Seeing the Cat

Tom Friedman, NYT 11/26/08 - All Fall Down

I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.

Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics. So many people were in on it:

• People who had no business buying a home, with nothing down and nothing to pay for two years;
• people who had no business pushing such mortgages, but made fortunes doing so;
• people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so;
• people who had no business rating those loans as AAA, but made fortunes doing so; and
• people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion.

While I don’t disagree with anything Friedman has said here, he – and most others — have omitted a major group of beneficiaries who made individual fortunes, enabled not just by these lending practices but also by our tax practices.

The beneficiaries to whom I refer are those who reaped a much higher price on the homes and land they sold during this period of relaxed lending rules.

• They are the people who were enabled, by the relaxed lending practices, to move up from a starter home to a larger, newer, or – more likely – better located home.
• They are the heirs of seniors whose estates sold homes for far more than they would have been worth had there not been lax rules elsewhere in the system.
• They are the people who borrowed against home equity to finance their children’s tuition bills, or to customize their homes, or to travel.
• They are the large builders of housing who were able to sell even distantly located subdivisions at high profits because buyers could put nothing down and borrow large sums relative to their incomes, particularly when commuting costs were taken into account.

Our tax system leaves the windfall in the pockets of those beneficiaries, and even treats them as if they were brilliant tacticians, deserving of their windfalls, which often represent more than one’s annual gross earnings from work!

And I doubt that Mr. Friedman would call attention to the fact that houses and other buildings do not appreciate. They’re never worth more than what it would cost to build them today, and they depreciate at 1.5% per year.

What rises in value is land, and it rises in value for reasons which have nothing at all to do with the current holder of the land. His neighbor and his tenant contribute no more and no less than he does.

Who benefited? Landholders, large and small – and most especially large – and the mortgage lenders. The FIRE – finance, insurance and real estate – crowd made out like bandits, and those most hurt were those who tried to jump on the bandwagon.

The answer, though, is not to increase homeownership so that more of us get to participate on the fringe, but to share all land value among all of us, just as if we held it to be self-evident that we all – as well as the next child born – are created equal. The most valuable land is usually commercial land in our major cities, and its ownership is quite concentrated. We treat its holders as if their property rights actually rightly included the economic value of the land, and many great fortunes have been made on the assumption that we will never, as a society, recognize the wrongness and widespread effects of this system, or realize how simple it would be to make the necessary correction.