HENRY POTTER: Have you put any real pressure on these people of yours to pay those mortgages?

PETER BAILEY: Times are bad, Mr. Potter. A lot of these people are out of work.

POTTER: Then foreclose!

BAILEY: I can't do that. These families have children.

POTTER:

BAILEY: But they're somebody's children, Mr. Potter.

POTTER: Are you running a business or a charity ward?

MR. Potter's questions from the 1946 film "It's a Wonderful Life" now haunt American politics. The contemporary mortgage crisis has destabilized the American and global economies, imperiled great banking enterprises, and threatened hundreds of thousands of American households with the loss of their homes. Washington politicians on both sides of the aisle have in recent weeks essentially answered Mr. Potter's final query, affirming the federal government's role as "charity ward" of last resort, this time for both threatened homeowners and endangered financiers.

Regarding the former, the legislators' actions might be viewed as more than a craven quest for votes. They could be understood as responding to an echo of another quote from "It's a Wonderful Life," this time by Peter Bailey's more famous son, George:

   Just remember this, Mr. Potter, that
   this rabble you're talking about....
   they do most of the working and
   paying and living and dying in this
   community. Well, is it too much to
   have them work and pay and live
   and die in a couple of decent rooms
   and a bath?

Our own politicos shout "no!" while approving billions to refinance delinquent loans. (Meanwhile, the Federal Reserve uses public dollars to save Bear Stearns.)

During the 1930s and 1940s, filmland's Bailey Building and Loan had built lovely suburban homes for struggling families and had weathered several financial crises, albeit always through private rather than public means. How would George Bailey, the fictional saint of the mortgage industry, view the current crisis and federal response? Put another way: What would George Bailey do?

Some real history may help here. The classic Savings and Loan association portrayed in the film grew out of the "friendly society" tradition of 19th-century America. Often associated with ethnic groups--two of my great-grandfathers were founders of the Skandia Society serving Swedish immigrants in Des Moines, Iowa--these early mutual savings banks encouraged thrift and made loans to responsible and creditworthy borrowers. Depositors and borrowers alike were members of the society, with voting and oversight rights. This ensured that those who took out loans were carefully scrutinized and personally monitored by the lenders.

Congress stabilized, and to some degree nationalized, the system through the Federal Home Loan Bank Act of 1932. This measure regularized the long-term, amortized mortgage for home purchases, mobilized capital toward this end, and allowed Savings and Loans to pay higher interest than commercial banks on savings deposits. The chartering of the Federal National Mortgage Association (Fannie Mae) came in 1938, funneling still more money into the system. Tax reforms made the interest on home mortgages deductible, turning houses into a favored form of capital investment.

After World War II, the mortgage business soared. The Serviceman's Readjustment Act of 1944 guaranteed VA home loans for veterans at up to 100 percent of the selling price. President Harry Truman told the National Conference on Family Life that "children and dogs are as necessary to the welfare of this country as is Wall Street and the railroads." The sweeping Housing Act of 1949 committed the country to providing "a decent home ... for every American family." Federal Housing Administration loan guarantees also came into play. In 1949 alone, the industry recorded 1,466,000 housing starts, an unprecedented number.

This housing boom had its own sociology. Nearly all the new VA- and FHA-insured loans went to young married couples starting their families. As the official Fannie Mae history of housing explains, federal mortgage programs "made home ownership available to many families who could never have considered it otherwise." They allowed Americans to express their preference "for bringing up children in the 'wholesome, clean-air' environment of the suburbs."

Importantly, calculations of mortgage eligibility during this era counted only a husband's income. Underwriters saw young married women as potential dropouts from the labor market once they became pregnant. This policy also had the unintended effect of holding housing prices down.

Americans responded to this favorable policy environment. Between 1945 and 1960, there was a 90-percent increase in the number of owner-occupied homes. The marriage rate climbed sharply, the fertility rate soared, and even the divorce rate fell steadily after 1946. By the early 1960s, the government's pro-family housing policy could be judged a success. To be sure, there were problems: a broad national over-investment in housing, which retarded other forms of capital investment; a discouraging conformity in suburban housing design; and a design preference for the "companionate" model of marriage and home life, which abandoned the function-rich family. All the same, George Bailey would surely have been proud.

The housing and mortgage markets, however, began operating in weird new ways around 1970. A massive investment in housing continued, with total non-farm mortgage debt climbing from $358 billion in 1970 to $2.2 trillion by 1987, an after-inflation increase of 311 percent. The number of housing units climbed from 65 million to 90 million. Yet the number of young married couples (husband aged 25-34) in homes actually fell by 2 percent over these years. The number of child-rich households with six or more persons plunged by 57 percent.

What was happening? In short, the family-centered nature of the American housing boom had unraveled. Policy changes were part of the dynamic. Under feminist legal pressures, the "husband-only" income rule for determining the maximum of a family's mortgage disappeared. A wife's income must also be counted. Results included upward pressure on housing prices and a disincentive to be a stay-at-home mother. Housing officials exhibited new interest in providing shelter for nontraditional households, explaining that there was no longer a "standard family" guiding housing demand. They introduced easier eligibility standards, and the proportion of new FHA mortgages going to married-couple households with children fell sharply. Government publications stressed that houses were increasingly purchased with "resalability" rather than "livability" in mind. This meant that housing was now more a form of investment and a hedge against inflation than a refuge from the elements.

Housing analysts George Sternlieb and James Hughes pointed to an even stranger development: while the number of distinct housing units climbed by 38 percent between 1970 and 1987, the average household size fell from 3.14 to 2.64 members, a decline of 16 percent. This meant that "the nation's population is diffusing itself into an expanding supply network." More darkly, they concluded that "the very decline in the size of household" may be "a consequence of the availability and costs of housing units generally."

Translated from academese, this meant that America's very success in building homes now perversely encouraged family breakup through separation and divorce. Direct and indirect subsidies also encouraged home ownership among singles by substituting government help for the economic gains, such as economies of scale, once provided by marriage and family living.

In addition, your friendly neighborhood Savings and Loan societies changed. In the late 1970s, they gained the ability to offer checking accounts and shed many state regulations. In 1980, Congress gave the "thrifts" power to make commercial loans, issue credit cards, and otherwise behave like regular banks. The result was disaster: a series of speculative loans and investments brought on the infamous Savings and Loan crisis of the 1986-95 period. Half of the nation's savings and loans went out of business; taxpayers took over about $125 billion in bad debt. And George Bailey rolled over in his Hollywood grave. At great public cost, stability returned to the housing and mortgage markets by the later 1990s.

Our current crisis was a product of the new century, a fairly conventional speculative bubble involving legislators, regulators, lenders, great financial houses, and borrowers in roughly equal culpability. Under the mantra that "housing prices in America have never gone down," modest eligibility standards for taking out mortgages were essentially scrapped. Risk was "shared"--read hidden--by the relatively new process of bundling mortgages for resale to investors. As housing prices soared, the rush to get into the game produced all the usual assurances from the financial talking heads, until the inevitable collapse.

So what would George Bailey do now? First of all, I think he would want to examine the sociology of the crisis. How many of the imperiled homebuyers are actually young families with children? These he would want to help. How many are singletons who used this speculative opportunity to jump onto the housing escalator? How many are empty-nesters who rode the bubble to move into a McMansion? How many are would-be investors looking for quick turnarounds in a rising market? There would be little sympathy for these latter cases, I suspect.

To help threatened families with children, George Bailey would support private and public efforts that put them first in line for access to renegotiated and publicly guaranteed mortgages. "Households with dependent children" would serve as the defining criterion. He would also probably agree with guidelines recently offered by the Heritage Foundation, including:

   All government-assisted refinancing
   should go only to homeowners
   who use that home as their primary
   residence.

   No help should be given to
   investors, speculators, owners of
   vacation homes, homebuilders,
   realtors, mortgage brokers, or
   bankers.

   Help should also be denied to
   anyone who lied or made misrepresentations
   on their original mortgage
   applications.

George Bailey would surely marvel at the stupidity and greed of our current crop of great financiers, who make Mr. Potter look like a genius--even a humanitarian. George Bailey knew truly good capitalists: his friend Sam Wainwright earned money through manufacturing useful products (including, yes, war materiel). He would shake his head, though, at Wall Street's more recent "Masters of the Universe," who claimed their vast personal incomes and stock options simply by piling onto the latest investment fad. He would want to see these sham geniuses and their boards of directors held personally liable to stockholders and investors. He would expect criminal fraud to be vigorously investigated as well.

I doubt, too, that George Bailey would support a quasi-public bailout of Bear Stearns or any other threatened financial giant. He would probably agree with many contemporary analysts that Bear Stearns has been an unusually nasty company without a shred of public-spiritedness. In its failure, it would merely have reaped what it had sown. Bailey would dismiss as preposterous claims that the fate of the American and world economies hinged on this rogue company's survival.

Over the long haul, George Bailey would probably try to return the housing and mortgage industries to their real purpose: providing homes to families. He would support limiting the tax deduction on home-mortgage interest to one principal residence per family. He might even favor a cap on the amount that could be deducted, so that only good shelter--not princely luxury--enjoyed favored tax treatment. And he would probably redistribute tax benefits to families according to their number of dependent children, raising either the child tax credit or the per-capita deduction for children--or both.

As his father had noted, "These families have children." That, I believe, would be George Bailey's touchstone for reform.

Allan C. Carlson is president of The Howard Center for Family, Religion, & Society in Rockford, Illinois. His latest book is Third Ways.