On October 1, 90-year-old Addie Polk, distraught over her home’s impending foreclosure, shot herself twice in an attempted suicide.

Fortunately, Ms. Polk’s attempt was unsuccessful. Even better for her, Fannie Mae – which had taken possession of her mortgage after numerous missed payments – forgave Ms. Polk’s debt and signed the house over to her, free and clear.

What part of this story makes any sense? A woman shoots herself after falling behind on payments she agreed to make, and, as a reward, she gets a free house? Since when did Fannie Mae, now essentially a wholly owned subsidiary of the U.S. government, get into the Extreme Makeover: Home Edition business?

In 2004, Ms. Polk took out a 30-year mortgage for $45,620 at 6.375% interest. That same day, she also took out a line of credit for $11,380. Four years later, her inability to make her payments had reached the point of foreclosure. Police had made 30 attempts to evict her before the October 1 shooting incident.

Now, you can feel sorry for Ms. Polk all you want. But the fact of the matter is that she took money and agreed to pay it back, and she didn’t. Yes, the lenders may have “taken advantage of her” – only because they knew the government would step in and bail them out if Ms. Polk and others like her couldn’t pay – and yes, the Federal Reserve System creates money and credit out of thin air, which is “predatory” by its very nature. But these were the rules of the game when Ms. Polk took out her loans, and if she didn’t know them, she had no business playing.

What message does Fannie Mae’s forgiveness of this loan send to other people facing foreclosure? Attempt suicide, and if you’re lucky enough to survive, you get a free house? This story is a fitting microcosm for a corrupt system in which lenders are criticized for making loans to people who couldn’t repay them and then are rewarded with a $700 billion bailout as “punishment.”

Under a free market, interest rates would be set by savings and investment. No entity would have the power to create money and credit out of thin air and, as a result, no “predatory” lending could take place. When companies made bad loans, they’d suffer the consequences, and when people took secured loans they couldn’t repay, they’d lose the underlying properties.

The free market is self-correcting. But what we have in America is far from a free market. As one Republican congressman put it, we have “capitalism on the way up, and socialism on the way down.” In order to maximize utility and respect individual rights, we must return to a more laissez-faire form of capitalism where the people who take bad risks – both mortgagor and mortgagee – are made to bear the consequences of their actions.

Related posts:

1. Fannie Mae & Freddie Mac: When Will the Government Learn?
2. Fannie Mae and Freddie Mac Now Under Federal Control
3. America’s Free Market…or the Lack Thereof
4. More Troubles for Fannie Mae and Freddie Mac
5. Fannie Mae, Freddie Mac Bailout: We Are Now at the Mercy of the Chinese