How the mortgage industry destroyed capitalism
OK, minor hyperbole there. We might still muddle through. Think I'm exaggerating? Let's pay a visit to Mr. History.
Many people have wondered why capitalism never developed until relatively recent history. After all, there's no inherent *technological* reason why it couldn't have developed in, say, Bronze Age Greece, or Stone Age Fertile Crescent.
The answer is that capitalism doesn't depend on technology. It depends on social conditions. Most critically, it depends on a more-or-less modern concept of personal property. In a situation where a king, nobleman, or senator can seize your property at will, and get away with it, the best that a would-be capitalist can be is a merchant. He might be a great merchant, whose caravan is guarded by his own small army; or he might have all the households in a small city as workshops; but he can't make the leap to capitalism. Because it takes certainty in property rights for capitalism to flourish.
As a result, what we recognize as capitalism emerged in the early 17th Century, in England and the Netherlands. More-or-less at the same time. Why those two countries? Because in those two countries, legal affairs had just evolved to the point that a nobleman who seized a commoner's property would be punished as harshly as a commoner who had stolen the same property. The practical result, is that merchants no longer had to worry that growing too large would result in property seizures to pay off some nobleman's debts to a third party.
Some property, such as clothes and tools, doesn't need significant protection; merely wearing the clothes and using the tools is enough to create a presumption that you own them. And courts of law have always been charged with sorting out the disputes, when there are disputed claims.
Some property has always had more meticulous protection. Land is probably the oldest example. Written descriptions of the borders of one's land have been part of the legal system as long as writing has existed. And many of the oldest deeds still extant refer to marking stones that were were so ancient that the scribes themselves didn't seem to know their origin.
Organized, systematic records of the ownership of all the land in the country entered English law as the Normans organized their hold on England in the late 11th Century. A system of recording sales of property at the county grew up, which the Founders kept after the American Revolution. Details varied a bit from State to State, but the principle was national: In order to be legally valid, all sales of property needed to have the ownership recorded by the county government. Capitalists supported the system, because that was how their ownership was protected.
And so things stood, for over two centuries. Details changed, as the quill pen was replaced by the typewriter, free-form deeds were replaced by standardized forms, and hand drawings were replaced by surveyors with geospatial databases. Different states took different approaches to modernization, so the number of details that varied from state to state multiplied. But the principle of registering real estate transactions with the county government remained.
And then came computers and the Internet. Suddenly going in person to the county clerk's office seemed as antique as leaded gasoline and cars with fins. And so, the big players in the real estate business got together, and decided to modernize the system.
Now, there's more than one way to do this. When the banks decided that physically moving checks around was obsolete, they lobbied Congress for a change. The resulting law was passed in 2003, and it's the reason your bank statement now has a digital image of your check, instead of giving you your check back.
In a responsible world, the mortgage industry would have done what the banks did: Persuade the government (whether Federal or all the States) to let them take the system online, so that they didn't need to make 8,000,000 or so trips to 3,077 county (or parish or borough) clerk's offices every year. Instead, they dreamed up an "it should work" legal hypothesis, and filed ownership changes in a private database. Without, as far as I can tell, ever checking (other than with attorneys on the payroll of the database firm) whether what they were doing was legally valid.
Behold, the power of wishful thinking: More than $4 trillion worth of business deals were based on an untested hypothesis that something not mentioned in the law was just as good as following the law. And the people making this decision had self-images as hard-headed capitalists.
The the foreclosure crisis hit. Some judges agreed to go with the flow, and signed the orders they were asked to. Others, insisting that the law be followed, sent the attorneys packing. Whether a transfer of real estate was legal or not, appears to hinge on whether a judge upholds the law, or decides an arrangement with only the haziest connection to the law is good enough. In other words, property rights depend on a whim. It's the whim of a judge, instead of a baron, but the principle is the same.
The mortgage industry has kicked the most critical support for capitalism out. This affects more than just those who have stopped paying their mortgage. For pretty much everyone who has bought real estate in America in the last baker's dozen of years, it is up to a judge's whim whether or not they "really" own their property.
It's a huge problem. Now that we know about it, the real estate market will remain depressed until a solution we all agree is fair, is found and implemented. (Not many, after all, will take the chance that their mortgage payments won't be buying ownership. And most of the exceptions will only play with the share of their capital they might otherwise risk on junk bonds or the common stock of companies in bankruptcy court.) And, for the last half century, it's been the real estate industry that led us out of recessions.
Many people have wondered why capitalism never developed until relatively recent history. After all, there's no inherent *technological* reason why it couldn't have developed in, say, Bronze Age Greece, or Stone Age Fertile Crescent.
The answer is that capitalism doesn't depend on technology. It depends on social conditions. Most critically, it depends on a more-or-less modern concept of personal property. In a situation where a king, nobleman, or senator can seize your property at will, and get away with it, the best that a would-be capitalist can be is a merchant. He might be a great merchant, whose caravan is guarded by his own small army; or he might have all the households in a small city as workshops; but he can't make the leap to capitalism. Because it takes certainty in property rights for capitalism to flourish.
As a result, what we recognize as capitalism emerged in the early 17th Century, in England and the Netherlands. More-or-less at the same time. Why those two countries? Because in those two countries, legal affairs had just evolved to the point that a nobleman who seized a commoner's property would be punished as harshly as a commoner who had stolen the same property. The practical result, is that merchants no longer had to worry that growing too large would result in property seizures to pay off some nobleman's debts to a third party.
Some property, such as clothes and tools, doesn't need significant protection; merely wearing the clothes and using the tools is enough to create a presumption that you own them. And courts of law have always been charged with sorting out the disputes, when there are disputed claims.
Some property has always had more meticulous protection. Land is probably the oldest example. Written descriptions of the borders of one's land have been part of the legal system as long as writing has existed. And many of the oldest deeds still extant refer to marking stones that were were so ancient that the scribes themselves didn't seem to know their origin.
Organized, systematic records of the ownership of all the land in the country entered English law as the Normans organized their hold on England in the late 11th Century. A system of recording sales of property at the county grew up, which the Founders kept after the American Revolution. Details varied a bit from State to State, but the principle was national: In order to be legally valid, all sales of property needed to have the ownership recorded by the county government. Capitalists supported the system, because that was how their ownership was protected.
And so things stood, for over two centuries. Details changed, as the quill pen was replaced by the typewriter, free-form deeds were replaced by standardized forms, and hand drawings were replaced by surveyors with geospatial databases. Different states took different approaches to modernization, so the number of details that varied from state to state multiplied. But the principle of registering real estate transactions with the county government remained.
And then came computers and the Internet. Suddenly going in person to the county clerk's office seemed as antique as leaded gasoline and cars with fins. And so, the big players in the real estate business got together, and decided to modernize the system.
Now, there's more than one way to do this. When the banks decided that physically moving checks around was obsolete, they lobbied Congress for a change. The resulting law was passed in 2003, and it's the reason your bank statement now has a digital image of your check, instead of giving you your check back.
In a responsible world, the mortgage industry would have done what the banks did: Persuade the government (whether Federal or all the States) to let them take the system online, so that they didn't need to make 8,000,000 or so trips to 3,077 county (or parish or borough) clerk's offices every year. Instead, they dreamed up an "it should work" legal hypothesis, and filed ownership changes in a private database. Without, as far as I can tell, ever checking (other than with attorneys on the payroll of the database firm) whether what they were doing was legally valid.
Behold, the power of wishful thinking: More than $4 trillion worth of business deals were based on an untested hypothesis that something not mentioned in the law was just as good as following the law. And the people making this decision had self-images as hard-headed capitalists.
The the foreclosure crisis hit. Some judges agreed to go with the flow, and signed the orders they were asked to. Others, insisting that the law be followed, sent the attorneys packing. Whether a transfer of real estate was legal or not, appears to hinge on whether a judge upholds the law, or decides an arrangement with only the haziest connection to the law is good enough. In other words, property rights depend on a whim. It's the whim of a judge, instead of a baron, but the principle is the same.
The mortgage industry has kicked the most critical support for capitalism out. This affects more than just those who have stopped paying their mortgage. For pretty much everyone who has bought real estate in America in the last baker's dozen of years, it is up to a judge's whim whether or not they "really" own their property.
It's a huge problem. Now that we know about it, the real estate market will remain depressed until a solution we all agree is fair, is found and implemented. (Not many, after all, will take the chance that their mortgage payments won't be buying ownership. And most of the exceptions will only play with the share of their capital they might otherwise risk on junk bonds or the common stock of companies in bankruptcy court.) And, for the last half century, it's been the real estate industry that led us out of recessions.