The NYT has a story about the Treasury Department’s plan to help homeowners facing foreclosure:

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

We shouldn’t be bailing out homeowners facing foreclosure for exactly this reason. It will make the problem worse as most government interventions do. As Paul McCulley, someone I rarely agree with, says:

“If the lunch truly is free, the demand for free lunches will be large,” said Paul McCulley, a managing director with the investment firm Pimco.

Rewarding failure is no way to run an economy. That applies to banks who made the loans as well as the people who took them. Let the bad banks fail and let those who face foreclosure become renters again. There is no shame in that; it’s just part of life.

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