090202: Bailout Madness: Man Who Played By Rules See Unfairness

(Boston Globe) -- Brian Carpenter bought his Woburn, MA home in 1980, and 29 years later, he has never missed a mortgage payment. It wasn't always easy. With three kids, it meant driving old cars, clipping coupons, and brown-bagging it to work.

Now, he sees the federal government committing nearly $1 trillion to bail out banks and struggling homeowners, and nearly $800 billion to offset economic damage caused by reckless lending and borrowing. What's in it for him? Probably $13-a-week, the middle-class tax cut in the stimulus bill.

"What about people like me who are playing by the rules, who got a mortgage we could afford?" said Carpenter, 52, who programs building management systems for MIT Lincoln Laboratory. "Maybe I'm too old school, but you sign on the bottom line, and you're responsible for it."

Carpenter is among the vast majority of Americans who work, pay mort gages, borrow responsibly, and now find themselves facing the bill to bail out those who didn't. Over the years they lived within their means. Now they're asking: What for?

The anger underscores the dangers government faces in private sector rescues. While such interventions aim to benefit everyone by preventing severe damage to the economy, they also risk encouraging irresponsible behavior in the future. Economists call this "moral hazard."

In other words, if homeowners believe the government will lower their payments if they fall behind, they won't have as much incentive to keep paying mortgage bills on time.

"We're telling individuals, 'Go ahead, buy a bigger house than you think you can afford because the government is going to bail you out,' " said Dan Mitchell, economist at the Cato Institute, a libertarian think tank in Washington. "If you're responsible, if you do the right thing, then you feel like a sucker."

The spending on bailouts and stimulus works out to the equivalent of $11,000 for each of the nation's approximately 160 million tax filers. The total costs, however, are expected to decline when the government sells its bank stakes after the system stabilizes. But most Americans, 67 percent, don't expect this spending to improve their financial positions, according to a CNN/Opinion Research Corp. poll conducted last week.

Randy Schmid, 50, of Worcester, is one of them. A self-employed consultant, Schmid and his wife Dominika are renters. They looked into buying a home a few years ago. They hoped to find a house they could afford on a single income, so if one of them lost work, they could still meet their obligations. They didn't.

"If we would have lived beyond our means," he said, "we would have gotten a handout."

At one level, the massive government intervention is aimed only at certain segments of the population. For example, 93 percent of homeowners are up-to-date on their mortgages. Obama's $275 billion housing plan unveiled last week aims to help as many as 9 million homeowners who are facing foreclosure or struggling to pay their mortgage. More than 140 million Americans are working, compared with about 12 million unemployed. The $787 billion stimulus signed into law last week extends unemployment benefits and subsidizes healthcare coverage for the unemployed.

But the hope is that this targeted intervention will stabilize, then lift the economy as a whole. Many economists say foreclosures and unemployment will soar without massive government spending. The economy has slipped into a downward cycle of tightening credit, falling spending, and shrinking demand, resulting in rising layoffs and foreclosures that begin the cycle again.

Nariman Behravesh, chief economist at IHS Global Insight in Lexington, agreed that it is unfair that people who made good decisions pay for those who didn't. But the costs would be much higher without government help to boost demand, create jobs, and stabilize the housing market.

"When you get a situation where the economy is in a free fall, the governments role is to fix the system," Behravesh said. "What's in it for everyone is this great recession doesn't morph into the Great Depression, version 2.0."

At its worst, nearly 1 in 2 first mortgages were in default during the Great Depression and 1 in 4 workers were jobless. Double-digit unemployment rates lasted for more than a decade. The current US unemployment rate is 7.6 percent.

Not all people in trouble now acted irresponsibly. Some just had bad timing.

Leigh Bigger, a case worker with state Department of Youth Services, thought she was helping herself and the neighborhood when she bought a Brockton three-decker for $357,000 in 2004 and kicked out the drug dealer on the first floor.

But when she tried to refinance her adjustable-rate mortgage a year later, her lender decided a three-decker represented too big a risk and balked at giving her a fixed-rate loan. She got one eventually, but at an 8 percent rate that increased her payments to $3,800 a month from $2,800. She then had trouble filling her rental units, and couldn't keep up the mortgage.

She's been trying, without success, to negotiate a lower interest rate with her lender.

"I'm a Christian, God-believing person, whatever happens in my situation, I am going to be OK," said Bigger, 45. "Overall, we do need a sacrifice and bailout to help people. Somehow we have to help people who are keeping neighborhoods intact."

Representative Barney Frank, the Newton Democrat who chairs the House Financial Services Committee, said he understands people's frustrations and expects Congress to pass laws that would prevent errors and abuses that sparked the crisis.

In the meantime, Frank said, government must act to stop the housing slide, which continues to undermine home values, banks, consumer spending and the broader economy.

"You are not going to get us out of this hole until you can deal with this," Frank said. "If enough people do things unwisely and they create a systemic risk, if you say tough, they take the rest of us with them."

Jane Cummings, a 34-year-old software engineer from Hamilton, also has mixed feelings. She said she believes the government needed to do something to help the economy. But she added, "I don't think they should be bailing out people who aren't making good financial decisions. It's not fair, but I think we might have to bite the bullet."

Many others take a harsher view, objecting to the idea of taxpayer money going to help people who borrowed and spent without regard to consequences. "I don't appreciate paying for someone else's mortgage," said Ashling Gowell, 38, a stay-at-home mother who lives in southeastern Massachusetts. "I almost feel its bailing out someone who overspent on their credit card."

Certainly, said Steve Pratt, who co-owns a small healthcare consulting firm, there are people who deserve help, such as those who lost jobs and are struggling to pay mortgages. Unfortunately, said Pratt, 49, of Braintree, the bailouts reward people who were greedy, stupid, or both.

"They're not differentiating the people really in need from the people who took on too much debt and pushed it to the limits of what they could pay," Pratt said. "Personal responsibility got lost. Now, we're all going to pay."

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