A taxpayer bailout of distressed homeowners would be expensive, unfair to the vast majority of homeowners and renters who have made prudent financial decisions, and set a troubling precedent that would invite reckless behavior in the future. What's more, a bailout will not stop the inevitable correction in home prices, and is unlikely to prevent the associated economic repercussions.Thanks, Alan.
A majority of subprime loans during the past few years have been cash-out refinance loans. Many subprime borrowers have extracted, through cash-out refinancing, much more than they ever put into the house in the form of a down payment. Would they be eligible for a bailout? How about people who chose a "stated income" option, so they didn't have to document their income and lied on their loan applications?
Would a bailout fund be limited to those with certain incomes or home values? Would there be an asset test, or would people with two brand new cars in the driveway or six-figure stock portfolios qualify? What kind of asset test?
It is self-evident that any bailout fund will be complex to administer, as well as arbitrary and unfair. While the plight of many who were caught up in the housing mania is tragic, a bailout package would almost certainly reward the least deserving. Those facing the greatest risk of foreclosure -- and presumably those who would get most of the taxpayer aid -- are those who bought a much more expensive house than they could afford, spent the equity of their once-affordable home, or lied about their income to qualify for a loan they otherwise would not have received.
Policies designed to suspend the laws of economics inevitably produce unintended consequences. Today's housing bust is itself the unintended consequence of an easy Federal Reserve monetary policy designed to cushion the economy from the fallout of the bursting of the tech bubble.
UPDATE: Arnold Kling agrees.
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