IN TIMES of crisis, opposition to big government suddenly evaporates. Witness the sigh of relief on Wall Street yesterday, after Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke began plotting a broad federal bailout of financial institutions hobbled by exposure to subprime mortgages and credit default swaps.
The bailout may be the least noxious option the only way, indeed, to prevent world financial markets from falling into chaos. And yet the whole idea is still galling.
Under the plan, the government perhaps a new federal agency would buy up bad debt from financial institutions at discounted prices. The cost of this rescue will be staggering: Saving reckless financial companies from their own decisions could cost perhaps a half-trillion dollars. Or maybe more. That money wont be available for the nations many other needs.
At least the bailout represents a systematic response to the crisis. Up to now, officials have been winging it agreeing to bailouts for investment house Bear Stearns, mortgage giants Fannie Mae and Freddie Mac, and the insurer AIG, but refusing to help the firm Lehman Brothers. As the crisis on Wall Street widened this week, though, it became clearer that Bernanke and Paulson werent going to be able to make arrangements ad hoc for each new impending failure.
Instead, taxpayers will now be asked to rescue firms that operated without enough government regulation. As they consider bailout legislation, lawmakers need to make it clear that, if the public has to bail out an industry, the government needs the power to regulate it scrupulously. Right now, Wall Street is in danger of learning the wrong message: risk all you want, because somebody else will always clean up the mess.