Let the Fed clean house

The subprime-mortgage mess may require more federal intervention, but it should be done judiciously, and for the right reasons.

Already, several things have been done. The Federal Reserve has put in new rules for lending, which will help in the future. The Fed has also lowered short-term interest rates in order to lower the banks' cost of funds, which helps them recover from the past. The lower rates, however, have quickened the plunge in the dollar.

Lawsuits have been filed, accusing institutions of deceptive practices. These are questions about specific borrowers, lenders and securities firms, and need to be resolved in the courts.

There is a political urge to help homebuyers as a class, but the case is not strong. People who buy houses are not poor, and for a buyer to lose a house is usually not to be rendered homeless.

Both lenders and borrowers have been reckless. Many of those in trouble have refinanced as home values rose, draining out their equity and spending it on immediate consumption. Others have bought with virtually no money down.

Says a recent report in The Wall Street Journal, "Because these people never put up much of their own money, they ... behave more like renters." When the pinch comes, they walk away.

The Bush administration suggests that lenders freeze interest rates on certain adjustable mortgages. Lenders may do that, but for government to reach into private contracts and make them do it would be to break a rule buyers and sellers rely upon. Letting a whole class of people walk away from their obligations encourages reckless behavior.

The subprime-mortgage mess will work itself out. The public interest is the stability of the system as a whole. The first intervenor in that case should be the Federal Reserve, which was created for just this purpose.

Let the Fed judge how much strain the system can stand — and, as much as possible, let the players themselves work out their problems according to the rules already in place.