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Rejecting the Purveyors of Pull: The Lessons of “Atlas Shrugged: Part II” – Article by G. Stolyarov II

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Categories: Business, Culture, Fiction, Politics, Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The New Renaissance Hat
G. Stolyarov II
October 13, 2012
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Atlas Shrugged: Part II is a worthy successor to last year’s Part I, and I am hopeful for its commercial success so that John Aglialoro and Harmon Kaslow will be able to release a full trilogy and achieve the decades-long dream of bringing the entire story of Ayn Rand’s Atlas Shrugged to the movie screen. The film is enjoyable and well-paced, and it highlights important lessons for the discerning viewer. The film’s release in the month preceding the US Presidential elections, however, may give some the wrong impression: that either of the two major parties can offer anything close to a Randian alternative to the status quo. Those viewers who are also thinkers, however, will see that the film’s logical implication is that both of these false “alternatives” – Barack Obama and Mitt Romney – should be rejected decisively.

While the cast has been replaced entirely, I find the acting to have been an improvement over Part I, with the actors portraying their respective characters with more believability and emotional engagement. Samantha Mathis, in the role of Dagny Taggart, showed clearly the distress of a competent woman who is ultimately unable to keep the world from falling apart. Esai Morales aptly portrayed Francisco d’Anconia’s passion for ideas and his charisma. Jason Beghe also performed well as Hank Rearden – the embattled man of integrity struggling to hold on to his business and creations to the last.

The film emphasizes strongly the distinction between earned success – success through merit and creation – and “success” gained by means of pull. The scene in which two trains collide in the Taggart Tunnel is particularly illustrative in this respect. Kip Chalmers, the politician on his way to a pro-nationalization stump speech, attempts to get the train moving through angry phone calls to “the right people,” thinking that all will be well if he just pulls the proper strings. But the laws of reality – of physics, chemistry, and economics – are unyielding to the mere say-so of the powerful, and the mystique of pull collapses on top of the passengers.

As the world falls apart, the film depicts protesters demanding their “fair share,” holding up signs reminiscent of the “Occupy” movement of 2011 – “We are the 99.98%” is a clear allusion. Yet once the draconian Directive 10-289 is implemented, the protests turn in the other direction, away from the freedom-stifling, creativity-crushing regimentation. Perhaps the protesters are not the same people as those who called for their “fair share”  – but the film suggests that the people should be careful about the policies they ask for at the ballot box, lest they be sorely disappointed upon getting them. This caution should apply especially to those who think that Barack Obama’s administration parallels the falling-apart of the world in Atlas Shrugged – and that Mitt Romney’s election would somehow “save” America. Nothing could be further from the truth.

If there is any character in Atlas Shrugged who most resembles Mitt Romney, it is not John Galt. Rather, it is James Taggart – the businessman of pull – the sleek charlatan who will take any position, support any policy, speak any lines in order to advance his influence and power. Patrick Fabian conveyed the essence of James Taggart well – a man who succeeds based on image and not on substance, a man who has a certain polished charisma and an ability to pull the strings of politics – for a while. James Taggart is the essence of the corporatist businessman, a creature who thrives on special political privileges and barriers to entry placed in front of more capable competitors. He can buy elections and political offices – and he can, for a while, delude people by creating a magic pseudo-reality with his words. But words cannot suspend the laws of logic or economics. Ultimately the forces of intellectual and moral decay unleashed by corporatist maneuvering inexorably push the world into a condition that even the purveyors of pull would have preferred to avoid. As Ludwig von Mises pointed out, the consequences of economic interventionism are often undesirable even from the standpoint of those who advocated the interventions in the first place. James Taggart is ultimately pushed into accepting Directive 10-289, though his initial plans were much more modest – mostly, a desire to hang onto leadership in the railroad business despite his obvious lack of qualifications for the position. Mitt Romney, by advocating James Taggart’s exact sort of crony corporatism, may well usher in a similar overarching totalitarianism – not because he supports it now (in the sense that Mitt Romney can be said to support anything), but because totalitarianism will be the logical outcome of his policies.

Because, in some respects, Ayn Rand wrote during a gentler time with respect to civil liberties, and the film endeavors to consistently reflect Rand’s emphasis on economic regimentation, there is little focus on the kinds of draconian civil-liberties violations that Americans face today. The real-world version of Directive 10-289 is not a single innovation-stopping decree, but an agglomeration of routine humiliations and outright exercises of violence. The groping and virtual strip-searching by the Transportation Security Administration, the War on Drugs and its accompanying no-knock raids, the paranoid surveillance apparatus of large-scale wiretaps and data interception, and the looming threat of controls over the Internet and indefinite detention without charge – these perils are as damaging as an overarching economic central plan, and they are with us today. While not even the most socialistic or fascistic politicians today would issue a ban on all new technology or a comprehensive freeze of prices and wages, they certainly can and will try to humiliate and physically threaten millions of completely peaceful, innocent Americans who try to innovate and earn an honest living. Obama’s administration has engaged in this sort of mass demoralization ever since the foiled “underwear” bomb plot during Christmas 2009 – but Romney would do more of the same, and perhaps worse. Unlike Obama, who must contend with the pro-civil-liberties wing of his constituency, Romney’s attempts to violate personal freedoms will only be cheered on by the militaristic, jingoistic, security-obsessed faction that is increasingly coming to control the discourse of the Republican Party. There can be no hope for freedom, or for the dignity of an ordinary traveler, employee, or thinker, if Romney is elected.

I encourage the viewers of the film to seriously consider the question, “Who is John Galt?” He is not a Republican. If any man comes close, it is Gary Johnson, a principled libertarian who has shown in practice (not just in rhetoric) his ability and willingness to cut wasteful interventions, balance budgets, and protect civil liberties during two terms as Governor of New Mexico. He staunchly champions personal freedoms, tax reduction, foreign-policy non-interventionism, and a sound currency free of the Federal Reserve system. Gary Johnson was, in fact, a businessman of the Randian ethos – who started as a door-to-door handyman and grew from scratch an enterprise with revenues of $38 million.  And, on top of it all, he is a triathlete and ultramarathon runner who climbed Mount Everest in 2003 – clearly demonstrating a degree of ambition, drive, and pride in achievement worthy of a hero of Atlas Shrugged.

Ayn Rand never meant the strike in Atlas Shrugged to be an actual recommendation for how to address the world’s problems. Rather, the strike was an illustration of what would happen if the world was deprived of its best and brightest – the creators and innovators who, despite all obstacles, pursue the path of merit and achievement rather than pull and artificial privilege. Today, it is necessary for each of us to work to keep the motor of the world going by not allowing the purveyors of pull to gain any additional ground. Voting for Mitt Romney will do just the opposite – as Atlas Shrugged: Part II artfully suggests to the discerning viewer.

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The Importance of Subjectivism in Economics – Article by Sheldon Richman

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Categories: Economics, Philosophy, Tags: , , , , , , , , , , , , , , , , , , , , , , ,

The New Renaissance Hat
Sheldon Richman
October 3, 2012
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After many years, Frédéric Bastiat remains a hero to libertarians. No mystery there. He made the case for freedom and punctured the arguments for socialism with clarity and imagination. He spoke to lay readers with great effect.

Bastiat loved the market economy, and badly wanted it to blossom in full—in France and everywhere else. When he described the blessings of freedom, his benevolence shined forth. Free markets can raise living standards and enable everyone to have better lives; therefore stifling freedom is unjust and tragic. The reverse of Bastiat’s benevolence is his indignation at the deprivation that results from interference with the market process.

He begins his book Economic Harmonies (available at the FEE store) by pointing out the economic benefits of living in society:

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions [a] man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries. What makes the phenomenon stranger still is that the same thing holds true for all other men. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else.

The Existence of Privilege

Bastiat was not naïve. He knew he was not in a fully free market. He was well aware of the existence of privilege: “Privilege implies someone to profit from it and someone to pay for it,” he wrote. Those who pay are worse off than they would be in the free market. “I trust that the reader will not conclude from the preceding remarks that we are insensible to the social suffering of our fellow men. Although the suffering is less in the present imperfect state of our society than in the state of isolation, it does not follow that we do not seek wholeheartedly for further progress to make it less and less.”

He wished to emphasize the importance of free exchange for human flourishing. In chapter four he wrote,

Exchange is political economy. It is society itself, for it is impossible to conceive of society without exchange, or exchange without society. …For man, isolation means death….

By means of exchange, men attain the same satisfaction with less effort, because the mutual services they render one another yield them a larger proportion of gratuitous utility.

Therefore, the fewer obstacles an exchange encounters, the less effort it requires, the more readily men exchange.

How does trade deliver its benefits?

Exchange produces two phenomena: the joining of men’s forces and the diversification of their occupations, or the division of labor.

It is very clear that in many cases the combined force of several men is superior to the sum of their individual separate forces.…

Now, the joining of men’s forces implies exchange. To gain their co-operation, they must have good reason to anticipate sharing in the satisfaction to be obtained. Each one by his efforts benefits the others and in turn benefits by their efforts according to the terms of the bargain, which is exchange.

But isn’t something missing from this account?

Austrian Insight

Indeed, there is: the subjectivist Austrian insight that individuals gain from trade per se. For an exchange to take place, the two parties must assess the items traded differently, with each party preferring what he is to receive to what he is to give up. If that condition did not hold, no exchange would occur. There must be what Murray Rothbard called a double inequality of value. It’s in the logic of human action–which Ludwig von Mises christened praxeology. Bastiat, like his classical forebears Smith and Ricardo, erroneously believed (at least explicitly) that people trade equal values and that something is wrong when unequal values are exchanged.

Perhaps I am too hard on Bastiat. After all, he was writing before 1850. Carl Menger did not publish Principles of Economics until 1871. Yet the Austrians were not the first to look at exchange strictly through subjectivist spectacles, that is, from the economic actors points of view. The French philosopher Étienne Bonnot de Condillac (1715-1780) did so a hundred years before Bastiat wrote:

The very fact that an exchange takes place is proof that there must necessarily be profit in it for both the contracting parties; otherwise it would not be made. Hence, every exchange represents two gains for humanity.

Bastiat Unaware?

Well, perhaps Bastiat was unaware of Condillac’s argument. That is not the case. He reprints the quote above in his book and responds:

The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. . . .

The exchange represents two gains, you say. The question is: Why and how? It results from the very fact that it takes place. But why does it take place? What motives have induced the two men to make it take place? Does the exchange have in it a mysterious virtue, inherently beneficial and incapable of explanation?

We see how exchange . . . adds to our satisfactions. . . . [T]here is no trace of . . . the double and empirical profit alleged by Condillac.

This is perplexing. Clearly, the necessary double inequality of value is not empirical or contingent. Contra Bastiat, the double inequality explains quite a lot, and his questions all have easy answers.

Yet more perplexing still is Bastiat’s statement in the same chapter: “The profit of the one is the profit of the other.” This seems to imply what he just denied.

Consequential Failure

Bastiat’s failure to grasp this point had consequences for his debates with other economists. For example, he and his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate over whether interest on loans would exist in the free market or whether it was a privilege bestowed when government suppresses competition. Unfortunately, the debate suffers because neither Bastiat nor Proudhon fully and explicitly grasped the Condillac/Austrian point about the double inequality of value. As Roderick Long explains in his priceless commentary on the exchange,

[E]ach one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it. . . .

Proudhon’s case against interest seems to depend crucially on his claim that all exchange must be of equivalent values; so pointing out the incoherence of this notion would be a telling reply. But Bastiat cannot officially give this reply (though he comes tantalisingly close over and over throughout the debate) because elsewhere–in his Economic Harmonies–Bastiat explicitly rejects the doctrine of double inequality of value.

How frustrating! Bastiat has so much to teach. But here is one blind spot that kept him from being even better.

Sheldon Richman is the editor of The Freeman and TheFreemanOnline.org, and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America’s Families.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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Dead-Tree Luddites – Article by Genevieve LaGreca

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The New Renaissance Hat
Genevieve LaGreca
May 28, 2012
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Imagine you’re living in the 15th century. You’re witnessing a revolution that will profoundly change the world. This revolution doesn’t involve swords and cannons but rather words and books. The cause of this upheaval is the most important invention in more than a thousand years: the printing press, by Johannes Gutenberg.

Within a few decades of its launch, you see the printing press transform the field of bookmaking in ways previously unimaginable. Printed books are far easier, faster, and less costly to produce than the books that had preceded them, which had to be laboriously copied, one page at a time, by hand. In the time it takes to copy one page by hand, the printing press can turn out hundreds or thousands of copies of that same page, thereby making it possible for the first time in history for almost anyone to own books.

Within a century of its creation, the printing press will spread throughout western Europe, producing millions of books, spurring the economic development of industries related to it, such as papermaking, and spreading literacy and knowledge around the world. The printing press will make possible the rapid development of education, science, art, culture — and the rise of mankind from the medieval period to the early-modern age.

Let us further imagine that not everyone in the 15th century is happy about this innovation. Unable to match the benefits of the printing press, the producers of hand-copied books are outraged. The scribes are being put out of business. The penmanship schools that train the scribes, the quill makers that supply their pens, and the manufacturers of the stools and drafting tables that literally support them are seeing a drop in sales. The hand-copied books are now priced too high to compete with the Gutenberg press, so their publishers are experiencing no growth, with no new capital coming into their industry. The sales force for the hand-copied books is also in despair, with their customers now ordering the new printed books from the Gutenberg people, and their lost income being money they can no longer put into their communities. Alas, the monopolistic monster, the printing press, is taking over.

The hand-copied-book interests complain bitterly to the Great Sages at their Hallowed Council of Justice. “Sires,” they cry, “you must stop the predatory pricing and scorched-earth policies of the Gutenberg press. It’s wiping out the competition. How can this be in the public interest?”

Fast-forward to the 21st century, and we see another revolution that is turning the book industry topsy-turvy — the transformation from printed books to electronic ones. This revolution is spearheaded by a modern-day Gutenberg, Amazon.com, the pioneer of the ebook, the Kindle device for reading it, and the online marketplace for publishing and selling it.

What Amazon has accomplished is truly amazing. With Kindle, it has eliminated the industry middlemen who come between the writer and reader of a book — from agents to publishers to distributors to wholesalers to brick-and-mortar bookstores. Kindle has also eliminated the need for a physical inventory of books, with its high printing, warehousing, and shipping costs. These innovations have resulted in far less expensive books now available to consumers. And the new marketplace of ebooks has been especially advantageous for self-publishers unable to get their books accepted through the traditional channels, who now have an avenue open to them for reaching customers directly.

The popularity of these ground-breaking innovations is enormous, with Kindle books now outselling the combined total of all paperback and hardcover books purchased from Amazon.

Without any middlemen or gatekeepers, with virtually no costs involved, and with self-marketing possible through social media and other Internet channels, electronic publishing is creating a robust market for new writers and books. For example, one novelist who was unable to find an agent or publisher has self-published two of her novels on Kindle. With her books priced at $2.99 and with a 70 percent royalty from Kindle, she earns approximately $2 per book. She is selling 55 books per day, or 20,000 books per year, which amounts to sales of $60,000 and royalties to her of $40,000. (As a simple comparison, without getting into the complexities of book contracts, this author might earn a royalty of approximately 10 percent from a traditional publisher, which would require her to achieve sales of $400,000 to earn as much money as she does self-publishing on Kindle.) Other authors are doing even better, including two self-published novelists who have become members of the Kindle Million Club in copies sold. These writers started with nothing — they were not among the favored few selected by agents and trade publishers, and they had no publicists or book tours — yet, thanks to electronic publishing, they are making a living, with some achieving stunning success.

The low pricing of ebooks, scorned by the traditional publishing interests, is the emerging writer’s new ticket of admission into the book industry. While readers may be highly reluctant to risk $25 in a bookstore to try a new writer’s hardcover work, they are buying the ebooks of new writers priced at or around $2.99 on Kindle. Writers are finding their fans and making money at these prices, and readers, judging by Amazon’s “customer reviews,” are happy with these low-cost books.

The writer-publisher in America dates back to our founding, promoting vigorous free speech and intellectual entrepreneurship. Benjamin Franklin’s Poor Richard’s Almanac and Thomas Paine’s Common Sense, both bestsellers in their day, were self-published. If the American dream is to start with nothing but one’s own talent, motivation, and hard work, and from that achieve success, then in recent times this dream was essentially closed to writers who failed to win the favor of the agents and trade publishers. Prior to the ebook revolution and online marketing spurred by Amazon, there was a stigma attached to self-publishing, despite its long and distinguished tradition in America. The major trade reviewers would not consider a self-published book, which meant that libraries and bookstores, which order based on the reviews, would not carry it. Now, ebooks are not only taking the stigma out of self-publishing but arguably making it the preferred route. Amazon has opened the avenue to pursuing the intellectual’s American dream once again.

Yet the same medieval attacks projected above against the printing press are now being launched against Amazon, with the attackers imploring the modern-day “sages” at the Justice Department to stop the new menace called Amazon.

Leading the charge back to the Middle Ages is the New York Times. Two articles appearing on the front page of its business section on April 16, 2012, illustrate what happens when the Luddites (i.e., those hostile to technological development) meet the statists (i.e., those who look to achieve their ends through government force).

“Daring to Cut Off Amazon” by David Streitfeld praises a publisher-distributor for pulling its printed books out of Amazon. (Amazon discounts not only ebooks but also the printed books it so successfully sells.) The company is Educational Development Corporation, whose CEO, Randall White, laments, “Amazon is squeezing everyone out of the business.… They’re a predator. We’re better off without them.”

One of Mr. White’s concerns was that his sales people were losing business because their customers were buying the company’s books cheaper from Amazon. Sales consultant Christy Reed comments about her local customers, “Yes they got the books for less [from Amazon]. But my earnings go back into our community. Amazon’s do not.” It apparently didn’t occur to her that by buying books cheaper on Amazon, her former customers have more money to spend in her community, and the Amazon staff who replaced her have more money to spend in their communities. But where spending does or doesn’t take place is not the main economic point. The real point is that for the same total spending in the economic system as a whole, people now obtain more books and have money left over to buy more of other things.

“Book Publishing’s Real Nemesis” by David Carr cites the recent antitrust suit brought by the Justice Department against five publishers and Apple, charging they engaged in the price-fixing of ebooks. Instead of condemning this police action against production and trade, Mr. Carr bemoans the fact that the strong arm of the law didn’t go far enough to grip the “monopolistic monolith” Amazon, which “has used its market power to bully and dictate.” Mr. Carr considers it bullying and dictating when a private company (Amazon) sets its terms, and other players (the publishers) are free to do business with it or not. But it’s not bullying and dictating when the compulsory power of the state intervenes to set economic terms and punish businesses arbitrarily?

Mr. Carr quotes Authors Guild president and best-selling author Scott Turow, who worries that the club of authors and publishers will shrink. (Really?) “It is breathtaking to stand back and look at this and believe that this is in the public interest,” complains Mr. Turow about Amazon’s success. He also wonders if Amazon will drive the price of books so low that there will be “no one left to compete with them.” Apparently the “public interest” doesn’t include the millions of customers who choose to buy the mother lode of affordable ebooks from Amazon and who may not welcome his solicitous concern over the low prices they’re paying. And apparently the “public interest” doesn’t include the fresh crop of new authors now sprouting through ebooks, without the benefit of the major publishers and lucky breaks that he had.

The Luddite tone of the attacks against Amazon rings like the following: The electric light will replace the candle. The car will replace the horse and buggy. The cure for tuberculosis will put the sanatoriums out of business. The computer will replace the typewriter.

The statist element lies in the attackers’ desire to enlist the police power of the state to stifle the competition and artificially prop up their businesses.

Granted, it may be disappointing and painful for those whose jobs are thinning out or becoming obsolete due to technological advancements, but that can’t justify government intrusion. Morality is on the side of the people engaged in voluntary trade and against those who urge the Justice Department’s encroachment into their industry. The charges levied against Amazon — as a predator, monopolist, bully, etc. — actually do not apply to a company engaged in voluntary trade, no matter how big its market share, but rather to those trying to preserve their interests through government action.

In the case of Amazon, the ones trying to restrain trade are the attackers themselves. Moreover, not only is morality on the side of Amazon, but so too are the long-run material self-interests of everyone in the economic system. Everyone working will earn money, but, thanks to Amazon and every other innovator of better products or more efficient methods of production, the buying power of the money he earns will be greater. The enemies of productive innovators are, by the same token, antisocial enemies of the general buying public.

The complaints lodged against Amazon would be harmless if the complainers could not use the government to advance their cause. But they can, through antitrust laws. These laws give the state the power to evaluate the price of a company’s product in relation to its competition and to punish companies — severely and arbitrarily — for prices deemed to be unacceptable. If a company’s price for its goods is deemed to be too low, it can be punished for being predatory and destructive of competition. If the price is deemed to be the same as its competitors, it can be punished for collusion and price-fixing. If the price is deemed to be too high, it can be punished for being monopolistic.

Using antitrust laws against the book industry poses an additional grave danger over and above their use against other industries. Because the book industry represents the dissemination of knowledge and ideas, an attempt to regulate the price of books abridges the free flow of ideas and violates our First Amendment right to freedom of the press.

Anyone interested in the survival of a robust book industry — or any other industry — with the free flow of products, the creativity of new business methods, and the preservation of economic freedom and property rights, must support the repeal of these oppressive laws.

The market — comprising the voluntary decisions of millions of free people — determines the pricing of books, the form a book will take, the device it will be read on, the winners and the losers of the competition. If the market chooses an innovative technology and a new direction, then so be it. Let the medieval bookmakers copying their books by hand and their contemporary counterparts using needless paper and ink, warehouses, delivery trucks, and bookstores, adopt the advances or quit!

Totally unlike competition in the animal kingdom, in which the losers are eaten or die of starvation, the losers of an economic competition do not die. At worst, they must relocate in the economic system at a lower level. But in an economic system free enough rapidly to progress, as ours has been for most of the last two and a half centuries, even the lowest-paid workers enjoy a standard of living that surpasses that of the kings and emperors of earlier ages. This is why the Gutenbergs of the world must be left free to dream, to create, and to trade without fear of punishment.

Gen LaGreca is the author of Noble Vision, a novel that won a ForeWord magazine Book of the Year Award and was a finalist in the Writer’s Digest International Self-Published Book Awards. After being rejected by dozens of agents and unable to find a trade publisher, it now enjoys steady ranking in the Top 100 Best Sellers in medical and political genre fiction on Kindle. Send her mail. See Genevieve LaGreca’s article archives.

Economist George Reisman contributed to this article.

You can subscribe to future articles by Genevieve LaGreca via this RSS feed.

Copyright © 2012 by Genevieve LaGreca. Permission to reproduce is granted with attribution.

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Eliminating Most Foreclosures: An Innovative and Just Approach to Mortgage Delinquencies

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Categories: Economics, Justice, Politics, Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The New Renaissance Hat
G. Stolyarov II
March 25, 2012
Recommend this page.
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The economic and personal consequences of foreclosure are devastating. Foreclosures leave behind not only blighted neighborhoods, but ruined lives. Furthermore, during the past three years, immense abuses of the foreclosure process have come to light – with numerous banks being found to have improperly foreclosed on thousands of homeowners. The banks have either been unable to produce documentation that demonstrated their right to foreclose – or, worse, have foreclosed on individuals who were never even delinquent or did not have mortgages in the first place (see, for instance, here, here, and here). The violations of due process, private-property rights, and the rule of law have been astounding.

At this point, any solution that can reduce the number of foreclosures will be a welcome benefit to individual liberty, the US economy, and millions of Americans. Indeed, the concept of foreclosure – the expropriation of one’s home – resulting from a few late payments has always struck me as draconian. It disregards one fundamental fact: the homeowner has equity in his or home, even if he or she fails to make a few scheduled payments. So, suppose that a homeowner has a $150,000 outstanding mortgage loan on a home whose market value is $200,000. This means that the homeowner’s equity in the home is $50,000 – or one quarter of the home’s value. If the homeowner fails to make a $1000 hypothetical monthly payment on time, why is the bank entitled to appropriate the entire home and thereby deprive the homeowner of the entire $50,000 in equity? Suppose, as is often the case these days, that the foreclosure proceedings drag on for a year. A 5000% annual rate of interest for that one delinquent payment is quite steep indeed!

While delinquencies ought to be penalized, wholesale expropriation of a home is an unnecessary and disproportionate response in most cases. It would not have been possible on a truly free market, where roughly equal negotiating power would exist between lenders and borrowers. In today’s politicized financial environment, however, the large banks receive all of the privileges: bailouts, loan guarantees, access to “free money” from the Federal Reserve, barriers to entry for smaller competitors, the ability to “securitize” personal loans through means of dubious accountability, the ability to flout laws such as those pertaining to mortgage modifications, and a swiftly operating “revolving door” between bankers and politicians. Thus, homeowners are often left to acquiesce to terms that are far harsher than what they could have gotten for themselves in a truly free market.

A more equitable solution, that recognizes that the real value of the homeowner’s equity, is not to foreclose, but rather to reduce the homeowner’s equity for each delinquent payment. If the homeowner fails to make a scheduled payment, then the bank should be able to recoup its resulting losses – by seizing the portion of the homeowner’s equity corresponding to the amount of the delinquency, perhaps also incorporating an interest charge at the prevailing market rate. Only when all of the homeowner’s equity has been exhausted in this way should the bank have the right to foreclose. In today’s housing market, where many homes are “underwater” (i.e., the mortgage balance exceeds the market price, which has declined precipitously since the days of the housing bubble), this solution would still mean that some foreclosures would occur. But the number of foreclosures would be greatly reduced, and the majority of currently planned foreclosures would never occur. Furthermore, the “underwater” homeowners could still be helped by downward principal modifications that recognize the illusory and unsustainable nature of the inflated market prices that existed during the housing bubble and that were fueled by the expansionary monetary policy of the Federal Reserve. Homeowners should not be made to suffer for the Federal Reserve’s blunders.

Under my proposed approach, the mere involuntary loss of one’s job, or a catastrophic illness, would not put one’s place of shelter in immediate jeopardy. Rather, in the time that it takes for the homeowner’s equity to be exhausted, the homeowner would have the opportunity to attempt to regain his or her employment or health. Furthermore, with fewer foreclosures, the unsightly, wasteful, and dangerous effects of neighborhood blight would be greatly scaled back. A homeowner will still largely maintain his or her residence, even if he or she cannot make a regular mortgage payment. But once a home enters foreclosure, it suffers from deterioration and decrepitude at best – and outright vandalism and destruction at worst.

In rolling back the political privileges of the large banks, it is essential to compensate ordinary, law-abiding, innocent homeowners for the damage that these special privileges have wrought. The benefits of years of hard work and consistent mortgage payments should not be nullified overnight by a single delinquency. Over a year ago, in “Wrongful Foreclosures and the Free Market”, I advocated breaking up the bailed-out banks and declaring a temporary moratorium on foreclosures. Rewriting foreclosure law to require the exhaustion of the homeowner’s equity before a foreclosure can be initiated can be another step to wipe out most foreclosures at the stroke of a pen – while restoring an outcome more compatible with individual liberty, true market freedom, and natural justice.