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Focus on Freedom

Abandoning a Fundamental Principle of Liberty
to Justify Mortgage Default


It is no longer unusual to see writers, sometimes even libertarians, failing to distinguish between physical force and social (including economic) pressure; in fact such individuals often use the term "psychological force" or even "economic force" for the latter - a kind of double-speak which seeks to distort the meaning of "force" away from its unambiguous root. However, I was surprised and even shocked to see Doug French, president of the Mises Institute, breach this fundamental distinction - absolutely crucial for the basis of any principled free society, by attempting to make a detailed comparison between the situation of a battered spouse and that of a home owner with a mortgage greater than the current market value of his house. And French is not even referring only to those borrowers caught up in the sub-prime mortgage fiasco where lenders frequently loaned government-guaranteed funds to individuals clearly unable to repay - although logically and ethically their situation is actually no different than that of owners who can repay.

French apparently sees no contradiction with the philosophical foundations of liberty when he equates the situation of a borrower of money under a mutually agreed contract with that of a physically abused person - even defending such inconsistency with additional distortion by pointing out that government law enforcement should but does not protect a spouse who has been aggressed against. Somehow such physical aggression becomes an accurate parallel to the actions of the federal government's Fannie and Freddie, thereby justifying a mortgage borrower simply walking away from from his/her (hir) loan - in effect intentionally breaching a contractual obligation.

At no time is the lender of mortgage money physically forcing a potential home-buyer to any of the following: "sign on the dotted line", "do not read the contract prior to signing", "do not consult someone more knowledgeable about contracts before signing", "do not have an escape clause in the contract". Of course, it is also unlikely that any battered spouse was forced into marriage either, at least not in the US. However, when physical force is used by one party in a relationship (including a marriage) against the other without permission (before or after), the physically harmed individual's best recourse is to cease the association - leave, and most important, since such use of force was not contracted for, terminating the relationship is that spouse's clear entitlement - whatever the government laws may say. Even without a specific exit clause in a marriage vow - unless one counts death, where those words of "till death do us part" are used - and no actual contract is written, canceling a relationship with a physically (or even psychologically) abusive person is the only reasonable response which will optimally maximize one's Lifetime Happiness.

Since no physical force played a part in the initiation or continuation of the mortgage loan and the borrower accepted the money under a contract on the terms agreed to, it is hir responsibility to meet those terms. To not do so is in fact a type of bankruptcy, a declaring that one will not honor one's debt obligations - a declaration of not being self-responsible. The fact that the housing market was bubbling when an expensive house was purchased is no justification for shrugging off the debt when the bubble has burst - apparently highly rising stock bought on margin still has to be paid for when instead its price falls (or the broker can sell to meet a margin call with likely resulting poor reputation for that buyer). One's reputation for abiding by contracts ought to be a serious concern to everyone since such reputation is the basis of all one's market exchanges. Renting out the now undesirable house for even half the cost of the monthly mortgage and renting a much smaller abode for even less while trying to sell the larger one, is one way in which the borrower demonstrates self-responsibility rather than the "feel[ings of] trapped and helpless" that French assumes must be the case since "the lender (backed by government force) is seen by the borrower as abusive". Note here that such lender is correctly backed by government forced (under the current system) precisely because of the existence of a valid legally and ethically enforceable contract.

French continues to distort the facts with such wording: "But if the same house can be had for half that now, being forced to pay double each month for nothing is a financial beating." Phrases like "being forced to pay" and "financial beating" are again equating physical force with the voluntary contractual obligations and the economic results of a poor decision - buying something that is actually overvalued and later has that overvalue realized by others. The mortgage lenders did not use physical force to bring about that loss of value, as would be the case if vandals had trashed or arsoned the house. Even if one grants that that all money market manipulation is the direct result of government use of physical force (with which I agree), since this is constantly occurring it is a requirement of any prudent borrower to take that into account. After all, such people are just as often attempting to gain from such manipulations and they sure don't give the money back when that happens! So why should they not also be prepared to lose when that happens.

Would French defend the failure to repay money received for other purposes? When it is for a luxury car now worth far less than its outstanding loan? Or is it only when government is part of the transaction? (But the latter is the case with all but individual privately contracted loans since banking regulations abound!) Government creates no value itself but instead uses money taken (primarily taxed) from residents and visitors for whatever purposes those in power deem in their best interest. So government-guaranteed money borrowed and not repaid is actually being taken by some from others under threat of force (by government) with the bank as the go-between. This applies to all government guaranteed student loans, small business loans and home mortgages, and it is major distortion to the market in those areas of education, business and home building. Failure to repay - "walking away" from - such loans simply magnifies the distortion and increase the effective theft of more money from those who have not defaulted on payments of monies previously taxed and borrowed.

Current society in North America (and most of the industrialized world) is so devoid of self-responsible interactions that seeing this defense by a writer of failure to pay a mortgage loan simply because the house is now worth less than the mortgage debt is actually no surprise. What is shocking is that it comes from the pen of the president of the Mises Institute, which prides itself on "Advancing the scholarship of liberty in the tradition of the Austrian School" of economics. So much for French and the Mises Institute advancing liberty... This piece shows such poor understanding of the philosophical foundation of that term that I fear von Mises would "roll over in his grave" if he could be aware of it. I am moved to wonder: is Doug French simply trying to justify his own mortgage default? ..and make a few bucks on a book about it too?