Housing slump causes U.S. to weigh another big bailout

Federal rescue efforts could match the $124 billion cleanup of the savings-and-loan crisis in the 1980s.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the February 26, 2008 edition

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By the time the Great Depression was over, a government-created corporation had become the banker for 1 in 5 American homeowners.

After the savings-and-loan industry faced a catastrophic meltdown in the '80s, the US government spent some $124 billion to clean up the mess.

Get ready for the next chapter in government-orchestrated financial rescues for homeowners and lenders.

As policymakers battle an economic slowdown, some financial experts say that rescue efforts could rise to a scale comparable to the savings-and-loan affair.

That doesn't mean that big banks stand today on the brink of failure. But the government is already working overtime in a bid to prevent the current credit turmoil from deepening:

•Federal agencies and private-sector players are considering a range of new policies, including some that would result in the government buying troubled mortgages and refinancing them. This would come atop other foreclosure-prevention programs recently crafted by the Bush administration. [Editor's note: The original version misidentified the origin of the foreclosure-preventing ideas.]

•Government-created enterprises are single-handedly propping up the nation's sagging mortgage market. Yet they are poised to post quarterly losses this week, which some analysts say could portend a taxpayer bailout down the road.

•The Federal Reserve, in a bid to help banks navigate short-term funding problems, has been lending more freely than usual to lenders in need of cash.

"We're getting a lot of bailout pressures from different directions," says Joseph Mason, a finance expert at Drexel University in Philadelphia. It's unclear how big a bailout will become, but the likelihood of expanding rescue efforts is growing, he says. And it will pay to heed lessons of the past.

"The choice is very similar to disciplining a teenager," he says. Infusions of money may serve an important purpose for the economy, but their effectiveness depends on setting limits as well as providing relief.

In fact, some experts say bailouts are a cause of financial crises, not the solution. In the current housing-market slump, for example, an awareness of past rescues may have lulled lenders into a reckless surge in high-risk loans.

Moreover, critics say that government-sponsored enterprises have gotten too big. In the wake of other hard landings for housing, these entities were designed to foster a stable mortgage market.

But they are so big that if a taxpayer bailout is ever needed, it could be very costly. And their gargantuan size – buoyed by the implicit backing of the US government – has made it harder for private-sector rivals to compete.

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