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Bailout runs into a populist backlash

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Walter Howard was living in Corona a few years ago, he said, when he realized that the country’s financial system was being run by crazy people.

How else to explain the working-class folk he kept encountering who were receiving loans of $800,000, $900,000, even $1 million to buy homes they couldn’t possibly afford?

Howard, 50, a computer programmer who now lives in upstate New York, told me he felt vindicated in having bailed out of the California housing market while the getting was good. But he’s deeply upset with the government’s plan to spend more than $700 billion bailing out financial institutions saddled with increasingly rancid mortgage debt.

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This week, Howard decided to channel his displeasure by joining an online grass-roots movement called Fed Up USA, which opposes spending even a nickel of taxpayer money on rescuing financial firms.

“These are the same geniuses who got us into this mess,” he said. “They can get themselves out.”

Many people, myself included, have come to grudgingly accept that a massive bailout of the financial sector is necessary to stave off greater calamity, such as a collapse of the global banking industry or a worldwide economic depression. The stakes, by most accounts, are that high.

But as the scope of the bailout takes shape, a populist backlash is emerging, with some people concluding that the only fair outcome would be for failed firms to fail.

“To some extent, it’s economic Darwinism,” said Todd Zywicki, a law professor at George Mason University who believes the bailout concocted by Treasury Secretary Henry M. Paulson and Federal Reserve chief Ben S. Bernanke goes too far. “That’s the nature of a free economy.

“I have no problem with someone making a lot of money if they take risks and all goes well,” he added. “The downside of that, however, is that they have to eat any losses.”

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Like many bailout bashers, Zywicki is a libertarian who prefers less government in virtually all aspects of life. He said federal authorities had no business handing money to companies that, through misfortune or mismanagement, got themselves in trouble.

This is a fair point. In fact, it cuts to the very heart of capitalism.

But as I wrote in Sunday’s column, market forces can’t always be relied upon to determine winners and losers in the marketplace. In the absence of strong regulation, businesses can and will easily go astray amid their constant search for profit.

“It’s too easy to think that the market will take care of everything,” said Leon Panetta, director of the Panetta Institute for Public Policy at Cal State Monterey Bay and former Clinton White House chief of staff. “That’s how we’ve gotten into the crisis we face today.”

Still, there is something inherently unfair about the nation’s roughly 138 million taxpayers having to foot the bill for an industry’s recklessness. No one told these guys to invest billions in ill-conceived mortgages, and they did so for no better purpose than to make themselves richer.

Similarly, no one told thousands of home buyers to take out mortgages they had no hope of repaying. Why should the rest of us have to subsidize a rewriting of their terms so these knuckleheads can keep their homes?

I know: The answer is that sometimes the greater good is served by sucking it up and doing what’s best for society. And in this case, there’s a strong case to be made that society benefits over the long run by helping Wall Street and distressed homeowners get back on their fiscal feet.

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That’s not how Fed Up USA sees it, though. The group’s website ( www.fedupusa.org) says taxpayers “have been subjected to the biggest con job ever in this country.”

Fed Up USA grew out of a financial blog called The Market Ticker (market-ticker.denninger.net), run by financial pundit Karl Denninger, who previously headed Chicago Internet service provider MCSNet. The blog hosts an online forum that claims 4,500 registered users.

“The solution that Ben Bernanke and Henry Paulson have put forward is to flood the market with money,” Denninger told me. “That’s like giving a drunk a bottle of whiskey for what ails him.”

I can certainly sympathize with the frustration Denninger and others in the let-’em-fail crowd are feeling.

But I also heed the words of the late Nobel Prize-winning economist Milton Friedman, who asserted that the Great Depression wasn’t caused by the stock market crash of 1929. Rather, he said, it resulted from the government not doing enough to provide liquidity for financial markets, depriving banks of the cash they needed to conduct business.

Bernanke has said he agrees with that assessment, and that’s precisely what he’s trying to avoid this time. I’m no economist, but I suspect he’s right.

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I do have one small suggestion, though. The White House and Congress were dickering Tuesday over whether the government should receive an equity stake in firms that receive bailout funds. It should.

But since this is our money at work -- about $5,000 per taxpayer -- we should benefit directly from any rescue of the financial system. Some sort of mutual fund should be created to invest in troubled companies, and every taxpayer should get a share of the fund.

President Bush has spoken of the virtues of an “ownership society.” Fine. Wall Street can have my money. In return, I want my piece of the rock, crumbling though it may be.

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Consumer Confidential runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.

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