The Title Industry Needs Economic Freedom

October 28, 2010

By Robert D. Miller, Ph.D.

Our industry faces a breathtaking torrent of new government regulations and market controls. The result is a shock wave of uncertainty.

As we struggle to recover from a seismic market meltdown, the epicenter is Washington, D.C., where a deficit-spending binge and false promises to “fix” the financial system have turned into exploding bureaucracy and expanded powers for the very perpetrators of the crisis. The philosophic and economic principles on which our industry vitally depends — above all the sanctity of contract and property rights, sound money and credit, and market pricing of financial risk — are under full assault. If this trend continues, what’s left of our economic freedom will be entirely supplanted by economic interventionism. It’s time to change direction.

Interventionism and Our Industry

The doctrine of economic interventionism — which has a long and sordid history — advocates government intercession in markets to influence economic outcomes. This doctrine draws its rationale from the notion of “market failure” — the false premise that markets, when left to function freely, “fail” to bring about “desired” results.

Of course, this begs the question: Desired by whom? The answer: Politicians and bureaucrats. Put another way, an interventionist economic system is one in which government force supersedes the uncoerced interaction of buyers and sellers as the primary means of organizing economic behavior.

Interventionism in our industry is pervasive. It ranges from a host of state regulatory schemes to overwhelming federal involvement in mortgage and housing markets.

The Federal Reserve System (the Fed), the Federal National Mortgage Corporation (Fannie), the Federal Home Loan Mortgage Corporation (Freddie) and the Department of Housing and Urban Development (HUD) are leading examples of such interventionism.

Fed-fueled Housing Policy—A Monetary House of Cards

The Fed is America’s government controlled, central banking system and the world’s largest nationalized financial institution. Its initial legal authority derives from the Federal Reserve Act of 1913.

That legislation granted the Fed monopoly control of the U.S. money supply and promised Americans future “price stability.” The Fed’s mandate subsequently expanded to securing “full employment.” But America’s nearly century-long experiment with government-controlled, central banking has failed — the U.S. dollar has lost 95 percent of its purchasing power and the notion that government can produce full employment is a cruel delusion. And the folly doesn’t end there.

The Fed is the root economic cause of the housing disaster. As Pepperdine University’s George Reisman rightly contends, “the housing bubble was inaugurated and sustained by a process of massive credit expansion, i.e., the lending out of newly created money by the banking system, operating with the sanction and support of the country’s central bank.”

And Hoover Institution economist, Thomas Sowell, correctly states:

“The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more “home ownership” through “affordable housing,” especially for low-income home buyers. These lax lending standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge.” He continues, “That nudge came as the Federal Reserve System, having lowered its own interest rates to an extremely low one percent, began slowly raising the interest rate back toward more normal levels in 2004.

Unusually low interest rates had been used earlier by the Federal Reserve, in order to maintain credit spending in the economy at large, at a time when the economy seemed about to decline otherwise. But such extremely low interest rates could not be maintained indefinitely, without an unending supply of easy credit leading to inflation. Federal Reserve authorities therefore began gradually but steadily raising their interest rates over time, from its low of one percent in 2004 until the Fed’s interest rate reached 5.25 percent in 2006.”

Moreover, the latest financial crisis is not the first or worst Fed-caused calamity. Its disastrous monetary contraction during the period 1929-1933 and the ensuing Great Depression hold that distinction.

Economic historians have shown that the Fed’s aggressively easy money policy during the 1920s, combined with the mistaken conviction that the Fed was capable of preventing an economic depression, triggered the worst American economic downturn to date.

And now, the Fed’s manic creation of new money in a desperate attempt to cure the ills caused by its reckless credit expansion from 2001-2004 will likely trigger an even worse outcome. Congress must craft legislation aimed at phasing out the Fed and replacing America’s monetary house of cards with solid gold.

The Anatomy of Housing Policy Chaos

The U.S. government’s housing policy, from the 1929 Hoover administration to the present, has operated on the premise that government intervention in housing markets is a prerequisite of housing affordability and a high rate of home ownership.

This is a classic example of government acting on the “market failure” doctrine. In practice, creating Fannie, Freddie, and HUD is a manifestation of this doctrine applied to the U.S. mortgage and housing markets. These government agencies were established and persistently expanded for the explicit purpose of raising home ownership rates above levels politicians and bureaucrats believed would occur in a free market. Though their pedigree dates further back, Fannie and Freddie have operated since 1968 and 1970, respectively, as “government-sponsored enterprises” (GSEs).

Fannie, prior to its conversion to a GSE, was a direct government agency (the Federal National Mortgage Association) established in 1938 to finance home mortgages with federal money channeled through local banks. Today’s Fannie, along with HUD — which traces its roots to the U.S. Housing Act of 1937 and has since metastasized into a massive federal bureaucracy — are modern-day consequences of the Depression-era interventionist movement called the “New Deal,” one of America’s most extensive, distorting and expensive seizures of economic control by the government.

Yet the mistakes of the past appear to be completely lost on today’s interventionists. When Fannie and Freddie failed in September 2008 they were placed into conservatorship of yet another new government agency and have since been on taxpayer life support amounting to $150 billion and counting.

Additionally, the government now insures the vast majority of U.S. mortgages. History teaches that such titanic bets with taxpayers’ money are unlikely to have happy outcomes.

As an antidote, consider Canada. The Hudson Institute draws this comparison: “Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers.

Nor does Canada have agencies like Fannie and Freddie promoting ‘affordable housing’ through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off the mortgage loans, Canadian banks hold a larger share of them on their balance sheets.”

“A homeowner in the U.S. can simply walk away from his loan if the balance on his mortgage exceeds the value of his house. The lender has no recourse except to take the house in satisfaction of the debt. Canadian mortgage holders are held strictly responsible for their home loans and banks can launch claims against their other assets.”

Canada’s rate of home ownership now exceeds that of the U.S. The country has not experienced a housing crisis and no major Canadian financial institution has required a taxpayer bailout. The long-term soundness of America’s mortgage and housing markets requires abolition of Fannie, Freddie and HUD.

Interventionism Versus Freedom

A properly functioning government — one that makes and enforces objective law, i.e., law based on the principle of individual rights — is essential to successful operation of a free market. In practice, this means a government limited to adjudicating disputes, punishing fraud and stopping physical aggression; it does not mean a government engaged in social engineering via economic intervention.

The U.S. housing market collapse was not caused by market failure—it was caused by government failure. This fiasco, and the government’s feeble attempts to “fix” it with more of what caused it, show that interventionism typically breeds more interventionism and, in turn, greater economic instability.

But intervention advocates tell us new and additional schemes are good if they are “smart” and “well planned.” Such has been their fatal conceit from time immemorial — always with the pretense that knowledge possessed by government officials is somehow superior to that produced by the discovery process of the free market. Of course if this were true, the former Soviet Union would now be the paragon of economic progress instead of economic failure.

Economic history and economic science provide irrefutable evidence of the supremacy of free markets over interventionism. But ultimate repudiation of government economic control derives from philosophy.

A market-based economic system hampered by interventionism is a mixed economy — i.e., a volatile mixture of freedom and government controls. As philosopher Ayn Rand wrote in her famous anthology Capitalism: The Unknown Ideal: “If parasitism, favoritism, corruption, and greed for the unearned did not exist, a mixed economy would bring them into existence.”

“Since there is no rational justification for the sacrifice of some men to others, there is no objective criterion by which such a sacrifice can be guided in practice. All ‘public interest’ legislation (and any distribution of money taken by force from some men for the unearned benefit of others) comes down ultimately to the grant of an undefined, undefinable, nonobjective, arbitrary power to some government officials. The worst aspect of it is not that such a power can be used dishonestly, but that it cannot be used honestly.”

Economic freedom and earned prosperity are corollaries. Our industry, like our country, fundamentally derives from economic freedom. It is what we need now, and what we must fight for going forward, if success is our goal.

Robert D. Miller is co-founder and chief executive officer of TSS Software Corp. More information can be found at

Contact ALTA at 202-296-3671 or