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Fix The System

September 25, 2008

Possibly because it is an election year and no one in Washington wants to alienate any potential voters, federal action to prevent a financial markets meltdown may not address the cause of the problem. In fact, it may continue to encourage the very behavior that sparked the crisis.

President Bush, others in his administration and leaders in Congress spent much of this week discussing a bill to provide emergency help to financial institutions. Some have placed the cost of the bailout at $700 billion - but it could be much, much more.

In essence, the plan is for the government to buy certain assets from financial institutions. The assets in question are related to bad mortgage loans issued by the hundreds of thousands, perhaps millions, for several years. Because some companies have not been able to recoup losses from bad mortgage loans, the firms' very existence is threatened. That has had a ripple effect in stock markets throughout the world.

Part of the problem was that many Americans were encouraged to take out mortgages they couldn't afford. And, too many financial institutions relied on those mortgages for both revenue and assets.

Some liberal members of Congress are insisting that the bailout bill needs to protect some borrowers from the consequences of their mistakes.

Any bailout bill - if there should be one at all - that does not include meaningful consequences for both irresponsible borrowers and lenders risks beginning the cycle of imprudent lending all over again. If Congress and Bush can't see that, we had just as well brace for continued financial problems for years to come.



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