The popular thing to do these days is to offer to help borrowers in trouble. Everybody’s doing it. Lenders are doing it. GSEs are doing it. Lawmakers are doing it. It’s the in thing right now.

But I have a few problems with this new fad.

First, many of the people who are now in trouble took on the risks of exotic loans and a bubbly housing market head on. They were speculating that prices were going higher. They rolled the dice and lost. You don’t see casinos offering to pay losers back. My broker doesn’t pay me back when I make a losing trade. Why should we taxpayers and bank depositors bail out people who made bad investments?

Another problem I have is that many of these troubled loans are called, “liar loans,” for a very good reason. These people committed fraud. They are criminals. If anything, they should be punished not rewarded.

Finally, bailing people out of problems they are at least partially responsible for creates moral hazard. It sends a strong message that consumers/investors are not responsible for the decisions they make and causes them to take even less care in subsequent financial decisions. “Why worry about risk when the Feds will just bail us out if anything goes wrong?,” is already the mantra of 21st century, “investors.” This new fad only emboldens them.

IMHO, all the money currently being thrown at this problem could be put to better use helping people faced with real tragedy.
LIV