My View: Bailout a recipe for disaster

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September 30, 2008

My View The Salem News Tue Sep 30, 2008, 05:44 AM EDT

A monumental shift in economic policy hit America two weeks ago when the government nationalized Freddie Mac and Fannie Mae, the largest holders of mortgages in the country. Several days later, the government took over AIG, America's largest insurer, for $85 billion.

This system of corporate welfare is un-American. Years ago, banks helped people buy houses by regulating how much of a mortgage they would issue. Rules protected homeowners from borrowing too much.

When we bought our first house, the bank allowed us to put a maximum of 28 to 30 percent of our annual income towards our mortgage. Banks often required 20 percent of the purchase price as a down payment. Otherwise the homeowner had to convince an insurance company to insure the bank against default. Leisa and I put down 10 percent and ate a lot of macaroni and cheese our first few years of home ownership.

Over the past few years, Congress has tried to provide home ownership for everyone. Mortgages were issued with nothing down. Debt-to-income ratios have been in the 40-to-50-percent range.

Many homeowners were set up to buy and borrow more than they could afford. And when housing prices began to decline, the dominoes started falling.

Easy money, no accountability and yes, greed, all came together in the perfect storm of financial trouble that we have today.

It is no surprise that we must now pay for the failures of the past few years. How to pay is the question.

Washington's approach in the past two weeks has been shocking. Rather than institute a rational plan, our government has been throwing huge quantities of our tax dollars into specific companies, nationalizing Fannie Mae, Freddie Mac, and AIG. And now it's asking for another $700 billion.

Nationalizing companies is an un-American approach to the problem. The United States has long preached to the world the virtues of democracy and free enterprise. But when the going began to get tough, the government folded and started to socialize the economy.

Where is the backbone of our leaders in Washington? We need courage to withstand political and economic pressures. We need a government that will exercise fearless leadership in this crisis.

The success of the U.S. is based upon the free enterprise system, under which companies can pursue innovation and find new avenues to make money. However, all innovation involves risk, and often failure.

If the US government removes the ability of companies to fail, we all become burdened with the costs, and no one learns the hard lessons. With every new bailout, the seeds for the next crisis are sown.

And for all the money government has spent to buy its way out, economists are not even sure that the bailout will work, according to the Wall Street Journal. A better plan was floated last week to insure the bad mortgages against default. This plan would charge lenders an insurance premium, bringing immediate income to the government and shifting the focus to the specific mortgages in default.

The number of mortgages that the government takes over would be much smaller, and banks would be motivated to make their mortgages work. In the bailout, banks can dump their bad mortgages and then make more bad mortgages.

An even better solution would be for private insurance companies to return to the business of providing private mortgage insurance policies, like those we purchased with our first mortgage.

America has grown into the largest economy in the world through free enterprise and open markets. We need congressmen with the courage to hold to these values.

¬¢¬¢¬¢

Richard Baker of West Newbury is the Republican candidate for Congress from the 6th Massachusetts District He faces incumbent John Tierney, D-Salem, in the Nov. 4 general election.

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