Bailout Will Slowly Rebuild Confidence in Markets

The House of Representatives is scheduled to vote Friday -- for the second time this week -- on what's known as the Troubled Asset Relief Program, or TARP. When the House rejected the Treasury Department's bailout plan on Monday, markets tanked. Hopefully the same mistake won't be made again. Perhaps by the time you read this, the House will have given Treasury the go-ahead to start buying up illiquid mortgage securities, and that will get the banking system back on its feet again.

TARP was rejected on Monday because the bill is deeply unpopular, and every member of the House is going to have to answer to voters in just one month -- even though most congressmen realize that TARP is the right thing to do. But now isn't the time for a "profile in courage," apparently.

Why is TARP so unpopular with voters? Simple: Voters don't want their government to use tax dollars to bail out wealthy Wall Street financiers whose irresponsible adventures got us into this mess. It's raw emotion, driven by a sense of fairness and not a little element of anger. And it's completely wrong-headed.

First, it's just plain stupid to let the U.S. banking system implode just to take vengeance on some Wall Street executives, even if they are entirely responsible for the problem.

Think about it this way. Imagine you are on an ocean liner with hundreds of other passengers. The captain of the ship is drunk, he rams it into an iceberg, and it starts to sink. Let's say you have the power to keep the ship from sinking. You'd do it, right? To save the hundreds of passengers from drowning, of course you would.

But wait! Some of the passengers on the ship are furious with that captain for getting drunk and letting the ship hit an iceberg. They want the boat to sink, so that the captain will go to a well-deserved death.

Pretty stupid, huh? These fools are willing to sacrifice hundreds of lives, including their own, to take their vengeance out on the captain.

TARP is just like that. We can "bail out" Wall Street, ensuring the banking system will keep functioning so that every American and every business have continued access to the credit that makes the modern world go round. Or we can let Wall Street sink, to punish the evil-doers. And if it takes a couple of years to put things back together again -- during which many credit-worthy families and businesses won't be able to get a loan -- that's just the way it will have to be.

It's not just the ordinary man on the street who seems willing to go down with the ship, so long as the drunken captain is punished. Many of my clients -- very sophisticated professional investors -- feel just the same way. They know the consequences very well, but they just don't care. They're just so furious about what has happened to the banking system, they're willing to pay any price so long as the villains get their comeuppance.

Not only is this attitude suicidal, it also happens to be based on a fairy tale, not the facts.

What happened in the subprime lending bubble isn't so simple. There's not just one bad guy: a drunken captain who we can conveniently blame. There are lots of bad guys in this scenario.

A couple of the bad guys are ordinary people like you and me. If we used subprime mortgages to buy a home we couldn't really afford, then we were cheating. If we knew we couldn't really make the payments, but hoped to be able to roll into a new mortgage at a better rate at some point in the future, then again we were cheating. In our own little way, we were being just as greedy as anyone on Wall Street.

Another bad guy is the government. A lot of the subprime lending facilitated by Fannie Mae (FNM) and Freddie Mac (FRE) -- which is what eventually killed them, and more than anything else triggered the present crisis -- was done at the command of the government. Congress and regulators insisted that Fannie and Freddie make more loans to low-income families. A noble goal, I suppose, but let's get real: Low-income families are at high risk of default, and lending to them is a big reason we have a mortgage crisis today. Sad, but true, and to pretend otherwise is cheating.

Enough cheating. Let's stop pretending that a couple of greedy CEOs caused all this. Even if they did, it doesn't matter now. Let's just move forward and do something that will help everyone.