism by dumping dollars the way they once dumped dot-com stocks. The would-be saviors of the world economy can no longer afford lunch in Europe.”