When you are in primary or secondary school, and you get yourself in trouble (Financial, legal etc) you can usually rely on your parents to bail you out. Better parenting will force a child to work off the debt themselves, because this teaches the young person that bad decisions have consequences. You do these things not because you enjoy making your child suffer but rather so they understand that the world expects a person to be self reliant and responsible. If you make a bad business decision as a small business owner you may lose your company or your assets.

So here we are in the midst of a sub-prime mortgage crisis. If headlines are to be believed hundreds of thousands (Sometimes reported as millions) of folks signed up for mortgages which they could not truly afford. They were given low rates for an introductory rate (2 % for example) with the understanding that after 2 or 3 years the rate would adjust upwards to whatever the adjustable rate was at that time. Now they are complaining that this new rate is too much and they want the federal government to step in and solve their problem. To compound the problem, some of these loans were made using negative principal. In other words your monthly payment is less then what is required to pay your interest and the unpaid interest gets added to the principal of the loan.

Now if I am making $100 a month, and I take out a loan for 10,000 which requires me to pay $20 a month for the first 2 years and $110 a month from that point forward, this is incredibly short sighted. It gets me into an obligation I know I cannot meet. I don't expect anyone to step up and take that burden from my shoulders, nor would I expect other members of my neighborhood to step up and pay my debt.

Worse still is the idea that business which made these loans, often to people who could not afford them, should be bailed out. The logic behind making these loans ran as follows.

1. Fix rate mortgages are at all time lows.
2. Person with so so credit wants to buy a 300,000 dollar house and can put down 10 %
3. Housing is booming, most houses are climbing in value 10 – 20% per year in hot markets (back in 2003)
4. The person can afford to pay monthly payments of 2% or so, so we sell them a loan which gives them this rate for 3 years
5. After 3 years, the loan will jump up in interest but not too much since interest rates are pretty low right now, but at that point the user's equity would have grown and they should be able to refinance to a reasonable fixed rate loan, with the equity they have, and now a solid 3 year mortgage payment history.

But…. there were several flaws with this line of thinking. No one can predict how the real estate market will climb. General speaking the value of a home goes up 5% per year (Source Rich Dad Poor Dad) but that's only an estimate. The boom of the late 90s and early 00's was an aberration which everyone hoped wouldn't stop, but it did. In some cases housing prices retreated and left folks with negative equity.

The second, and more important flaw in the line of thought, is that people would so so credit will have better credit after 3 years. Typically speaking folks spending habits do not change. And that person looking for a loan who really doesn't deserve one in 2003, will most likely not deserve one in 2007. At which time he will need to pay a premium for their loan and they cannot afford to have a loan which they were paying 2% on jump to 9%.

So now the federal government is being asked to step in and help Banks deal with all of this bad paper they are about to be faced with, through their own wishful thinking and incompetence. One party is playing this as a human interest story, these are folks which are about to lose their houses because of despicable practices of the Banking industry. If they succeed in a bailout, they will have effectively bribed a large number of people for their votes, and bought the banking and loan industries goodwill in 1 fell swoop.

If there was actual fraud involved, as Chuck Schumer insists there is, prosecute the perpetrators to the fullest extent of the law, but don't shield business or citizens from the results of their own bad decisions. Not to sound callous, or mean, but to have the government soften the blow of a bad decision on both parties part is bad parenting.