We hear a lot in American politics about “uncertainty”. Mostly, it’s from politicians who are trying to protect the unjustifiably low tax rates on corporations and the rich. But now we face a more dangerous and destabilizing form of uncertainty—in the rule of law.
The basis of the rule of law is that it creates a system in which individual members of a society can reasonably predict an outcome to a certain event. In essence, it is the formal framework that defines what society expects from its members and what those members can expect in return. That is, we know that if we rob a bank, we are going to go to jail—that’s not playing by the rules, and society will take action. We also know that our private contracts will be enforced by an impartial third party. These are the basics. Some people may disagree with this no-nuance approach, but this is a good man-in-the-street understanding.
Today marks the day that we can no longer rely on a system of legal certainty in the United States.
With the announcement of the government’s robo-signing settlement with fraudster banks, the system protecting the moneyed interests from accountability for whatever crimes they want to commit, while forcing the rest of society to suck it up, has been firmly established. The rules of property law were created to provide the certainty of a fair system with regard to ownership rights, and the lawful transfer of those rights. That certainty died today. There is no longer any certainty in property ownership—a bank can take your land whenever it wants, whether it has a legal claim against it or not, and the only entity big enough to stop it will clear the way—after the fact, if need be.
Concerns about moral hazard are waived away by the Obama Administration and its apologists by the “fact” that “investigations” continue and that there will be “accountability”. The idea is that the settlement is “forward looking”, which means it hopes to create an atmosphere in which the banks will not want to engage in this type of fraudulent behavior again. Call me old fashioned, but we already have—or had, I should say—a mechanism to ensure that: An impartial and fairly applied rule of law.
But the person charged with enforcing that rule of law is too weak to do anything except bless corporate lawlessness with a “let’s-look-forward-not-back” approach to it. The only thing we can be certain of now is that the Obama Administration will protect the banks at all costs. Whether he is being bought outright or surrendering to some irrational fear created by backroom threats is irrelevant. The net effect is that he has created for posterity a rule of law which is founded on uncertainty. How long can that last? When the rule of law loses legitimacy in the eyes of those it governs, the government created by those rules will not last long.
Some economists are excited because they believe that the principal reduction portion of the settlement will help restart the housing market. Leaving aside the inadequate size of the settlement, they make solid arguments pertaining to how markets would react to adjustments in property values, etc, but they are missing the big picture: Economics is only a small part of this equation. They miss that the dynamics of financial transactions do not take place in a vacuum of economic theory: Those dynamics are constrained by the laws under which the transactions take place. The settlement announced today creates destabilizing uncertainty in the rule of law regarding property rights.
Property rights are no longer as solid—or predictable—as they were just a few years ago. Why should anyone invest in home ownership—or any real estate acquisition, for that matter—when a bank, with the full backing of the government, will be able to steal it—literally steal it—from you at their whim? Illegal foreclosures are illegal, therefore the government’s failure to force the return of property to its rightful owner is a ratification of the theft. [For anyone who wants to make the kneejerk argument that a mortgage gives the banks the right to foreclose, I would like you to consider the cases you have heard over the past few years where homeowners were free and clear, but robo-signors filed papers to foreclose anyway (absent the resources to mount a legal challenge to protect their rights, those homeowners could have lost their property)].
If I buy a piece of property, I should know that the law is going to enforce my rights to that property. If I am in a contract with someone for a mortgage against that property, the law should enforce the provisions of it. And if the law says that certain papers have to be filed in order to transfer the deed or title, the failure to file those papers according to the rules would invalidate any transfer. So anyone—or any bank—that wants to foreclose would have to appear in court with proper (i.e. not fraudulent) documents proving their right to do so. You can say bye-bye to that idea of fairness right now. The banks decided to become a law unto themselves regarding the filing of title transfer documents, and the United States government—along with 49 of the 50 states—today ratified that.
The narrow-mindedness of this backward-looking rewriting of the rules, just to protect the banks for willful fraud, is breathtaking. In essence, they are trying to force the square peg of illegality into the round hole of legal legitimacy. But they want to do it just for this one instance of systemic fraud. The idea is to have the system snap back into the old customs, with everyone acting as if it never happened. It doesn’t work that way. The banks want forgiveness for their crimes (oh, and to keep the money and property!) and they expect everyone to go back to playing by the previous rules. How can the rules of property law be rewritten after the fact to excuse widespread willful fraud and then be taken as legitimate going forward? What assurance do we have that the rules won’t be rewritten again, when corporate malefactors need more official forgiveness for crimes intentionally committed?
