It is a time-honored tradition. When big US companies get in trouble, they turn to the US government for financial help. Even Chrysler got big loans from Uncle Sam three decades ago. Cerberus is unlikely to be able to get that done again.
Now large banks want the Feds to take on part of the risk of home loans, probably by having the FHA guarantee certain subprime loans which are candidates for being refinanced.
As The Wall Street Journal points out, the plan has one flaw. "If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss," the paper writes.
That puts Congress and the Administration in a very bad place. If the economy moves into recession and defaults accelerate they can be blamed for not having created a safety net for homeowners. If the banks do get support for moving risk off their balance sheets why shouldn’t other business, pinched by recession, also get federal aid. The US could move in the direction be being a business welfare state.
Tax-payers who do not have mortgage problems will end up paying for almost any of these programs through taxes to cover government losses. No matter how tempting it seems to help borrowers who could lose their homes, it is called a "free market" system for a reason.
Undermining the most broad principal of the US economy is not worth the possible short-term benefit.
Douglas A. McIntyre
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