Megan McArdle’s excellent post on the problems with the various bailout plans makes a point that I’ve been meaning to get around to:

Bailing out home gamblers by freezing their mortgage rates, extending their loan terms, or otherwise forcing the banks to give them free money, will teach them the same thing we are trying hard not to teach Wall Street:  if you gamble big enough, Uncle Sam will pick up your losses.  Moreover, it’s not exactly the cleverest idea to levy a huge regulatory taking on an industry that’s already really shaky, and threatening to take the rest of us down with it in the event of a collapse.

Any bailout should not aim to help either homeowners or lenders for their own sake–we are helping them because if we don’t, the rest of us will suffer more than the cost of the bailout.  The health of the Fort Meyer housing market is not the proper province of the federal government, no matter how distressing the locals may find it.

Exactly right. There has been quite a lot of talk, not all of it uncritical, about the moral hazards (def.) that attend to bailing out companies that have been brought down by their own stupidity – or, for that matter, by the smartness of others or even sheer chance. If failures aren’t followed by sufficiently serious consequences, there’s that much less motivation not to repeat them.

But the point Megan is making here is that the same thing applies to irresponsible homeowners, too: any bailout plan that focuses on giving free money providing financial relief to people who are struggling to pay their mortgages will be one that relieves Main Street of need to face the consequences of its failures in very much the same sorts of ways that everyone is complaining about in the push to bail out Wall Street. That’s not to say that this absolutely shouldn’t be done if the need is really there – though what exactly that need would come to is of course a crucial issue. But we’ve all (or nearly all, at least) taken part in the sorts of foolish decisions that got our economy into this mess, and taking money from homeowners who lived within their means to give to those who didn’t is no less problematic than showering taxpayer dollars on the Lower East Side.