Peter Coy at Bloomberg provides an excellent commentary on how banks playing fast and loose with property rights strikes at the heart of capitalism (something bankers, being capitalists, would be expected not to do). Coy directs our attention to Peruvian entrepreneur, Hernando de Soto's, book The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else:
While people in developed nations can borrow against their property and use the money to start businesses and accumulate wealth, [de Soto] wrote, squatters in countries like Peru have no such option. Property rights beget prosperity.
That's why the burgeoning foreclosure mess in the U.S. strikes at the nation's economic heart. Confusion is so rife that Bank of America (BAC), the biggest mortgage lender, suspended foreclosures in all 50 states to determine whether faulty documents were used to confiscate homes. Americans took their title-recording system for granted, abused it during the housing boom, and let it deteriorate. "Somehow in the last 10 or 15 years, everything that was good record-keeping isn't telling the truth anymore," says de Soto, reached by phone while traveling in Copenhagen. "My feeling is this: Your recession is going to last. And it's going to last, and it's going to last, because essentially the trust has broken down."
"Americans took their title-recording system for granted, abused it during the housing boom, and let it deteriorate????" Which "Americans" would that be? Certainly not the buyers, I'm thinking. No. This is the part beyond belief: financiers, capitalists, abused the core of our property rights system, the laws that define it, during the housing boom, let it deteriorate, and now may attempt to dismantle it (except, of course, when it works in their favor). (Update: according to the BBC, BofA will be resuming foreclosures on 102,000 homes in 23 states.)
De Soto's take is that "trust has broken down," but if you read his book, especially Chapter 5, "The Missing Lessons of US History," what you will note is that the "trust" was a byproduct of a property rights system that evolved over time to favor he (yes, "he" at least at first) who occupied and improved property. Not necessarily he who paid for or held title to such property. Moreover, it evolved during a time when the US government for a variety of reasons had decided to expand the territories that it held and therefore needed to secure the (new) property as it was acquired. In doing so, property law on the frontier became something of a free-for-all and juries of squatter peers tended not to side always with those who held legal title.
De Soto's contention is that the body of US property rights law tended over time to adapt to and accommodate fairly populist notions of land ownership. Bolstered by the Homestead Act of 1862, under which settlers could hold 160 acres of free land as long as they lived on and developed it, the United States accomplished a redistribution of property and capital from indigenous peoples to future US citizens that while bad for the indigenous peoples would be extremely good for the then agrarian United States.
What is interesting about de Soto's account of this process is that it is not a tale of rugged individualism, at least not in its entirety. In the absence of formal laws and law enforcement, early settlers formed claim associations and other voluntary organizations to protect their property rights from speculators and claim jumpers. These extralegal organizations evolved to protect informally acquired property rights. For example, a claim association would protect members if claim jumpers threatened their holdings. In addition, the members of the claim association would intimidate speculators who attempted to outbid a member claimant at a land auction. E pluribus unum, yes?
And don't go thinking that the claim associations were nothing more than a Rotary Club for early settlers. They had a well developed sense of what they viewed as justice and were willing to act as judge, jury, and executioner should the need arise to protect a member. They weren't above exploiting power for personal gain either. De Soto provides accounts of associations claiming land that was not in fact held by any member and demanding exorbitant payment from individuals attempting to claim and hold it. Monopoly rents, anyone? They also used their power to...well...speculate on land, drive prices up, drive prices down, basically gaming the "system."
Depressing isn't it? Nobody's perfect. Not government. Not corporations. Not John Q. Public. A little power corrupts them all. That's why good, enforceable and enforced laws and regulations are so necessary. Many of us have mute impartial spectators or perhaps we ourselves are deaf. But I digress.
De Soto's chapter makes the point that the US system of property rights evolved as a combination of precedent from British jurisprudence and populist pressure to accommodate what the small landholders and their various voluntary associations viewed as fair and equitable. The latter formed the basis for an evolving common law. It filled a legal void on the frontier of our new nation and most likely also sated early settlers' desires for justice.
De Soto makes the point that these extralegal institutions supported property rights among the poorest of Americans (unless, of course, they were indigenous). This is very different from how property rights tend to evolve in, say, a feudal or semi-feudal system or in a country dominated by powerful and wealthy interest groups. It placed land (capital) in the hands of many and allowed them to keep it as long as they improved it, i.e., they produced from it. It unleashed productive power at the bottom of the economic pyramid. It almost certainly accounts for what I regard as one of the true sources of any US exceptionalism: the unfailing ambition, creativity, and productivity of its poor and its working and middle classes.
Now, those evolved property rights, rights that tended to favor those with little, may be about to be trampled by those with a lot. I'm willing to bet that, even as I type, the laws and the rights they codify are in danger of being dismantled by Congress out of fear that otherwise bankers will act like spoiled children and trash the economy and the country that made them rich and bailed them out.
The United States became great in part (IMHO) because a revolution in thought and government along with a (sometimes misguided) sense of manifest destiny put us on a path in which those at the bottom of the economic pyramid had opportunities to surpass the circumstances of their birth. Putting land (capital) into the eager hands of hard-working, occasionally extortionist miners, farmers, ranchers, and small businessmen at the bottom and middle of the social and economic pyramid is part of what has until recently given us historic levels of growth and development.
As a product of the middle class and generations of small business owners and as someone who until recently had firm confidence in markets when they work, regulation when they don't, watching the real wealth of our nation siphoned off and destroyed in a financial casino enabled by laissez faire regulators and lawmakers has been deeply disturbing to me. That I and my own discipline may have provided rhetorical cover in the run up to the crisis also causes me pain. If the players in that casino now succeed in dismantling or weakening the US property rights system, especially those parts of it that favor homeowners and small businesses, they will have done more to destroy, not just the United States, but the Idea of the United States, than any foreign nation, communist or otherwise, ever could have done.