Subprime Lending and Avoiding Consequences

I'm no economist. I don't carry cash because If I do, I spend it on needless stuff. The fact that I'm incurring large debts to finance an education when the resulting job market is consistently shrinking is not what financiers might call a "sound investment." So the nuances of this whole "bailout" thing is far and away out of my grasp. But I do know one thing, and that is that the subprime lending issue is at the center of the problem. Now people are defaulting on thousands of mortgages because subprime lending is an all-around absurd proposition that was destined to fail throughout its inception. And I know enough to understand that if a lot of really bad mortgages are piling up, and someone's buying them all, then great shall be the fall thereof.

What I do know, however, is that most problems, be they economic, social, political, or personal, have a common solution. See, with every choice comes a consequence. This is simple stuff. If you do X, you get Y. In the case of subprime lending (which is the practice of making high-interest loans to high-risk individuals) if you give someone a loan where they traditionally would not qualify, you take a sizable risk that they will default on that loan. And in a market where $600 billion is tied up in these high-risk loans, that's a recipe for disaster, which is a good term for what's currently going on.

The problem is that all the proposed fixes to this problem seek to avoid consequences. The $700 billion bailout was predicated on the bare assumption that if the government eats up all those bad mortgages, the market will recover and those mortgages can be sold several years down the road. Basically, the American taxpayer puts $700 billion of his taxes in escrow while we wait for the market to recover and gain ground, the government then unloads the bad mortgages, and we get our money back. And who gets bailed out? The guys who made these loans in the first place. They're trying to avoid the choice-consequence paradigm I mentioned earlier. The problem is that such a scenario poses an even greater risk to the economy. What happens if things don't go according to plan? Then the crap really hits the fan, taxes go up to compensate, and pretty soon a bigger chunk of my paycheck is going to Congress while corporate executive retain their lifestyles.

This is not good policy. Again, you don't need to know anything about economics to state that if you do something, attempting to evade the consequences usually makes things worse. The safest bet is usually to accept the consequences, take your medicine, and be done with it. If you lie to a friend about one thing, you normally don't (or at least shouldn't) keep lying to maintain that first lie. You sack up and tell the truth. If you smoke crack, you shouldn't go through your mom's purse to steal coke money; it'd be better to stop and check into rehab. It just makes the situation worse to avoid the consequences of one's actions. Which is exactly what Wall Street and Congress are trying to do. And who picks up the tab? The American taxpayer, many of whom understand this principle and live by it.

I've said this from the beginning. The answer is not to bail these companies out, but to let them fail. Cut off the cancerous limb to save the body. Let them spiral into bankruptcy. Sure, there will be hard times for all of us, but we're in a "damned if you do" scenario anyway. The only thing this bailout would do is trade one financial crisis now for another one years down the road. How long can we keep running from ourselves?

I've got backup too. Check out this opinion piece from Harvard lecturer Jeffrey A. Miron. As blasphemous as it might sound to the ears of capitalists continually seeking to avoid the messes they make, I hope there is no bailout. I hope those golden parachutes get shot down. I hope we just take our medicine now and ride it out.