This Land is My Land?

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.

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Addendum: see here (hat tip to Raven)

Comments

[The Raven]

I like David Dayen's coverage of this over at FDL. His interview with Prof. Christopher L. Peterson of the University of Utah: http://news.firedoglake.com/2010/10/18/law-expert-mers-mess-could-have-a-massive-effect-on-the-economy/ I suspect that Congress will not dismantle the US real property system; it has too many defenders, especially among conservatives. Unfortunately, it seem likely to me that they will not fix the system's problems, either. Maybe Elizabeth Warren will be able to exercise some influence here.

I don't think land is capital in the sense of modern capitalism, though. Modern large-scale capitalism is the handmaiden of industrialism; the system whereby economic advantage is taken of industrial production. The Anglo-Saxon system of real property far predates anything recognizable as capitalism--even predates the word. That small land-holding capitalists are grist for the mills of large industrial capitalists is an observation that goes back to the 19th century, though I am not sure who it originates with. One of the things I find most discouraging is that the current crop of financiers are more anti-capitalists than capitalists; when it comes to actually investing in productive industrial capital, they'd rather...not.

[Maxine Udall (girl economist)]

Thanks for the good link, Raven.

[Charon]

Thomas Jefferson Said it best 200 years ago, "Banking institutions are more dangerous to our liberties than standing armies." But why stop with blaming banks?

Americans are impatient with tediuos but necessary process. There used to be an elected office at most county courthouses, and it was called the Recorder of Deeds. The office was a check and balance removed from public life because it was tedious, and because the process worked so well for so long people thought it didn't need an elected official to manage it. Who wants to think about electing someone to manage the recording of their deed?

Consider however, if this was still an office. Would there be a national recorder of deeds association? If so, these people would have had a collective heart attack about mortgage backed securities. But recording of deeds is now just a clerical function, and not considered something worth examining. What clerk will say boo about a policy issue affecting how they perform their job unless it will mean they will loose their job?

We have our own impatience to think of here as well. We've changed as a culture and that change allows for banks, or any other corporation for that matter, to take us for a ride. Because we're willing let them instead of flaying the politicians who bail them out, we maybe deserve what we get. The same lazy and impatient attitude that allows an individual to accept the removal of a check and balance also allows for the same individual to accept massive system failure as long as it doesn't hurt that individual too much.

[McMike]

Welcome to the party. Some of have seen this train wreck coming for three decades, from the moment that Reagan pronounced "government is the problem" You could feel the pendulum swing and gain momentum. By the middle of Clinton's term it was obvious that the corporatist beast was firmly in control. Back then I was dismissed as a liberal crank. Now people are starting to undersand that we allowed ourselves to be canibalized. The price for our acquiescence is steep and going to get steeper.

[The Raven]

BTW, Dayen has another article up on the moral hazards that makes foreclosure a first, rather than a last, option.

http://news.firedoglake.com/2010/10/21/foreclosures-pay-how-to-reverse-the-incentives/