“Free” Market Ethics

I thought it might be interesting to have a regular post about business ethics in this space; I’m going to start posting about this topic on Sundays until there is some reason to stop. Given the nature of a free-market economy, the chances of ever running out of topics to discuss is essentially nil. So let’s start with one of the big ones:

In my last post, I mentioned that if the “Bigger Idiot” effect takes hold of a nation’s economy, it is quite possible for a downturn in the market to set off a chain reaction that can lead to a national (or even global) catastrophe, as in the case of the sub-prime lending crisis going on right now. An actual collapse of the U.S. housing market, not just a temporary correction, could force dozens of companies out of business, throw tens of thousands of people out of work, and force millions of people from their homes. This will, in turn, eliminate all of the collateral businesses (in this case, everything from home furnishings to food) that would have serviced both the homeowners and the mortgage company employees, which will in turn deprive all of the companies servicing those companies and their employees of income, and so on.

Clearly, this is a situation that our society should avoid. But how are we to do so? Laws preventing sub-prime lending would prevent real estate speculators from purchasing many properties they can’t possibly afford in the hopes of “flipping” them before the lenders can foreclose, but it would also deny millions of people who can afford the payments on a single house but don’t have the credit rating to get a prime mortgage the chance to own a home. And since home ownership is one of the best ways of developing real net worth, this will condemn millions of these so-called “marginal” customers to never escaping from their poverty.

By the same token, a bailout by the Federal government for those people with sub-prime mortgages who are facing foreclosure would definitely save a lot of people from losing their homes. But this would also enable many of those would-be real estate moguls to continue to milk the system, creating their personal fortunes at the expense of the taxpayer. I can’t speak for everyone, but I personally resent the government taking my money and giving it to someone who they think deserves it more than I do; I find the idea of the government taking my money and using it to prop up some wildcat entrepreneur absolutely intolerable.

Even worse, the Federal bailout being proposed would prop up the artificially inflated real estate market, thus barring more and more middle-class buyers from ever entering the market without taking insane risks with their mortgage – effectively perpetuating the sub-prime industry and the current crisis indefinitely. Laws that would eliminate predatory lending practices (offering people loans with misleading terms, or outright falsifications about costs and penalties) would help, but the real problem with the real estate bubble, as with all “Bigger Idiot” situations, is greed on the part of the speculators. There is no way to legislate against greed, and as attractive as the idea of passing the Being Bloody Stupid Act of 2007 is, if we put everyone gullible enough to believe they can make a fortune in real estate with no money of their own in prison, we’d run out of land to build anything else.

In the final analysis, all the government can really do is attempt to eliminate the outright fraud through closer industry regulation and increase the availability of capital as much as possible without causing unmanageable inflation. The actual price corrections within the real estate market must come from within, and will doubtless result in a lot of otherwise innocent people getting hurt. Unfortunately, anything else will constitute attempting to control people’s lives for their own good – an idea as useless as it is unethical. If we believe in a free-market economy (and having seen the results of large-scale Communist and Socialist economies, it’s hard not to), then we must support the rights of the individual to spend money how and where they like, even if what they like is stupid, greedy, self-destructive and against the public good.

Because the only known alternatives are worse…