May 2008 saw an increase in mortgage foreclosure filings by almost 50 percent over the same period last year. This is bringing a chorus of calls for a mortgage bailout. The real question is who is getting bailed out: bankers or homeowners?

This huge upsurge in mortgage foreclosures should come as no surprise to any experienced economist. After three years of reckless lending practices the natural expectation is that a fair number of these loans will not be recouped. This is the way an unregulated free market works! A natural capitalist economy runs in large cycles with huge spikes and correspondly huge plummets. As long as forces are trending upwards everyone can sing the praises of the free market. When things turn sour, as they always do, the tone of the debate changes. The American housing market is now in one of those plummets and everyone (politicians, banks, home loan borrowers) is screaming for action.

There are two problems with any government action. First is what the nature of the action should be. Should the government bail out the banks by supporting the loans with government money? This is typically the Republican response to such downturns. It has already been used for some struggling banks. The other possible response is to use public funds to get people with high risk loans into more affordable loans by limiting the actions of banks to seize forclosed properties. This essentially gives struggling homeowners a grace period in which they can search out a more affordable loan. Both strategies are supposed to have a trickle effect. Supporting the banks will allow them to support their risky loans or supporting homeowners will allow them to get into loans that they can actually afford, which will stabilize the banking industry.

The other problem with government action is that it rewards reckless behavior by cushioning the landing and limiting the risk. If there is little risk involved in speculative adventures then there is no incentive to reduce this behavior. Crime with no punishment just encourages more crime.

Ultimately, the question is why public money should be used at all to bail out anyone? Why should the taxpayers who did not undertake these risky practices pay for those that did? At some point someone needs to be held responsible, whether that be elected officials, bankers, or homebuyers.

Finally, former Fed Chairman Alan Greenspan said on Friday the 13th that the worst of the economy's troubles will be over once the financial crisis ends. "I think the worst is over (for the U.S. economy) if the financial crisis is over...It can struggle along for a while. It could get worse, it could get better." Huh? Doesn't that go without saying that once everything is fine everything will be fine. The man is famous for talking up an economy and having the markets follow his word. If this is the best Alan Greenspan can come up with after the foreclosure news then the economy may be even worse off than most fear.