April 19, 2008

April 19, 2008 | Commentary on Economy

Tough Love

The sky is falling.

At least, that's what politicians who make a living out of pandering to the fear of the masses would like for us to believe. In this busy season of finger-pointing, it's easy to see why our elected officials would like to flex their political muscles for the constituents back home. But perhaps our country would be better served if our elected officials were to plot a more sensible and responsible course, even if it is not the most popular.

A volatile stock market, high gas prices and a rise in unemployment claims have all contributed to the perception that our economy is in shambles. And while economists continue to argue about the definition of a recession and whether one has already begun, we would do well to slow down and understand what got us here. Furthermore, we should look with skepticism at those who promise us a quick fix.

Much of the blame for the current situation centers on the housing sector, which has witnessed a dramatic rise in foreclosures and drastic slowdown of home sales. As my colleague Ron Utt points out in a recent paper, the seeds were first planted back in the mid-1990s when mortgage lenders made it a lot easier for families with poor credit to receive loans.

Although the number of homeowners increased, it's now becoming clearer that the rosy exterior covered major problems in the housing sector. We now know that as folks began to default on their mortgage payments, investors in the financial markets were left to pick up the tab.

Rather than putting the brakes on this dangerous course, Congress' response to the situation seems to endorse bad financial decision-making. Exhibit A is the Senate-led "Foreclosure Enhancement Act," which includes mortgage-contract rewrites, tax credits for foreclosed homes and multi-billion-dollar slush funds for state and local governments. In layman's terms, irresponsible lenders would be let off the hook for issuing bad loans, and taxpayers would be stuck with the bill.

Compounding the mess was the federal government's recent financial support for the sale of Bear Stearns to another major investment bank. Although there are valid arguments for the federal government's role in the situation, wouldn't allowing the free market to operate have been a better alternative? Or are the supporters of the financial package correct in saying that a crisis was averted?

Therein lies the danger of how Congress responds to the current financial situation. As tempting as it may be to support an expansion of the federal government in what some perceive as an economic crisis, rewarding bad behavior and increasing bailouts may only hamper our ability for us to get out of the current mess.

When we were young, our mothers would tell us that we had to take our medicine if we wanted to get better, even if it tasted terrible.

We may not like to hear it, but unless we stop supporting politicians who are more interested in scoring cheap political points and patting themselves on the back by telling us what we want to hear instead of giving us some tough love, we may only be extending our country's financial ills.

Israel Ortega is a Senior Media Services Associate at the Heritage Foundation. www.heritage.org.

About the Author

Israel Ortega Contributor, The Foundry
Accounting

First Appeared in the San Diego's La Prensa