Psychologists speak of what they call an action bias: In the face of a traumatic experience, most people have a strong impulse to do something, even when the action produces an outcome that leaves you worse off than before.
The impulse arises in most of us, but it seems stronger in politicians. Unfortunately, that’s what’s happening in the wake of the mortgage crisis.
People have lost their homes, banks are facing losses. Since the Federal Reserve bailed out Wall Street’s Bear Stearns, shouldn’t we do something for Main Street? We wouldn’t want to be accused of being do-nothing politicians, would we?
And so a bipartisan group of senators last week announced they were ready to begin serious work on a mortgage relief bill. Details were still being worked out, but the legislation is expected to include some $200 million for counseling programs for homeowners facing possible foreclosure, $10 billion in tax-exempt bonds for local housing authorities to refinance subprime loans, grants for local governments to buy foreclosed properties, and a tax credit for purchasers of foreclosed homes.
In this case, however (as in more cases than most politicians understand) having the government do nothing really would be the best course.
Economists have been warning for at least a year that the housing bubble was likely to burst as home prices rose well above the level of affordability for many Americans.
Stories abounded last summer about the perils of subprime lending, fed in part by a loose-money policy at the Federal Reserve.
Too often lenders abandoned responsible scrutiny of borrowers, lending money to people who had no business, based on their income and realistic prospects, buying such expensive houses.
A correction was inevitable, and, as usually happens when markets are allowed to operate, it is happening. Some people are losing houses, and plenty of lenders are taking losses.
But if it is allowed to play out, the end result will be more realistic home prices and financial institutions that have relearned prudence.
Unfortunately, Congress is unlikely to leave well enough alone. So lenders and borrowers will learn that if they make mistakes, Uncle Sam will bail them out, the taxpayers will pay, and the correction of the market will be delayed.