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American system of bailouts needs rethinking

Nick Fickling

The news from London is that Prime Minister Gordon Brown has chosen to nationalize the mortgage lender Northern Rock as a way to secure the $107 billion in loans and mortgage guarantees his government has provided in recent weeks.

Brown’s solution alleviates the problem and yet does not reward high-risk investors.

This is in stark contrast with the way similar crises have been handled in the United States.

Sen. Clinton wants a 90-day moratorium on foreclosures and a five-year freeze on the monthly rate for sub-prime mortgages. The Bush Administration is brokering an agreement with lenders so that mortgage defaults do not spiral out of control. So what about my mortgage getting a subsidy or my bank getting told to reduce my rate? As far as I can tell, responsible borrowers and lenders are being asked to bail out the irresponsible in society.

In any free-market economy, “nationalization” is a dirty word and is an approach that any self-respecting conservative would rail against. After all, Republicans prefer tax cuts to subsidies or bailouts. Just ask any oil company trying to do business in Venezuela: Chavez is trying to nationalize everything that moves. And yet, in the past eight years the Bush Administration has not exactly allowed the market to rule when businesses, industries, towns, cities and citizens have landed in difficulties due to actions either within or outside their control.

Shortly after the U.S. invasion of Iraq, the U.S. airline industry was bailed out to the tune of $3.1 billion. This followed an earlier airline aid package. Both bailouts can be seen as Bush responding to dire warnings of financial collapse from airline bosses. Should not the costs associated with added security have been borne by the air traveler and not all taxpayers? Many argue that 9/11 was used by the airline industry to avoid pre-existing difficulties they already faced.

Hurricanes, fires, floods and other natural disasters result in Federal disaster area declarations and direct assistance from the Federal government. Enormous no-bid contracts essentially turn large private U.S. companies into the equivalent of state-owned enterprises in terms of risk, yet they remain “geese that lay golden eggs” as far as investors are concerned.

U.S. taxpayers (i.e. you and I) foot the bill, and businesses and individuals benefit from our largesse. Should we not be adopting a bailout approach that ensures that the handouts and no-bid contracts are always given with strings attached? In New Orleans, we might insist that any rebuilding incapable of resisting the surge from a Category 5 hurricane requires the developer to insure the property. In California, we might be insisting that development in areas of high fire or flood risk have similar conditions attached. Why should we subsidize the high-risk schemes of others? If we are to assume this risk, then should there not be an upside for us as well?

As an example of the bailout of foolish and greedy investors and individuals, the sub-prime mortgage crisis is a classic. Nationalization may be a dirty word to Republicans and a complete anathema to a Republican president, but it may be that Gordon Brown’s approach is better for the economy in the long term than the schemes put forward by Sen. Clinton or President Bush. In Britain, the taxpayers are bailing out a company and helping ease the pain of the sub-prime disaster, but they get an asset that can later, through privatization, ensure some return on investment for the taxpayer. In many ways the Brown approach is more responsible. The Bush or Clinton proposals serve only to reward shifty lenders, shoddy business practice and poor investment choices by individuals.

Shouldn’t our government expect more from the recipients of our tax dollars than just a snicker and a smile?


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