Help for Subprime Borrowers?

Peter Coy

At first glance, helping out subprime borrowers who are in a pinch seems like a no-brainer. How can the government stand by while people get thrown out on the street because they can't make their mortgage payments?


Indeed, two top Democrats have already put forth ideas. Senator Hillary Clinton, who's running for president, wants a federally mandated "foreclosure timeout." Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, also favors steps to protect homeowners from foreclosure.

Most economists are skeptical. They're afraid that if government steps in to bail people out of bad decisions, it will set a dangerous precedent. Borrowers will be even more likely to throw caution to the winds the next time because they'll be confident that they won't have to suffer the consequences if things go wrong. In economics lingo, this is "moral hazard." What about people who were misled by unscrupulous predatory lenders? Well, the free-market economists say, it's too bad for them, but people won't be so trusting next time if they see what can go wrong.

Here's a link to an article published by the University of Pennsylvania's Wharton School of Business that thrashes out the pros and cons of bailouts--and concludes that they're probably a bad idea.

Before it's here, it's on the Bloomberg Terminal.