<blockquote>
'Needless to say, housing finance over the last couple of decades has been a prime example of what goes wrong when free market principles are subverted, and the price mechanism is made to serve statist ends. The previous direct system of housing finance, exemplified by Jimmy Stewart in the 1946 movie “It's a Wonderful Life,” was superseded by a system of guarantees and securitization that was nevertheless more expensive for the customer –albeit highly profitable both for Wall Street and for the shadowy netherworld of mortgage origination.
In summary, the U.S. political tradition is not particularly friendly to the free market. To the extent it allows a free market, it facilitates a bastardized version of the market in which, as in Twain's “Gilded Age,” political pull is far more profitable than ownership. Thus among the most profitable companies in the last few years have been producers of corn, and manufacturers of ethanol by a process neither economical nor useful to the objective of slowing global warming, its supposed goal. Indeed the global warming problem has been used, not to produce market-friendly solutions to the modest but probably real problem of man-caused carbon dioxide emissions, but to construct ever more Byzantine schemes for government control over large parts of the economy, with massive rents extracted therefrom.
...Germany, for example, has a more sensible housing finance system, less of its capital diverted to housing investment...'</blockquote>
Populist Before It Was CapitalistBy Martin Hutchinson
August 23, 2010
SourceThe United States is often held out as the world's principal beacon of free-market principle. To the extent that it backslides, there is thought to be little hope for such principles in other countries. Yet as last week's housing finance debate demonstrated again, the United States was populist before it was capitalist, and free-market principles often have a tougher battle here than in supposedly socialist Europe, let alone the supposedly state-directed economies of east Asia.
It began with the American Revolution. As is obvious to historians who are not also myth-makers, this was not instituted by a group of dedicated capitalists. In particular, to get sufficient support among the working folk who were needed to man the Continental Army, the governing ethos of the revolution was heavily populist and anti-aristocratic. Washington may have been as rich as Lord Fairfax, if not richer, but politics demanded that he exploit the impoverished masses' resentment of his Lordship. As for Thomas Jefferson, he was a classic upper class radical; as the Irish poet Thomas Moore (1779-1852) wrote of him:
<blockquote> The Patriot, fresh from Freedom's councils come
Now pleased retires to lash his slaves at home
Or woo, perhaps, some black Aspasia's charms,
And dream of freedom in his bondsmaid's arms.*</blockquote>
Property rights in slaves were questioned by the Founding Fathers far less than they were in England – Lord Mansfield's decision prohibiting slavery within metropolitan Britain had already been issued in 1772. However feeding popular prejudice required that the property rights of landowners in general must be sharply restricted compared with their position in England. Whereas in England landowners owned both the game on their land and the fish in the streams running through their land, in the United States, as R.J. Smith of the Center for Private Conservation has ably pointed out, rights of landowners were much more restrictive, so hunting and fishing by the populace at large were allowed without restrictions. The result was a classic “tragedy of the commons,” wiping out buffalo herds and East Coast salmon alike. Capitalism defines and protects property rights; populism allows unrestricted access, thereby destroying the amenity concerned.
The priority of populism over property rights continued throughout the nineteenth century, with Abraham Lincoln being a major exemplar and the much reviled James Buchanan a feeble resister of the tendency. To a certain extent this paralleled developments in Britain: the nineteenth century Whigs who proclaimed their devotion to free markets in practice were more than happy to violate property rights when they got in the way of one of their schemes. The previous generation's leaders, William Pitt and Robert, Lord Liverpool were far more conscious that capitalism requires well defined property rights to work property, and that free markets without well established property rights are a mass of illicit rent seeking.
However the U.S. political system was more prone to rent seeking and violation of property rights than its British equivalent. To be fair, property rights themselves were often disputed in the wilderness; the Yazoo land scandal of the 1790s created property rights in a vast area of land, regardless of prior occupation by Indians or others, simply by the action of the corrupt Georgia legislature, a transaction upheld by the Supreme Court in the 1810 “Fletcher v. Peck” judgment. In Mark Twain's 1873 “The Gilded Age,” the Hawkins family's 75,000 acres of Tennessee land only acquires value when a corrupt senator agrees to sponsor legislation founding a federal college on the land. Even in 1810 or 1873, when free market capitalism was theoretically unchallenged, political favors were able to trump property rights, which had value only when some legislative body smiled on them.
When the Progressives took over economic policy after 1900, property rights had an even harder time. Theodore Roosevelt, nominally a Republican, indulged in class warfare rhetoric against Wall Street and business interests more ferociously than any successor except his cousin. He also forcibly nationalized, in the name of environmentalism, vast acreages of the west with scant regard for the property rights of existing landowners.
Since the retirement of the Four Horsemen Supreme Court judges who thwarted much of the first New Deal meddling, the Supreme Court has also been an unreliable supporter of property rights. In a previous column, published at the time, I wrote about the case of Kelo v. New London (2005), where the Supreme Court allowed the city of New London to take Suzanne Kelo's property for redevelopment, even though the proposed redevelopment was a private sector one. Thus even the limited protections for property in the U.S. Constitution are eroded when political interests are at stake.
However it is in the area of housing policy that U.S. populism has most clearly trumped any reasonable version of the free market. Herbert Hoover, no great respecter of property rights or the free market himself, as Secretary of Commerce devised an “Own your own home” campaign that contributed markedly to the excess housing investment of the late 1920s and the subsequent downturn. Once the Great Depression hit, he formed the Federal Home Loan Banks in 1932, government agencies set up to make housing loans, to which Franklin Roosevelt added the Federal Housing Administration in 1934. Fannie Mae itself, guaranteeing home loans, was created by Roosevelt in 1938, while Freddie Mac was a creation of the Lyndon Johnson administration.
The entry of the federal government into the business of guaranteeing home loans was thus mostly a child of the Great Depression and of the pathological market conditions (50% delinquency rates) of that unhappy period. However the downturn had been exacerbated by Hoover's artificial encouragement of the housing market in the 1920s. In any case, the popularity of housing finance and home ownership in general was such that there was no great constituency for returning to a system without government guarantees, even in the 1950s when such a return would have been easy.
Even after the disaster of 2008, and the $149 billion (and counting) taxpayer contributions to Fannie Mae and Freddie Mac, it is by no means certain that housing finance will revert to a private sector solution. The principal theme of last week's housing finance conference was how to reconstitute the state supported system, not how to abolish it. Only House Financial Services Committee chairman Barney Frank has now retreated from his previous support of Fannie Mae and Freddie Mac, saying that if there is to be public support for housing finance, it should be open and on-budget, rather than through the Fannie Mae and Freddie Mac system of hidden and unacknowledged guarantees. However Frank's support for genuine reform by no means guarantees that it will happen, when so many lobbyists are opposed to it.
Needless to say, housing finance over the last couple of decades has been a prime example of what goes wrong when free market principles are subverted, and the price mechanism is made to serve statist ends. The previous direct system of housing finance, exemplified by Jimmy Stewart in the 1946 movie “It's a Wonderful Life,” was superseded by a system of guarantees and securitization that was nevertheless more expensive for the customer –albeit highly profitable both for Wall Street and for the shadowy netherworld of mortgage origination.
In summary, the U.S. political tradition is not particularly friendly to the free market. To the extent it allows a free market, it facilitates a bastardized version of the market in which, as in Twain's “Gilded Age,” political pull is far more profitable than ownership. Thus among the most profitable companies in the last few years have been producers of corn, and manufacturers of ethanol by a process neither economical nor useful to the objective of slowing global warming, its supposed goal. Indeed the global warming problem has been used, not to produce market-friendly solutions to the modest but probably real problem of man-caused carbon dioxide emissions, but to construct ever more Byzantine schemes for government control over large parts of the economy, with massive rents extracted therefrom.
As suggested above, the tendency for populism to trump market principle is difficult to eradicate. It is both embedded in the national culture and exacerbated by the peculiar U.S. political system, which turns individual Representatives and Senators into political entrepreneurs, financed by campaign donations from vested interests. All societies have their disadvantages, and the U.S. economy has survived pretty well even with its excessive populism. But Americans who sneer at continental Europe's big government and high taxes should remember: Germany, for example, has a more sensible housing finance system, less of its capital diverted to housing investment, and a healthcare system that provides high quality care while tying up far fewer resources than the U.S. one. It is thus not surprising that some of the time, as at present, Germany's economic performance surpasses that of the United States.
*“To Thomas Hume, Esq., M.D.”