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EYE ON THE PIE: Crisis pits fairness against urgency

October 6, 2008

As these words are written, we do not know what Congress will decide to do about the mortgage mess. But it is clear folks are angry about the inequity of rescuing borrowers, lenders or traders with funding from the pockets of the innocent.

Among the "villains" are home buyers who took on mortgages they could not afford. Also marked for sanctions are over-eager lenders, highly paid executives, and those who dealt in "innovative" financial products linked to mortgages.

Those who rejected adjustable-rate mortgages, those who conscientiously lived within their means, do not sympathize with a bailout of those who face foreclosure. Workers struggling to pay medical bills and the high costs of prescription drugs find it strange that $700 billion might be used to protect banking institutions.

Main Street business owners, who take risks every day, have little sympathy for Wall Street wizards who have earned millions buying and selling mysterious, risky financial instruments. The idea that taxpayers should save these people from the consequences of their actions is alien to those who insist that individuals accept responsibility for their behaviors.

There is, however, another viewpoint. Problems in the banking system are transmitted quickly to businesses and households everywhere. Everyone who wants to borrow money will face lenders who are hesitant to make loans because they don't know if they will be repaid. This means the business owner and the consumer alike will be refused loans or charged high fees and high interest rates.

If banks are unwilling to risk lending or don't have the funds to lend, what happens to the business owner who needs a loan for new equipment to stay competitive?

If bankers and other financiers are hesitant to lend, credit card companies (that need to borrow to pay merchants) might suspend use of their cards. What does the consumer do without credit cards? It means a decline in store and Internet sales and the loss of jobs for retail, wholesale, transportation and manufacturing workers.

Do state and local governments get frozen out of the credit markets when tax revenue falls because incomes and sales are down? Which public services do governments close down as they try to borrow funds to get them through the downturn?

If you believe the private sector can and should resolve its problems, then no government bailout is appropriate. Let the banks and the homeowners suffer whatever consequences await them. Don't burden the innocent with the costs of salvaging the residue of an era of excess.

While some say, "The competitive market will solve the problem," others ask, "When?" They see the innocent suffering if there is no bailout. They say the origins of those problems do not matter as much as the potential for extensive economic distress. Fairness is not as important as the urgency of action to prevent widespread calamity.

If the banking crisis is not resolved quickly, economic distress will spread throughout our society. However, the opponents of a bailout are correct to insist that the solution links our sense of justice and our demands for responsibility to our efforts to escape further economic problems. This is not an easy task.

If we promise aid to borrowers when they get behind on their mortgage payments, what incentive do they have to stay out of trouble? If we bail out the lenders today, what message are we sending about responsibility tomorrow?

And, lest we forget, there are vacant homes all across America. We must be good stewards of the labor and materials used in these homes. Unused housing is as serious as unemployed people. A responsible program to reoccupy these homes is necessary.

This is another time when there are many sides of an argument and more than one is correct. Now let's see if we have learned how to solve problems together.



Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
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