Is there any way to bailout the sub-prime mess without bailing out speculators and lenders? Treasury Secretary Paulson thinks so – he allegedly has “no interest in bailing out lenders or property speculators.”
Except, if you bail out the borrowers, you can be assured that you’re bailing out some speculators – it would require an impossible bureaucracy to ensure that you didn’t, and probably at the expense of bailing out people who you feel are deserving of assistance, in the process. Consider: I’m certain that there are thousands of people who were “speculating” in the true sense of the word on a single, owner-occupied property, the payments for which they could barely afford, in hopes that they could sell it for a killing a few years down the line. How precisely are these people any different from Joe McFlipper, who went all-in on a dozen run-down investment houses? If there is a difference, it is merely one of degree.
A bailout effort will rely on either a direct write-off/repudiation (highly unlikely) or taxpayer subsidized assistance to the beleaguered borrowers. However it happens, the end result is to insulate the lending and depository institutions from failure, which is exactly the fate they should suffer once it’s been revealed that they’ve mismanaged their “investments,” (e.g., New Century Financial, Northern Rock). To Paulson’s chagrin though, this sort of market-correction, the necessary failures, cannot be allowed to happen without causing wholesale financial collapse.
