The Fountainhead: Subprime, U.S.A.

The Fountainhead: Subprime, U.S.A. October 12, 2018

The Fountainhead, part 4, chapter 1

Last week, we found out about Monadnock Valley, the brand-new summer resort in Pennsylvania that Howard Roark had just completed. Here’s how it happened:

It had happened a year and a half ago, in the fall of 1933. He had heard of the project and gone to see Mr. Caleb Bradley, the head of some vast company that had purchased the valley and was doing a great deal of loud promotion. He went to see Bradley as a matter of duty, without hope, merely to add another refusal to his long list of refusals.

…He could learn little about Mr. Bradley. It was said that the man had made a fortune in real estate, in the Florida boom. His present company seemed to command unlimited funds, and the names of many wealthy backers were mentioned as shareholders. Roark never met them.

Although he doesn’t expect to win the bid, Roark makes his pitch:

If what they wished to build was an unusual summer resort for people of moderate incomes — as they had announced — then they should realize that the worst curse of poverty was the lack of privacy; only the very rich or the very poor of the city could enjoy their summer vacations; the very rich, because they had private estates; the very poor, because they did not mind the feel and smell of one another’s flesh on public beaches and public dance floors; the people of good taste and small income had no place to go, if they found no rest or pleasure in herds. Why was it assumed that poverty gave one the instincts of cattle?

Wait wait wait. Are you saying it’s bad to assume that poverty gives people “the instincts of cattle”? Because you just wrote that very thing in the immediately preceding sentence, which says that the very poor “did not mind the feel and smell of one another’s flesh” and are fine with congregating “in herds”.

This is such a perfect example of how conservative writers pathologize poverty. It’s no surprise that the poorest of the poor, who can’t afford even the low-cost resort that Roark plans on building, would get used to taking recreation in crowded public spots. Who wouldn’t, if the alternative was no vacation at all?

But Ayn Rand, like many others, assumes that how people act under conditions of deprivation reveals what they really want. And it’s a happy coincidence that their desires sort neatly by income. The “people of good taste and small income” want just a little leisure, nice but not too fancy. The extremely poor don’t mind being jam-packed into public spaces like cattle – because in her eyes, if you have no income, it follows that you also have no taste.

Meanwhile, it just so happens that the people who prefer vast private estates are the very rich, who can afford them. So it all works out! It’s a classic illustration of the logic by which social-Darwinist advocates persuade themselves that grossly disparate outcomes are just and fair.

Roark’s proposal for Monadnock Valley is to build a summer resort that isn’t one huge hotel, but many small cottages out of sight of each other, so that people who enjoy privacy and solitude can go for a vacation and not have to bump into strangers: “a resort for people who enjoyed their own presence well enough and sought only a place where they would be left free to enjoy it” (which fits very well with this book’s misanthropic disdain for other human beings).

He’s certain that Caleb Bradley and his investors are going to reject him outright (“He saw them exchanging glances… He felt certain that they were the kind of glances people exchange when they cannot laugh at the speaker aloud”). But, to his surprise, he gets the contract. In what must be the only example on record of a Randian protagonist learning from experience, he demands written approval for everything so as to avoid another Stoddard Temple fiasco:

He demanded Mr. Bradley’s initials on every drawing that came out of his drafting rooms; he remembered the Stoddard Temple. Mr. Bradley initialed, signed, okayed; he agreed to everything; he approved everything. He seemed delighted to let Roark have his way.

Why is Bradley so cheerfully eager to let Roark have his own way? We’ll find out in the next installment.

For now, let’s focus on another of those major historical events that The Fountainhead alludes to so off-handedly. Ayn Rand mentions that Bradley made his fortune “in real estate, in the Florida boom”. She’s referring to a real historical craze from the 1920s:

At the peak of the mania, it seemed as if almost everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world due to its incredible quantity of real estate advertisements.

…As the Florida real estate bubble crescendoed in 1925, property prices quadrupled in less than one year. Investors made incredible fortunes, such as an elderly man who invested $1,700 in a Florida property and watched its value soar to $300,000 in 1925. It seemed as if investors could do no wrong by simply buying any property in Florida and riding it to lofty heights.

To all of us who lived through the great subprime mortgage crisis of ten years ago, this should sound familiar. It’s just another chapter in Florida’s boom-and-bust, bubble-ridden history. In an Atlas Shrugged post, “The Thin Red Line“, I wrote about that crisis and how libertarians falsely blame the government for it.

However, it’s worth asking why Florida in particular is so susceptible to these bubbles and scams, to the point where the name of the state is a byword for shady real-estate dealings.

A 2009 article in the New Yorker, “The Ponzi State” by George Packer, points out a big part of the problem: Florida has no income tax – the state constitution forbids it – which means that to pay for services like schools, police and fire departments, the state relies on sales tax. In particular, one of the biggest revenue sources is taxes on real-estate transactions. This means that Florida depends on future development to finance current development. That’s a perfect recipe for generating unsustainable bubbles.

In the past, banks themselves might have been a check on risky lending, but “securitization” – the crisis-era practice of bundling up mortgages and selling them off to investors – meant that banks could afford to take a not-my-problem attitude to the creditworthiness of the people they were lending to. Loan officers who were rewarded based only on how many loans they could churn out, not on what happened to them afterwards, had an incentive to push unsophisticated buyers – especially minorities and the poor – into predatory loans they had little chance of repaying. On the other side of the equation, the greed for big profits and the fear of missing out meant that investors were motivated not to ask too many questions either.

And while the banks are hardly blameless, some fault also lies with ordinary homeowners who got greedy. Many used cash-out refinances or home equity loans to borrow against the rising value of their home, assuming they’d recoup it and then some when they sold the property. This gamble works as long as property values keep going up, but when prices inevitably start to drop, borrowers are left with unsellable houses and crushing debts.

As Packer writes:

When, at the Florida market’s dizzying mid-decade height, speculators lost confidence, the faith that kept the state aloft gave way and the economy plummeted like a Looney Tunes character who, suspended in midair, suddenly looks down.

In a state where so many jobs were in construction and real estate, the bursting of the bubble was a one-two punch. Millions of people lost their livelihood at the same time as their only major asset plummeted in value. The result was a plague of abandoned, blighted homes and entire ghost towns, many of them left half-completed when developers went bankrupt:

Driving around Florida’s ghost subdivisions, you feel not just that their influence is waning but that they are physically hollowing out. In a place like Lehigh Acres, near Fort Myers, where half the driveways are sprouting weeds, and where garbage piles up in the bushes along the outer streets, it’s already possible to see the slums of the future… The vacant houses in Country Walk will be boarded up. The St. Augustine grass in the front yards of Tanglewood Preserve will grow three feet high. The open fields with street lights but no houses will become dumps.

The crisis was so severe that it continues to reverberate years later. As recently as 2014, at least one-quarter of mortgages were still underwater in 50 of Florida’s 67 counties, meaning that the borrower owes more than the home is worth.

This has special relevance for Ayn Rand, since she was fiercely opposed to taxes and believed that people should voluntarily pay for the government services they use. Florida’s model may be the closest real-world equivalent to this, and it’s not a coincidence that it regularly produces scams, bubbles and crashes.

Image credit: respres via Wikimedia Commons, released under CC BY 2.0 license

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