Bailout frenzy triggers backlash

Brian Carpenter bought his Woburn, Mass., home in 1980, and he hasn't missed a payment. It wasn't always easy. With three children, it meant driving old cars, clipping coupons and brown-bagging it to work.

He now sees the federal government committing nearly $1 trillion to bail out banks and struggling homeowners, and nearly $800 billion to offset economic damage caused by reckless lending and borrowing. What's in it for Carpenter? Probably $13 a week, the middle-class tax cut in the stimulus bill.

"What about people like me who are playing by the rules, who got a mortgage we could afford?" said Carpenter, a computer programmer. "Maybe I'm too old school, but you sign on the bottom line, and you're responsible for it."

Carpenter, 52, is among the vast majority of Americans who work, pay mortgages, borrow responsibly and now find themselves facing the bill to bail out those who didn't. They have lived within their means. Now they're asking: Why?

The anger underscores the dangers that government faces in private-sector rescues. While such interventions aim to benefit everyone by preventing severe damage to the economy, they also risk encouraging irresponsible behavior. Economists call this "moral hazard."

In other words, if homeowners believe the government will lower their payments if they fall behind, they won't have as much incentive to continue paying mortgage bills on time.

"We're telling individuals, 'Go ahead, buy a bigger house than you think you can afford because the government is going to bail you out,' " said Dan Mitchell, an economist at the Cato Institute, a libertarian think tank in Washington, D.C. "If you're responsible, if you do the right thing, then you feel like a sucker."

Big hit for tax filers

The spending on bailouts and stimulus works out to the equivalent of $11,000 for each of the nation's approximately 160 million tax filers. Total costs, however, are expected to decline when the government sells its bank stakes after the system stabilizes. But most Americans, 67 percent, don't expect this spending to improve their financial positions, according to a CNN/Opinion Research poll conducted last week.

At one level, the massive government intervention is aimed only at certain segments. For example, 93 percent of homeowners are current on their mortgages. Obama's $275 billion housing plan, unveiled last week, aims to help as many as 9 million homeowners who are facing foreclosure or struggling to pay their mortgage.

More than 140 million Americans are working, compared with about 12 million unemployed. The $787 billion stimulus signed into law extends unemployment benefits and subsidizes health-care coverage for the unemployed.

But the hope is that this targeted intervention will stabilize, then lift the economy. Many economists say foreclosures and unemployment will soar without such spending. The economy has slipped into a downward cycle of tightening credit, falling spending and shrinking demand, resulting in rising layoffs and foreclosures that begin the cycle again.

Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass., agreed that it is unfair that people who made good decisions pay for those who didn't. But the costs would be much higher without government help to boost demand, create jobs and stabilize the housing market.

"When you get a situation where the economy is in a free fall, the government's role is to fix the system," Behravesh said. "What's in it for everyone is this great recession doesn't morph into the Great Depression, version 2.0."

At its worst, nearly half of first mortgages were in default during the Great Depression and one in every four workers was jobless. Double-digit unemployment rates lasted for more than a decade. The current unemployment rate is 7.6 percent.

Sometimes it's bad luck

Not all people in trouble now acted irresponsibly. Some just had bad timing.

Leigh Bigger, a Massachusetts Department of Youth Services caseworker, thought she was helping herself and the neighborhood when she bought a Brockton three-decker for $357,000 in 2004 and evicted a drug dealer on the first floor.

But when she tried to refinance her adjustable-rate mortgage a year later, her lender decided a three-decker was a risk and balked at giving her a fixed-rate loan. She got one eventually, but at an 8 percent rate, increasing her payments to $3,800 a month from $2,800. She then had trouble filling her rental units, and couldn't keep up the mortgage.

She's been trying, without success, to negotiate a lower interest rate with her lender.

"I'm a Christian, God-believing person, whatever happens in my situation, I am going to be OK," said Bigger, 45. "Overall, we do need a sacrifice and bailout to help people. Somehow, we have to help people who are keeping neighborhoods intact."

Many others take a harsher view, objecting to the idea of taxpayer money going to help people who borrowed and spent without regard to consequences. "I don't appreciate paying for someone else's mortgage," said Ashling Gowell, 38, a stay-at-home mother who lives in southeastern Massachusetts. "I almost feel it's bailing out someone who overspent on their credit card."

Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, said he understands the frustrations and expects Congress to pass laws that would prevent errors and abuses that sparked the crisis.

In the meantime, Frank said, government must act to stop the housing slide, which undermines home values, banks, consumer spending and the broader economy.

"You are not going to get us out of this hole until you can deal with this," Frank said. "If enough people do things unwisely and they create a systemic risk, if you say tough, they take the rest of us with them."