Presidential candidates insist that Washington needs fixing, and we in the commentariat love to expose hypocrisy, pork-barreling and gridlock. So it feels awkward to admit the truth about the subprime meltdown. First Congress produced a timely and well-crafted stimulus. Now it is working on proposals to help homeowners, and with one ugly exception, the recommendations are sound.
Why, you might ask, even bother to help homeowners? They have no moral claim to government assistance. People who are falling behind on their mortgages generally aren’t poor, since the poor tend not to buy houses in the first place. They generally aren’t deserving, since they chose to take on mortgages they could not afford. When thousands of needier Americans languish on the waiting list for housing assistance, there’s no compelling case for lavishing federal dollars on the profligate middle class.
But there is a case for preventing profligates from harming bystanders. When homeowners fail to pay their debts and go into foreclosure, their homes stand empty and attract looters and squatters, dragging down the value of neighborhoods. Falling home prices depress consumer spending; the economy gets rockier, driving home prices down further. It is this threat of a negative spiral, not sob stories from homeowners, that warrants limited federal assistance to families facing foreclosure.
Of course, some fall in house prices is necessary. But absent federal action, market failure will cause real estate to fall further than the basics of supply and demand would justify.