Our View - Sunday

No shock absorber

Feds should keep out of housing market

No one can now deny the obvious: The housing bubble, especially in high-priced real estate markets, has popped. Analysts disagree over how long the downturn might last, but most suggest that the housing doldrums will be around for two or more years as bad loans work their way out of the system.

Although West Coast markets are worse off than other parts of the country, this is a nationwide phenomenon. Prices soared over the past few years, with subprime loans — variable-rate and low-money-down loans made to people who could not qualify under traditional lending criteria — keeping the boom going. Real estate agents, mortgage brokers, lenders, homebuilders and homesellers were happy enough to keep the market going (as were big investors in the mortgage-backed securities and agencies that rated their creditworthiness), but prices couldn’t keep going up by double digits forever.

Many of these buyers could not make their payments, many subprime lenders have gone under, and the increased number of foreclosures is depressing prices and leaving builders with unsold inventories. As anyone with property on the market right now knows, prices sink as demand falls, and as new potential buyers cannot qualify for the loans necessary to pay the prices sought by sellers.

Pop goes the bubble. In calmer terms, the market is self-correcting. That’s how markets are supposed to work. The biggest problems occur when government protects buyers and sellers from the consequences of their decisions. When government softens the blow of a market correction, it creates what is known as “moral hazard.” Investors will then make riskier investments under the assumption that the government will bail them out.

President Bush has vowed not to bail out lenders as this housing problem unfolds. He promised only a limited federal role, and he emphasized that a “federal bailout of lenders would only encourage a recurrence of the problem.” But then he and his advisers floated a plan that would, in essence, bail out homeowners who made bad investment decisions.

The president is supporting a bill that would let the Federal Housing Administration “help people stay in their home.” The plan would help those homeowners with risky loans, who meet certain criteria, to refinance into more affordable fixed-rate loans that would be insured by the FHA, something it does not do now for currently delinquent borrowers.

The president justified his proposal this way: Variable rates have “led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan or misled by irresponsible lenders.” That is true, but it’s not an excuse for government to intervene, even just with insurance support. People have to be responsible for their own choices. The only role of government in such matters is to enforce laws against fraud. If the administration insists on going further, it should look at reducing onerous rules and regulations that might hinder the ability of sub-prime borrowers to work out deals with lenders that allow them to keep their homes.

The goal then is to let the market adjust and keep the federal government out of it. There will be plenty of economic pain to accompany the falling prices, but any attempt to cushion the blow will only delay the day of reckoning and assure that the pain is more widely felt.

Dalai Lama honors a boost for freedom

The Bush administration’s foreign policy is a mess, given its preference for war and bluster for dealing with adversaries in the Middle East. But the administration has pursued a reasonable policy toward China, still at least a nominally communist regime that has mixed authoritarian political rule with relatively free markets. The president has engaged China through open trade, but has not been reluctant to highlight its many human-rights abuses.

It’s in that context that we appreciate the willingness of the administration and Congress to honor the Dalai Lama, the 72-year-old Tibetan Buddhist spiritual leader and Nobel Peace Prize winner who has set up an exiled government in Dharmsala, India. China views him as a dangerous advocate for Tibetan separatism.

On Wednesday, the Dalai Lama visited Washington, D.C., where he accepted the Congressional Gold Medal. President Bush called him “a universal symbol of peace and tolerance, a shepherd of the faithful and a keeper of the flame for his people.” The honor highlights international frustration at China’s harsh rule over Tibet, which it invaded in 1951.

Chinese officials reacted angrily. “The move of the United States is a blatant interference with China’s internal affairs which has severely hurt the feelings of the Chinese people and gravely undermined the relations between China and the United States,” said Foreign Ministry spokesman Liu Jianchao.

That’s ridiculous. The United States is free to meet with and honor any person it chooses on its own soil, regardless of what China’s authoritarian leaders might say, just as China is free to honor anyone it chooses.

China will boycott a trade meeting or two with the United States to protest the action, but it won’t do anything that will jeopardize relations with its largest trading partner. China and the United States have many common diplomatic goals, as well. So, in this case, it’s the Chinese who are engaging in pointless bluster.

The Dalai Lama thanked the president for his stand for religious freedom, arguing, according to the Associated Press, that the award would bring “tremendous joy and encouragement to the Tibetan people.” If that’s true, then the U.S. action was wholly worthwhile.