"Commentary"-Repairing the Housing Crisis
Monday, June 09, 2008SUSIE GHARIB: Tonight's commentator has a few thoughts on fixing the housing crisis. She's Alice Rivlin, senior fellow at Brookings and former vice chair of the Federal Reserve.
ALICE RIVLIN, SENIOR FELLOW, BROOKINGS: We hear a lot about moral hazard these days. That's jargon for policies that tempt people to take risks. Libertarians claim that requiring motorcycle helmets poses moral hazard because it invites reckless biking. Free market purists think the Federal Reserve's rescue of Bear Stearns invites reckless investment banking. Never mind that the shareholders of Bear feel like the biker whose helmet saved him from brain injury, but not from broken legs and a destroyed Harley. The same people are now saying that putting public money at risk to help families facing foreclosure will encourage the reckless at the expense of the prudent. But society shares the blame for not regulating the lax lending standards and high pressure tactics that led home-seekers to borrow so much. Moreover, foreclosures are a contagious disease, destroying property values even of prudent neighbors. If help is not forthcoming, the foreclosure disease will spread more rapidly and prolong the pain. All public policies involve trade-offs between conflicting values. Policy makers must weigh the benefits of helping distressed homeowners against the risk of encouraging future imprudence. This moral hazard problem is tougher than motorcycle helmets, but I believe that we should mitigate the contagion and buy time to fix the fundamentals that society got wrong. I'm Alice Rivlin.
