Who Ought To Be Bailout-Eligible?

It appears the Federal Reserve will be providing a limited bailout to Bear Stearns, which will have a 28-day credit extension courtesy of the federal government. Commentators who know a heck of a lot more about this than me are wondering why it's suddenly the government's job to cover the downside of aggressive investment strategies on Wall Street.

The answer I'm hearing, which makes some sense to me, is that the government ought to take limited steps to contain the fallout of these bad decisions. In short, allowing Bear Stearns to disintegrate completely would be really bad for the economy. And although it's not necessarily good for the economy to spare investors the punishment for their bad decisions, the Feds can balance two competing interests — protecting the larger economy and ensuring that brokerage houses "bear" the downside of the market (two puns intended) — with a calibrated approach that gives some assistance to BS (yes, another pun), without carrying the company on its back.

So fine. Now the turn:

Hillary Clinton gave an interview on NPR some time ago (yes, to the "latte-drinking crowd," surprisingly), and she was asked what she thought of Mike Huckabee's position that federal assistance to subprime borrowers was a bad idea. Huckabee's argument was simple, and it had homespun, surface appeal. As he put it, why should a taxpayer who made good decisions and bought as much house as he could afford have to pay for his foolhardy neighbor's mortgage, too? Clinton answered with three points:

(1) For the subprime mess to happen, a lot of people had to make bad decisions — borrowers, lenders, and investors, to name the three most obvious categories — and the borrowers were arguably the least reckless and culpable, but they expected to bear the brunt of the consequences, by losing their homes.

(2) Quite a lot of the borrowers signed on to exploitative contractual terms by which advance payments against principal triggered dramatic percentage rate increases. In attempts to "do the right thing" and get ahead of their payments, they paid more than their monthly bills required, triggering the oppressive rates.

(3) The housing market is interconnected. There is not a separate market for houses under subprime loans. The more borrowers default on their loans, the more the housing market is affected, and the "wise lender" that Huckabee would protect from the government loses equity in his house, because his foolhardy neighbors are flooding the market with homes they can't afford.

Now, to me, Hillary's argument (3) sounds quite a lot like the argument for bailing out Bear Stearns. One wonders, then, why it's okay for the government to cut breaks to brokerage houses, but to offer help to borrowers is creeping socialism in the minds of our free-market conservatives. If there's going to be an inconsistency here, shouldn't it favor the borrowers, who, as Ms. Clinton observed in argument (1), at least have the equities in their favor?