Call it "a bailout in every pot": Having poured money into storied Wall Street institutions and major banks, the federal government is considering more aid for homeowners who are defaulting on their mortgages, along with billions in loans to help two U.S. automakers merge their troubled operations. There's also talk of another stimulus package of $150 billion or more.
The ever-expanding roster of rescues is a testament to how stubborn the problems in the U.S. economy are. Providing $30 billion to save Bear Stearns Cos. from default in March didn't prevent Lehman Bros. from going under six months later. Offering a bigger credit line to Fannie Mae and Freddie Mac in July didn't avert a complete government takeover in September. And so it has gone, on down the list of interventions.
Lost amid the scattershot responses is the rationale for government's deepening role in the economy: a breakdown in the financial markets. The hands-off approach to enforcing bank and lending rules, combined with an overly long period of ultra-low interest rates, created the perverse incentives that swelled property values and propelled risk-taking. When those values started to fall, the results were just as irrational in reverse. Market forces couldn't sort out the mess without causing even more widespread damage to the economy. But Washington didn't know how to fix things either.