During the course of 2007, one of the most vocal critics against federal intervention in the subprime crisis was Alex Epstein, an analyst with the Ayn Rand Institute and a contributing commentator to major newspaper op-ed sections and syndicated news talk shows.
Epstein advocates the Objectivist school of economics championed by the writer Ayn Rand (1905-1982), whose landmark novel ‘Atlas Shrugged’ recently celebrated its 50th anniversary. During her lifetime, Rand's pontifications on individual rights and laissez-faire capitalism attracted many economists, most notably Alan Greenspan, who was closely aligned with Rand and her movement.
MortgageOrb spoke with Epstein on his Objectivist view regarding the federal government's handling of the current crisis.
Q: What would Ayn Rand think of the state of today's subprime mortgage crisis?
EPSTEIN: As an advocate of laissez-faire capitalism, she would certainly be against all the proposals for the government to increase its already massive intervention in the housing market.
Q: What role, if any, does the federal government have in strengthening the housing market?
EPSTEIN: The federal government and the state governments should have no role in the housing market whatsoever beyond enforcing laws against fraud. What kinds of residences are built and how they are financed is the right of individuals – such as businessmen, investment bankers and residents – to decide.
When the government gets involved in the housing market, the only ‘strength’ it brings to the table is its power to coerce individuals to act against their judgment or give up their wealth. For years, it has been using this power to ‘promote homeownership’ – i.e., promote borrowing and lending that would not exist on the free market.
Today, it is actively using this ‘strength’ to overthrow private contracts, to bail out borrowers, to dictate to borrowers and lenders what kinds of transactions they may engage in, and to effectively guarantee (through deposit insurance and other means) that big banks like Countrywide will never fail, no matter how irresponsible they have been.
The government needs to exit the housing market, the sooner the better. We need a truly free market – one in which individuals are responsible for their choices. In such a market, if individuals lend too freely or borrow too much, they suffer accordingly, and hopefully learn a lesson – but they may not turn to a government that has the power to compel others to pay for their mistakes.
Q: In that case, do you believe that all of the government-sponsored enterprises should be cut loose from the federal government and privatized?Â
EPSTEIN: Yes, for the reasons named above.
Q: On the other hand, how much responsibility for today's troubled market rests with the borrowers of the subprime mortgages?
EPSTEIN: A significant amount. Many of the people struggling today because (a) they took out loans knowing they would have a great deal of difficulty affording; (b) they didn't bother to examine the various contingencies of their mortgages; and (c) they followed the herd mentality that ‘everyone is buying homes,’ that homeownership is ‘the American dream,’ and that real estate is a ‘can't miss investment.’
That said, there are other parties that bear major responsibility for today's mess. It is important to condemn the government for propagandizing for homeownership, for its ‘too big to fail’ policies that encourage big banks to be reckless, and for its other measures designed to influence the market to get people to buy homes.
Also, it is important to condemn the various charlatans in the market who sold people mortgages they shouldn't have in order to make a quick buck (when there is fraud involved, these people should be prosecuted) or who sold Americans on the myth that a home is a guaranteed source of income.
Q: How do you feel this current market crisis will play out?Â And what, if anything, can mortgage bankers learn from what transpired?
EPSTEIN: I don't have any prediction as to how this will play out. Beyond that, short-term, mortgage bankers will learn to be more diligent about investigating the mortgages they are securitizing.
But for any enduring change in banker responsibility, the government needs to get rid of all of its various bailout agencies and policies. That includes the Fed's ability to inflate the currency whenever struggling banks want cheap money, and the FDIC's ‘insurance’ of every bank, no matter how bad its lending practices.
So long as banks are insured against failure, bankers are insured against suffering the full extent of their economically destructive decisions.