The moral imbalance of bailouts

When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes — built in risk-prone areas — were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor’s house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she’ll also get no help from us unless she or her employer could afford insurance.

But the government is — we are — bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she’s out of luck.

Perhaps every sick person without insurance should march on Washington to show that they’re a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, “Bail me out.”

In today’s NY Times, Floyd Norris argues that it’s worse than that, for the government is bailing out the most irresponsible offenders who put themselves and the economy at the worst risk. Lehmann wasn’t so bad, so it got nothing. Fannie Mae, Freddie Mac, AIG, and those teetering now will get saved in some form because of the greater impact of their greed and irresponsibility.

Lehman did not measure up because its chief executive, Richard S. Fuld Jr., simply was not reckless enough as he ran Lehman into the ground.

Had he had the foresight to make a lot more bad bets in the derivatives market, the government would have feared financial chaos and might have nationalized Lehman, just as it nationalized A.I.G., Fannie Mae and Freddie Mac. Or it would have subsidized a takeover, as it did for Bear Stearns.

The Paulson-Bernanke Doctrine is not “too big to fail.” It is “too reckless to fail.” If you get your company into enough trouble to threaten the financial system, Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the Treasury secretary, won’t let you collapse.

The problem for those left holding the bag — us — is that we have no leverage ourselves to demand conditions in return for our involuntarily generous rescue. Before any bailout is agreed to, shouldn’t our representatives demand responsible regulation in the future and repercussions for irresponsible management in the past — or, for that matter, demand a new look at our national priorities (helping out that neighbor with her cancer and her foreclosure)? No, it’s an emergency. We need decisive action to avoid disaster. No time for that. Of course, we could have avoided this disaster with responsible regulation and management in the past.

I believe in the market but I also believe that government must decide when to regulate just enough. (That is the essence of why I am a Democrat.) Our government has failed us and will continue to, I fear. What we need is a new moral scale. If you put yourself at risk, it is your responsibility to protect against that risk. If you put the rest of us at risk, then you will suffer the consequences but we will have sufficient oversight, demanding sufficient transparency to try to stop you from doing harm. If fate deals you a bad blow, then we need a structure to help protect you (that is, health insurance is just as great a national obligation as after-the-storm and after-the-fall bailouts).