Bailouts in Disguise
November 9, 2007

Irvine, Calif.--As we witness large numbers of defaults on subprime loans--loans extended to those with no credit or bad credit--many are calling for the government to do something to stop the suffering. At the same time, many recognize that a bailout of struggling homeowners would be wrong. Those proposing a government solution claim that they can save the day without a bailout: "borrower assistance" programs to refinance defaulting mortgages, crackdowns on "predatory lending" practices, or laws restricting mortgages the government deems too risky.

"In fact," said Alex Epstein, an analyst at the Ayn Rand Institute, "regardless of how these proposals are described, all embody the essence of a bailout: they absolve individuals of responsibility for their bad decisions--and force those who did nothing wrong to pay the price.

"The government is not a savvy lender or mortgage expert able to contribute innovative financing strategies or new knowledge to the mortgage market. Its sole power, which all the proposed 'solutions' would utilize, is the power to forcibly compel some people to give up their money or freedom for the sake of others. This applies, not just to 'borrower assistance' (read: borrower bailout) programs, which can cost hundreds of thousands of dollars per 'assisted' homeowner, but also to  measures to target 'predatory lending'--an undefined term that gives the government license to extract huge fines from any innocent lender it retroactively deems should have given better counsel to borrowers. The government is also punishing the innocent when it attempts to 'protect' future borrowers. For example, proposed prohibitions on future mortgages that the government deems overly risky punish individuals who manage risk well, many of whom will not be able to afford new homes without these vehicles.

"The proper response of the government to subprime problems is simple; commit to no new interventions in the housing market, and cease all existing intervention designed to influence home ownership--from programs like Freddie Mac and Fannie Mae to artificially low interest rates. Such a move would send a message befitting a free people: a message of responsibility. The current proposals in Congress send the exact opposite message."

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Alex Epstein was a writer and a fellow on staff at ARI between 2004 and 2011.