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Government Should Stay Out Of Subprime Mess

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By ALEX EPSTEIN

Published: November 12, 2007

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. Thus, we see a growing list of proposed solutions that purport to 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, 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.

While we may empathize with those suffering the pain of foreclosure or bankruptcy, we must recognize that any struggling borrower or lender who signed a clear, non-fraudulent contract, is responsible for making sure it is paid off. In cases where fraud was committed, the victims can and should take legal action under existing laws - but there is no evidence that such cases are epidemic.

Most of the defaults are due to the simple fact that many lenders and borrowers made risky loans. Some were betting on a never-ending real-estate boom. Some, observing the Fed's longtime manipulation of interest rates to keep them artificially low, expected that their adjustable rate mortgages would stay low forever.

Others did not carefully assess the contracts they signed - while certain lenders gave money without carefully analyzing the borrower's finances. Still others were encouraged to buy homes, even when it didn't make financial sense, by a government that believes home ownership is essential to the American Dream.

Given this range of factors, many people and institutions besides struggling borrowers and lenders - most notably, the federal government - bear responsibility for the mess. But the ultimate responsibility lies with the borrowers and lenders themselves. Any problems they have are their responsibility to remedy - just as any gains borrowers and lenders have made on risky subprime mortgages are theirs to keep. In the case of a mortgage borrower, taking responsibility might mean trying to find a lender who will pay off and renegotiate the old mortgage into a more manageable one.

If such attempts fail, however, a person must accept the unfortunate consequences - for example, the borrower who loses his house and must live more modestly, or the lender who must take a large loss from a loan default. The only alternative is to make others pay for the consequences of his actions - which is exactly what all government attempts to "do something" necessarily do.

Alex Epstein is an analyst at the Ayn Rand Institute in Irvine, Calif. The institute promotes objectivism, the philosophy of Ayn Rand, author of "Atlas

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