The Mortgage Crisis and Monetary Policy, by Charles Edward Lincoln, IV

My dad is a property management consultant with a J.D., and this past summer, between my 11th and 12th grades, and while I was in my second summer at Harvard Summer School,  (2009) I got a firsthand look at what his trust & advocacy organization (Tierra Limpia/Deo Vindice Foundation) does in trying to help people keep their homes in the face of the national foreclosure crisis/epidemic hitting the United States for the past two years.   I don’t know where to begin except that I think I began to understand a little bit about money and homeownership over the summer, what it is and how it works, and it made me very interested in economics, which is not something I had ever really thought about before.  Working with my Dad has inspired me to refocus my educational plans on economics and history, instead of “just” pre-Law.

I suppose everybody has the idea that money is something fixed, tangible, and “real” in some way, and that money is just a medium of exchange that is used to buy things, like houses, like cars, like almost everything we have.   Last summer I learned a very different perspective on exactly how money works and what the relationship between money and property really is.  My parents both have Ph.D.s in Anthropology with specialties in Archaeology/Ethnohistory, so (obviously) I know that not all societies have anything remotely like what we call “money” and that “money” in fact is a relatively recent invention in cultural evolution/human history.

Homes of course, have a very, VERY long history in cultural evolution and human history, and it could be said that the increasingly “fixed” nature of the nightly sleeping place was part of what made humans “human” during the 3-5 million years or so between the earliest identifiably Hominoid ancestors and fully modern Homo Sapiens sapiens (Linnaeus).

What I learned from my dad over the summer, and what makes me think that I should study economics, is that HOMES are MONEY and MONEY is MADE FROM HOMES.   Obviously, it’s not quite that simple, but Dad says that that the economy of the United States of America really doesn’t produce anything anymore EXCEPT HOMES and MONEY—and that’s sad because America in the 19th century was probably the invention center of the world and in the 20th century (at least up through the 1960s) was still the manufacturing and production center of world.  But then Henry Kissinger and Nixon went to visit the Chinese Communists, and now the Chinese Communists are the leading capitalists (well, at least the leading manufacturers) in the whole world.

Money apparently comes into existence very systematically through loan applications.  I guess I always just thought that the government authorized a certain amount of money to be printed and that’s how we get money.  But instead, it turns out that money is a reward for productivity, or at least for maintaining the façade or semblance of productivity that well-behaved social conformity can apparently create: the more you conform to certain norms of money-management, credit handling, and “work ethic”, the more money you get—at least until the economy goes haywire like it did over the past ten years.  Then EVERYBODY gets money whether they are productive social conformists or not.  Politicians apparently do this as a way of buying votes and lulling people into somnolent catatonia where they really have no idea just how bad off they are, with their money being completely worthless and their homes being bigger and better and ever increasingly expensive in about the direct proportions (but opposite directions).

Now what money is came as a big shock to me, also.  “Money” is nothing but a “promise to pay” which by law must be accepted as a “tender” (i.e. offer) of payment.  Money itself is just (intrinsically) worthless paper.  But the money we put in our pockets and bank account ledgers all takes the form of “notes”, and all “notes” are basically “promises to pay.”  However, and this is where my Dad’s J.D. comes in handy, “notes” or “promises to pay”, when accepted by a National Banking Associations, are actually defined by law (Title 12 of the United States Code, Section 1813l) as “deposits in money.”

What this means is that when a National Banking association accepts a note, say, for a house worth $500,000.00, they are required by Federal law to itemize this on their “dual entry” ledger of assets and liabilities as an “asset” which is to say a “deposit” of $500,000.00.   Ironically, if a person comes into the bank with $500,000.00 in actual money, this sum must be listed on the bank’s dual entry accounting ledger as a “liability” for the simple reason that a deposit in cash must be repaid upon demand, while a “note” deposit will never be repaid: it becomes part of the Bank’s “Wealth” until it is returned or canceled upon final payment (but by then the bank has received payments of the principle amount of the note plus interest, which interest may amount, over 30 years, to 2-4 times the face value of the note).

I have come to understand that, in essence, credit extended by modern versions of traditional commercial paper has taken the place of “capital” as the motivating and controlling factor in the control and impulse of production in the modern world.   Struggles over the establishment, extension and expansion of personal and consumer credit shaped the growth and development of society during the 20th century from “progressive liberalism” of William Jennings Bryan and Lloyd George.  Metal-standards of currency (e.g. gold and sterling silver) were abandoned in favor of credit standards based on production, measured through income tax and contributions to programs such as social security, which seemed likely to measure both individual ability and need simultaneously.   Thus it is that Karl Marx’ 1875 restatement of Christian sharing first articulated in Acts 4:32-35, “from each according to his ability to each according to his need” became the motto of the modern redistributive socio-political order, even as communism itself was rejected.

In the United States and England, early 20th century governmental monetary and public-credit policies were synonymous with the planting of the seeds, which ultimately grew into the modern welfare state.  In the 1930s, the credit-inflationary economics of John Maynard Keynes took both the U.K. and U.S. by storm after the stock market crash of 1929 and in particular the election of Franklin Delano Roosevelt, and has basically dominated the economic policies of Western European and the Western Hemisphere generally up until the present time.

The conflict (the Hegelian “contradiction in all things”) which led to the current mortgage crisis, it seems to me, is that which has arisen is between private corporate interest in credit and welfare and the governmental policies of privatization coupled with “deregulation” of financial responsibility and “credit reserve” laws defining standards for “purchase on margin” or “minimum downpayment” requirements for the purchase of securities or other types of property (such as real estate) on credit.  Such standards were in fact imposed in 1933-34 as part of the adoption of Keynesian inflationary economics in the United States, via the enactment of the Securities and Exchange laws relating specifically to the issuance and marketing of “notes.”  The coupling of “deregulated” private bank credit lacking marginal reserve or downpayment requirements with governmental stimulus policies aimed to compensate for the lack of productivity, declining tax revenues, etc., has had the effect of setting up the economy analogous to a car on high acceleration with no brakes or steering wheel.

2 responses to “The Mortgage Crisis and Monetary Policy, by Charles Edward Lincoln, IV

  1. Brilliant writing and summary of credit and banking. Now if we could only get 98% more of the population to read and understand these principles and concepts. Especially elected officials who seem to love their cars with no brakes or steering wheels. Great work!

  2. Very Profound you are going to be quite possibly more insightful than your father. I read his complaint he used to get the 4 properties he purchased free and clear, very powerful. I am a pro se appellant in a TILA Rescission case & live in OC California if you or anyone you know that could help me drafting my informal briefs please let me know :

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