WITH ELECTION SEASON
in full swing, politicians of every party and persuasion are falling over themselves to propose ways to remedy the millions of people adversely affected by the dramatic shift in housing and credit markets. Sen. Hillary Clinton, for example, hasproposed
the establishment of a $1 billion fund to help states help borrowers who are in danger of foreclosure.
Most people with even a cursory knowledge of free market economics understand that governmental interference doesn't alleviate problems; it simply makes them more severe and longer lasting. If someone can't afford to pay their mortgage, certainly the government paying it for them for a few months isn't going to make any meaningful difference.
In reality, it simply distorts the rational allocation of assets and ultimately drives up costs for both lenders and borrowers. The negative byproducts of governmental intervention in a free market are well documented, and were most recently seen in agriculture, where massive subsidies for ethanol production have led to skyrocketing corn prices.
But the real reason to oppose a bailout isn't that it's impractical, but that it's immoral.
To live freely means to act in accordance with your own rational beliefs and to accept the consequences of your decisions, no matter how unwise they might seem after the fact. Those individuals who made financial commitments they can no longer afford to honor have no right to demand taxpayers bail them out. In America, we have the right to "life, liberty and the pursuit of happiness," but not the guarantee we can live in the four-bedroom Colonial that's priced way beyond our means. It might sound cold, but homeowners who can't pay their mortgages should not expect to be able to keep their homes.
As traders, we are unquestionably comfortable with this sort of personal responsibility. If we make poor investments and lose money, we certainly don't expect the government or anybody else to bail us out.
But Americans, especially many populist politicians, believe that individuals deserve to have their mortgage paid simply because they can no longer afford to pay it themselves. Forgetting the fact that these individuals willingly took out loans well beyond their means or didn't plan for a rainy day in which the real estate market wasn't soaring, politicians on both sides of the aisle say they are entitled to keep their home. So they plan to take other people's hard-earned money and give it away...not because these individuals did anything to deserve it, but simply because they need it. It's the essence of the "entitlement mentality" I wrote about last winter.
The purpose of government is to protect my rights end of story. But because there is no such thing as a right to a home, using taxpayer dollars to bail out homeowners or home lender, is an immoral abuse of governmental authority.
Those who advocate for such measures tend to think with their hearts instead of their heads. When challenged about the morality of such schemes, they usually present a tragic example about a down-on-their-luck Rust Belt family who are in danger of being evicted from their home. Dad lost his job at the plant, mom is on dialysis and takes care of the kids, all of whom desperately need braces and new books for school. The argument is always an emotional one: "Don't you want to help poor people in need?"
But a government bailout is not charity it's coercion. Americans are incredibly charitable people, last year donating a record $295 billion. But when you donate to Habitat for Humanity, for example, you do so voluntarily, deciding how much you'd like to give and to what particular cause. When Hillary pledges $1 billion in financial aid for homeowners, however, it's not her money; it's the taxpayers', many of whom would undoubtedly prefer to give to any number of other deserving recipients.
The other tactic used by proponents of a bailout is to demonize the banks and mortgage companies for making "predatory" loans to financially unstable families, as if somehow loaning someone money is harming them. What's ironic is that for years, elected officials chastised businessmen for failing to offer loans to people with poor credit. After the private sector stepped up and many billions in loans to lower-income families, many of those loans are not being paid back, and those same businessmen are being criticized for making the loans in the first place. Indeed, businessmen are the scapegoat either way.
The more the government gets involved in mortgages and banking, the tighter credit will become. But beyond the impractical reality of collectivist economics, a bailout of homeowners facing foreclosure would be an immoral violation of the property rights of the millions of citizens who live within their means and pay their bills on time. The responsibility of paying back subprime mortgage rests with those who took them, not the publicity-seeking politician eager to sacrifice the individual for the "public good."
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.>