George Will

Clinton leapt to explain the subprime problem in the terms of liberalism's master narrative -- the victimization of the many by the few. In a speech favorably contrasting a "shared responsibility" society with an "on your own" society, she said, in effect, that distressed subprime borrowers are not responsible for their behavior. "Unsavory" lenders, she said, had used "unfair lending practices." Doubtless there are as many unsavory lenders as there are unsavory politicians. So, voters and borrowers: caveat emptor.

But this, too, is true: Every improvident loan requires an improvident borrower to seek and accept it. Furthermore, when there is no penalty for folly -- such as getting a variable-rate mortgage that will be ruinous if the rate varies upward -- folly proliferates. To get a mortgage is usually to commit capitalism; it is to make an investment in the hope of gain. And if lenders know that whenever they go too far and require inexpensive money the Federal Reserve will provide it with low interest rates, then going too far will not really be going too far.

In 2008, as voters assess their well-being, several million households with adjustable-rate home mortgages will have their housing costs increase. Defaults, too, will increase. That will be a perverse incentive for the political class to be compassionate toward themselves in the name of compassion toward borrowers, with money to bail out borrowers. If elected politicians controlled the Federal Reserve, they would lower interest rates. Fortunately, we have insulated the Federal Reserve from democracy.

The Federal Reserve's proper mission is not to produce a particular rate of economic growth or unemployment, or to cure injuries -- least of all, self-inflicted ones -- to certain sectors of the economy. It is to preserve the currency as a store of value -- to contain inflation. The fact that inflation remains a worry is testimony to the fundamental soundness of the economy, in spite of turbulence in a small slice of one sector.

Ron Chernow, in his book "The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance" (1990), says Morgan's 1907 rescue was the last time private bankers "loomed so much larger than regulators in a crisis. Afterward, the pendulum would swing decidedly toward government financial management." Happily, Chairman Ben Bernanke's Federal Reserve remains committed to minimal management, which is what government does best.

George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
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