…representatives blithely ignore the injustice of their bailout schemes, claiming that the health of the entire financial system is at stake—just as they did with Long-Term Capital Management in the ’90s and Savings and Loans in the ’80s. But if the financial system ever does need these bouts on government life support, it is only because of decades’ worth of government interventions that have radically distorted private investments and camouflaged and shifted risks. To unwind these uneconomic policies and practices will be disruptive. But it is the only way to restore genuine financial health.
The question we face today is: Do we let the market function, penalizing primarily those who made bad investments—or do we unfairly foist damage on those who did nothing to cause it, while gifting boom-era borrowers and lenders with propped-up housing prices, lower mortgages, and easy credit?
There is no conflict between individual responsibility and a functioning housing market; to the contrary, the second requires the first. If we let the market function, home values would fall to some market bottom, new buyers would eagerly seize on lower home prices, borrowing from lenders who would have learned to lend rationally—and mortgage-backed securities would be valued accordingly.
The bailout policy, on the other hand, is creating indefinite uncertainty about home values and mortgage-backed securities, exposing taxpayers to trillions of dollars in future risks, further devaluing our savings through inflation, encouraging more irresponsible behavior in the future, and creating destructive new government interventions that destroy the vital protection of contracts.
Clearly, the just and the American solution is for all of us to tell the government that we will take responsibility for our decisions, and that no one has the right to make anyone else pay for his mistakes.
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