Friday, October 8, 2010

Today’s Financial Situation

It is not hard to see some of today’s troubles as a repeat of the errors of the 1930's. There is arrogance up top. The federal government is arrogant with the money supply and exhibits disregard and even hostility to all other businessmen and money handlers. It is as a result of this that economic recovery seems out of reach.

The key to recovery, now as in the 1930s, is to be found in property rights. These rights suffer under our current politics in several ways. The mortgage crisis, for example, arose out of a long-standing erosion of the property rights concept. Broadening FDR’s entitlement theories of the 1930’s, Congress has taught the country that home ownership is a “right.” This has fostered a misunderstanding of what property is. The owners of homes have failed to realize what ownership entails—that is, they haven’t grasped that they are obligated to deliver on the terms of the contract of their mortgage. In the bipartisan enthusiasm for making everyone an owner, our government has debased the concept of home ownership.

Property rights are endangered as well by the ongoing assault on contracts generally. A perfect example of this was the treatment of Chrysler bonds during the company’s bankruptcy, where senior secured creditors were ignored, notwithstanding the status of their bonds under bankruptcy law. The current administration made a political decision to subordinate those contracts to union demands. That sent a dangerous signal for the future that U.S. bonds are not trustworthy.

Three other threats to property loom. One is tax increases, such as the coming expiration of the Bush tax cuts. More taxes mean less private property. A second threat is in the area of infrastructure. Stimulus plans tend to emphasize infrastructure—especially roads and railroads. And after the Supreme Court’s Kelo decision of 2005, the federal government will have enormous license to use eminent domain to claim private property for these purposes. Third and finally, there is the worst kind of confiscation of private property: inflation, which excessive government spending necessarily encourages. Inflation is closer than the country thinks.

Property rights must be firmly established or else we will not have the kind of economic activity that leads to strong recovery. Economic growth depends on the impulse of the small businessman and entrepreneur to get back in the game. In order for this to happen, we don’t need a perfect government. All we need is one that is “not too bad,” whose rules are not constantly changing and snuffing out the willingness of these players to take risks. We need a government under which the money supply doesn’t change unpredictably. Business must be confident in the possibility of seeing significant returns on investment.

Recovery won’t happen from the top. But when those at the top step back and create the proper conditions, it will happen down there on main street.

This blog post was excerpted and modified from Imprimis, September 2010.

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