Fannie and Freddie, far from being the sole miscreants of the crisis, operate on the same parlous economic principles that the Fed functions on and facilitates. Ridding the market of the crippling appetites of Fannie and Freddie, even if a step in the right direction, is hardly a panacea for the current economic plights. FULL ARTICLE by David S. D’Amato
Source link: http://archive.mises.org/15878/fannie-and-freddie-reform-too-little-too-late/
Fannie and Freddie Reform: Too Little, Too Late
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Thank you for the excellent article. Truly, when you consider the massive scope of the Federal Reserve, and especially when you realize that the Fed is only one arm of a behemoth worldwide banking cartel, Fannie and Freddie are mere drops in the bucket. Geithner’s and Bernanke’s assurances of “reining them in” are nothing but condescending insults.
Murry Rothbard was a great FOE of Henry Georgist ideas – so whatever is meant by “land monopoly” in the quote it can not mean what Henry George meant.
As for “fedualism” – Rothbard was an anarchist (in the sense of being an anarchocapitalist), he opposed ALL systems of government. Of course “feudualism” is a system of government (it does not mean “serfdom” – one can have serfs without feudalism, and feudalism without serfs).
As for a “stateless society”.
Murry Rothbard did indeed favour a stateless society (civil society on its own – with no state).
But he was NOT against private property. Either corporate property (of course the idea of limited liability is ancient to be found in clubs, churches and for profit enterprises – it is far older than specific statutes) or individual owners of large farms, mines, or factories.
Just want to make that clear – because now Murry Rothbard is dead certain leftist persons may be tempted to play games.
Paul, a corporation’s private property is certainly defensible insofar as it does not rest on the coercive interventions of the state, but the message of this article is that the big banks and mortgage companies have benefitted in important ways from the environment created by the Fed, that is, by the the state. Rothbard was always very clear that real private property required legitimate homesteading or else a voluntary transfer from a legitimate homesteader, desisting from (as I quote Rothbard in the piece) the “assum[ption] that all land titles must be protected simply because some government has declared them ‘private property.”
David,
Rothbard writings clearly indicate a reliance on private property. Foreclosures are a result of voluntary contracts. A buyer wishes to obtain a piece of property, borrows money and offers a deed to the lender. The buyer agrees in advance to a transfer if certain conditions (repayment) are not met.
Rothbard also addresses the holding back of improved property from use by an owner due to speculation that its marketability may improve. It is true that if a bank gave up on a piece of property, letting it fall in to disrepair and someone moved in and improved it that Rothbard would probably conclude that a transfer of ownership had occurred.
I agree with your writing about the gses and the Fed but the private real property issue is a key issue on which classical liberals have to answer their critics.
I totally agree that the Federal Reserve should be abolished, and that the fractional reserve banks (and so on) should be allowed to go bankrupt.
I fully agree that the Federal Reserve should be abolished and that franctional reserve banks should be allowed to go bankrupt – no “too big to fail”.
However, Murry Rothbard utterly rejected the Henry George idea of “land monopoly”.
Nor did he believe that limited liability enterprises (limited liability being an ancient concept, in churches, clubs, and trading enterprises that goes back long before any specific stature) was in any way “feudalism” (of course even feudalism is a system of government – although one can have feudalism without serfdom, and serfdom without feudalism).
Murry Rothbard was indeed an anarchist – but he was an anarchocapitalist, a great ADMIRER of the work of great businessmen in the past.
Nor did Murry Rothbard believe that if someone could not show an unblemished title, going back, without a break, to the stone age, that someone did not own their land.
Land belongs to the present civil (peaceful) owners. Even if the land was taken by the Romans from the Celts (or whatever) centuries ago.
I’m not easily impressed. . . but that’s imerpssing me!
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“bank credit expansion raises prices and causes a seeming boom situation.”
This is simply a Ponzi scheme, where the initial payoff is not due to the development of wealth, but to an increase in funds. As long as the expansion continues, there is an artificial gain which (akin to the fix of an addict) brings a greater loss.
It is often claimed that the “libertarian left” want a North Dakata type situation – where State statutes (surely a problem there) make it virtually impossible for banks (or other companies) to own farm land. So individuals (not companies) own most such stuff.
However, this view is misaken – the true left (whether they pretend to be “libertarians” or not) want to go far beyond this.
The first thing they would say is that “this land was stolen from Indians – sorry Native Americans”.
Then, if someone replied “no my forefather bought this from Chief …. or married his daughter …….” they would say “the Chief was not the rightful owner – it belonged to the tribe as a whole”.
Or, if the tribe all agreed, it would be “this tribe were not the rightful owners – they took the land from another tribe, which………”
It is a game (a con) – the leftist opposes private property (period) the “justly acquired” bit is a trick (because if one traces back far enough ……..).
Murry Rothbard did try and “join hands with the left”, over the Vietnam war – against Frank Meyer types, i.e. against people like me. But he came to understood that in domestic policy there could be no cooperation with the left.
The left are the left – the enemies of private property (it was not true in the days of Bastiat when “left” did not mean what it means today), but it is true now.
By the way I have left aside the mixing one’s labor Lockian stuff aside.
Although Murry Rothbard really cared about that, to him nomads (like the Plains Indian tribes) did not own the land – the first sod buster owned it.
Didn’t the fellow who bankrupted Freddie also trash two banks in Seattle?
There are a lot of words, few facts, and even less content than I would expect.
The brass tacks of this issue was the politicians failed to curb a bureaucratic
semi independent institutions.
Senators got loans below market, Democrats ran the place got huge bonus, got caught cooking the books, changed the rules, and no one was held accountable, and most the politicians that failed in oversight, and participated in fraud got re-elected.
The Justice Department hides the facts, the banks get blamed, and the old gang keep control,
and scare people of the evils of the “Tea Party”….
Paul Marks @ “limited liability being an ancient concept, in churches, clubs, and trading enterprises that goes back long before any specific stature” (I think the last word in what I have quoted may be a typo, which was meant to read “statute.” Yes, no?
Anyway, assuming you meant to type “statute,” I am puzzled by your assertion, though I certainly don’t know enough history to refute it. I have always presumed that the limited liability enjoyed by corporations, and perhaps by other organizations, was dependent for its creation and enforcement upon the State through legislation. Can you enlighten me as to the basis for your assertion?
Yes Ned – I am the worst typist in the known universe.
The basis for my assertion?
I was not making a point of logic – I was making a point of history.
There have always (or at least for thousands of years) corporate entities (although perhaps it would be a mistake to call them “corporations” which has a specific legal meaning) where you could sue the organization – but not the individual members.
Clubs are an obvious one – such as Roman burial clubs (that also provided payments for widows and so on). The state got in on the act eventually (it does tend to), but they evolved without any clever government planner thinking them up.
Ditto relgions (of various sorts).
Indeed in Europe in the Middle Ages some of the economic ventures of religous houses (and so on) were vast. You might take the house or the order to court (a church court, or a Royal court, or a merchant court depending on where and when you were) over some commercial dispute, but an indivdual member? Of course not.
It is the same with trading companies – of course the government got in on the act with their “charters”, but even in the Dark Ages a group of merchants would club together and set up a group with a “trading pot” of money (to which they had contributed) and expecting a share in the profits (if there were any). You sue the organization – (the club or company or whatever) not individual members (because they are only liable for the money they have pledged to the trading pot).
Of course there are other ways of conducting business – for example a “Lloyds name” used to pledge everything (down to the shirt on the back) to an insurance syndicate.
Very profitable if things go well for you – total wipeout if they do not
In Britain being a Lloyds Name used to be considered a rather wonderful thing to be – as if cheques just arrived by magic (with no risk).
They did not seem to understand that being a Lloyds Name was NOT limited liablity (indeed the whole point of it was that it was NOT).
They were involved in ultra high risk investment (risking everything) and (some of them) treated it all as nothing – weird.
Still Ned – you asked me to provide a basis (logic not history) O.K. then.
I (Paul Marks) set up with a few friends a trading company (we will call it “Starlight” or whatever).
We put in different amounts of money – let us say I put in one thousand Dollars, which happens to be 1% of the trading pot (the trading capital) of Starlight. So I get a 1% say in the business – and a 1% share of the profits.
You do not like trading with a limited liability company – so you do not (fine – no problem there).
Someone else does like the idea and does trade with us (say he likes the price we are offering).
Well the Starlight ship goes down (there was a storm) he does not get his goods – so he sues……
Starlight (not Paul Marks) – remember the customer AGREED to that when he choose to do business with us (that is why you choose NOT to do business with us).
Starlight gives him what money it has (not much – as most of the trading capital went to buy the ship and pay for the goods) so the customer gets very little, Starlight no longer exists, and I drive (in my mythical car) back to my (mythical) big house – waving my evil corporate fatcat cape.
Accept it is NOT evil – because the customer AGREED to do business with Starlight KNOWING WHAT IT WAS.
Now the state can get involved with its “company acts” or “acts of corporation” (or whatever) BUT THERE IS NO REASON IT SHOULD (not in logic).
About the only thing the state might (sensibly) say is “make sure everyone knows what you are – by your very name”.
In Britain that would mean it would not be called “Starlight” – but rather “Starlight Ltd” Starlight – limited liability.
In the United States it would not be called “Starlight” – but rather “Starlight Inc” Starlight incorporated.
One of the desturbing things about recent years is how this little things “Ltd” and “Inc” have been dropped from the names of enterprises, that may mean that customers (and suppliers) do not fully know what they are dealing with.
However, this is NOT a reason for state intervention.
After all let us say you (Ned) decided to do business with Starlight thinking I stood behind it with the shirt on my back – because I had tricked you.
You would still (in any free enterprise merchant court) be able to take that shirt off my back – if the goods you had paid for did not arrive (even if it was not my fault – the ship sank because of a terrible storm).
To establish limited liability (in logic – not in government statutes) a customer (or a supplyer) must know what he or she is dealing with IN ADVANCE.
Just turning round later and saying “we are limited liability – silly me, did I forget to tell you?” should not (in logic) do.
However, remember you pay a PRICE for choosing to never deal with a trading pot (a limited liability) group.
Higher prices.
If the shirt on my back (my home – everything) is on the line, I am going to charge you through the nose for any goods you buy from me (to cover the risk).
The trading pot principle (which is all limited liability really is) is really a way of reducing risk – so that I can offer an lower price.
Another way might be via insurance.
However, (as Rothbard was fond of pointing out) insuance only works with certain types of risk.
“Fire and storm” as they used to say.
Insurance against messing up (against making mistakes) does not really work.
Which is why I think Murry Rothbard was correct to think that even private “deposit insurance” just will not work.
You are handing over money to someone to invest (to lend out), you are trusting the bankers’ JUDGEMENT. An insurance policy can not really cover mistakes in JUDGEMENT – that just will not work.
By the way – (again following Rothbard and others) fractional reserve banking is really dodgy concept. This is nothing to do with limited liabilty – it is in the very concept of fractional reserve banking itself.
Basically a banker has got a shell game going (or, to be nice, he is like someone juggleling balls in the air). This is because, unlike a simple money lender, a lot of the money a banker lends out is not just “other people’s money” – it does not exist at all. No one saved the money – it is book keeping stuff (“legalized fraud” some might say – and there the state and its courts do have a big history).
Old style bankers (the obvious case is J.P. Morgan) understood they were playing with balls in the air – an ultra high risk business, highly profitable, but one mistake and everything will come crashing down. But modern bankers do not seem to understand this at all (perhaps least of all at J.P. Morgan Chase – both Morgan and his old rival John D. would spin in their graves if they knew how modern bankers behave).
It is all considered “scientific” now – with nothing dodgy about it all.
Why have three balls in the air – why not four or five, or thirty balls in the air (all at the same time).
What is the problem? There is no such thing as gravity – so none of these balls can ever hit the ground.
And when the do it the ground the university educated banking executives just stare – their eyes must be playing tricks, this CAN NOT HAPPEN.
Of course it was the Federal Reserve that changed everything – the bankers wanted it (for obvious reasons), but I do not believe they dreamed how radically it would change behaviour.
“Look Ma – no hands” has become the norm, whilst driving down the free way on the wrong side of the road (and the people doing it are normally not bad people – they really do not think anything can go wrong).
Of course some Fed Chairman are worse than others – Alan Greenspan was demented (his response to every situation was bailout), but the very existance of the Fed (of the safety net – the “lender of last resort”) undermines responsibilty – and leads to a bonus cheque culture.
The Fed backed every increase in the credit money supply – and Fannie Mae and Freddie Mac guided the money into housing.
So did the Community Reinvestment Act – especially after the changes made in 1989 and then (a few years later) under Clinton.
But the bankers are not blameless – they mostly went along with all this crazyness (does anyone think that J.P. Morgan would have been scared of an ACORN office invasion – he would have either laughed at them, or reached into his desk and pulled out his pistol and said “the last one out of my office is a dead man”).
But modern bankers just agreed to everything – indeed they started handing out loans even in places where “community organizers” were not active.
Why?
Because they were (with the encouragement of the government – officials and politicians) turning the worthless mortgages (and a mortgage to a person with no money to pay it back is worthless) into securities – and selling them round the world.
Indeed a whole inverted pyramid of debt was based on this (worthless) stuff.
Fine whilst you are trading it – but eventually it is going to fall apart.
But, silly me, reality does not exist (the government has abolished reality) so we can all carry on collecting bonus cheques for ever.
This mess is not “over” – it has hardly started yet.
The phasing out of Fannie Mae and Freddie Mac will bring back private capital and banks to the real estate market and the playing field will be level for private capital investment. Borrowers will also be required to put down a larger down payment.
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