International Herald Tribune Editorial - B is for Bailout, C is for ...

International Herald Tribune Editorial - B is for Bailout, C is for ...
Copyright by The International Herald Tribune
Published: September 10, 2007


When President George W. Bush recently announced a plan to help trouble American homeowners avoid foreclosure, one of his aides made a point of saying, "We are not using the b-word" - bailout.

But a bailout it is. A government bailout is aid to people or industries in financial distress. It shields them from the full losses they would incur if left entirely to the vagaries of the market. A bailout is justified when remedial assistance averts even greater harm to the economy.

Bush's plan meets those criteria. Its most direct relief measure would allow an additional 80,000 at-risk homeowners to refinance their loans through the Federal Housing Administration, on top of 160,000 already eligible. Though not likely to be aggressive enough - some 2 million homeowners are now headed for default - the refinancing effort is a good first step. Properly executed, it would help families and communities that could otherwise be ruined.

Similarly, the Federal Reserve's recent efforts to grease the financial markets also amount to a bailout. The meltdown in the market for subprime-mortgage-related debt - a market fostered by Wall Street - has sharply curtailed lending, threatening a cascade of business and financial failures. To parry the threat, the Fed has lowered its lending rate, injected tens of billions of dollars into the markets, and also allowed banks to funnel extra billions to clients who presumably would otherwise fail and wreak havoc on the economy.

Indeed, the Fed's ongoing bailout of Wall Street added to the political pressure to help ailing homeowners. It was simply too unseemly for the government to take steps that aid Wall Street bankers without aiding the far more vulnerable people caught up in the same crisis.

Now, policy makers from Bush on down must acknowledge the bailouts for what they are - government interventions in private markets to correct for something that has gone wrong. They may be squeamish about using the "b-word." But if there is no acknowledgment of a bailout - no "b-word" - there will be no grappling with the "c" word," complicity.

The White House is complicit in the current mess for advancing an absolutist notion that self-policed markets self-correct, and therefore require little or no regulation. The Federal Reserve and other regulators are complicit because they failed to rein in clearly reckless lending. The Congress of the bubble years is complicit for failing to oversee the derelict regulators. For the current bailouts to ultimately do more good than harm, those failings must be corrected via stronger laws, regulation and oversigh