When Congress and the Bush administration rushed to bail out the lending industry, some of us warned that a precedent had been set for continued government interference in the market. Others said that government action could be limited to keeping banks from failing, and that the intervention could be strictly limited to keeping the banking system from defaulting. Now Congress is about to prove that they can’t stop at one potato chip, using the precedent set earlier to broadly bail out everyone affected by the lending crisis — and the Wall Street Journal reports that voters may have seen enough:

Democrats may be risking a backlash at the polls in November by pushing hard to use taxpayer money to rescue homeowners who can no longer afford their mortgages in the face of stiff resistance from President Bush and many other Republicans.

The Democrats in Congress and the party’s presidential candidates frame the issue as doing at least as much for beleaguered homeowners as the government is doing for Wall Street. The White house and most House Republicans counter this amounts to using taxpayer money to reward bad behavior.

The Republican protests are striking a chord with some Americans who are paying their mortgages on time or who didn’t buy more house than they can afford. President Bush is vowing to veto a bill the House passed last week — with the support of 39 Republicans, about a fifth of their ranks — that would, among other things, allow certain homeowners to refinance loans through a government agency if their lenders agree to take less than the full amount borrowed.

Perhaps if this happened in an off-election year, like 2007 or 2009, common sense would prevail. People would understand that the government does not exist to guarantee against investment risk, and that foolish choices often result in financial loss. The market would then correct for the failures, prices would drop in the short term, and houses would get purchased by more qualified buyers under more stable lending terms, bringing long-term stability back to the market and producing wiser homeowner and lending classes.

Unfortunately, this is an election year, which makes pandering the rage. After bailing out the lending industry, regardless of how one rationalizes it, it’s political suicide to allow homeowners to suffer foreclosure without intervening on their behalf. How does one explain on national television that bankers who offered ridiculous loan terms to underqualified buyers deserve welfare more than the family they just threw onto the street? Even if one can make a nuanced economic case for it — and it can be done — the optics of it are insurmountable.

This is what happens when government intervenes in markets, and why most conservatives had deep misgivings about the Fed action to sell off Bear Stearns and issue hundreds of billions in guarantees. It set a precedent for the action that Congress now contemplates, which is to force all Americans to pay the mortgages of those who made bad investment decisions. All that does is reward folly, and now that we’ve done it once, we will be sure to do it again, and often.

The US government is not a co-signer for loans. Risk is something that people need to manage for themselves. Today’s politicians don’t seem to grasp that concept, which presents a real risk to private property rights, free markets, and the concept of personal liberty. These efforts assume that the lenders and the buyers alike are playing with Monopoly money that belongs to the government, and not the owners themselves, and that the government can choose winners and losers capriciously at any time.

The WSJ seems optimistic that citizens have recognized this risk. I’m less optimistic. The politicians have a better sense of the national mood, I suspect, which is why we see a bipartisan rush towards bailouts in an election year rather than personal responsibility and protection for taxpayers against forced guarantees with their money for bad investments. (thanks to Michelle for the graphic)