Mirror of Justice

Though one might laud our (early 1930s through mid-1990s) American system of mortgage finance from many nominally distinct points of ideological view, I have long been struck by how well this system cohered, until recently, with the Catholic 'distributist' ideals of such as Chesterton and Belloc.  Advocates of distributism, some MoJ readers will likely recall, cast their 'ism' as a sort of 'third way' between perceived capitalist excess on the one hand, and perceived communist excess on the other.  The form of excess shared at those putatively opposite ends of what was actually a de facto circular 'spectrum' (the 'end-points' actually touched), of course, was the tendency for wealth and property distributions to skew over time in favor of oligopolistic or oligarchic elites -- that is, corporate or party elites -- who often came to control the instrumentalities of the state to their own advantage.  The remedy, in the view of the distributists, was for a republic of small holders to employ the instrumentalities of the state to maintain itself and its character over time, essentially by ensuring that property not only remained privately owned, but also -- and quite essentially -- broadly owned.  (The pre-imperial Roman republic did just that for centuries through its law of property.  Bill Simon at Columbia has written wonderfully on this.)

Many Americans are aware that a vision much like that held by the distributists, in this case under the rubrics of 'Jeffersonian' or 'yeoman' republicanism, animated early colonial American reforms to the English common law of property (perhaps most notably the elimination of primogeniture), as well as the Lincolnian Homestead and Land Grant Acts (yes, there were multiple such enactments, clear into the 20th century).  Fewer seem to be aware of the role played by the late Hoover and subsequent Roosevelt administrations in realizing the same broadly distributist ends.  It is the latter two administrations that brought us, respectively, (a) the 1932-vintage Federal Home Loan Bank Board, as well as, in consequence, the savings and loan industry that the Board effectively regulated and enabled to thrive until deregulation during the Reagan years; (b) the 1934-vintage Federal Housing Administration, which invented mortgage default insurance and the 30-year, fixed-rate mortgage, upon which FHA insisted as a condition for extending default insurance, both of which rendered mortgage credit much less expensive; and (c) the 1938-vintage Fannie Mae, which invented and 'made' the secondary market for mortgages by purchasing, with mixed private and publicly supplied capital, now nationally standardized (yep, those 30-year, fixed-rate) mortgage instruments from home loan banks in need of liquity, which rendered loanable funds all the more inexpensively available to home-buyers. 

The upshot?  We moved from being a society in which fewer than 40% of American households owned their own homes circa 1928 (because loan-to-value ratios were typically well below 50%, down payments in consequence had to be huge, and mortgage debt had to be refinanced every two to three years) to one in which nearly 70% did by the late 1970s. 

What went wrong?  Long story, but suffice it to say that the destruction of the deregulated savings and loan industry opened a vacuum into which stepped a new industry of 'mortgage banks,' which were not banks at all and accordingly were not regulated as such, over the course of the 1990s.  This new industry pioneered new mortgage products, which did not meet FHA standards, just in time to exploit a new tidal wave of cheap credit brought to you by (a) a Greenspan-led Fed on a bender, and (b) a cash-flush China and set of OPEC countries looking for places to park their (cheap, toxic) export- and petroleum-bought dollars.  That of course brought us a classic credit-fueled, feedback-sustained asset-price bubble of the sort that makes many individual decisions which, ordinarily, would look irrational, look altogether rational, at least in the short-to-medium term.  (Example: If the house that collateralizes a risky borrower's debt is rising in market value by 50% per annum, and has been doing so for a while, it looks rather less crazy to lend to that borrower than it otherwise would, since at worst you are left holding a rapidly appreciating asset; and if you don't extend the loan, someone else will.)  These bubble conditions, I've argued elsewhere, are in the nature of collective action problems.  Multiple acts of individual rationality aggregate into collectively wasteful, if not calamitous, outcomes.  (Compare: arms races, consumer price hyperinflations, employee-lay-off-fueled recessionary spirals, 'prisoner's dilemmas,' & cet.)  

Collective action problems require collective agents for their solution.  That agent in this case should have been the Fed, whose statutory mandate is, precisely, to control the credit-money supply economy-wide with a view to maintaining price stability -- a form of stability that is of course the very antithesis of price bubbles and bursts.  The Fed's greatest chairmen of the past -- Paul Volcker and, especially, William McChesney Martin -- would likely have been up to the task.  (Martin is he who memorably said that the role of the Fed is to 'take away the punch bowl just as the party is getting good.')  Alan Greenspan, who seems not to have understood the structure of the asset price bubble we went through -- and who said multiple times that private borrowers, private lenders, and secondary market makers like Lehman and Freddie alike would be 'crazy' to 'leave money on the table' by favoring boring FHA-approved 30-year fixed-rate mortgages over ever-refinanceable 'balloon' mortgages -- was not.  Collective action problems also, of course, are such that one need not impute sinister motives or irrationality to any market participants to explain them.  I accordingly think we distract ourselves when we look for demons among the investment banks, the secondary market makers, or at other nodes of our ramified financial-cum-mortgage markets.  Doubtless there were sharp practices and lunacies aplenty -- there always are -- but the point is that they're not the culprits.  Collective agents who do not believe in their own mandates are the closest we have to those.

Readers who would like more on the history of our mortgage finance programs, as well as additional distributist-friendly American social welfare programs, might enjoy a USC Law Rev piece titled A Jeffersonian Republic by Hamiltonian Means, written by an eccentric law professor, available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=926409   

Readers who would like to read more about a set of new distributist-friendly proposals, themselves offered by an eccentric law professor, might enjoy a Cornell Law Rev piece titled What Kinds of Stock Ownership Plans Should There Be? Of ESOPs, Other SOPs, and 'Ownership Societies,' available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931049 

There is also a 'global' rendition of the previous piece in the U. Va. L. & Bus. Rev., titled Insource the Shareholding of Outsourced Employees: A Global Stock Ownership Plan, available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108226   

Finally, readers who would like to read more on the nature of asset price bubbles and bursts of the sort we have just been through might enjoy a piece called A Fixer-Upper for Finance, a draft of which is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1367278 .  The final version of the piece has just gone to press for the Wash. U. L. Rev.

There are also some interesting posts at Dorf on Law concerned with these matters, e.g. these: http://www.dorfonlaw.org/2009/09/what-maynard-keynes-james-dean-and-now.html ; and http://www.dorfonlaw.org/2010/05/meanings-of-goldman-sachs.html . 

All best and more soon,

Bob