In defense of free market fundamentalism

Jun 10, 2011 16:32 UTC

“Extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue.”

–Senator Barry Goldwater (R-AZ)

There is a great deal of debate in the media about the economy and whether the “recovery”, which supposedly occurred in the US in 2010, is faltering. While the macro economic statistics, which fascinate many economists, show that there was indeed some increase in financial flows through in the US economy, it remains debatable whether any real economic benefit trickled down to the lowest common denominator, namely people.

The growing political unease in the country over economic policy and job creation is starting to become downright nasty. For the first time since the 1970s, Americans face the prospect of a low or no growth economy and this is not an outcome that is at all welcome. The swing from the irrational exuberance of the past two decades to something more closely akin to “normal” is shocking for the public. The latest evidence of pressure for fiscal cuts is shown in the proposal this week by Democratic New York Governor Andrew Cuomo to limit public pensions.

Reading various online threads, it never ceases to amaze me that advocates of what we will call a more liberal or progressive line of economic thinking inevitably embrace the corporate state for solutions. We need to buy every American a copy of George Orwell’s Animal Farm, a book you need to read a couple of times during your life. Orwell was a long time supporter of the socialist Labor Party in the UK , but he was also a fierce libertarian who saw the authoritarian side of socialism so beautifully told in Animal Farm.

The individualist or free market tendency in economics, on the other hand, is ridiculed by supposedly liberal economists and others as the choice of greedy people who are really sociopaths or worse. Free market fundamentalism, to paraphrase environmental activist Vandana Shiva, is at the root of the economic woes of the earth. She writes in her book War on the Earth:

The predatory practices of corporations are increasingly turning our fragile garden into a junkyard. Citizens are told by their political masters and the corporados who pay them that there is no alternative. That’s true if one’s only concern is profits. That approach is fast turning our planet into a toxic waste dump.

What is fascinating about Shiva is that even as she attacks the excesses of big business, much of her work and also her background as a physician and scientist is very similar to that of the great libertarian economic thinkers such as Ludwig von Mises, F.A. Hayek and Frederick Bastiat. Shiva’s focus on empowering individuals to think and to act in a free fashion as actors in a larger civil society to achieve collective needs is very much in line with von Mises, not to mention the classical liberal view of America’s founders who embraced diversity and equality of opportunity for all as the basic rule of civil society.

The rapid commercialization of American society since WWI and the rise of the corporation as the dominant model in the global political economy raises many challenges for those who struggle to protect individual liberties. First and foremost its is necessary is to understand the distinction between true individual choice as economic actors and people being swept along by a consensus about economic policy that is molded by the public relations apparatus of government and large corporate enterprises.

Geoffrey West, in a conversation published by Edge, “Why Cities Keep Growing, Corporations and People Always Die, and Life Gets Faster,” illustrates the dilemma facing society. Large organizations, which seem to promise stability and security, often are actually dying and thus unable to promote wealth creation and employment. Noting the quality of great cities as economic entities which promote and encourage individual diversity, West raises basic questions about whether industrial consolidation and the rise of global corporations is really good for society — that is, individuals in aggregate — in terms of long-term economic growth.

Von Mises argues in his classic 1945 book, Human Action, that it was the development of economic thinking generally, not merely the free market variety, which made the period from the industrial revolution onward so powerful in terms of expansion of benefits for all people. Von Mises wrote:

People fall prey to the fallacy that the improvement of the methods of production was contemporaneous with with the laissez faire only by accident. Deluded by Marxian myths, they consider modern industrialism an outcome of the operation of mysterious ‘productive forces’ … Hence the abolition of capitalism and the substitution of socialist totalitarianism for a market economy and free enterprise would not impair the further progress of technology.

So when author and professor Nassim Taleb is reported to say that all CEOs and economists are basically “sociopaths,” a person with a lack of conscience and extreme antisocial attitudes and behavior, what does he mean? My interpretation is that Taleb accurately notes that most CEOs of large enterprises are value destroyers in the sense described by West, while individuals and smaller enterprises tend to be far more productive in terms of creating value for society and employment for people.

Large corporations tend to avoid risk and over time try to control markets and even governments to protect their interests. While the vast majority of business people, who run smaller enterprises, are honest and support a civil society (and generate the majority of jobs), the captains of the largest corporations often take actions antithetical to a democratic society and their shareholders.

Far from being an achievement of the era of laissez faire economics, the rise of the large corporation is a throwback to the period of monarchism and tyranny before the industrial revolution. In The Modern Corporation and Private Property by Adolf Berle and Gardiner Means, published in 1932, the authors warn:

The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital … [Such owners] have surrendered the right that the corporation should be operated in their sole interest.

Likewise, the wonderful reference to economists as sociopaths conjures images of the dominance of the statist mindset among the dismal profession. The notion that national economies can be managed from the macro level and that human action, as opposed to market perception, is not significant are entirely authoritarian perspectives. Yet this type of thinking is precisely what passes for mainstream economic thought in the academic world and in important institutions such as the Federal Reserve System. The Fed likes the idea of large banks because they serve as conduits for make-believe macro economic policy, not because large banks are good for the economy or its inhabitants.

Just as large, mature organization tend to lose the ability to innovate and thus destroy shareholder value, the economic thinking which celebrates big government and cartels in finance and industry is slowly killing the private sector in America and diminishing the rights of individuals. In the difficult debate over economic restructuring and renewal which must occur in the US over the next several years, we ought to begin with an assessment of elemental principles. Americans need to leave aside labels like left and right, and start asking basic questions about what mixture of policies will best enhance the economic and political lives of individuals.

Once we understand that many of the problems we face today as communities of individuals called nations come about due to concentrations of power in large governmental and corporate enterprises, and the corruption of these structures, then people on all sides of the supposed political debate are going to discover new common ground.

Focusing on individual economic and political rights is no vice, as Barry Goldwater famously declared. Rather, a new focus on individual rights and responsibilities in an economic and social sense is the start of a long overdue discussion about the American political economy. If we inform our discussion with the focus on individual liberties that was the point of departure for our nation’s founders, we will be successful.



Another Good article, and thank you, Chris.

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A new deal for the 21st century

Jan 20, 2011 19:13 UTC

Below is an excerpt of a speech titled “A New Deal for the 21st Century: Less Entitlement, More Accountability.” I am scheduled to deliver the keynote talk today in Indianapolis at an event sponsored by the Indiana Leadership Forum.

In a January 2011 article in The Nation magazine, author William Greider bemoans the death of New Deal liberalism: “When the party of activist government, faced with an epic crisis, will not use government’s extensive powers to reverse the economic disorders and heal deepening social deterioration,” Greider writes, “then it must be the end of the line for the governing ideology inherited from Roosevelt, Truman and Johnson.”

Greider is not the only observer to note the end of the New Deal and the related unwillingness of liberals to fight efforts by members of both parties to roll-back the size of government. “[T]he public is being sold a big lie — that our problems owe to unions and the size of government and not to fraud and deregulation and vast concentration of wealth,” former Secretary of Labor Robert Reich told the New York Times. “Obama’s failure is that he won’t challenge this Republican narrative, and give people a story that helps them connect the dots and understand where we’re going.”

President Herbert Hoover said of the New Deal that it was an attempt to crossbreed Socialism, Fascism and Free Enterprise, part of a collectivist revolution led by FDR and carried within the Trojan horse of economic emergency. The New Deal was also a way for the Democrats to finally end decades of largely unbroken Republican rule in Washington. FDR had, after all, nominated Al Smith three times as Democratic presidential nominee. The former New York governor had lost each election. FDR and the New Deal not only enabled the growth of government, but also of the private and public unions that came to underpin the finances of the Democratic Party after WWII.

Today the debate among and between liberals as to how the government should respond to the latest financial crisis is a function of not so much about ideology but of shrinking revenue and burgeoning obligations. The New Deal Model of defined benefits has been replaced with defined contributions or, more recently in the auto industry, profit sharing.

Whereas after WWII the U.S. seemingly had the resources and borrowing capacity to address any national want or need via government fiat, today constraints on resources seems to be the dominant theme. This fundamental lack of growth and revenue, particularly in the private sector economy, is leading to a dearth of job opportunities — a reality that seems to have replaced the open horizons and endless opportunities that are part of the mythology of the American dream. But this is a circumstance that has been building for decades.

At least since the early 1970s, when the Nixon Administration made the decision to leave the gold standard and embrace a series of socialist policy expedients, stagflation, that is, rising prices and receding job growth and economic activity, have been the predominant trends, relieved by tax cuts and spurts of monetary exuberance by the Fed.

Where we are going as a nation looks an awful lot like America a century and more ago, the era of rampant political corruption and financial excess known as the Gilded Age, taken from Mark Twain’s wonderful novel. The Gilded Age was an era following the Civil War that saw rapid growth and relatively low inflation, even compared with the post-WWII period.  But it was also a period when large railroads and banks basically ran the country unchecked.

Today large banks are in explicit control of Congress and the White House, and the individual American seems helpless to push back. And Democrats and Republicans alike today look to big business for financial sponsorship. The Robber Barons of the 21st Century are the managers of large banks and of the various government sponsored-agencies, and their corrupt political enablers in Washington.

Liberal advocates such as Greider, Reich and others focus on the bad acts committed by ostensibly private banks and investors during the most recent Fed-induced mortgage boom. Today’s liberals have a hard time dealing with the takeover of our public institutions by large corporations, which are themselves largely unaccountable to their shareholders. Many people fail to identify the corrupt relationship between the federal government and large banks, for example, as driving social issues such as domestic jobs losses, foreclosures and growing disparity between rich and poor.

“Increasing inequality in the United States has long been attributed to unstoppable market forces,” Robert Lieberman writes in Foreign Affairs reviewing the new book, “Winner Take All Politics”. “In fact, as Jacob Hacker and Paul Pierson show, it is the direct result of congressional policies that have consciously — and sometimes inadvertently — skewed the playing field toward the rich.”

The political narrative in America over the past fifty years has been a function of the Cold War, left vs. right, liberal vs. conservative, but is this really an accurate description of the political situation in America today? The focus by some commentators on the rich echoes the debates of a century ago, when Americans felt that opportunities were being decreased by the wealth and power of the great captains of industry and finance, the likes of Carnegie, Morgan and Rockefeller. In the new book, “Exploring Happiness: From Aristotle to Brain Science” by Sissela Bok, the author notes:

“Opinion surveys show that Americans are twice as likely (60 percent) as Europeans (29 percent) to believe that the poor can get rich if they only try hard enough. While most Europeans feel that where you end up is largely a matter of luck or other circumstances beyond your control, fewer than half of Americans agree. Armed with these beliefs, lower-income Americans are less likely to blame society when inequality grows and more inclined to believe that persons of great wealth must deserve their good fortune.”

Today, however, political as well as economic power is exercised by managers such as JPMorganChase CEO Jamie Dimon, whose former colleague Bill Daley is now White House chief of staff.  Daley, the seventh and youngest child of the late Chicago Mayor Richard J. Daley, is not only the representative of JPMorgan in the White House, but is the replacement for Rahm Emanuel as chief fund raiser for Obama in the 2012 general election.

“These banks again have unfettered access to the very top of the political decision making in the United States,” says MIT professor Simon Johnson, “and reflects the fact their status is completely undiminished, despite all the mistakes they made and all the damage they did to the rest of the economy.” Johnson argues that unless the largest banks are broken up, another major financial crisis is inevitable, a view that shared by a number of other Americans in and out of government.

Click here to continue reading the speech.

The Ibanez Decision: What it means for home owners and investors

Jan 10, 2011 18:09 UTC

Last week the Massachusetts Supreme Court issued a decision voiding several home foreclosures by US Bancorp and Wells Fargo. The news caused the financial markets to retreat with bank stocks down hard. News reports and some analysts are predicting that the decision in U.S. Bank National Association vs. Antonio Ibanez, will mean an apocalypse for commercial banks, especially those involved in issuing residential mortgage backed securities or “RMBS.” But like most things in life, the reality is a little more subtle.

We’ve seen this movie before — in the 1930s and 40s — when disputes over foreclosures and property titles dragged on for years, even decades. I wrote about this issue previously for — “Everything that Americans should ask about home mortgages”). In that article, I discussed how sales of mortgage notes to investors depends upon the unsteady foundation of state law property title regimes and the partial, post-WWII fix put in place by the states.

In simple terms, in the late 1950s the states’ attorneys general for the lower 48 states subjected the mortgage note to the Uniform Commercial Code, but left the mortgage itself a purely state law document. This duality is part of the dispute now partly decided by the MA courts for foreclosures in that jurisdiction. While the founders of the U.S. provided the Commerce Clause of the Constitution to enable interstate trade in goods and services, the ownership and transfer of property remains an entirely state law matter.

Since the 1950s, however, Wall Street lawyers have taken the view that the sale of a mortgage note to another party is governed by the UCC and therefore does not require that the documentation down at the court house be up to date.  Some financial counsel even went so far as to say that the mortgage document was incidental to the note and thus that the mere possession of the note was sufficient to obtain all of the rights under the mortgage as well. And in a narrow sense, under the UCC, this view is correct, as the banks argued in Ibanez.

But the MA Court decision raises some interesting questions that neither the banks, the several states, nor the Congress have addressed. First, Ibanez illustrates just how sloppy banks have become with respect to changing the lien on the property when a note is sold. In the decision, the Court shows how one mortgage was originated and then sold half a dozen times before it was eventually deposited in a trust created by Lehman Brothers. This last corporate vehicle then sold securities to investors using the mortgaged property as collateral.

The trouble is, the final “assignment” of the mortgage note to the trust was never properly completed by the seller, again relying upon the Wall Street view that the UCC protected such shoddy or non-existent legal work. The Ibanez case raises questions as to whether the investors who own the RMBS issued by the trust have any recourse to the underlying collateral, namely the house owned by Ibanez, as well as the work of lawyers and other professionals. It will come as no surprise that the trustee for the securitization trust also is a party to the Ibanez lawsuit.

It needs to be said that the transfers of a note under the UCC must comport with state law. The UCC specifically requires the note be delivered to the assignee in good order. Thus the Wall Street view of property title, where the assignment of the note is never actually completed or is merely done generically, is clearly a violation of the UCC and does not provide a legal safe harbor for defective RMBS. Indeed, the Ibanez case now drives another nail into the coffin of the private RMBS market — as if that were needed.

Second, the Ibanez decision makes clear that in Massachusetts at least, the note holder cannot commence foreclosure proceedings unless the chain of title is perfected and in good order with the state courts. The banks in the Ibanez case proceeded to foreclosure based upon the Wall Street world view that says that the UCC protects the assignment of notes in the creation of RMBS. The MA Supreme Court, however, has stated emphatically that the note holder must follow state law with respect to the transfer of property titles, including upon foreclosure.

A couple of weeks ago I helped to organize an open letter to regulators regarding the need for loan servicing standards. In order to convince a number of people to sign the letter, we included the words “consistent with state law” in the bullet point about mortgage modification. The MA Court decision illustrates that when it comes to the ownership and transfer of real property, state loan still prevails despite all of the clever subterfuges used by the banking industry to subvert our federalist system.

The Ibanez court decision only applies in MA. It does not mean that delinquent borrowers in MA or anywhere else are likely to be able to win forgiveness of their loans because the information about the lien holder of their mortgage is not up to date. But the Courts in MA have made clear that all of the documentation (and fees) must be up to date before a foreclosure proceeds. This will add expense for banks, but will really not affect the overall flow of foreclosures nationally.

Perhaps the most striking aspect of the Ibanez decision is the light it sheds on the huge liability facing large banks from the investors who purchased hundreds of billions of dollars in private label RMBS. One of the reasons that my firm remains cautious about the outlook for Bank of America, Wells Fargo and JPMorgan Chase is the huge liabilities facing these banks from investors in and insurers of private label RMBS that, in many cases, have significant defects between the note and the underlying mortgage.

In the case of MA, at least, these defects in the collateral lien on the underlying mortgage may leave investors open to large losses and expenses related to defending their rights and pursing claims on negligent financial institutions, lawyers and other professionals. As we wrote in The Institutional Risk Analyst last week when we proposed a “Brady Plan” for the mortgage sector: “This is the choice: address the problem in the mortgage sector now with restructuring and thereby jump-start the U.S. economy, or face years of additional uncertainty and losses for the banking system as we ‘extend and pretend’ under Obama and Geithner.”


I have been trying to work with Chase Home Finance forever to secure a loan modification. However, Chase has done everything to make this impossible. I would not have believed it if I would not have seen it first-hand. So, I am filing a lawsuit against Chase and/or joining the hundreds of class action lawsuits against them for home loan modification fraud. This will be very expensive for the banks. Just one single lawsuit that the firm that I am working with is filing is seeking $10 million in damages. Wow, I think the big banks will never recover from the huge losses in the MBS and are actually insolvent. Watch and listen to what I say. Their stock is going to plummet, because the government will not assist them again. Bank of America, Chase, GMAC, etc. are insolvent. Just like in the 1930s, but they don’t want to admit it yet. They are going to be hit with tens of thousands of lawsuits along with millions of people declaring bankruptcy and strategic defaulting on over-priced properties in a glutted real estate market. Mark my words. I told you ahead of time.

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