Mitt Romney, Uncreative Destructor
by David Atkins
Mitt Romney had a fascinating take on the foreclosure mess today. Dave Dayen and Digby have superb rundowns of Romney’s comments particularly as they relate to strategic default and the Administration’s foreclosure settlement, but I want to focus on a specific part of Romney’s answer to struggling homeowners:
“The banks are scared to death, of course, because they think they’re going to go out of business,” Romney said. “They’re afraid that if they write all these loans off, they’re going to go broke. And so they’re feeling the same thing you’re feeling. They just want to pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business themselves.”
“This is cascading throughout our system and in some respects government is trying to just hold things in place, hoping things get better,” Romney continued. “My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren’t will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.”
It takes a while to think through what Romney is saying here, but at its core what you get is a terrifying view of Romney’s perspective as a vulture capitalist.
The single silver lining to the cloud of vulture capitalism is the principle of creative destruction. From a business point of view, creative destruction rests on the notion that while killing and carving up struggling firms may entail short-term pain, in the long run the economy benefits by freeing up capital and resources to function in smaller, more dynamic parts or even just the broader economy. It’s not much of a silver lining to those who lose their jobs or to the towns that die when factories are closed, but a halfhearted case for the role of vulture capital in helping along creative destruction can be made by an economist.
So when Romney says to simply flush all the bad debt out of the system for both homeowners and banks alike, he’s resting on this same worldview: that things will be better off once the current mess is destroyed, so that the housing market and banking market can be rebuilt from the ground up. It’s the same perspective he had when he insisted that Detroit be allowed to go bankrupt. Creative destruction is the name of Romney’s game. It also serves the Libertarian economic project fairly well, because the alternative to creative destruction is direct intervention, usually by a government entity.
But applying the principle of creative destruction to the entire housing and banking market is nothing short of terrifying. It’s one thing to do it in the Rust Belt or Silicon Valley, where factories and offices can be liquidated so that mechanics and engineers can theoretically be assigned to more productive industries. It rarely works out that way, of course: usually the engineers and mechanics stay unemployed or are rehired at far lesser wages, even as the vulture capitalists make off like bandits. But at least there’s a sound theory behind it.
Banking isn’t like manufacturing or technology, though. Banks don’t produce anything but loans and interest on investment. You can’t take a banker and reassign her to a more productive type of finance, even in theory. Banks are less like factories themselves, and more like cogs in an economic machine that are allowed to take profits in return for the service they provide. Banking is a boring and often ugly business that is in many ways a necessary evil–so much so that most societies have historically placed stringent, usually religious rules or even bans on the activity, forcing social outcasts to provide the service. “Creativity” in banking is almost always a bad thing, as is financialization of economies. There’s no “creativity” to be had in destroying banks; rather, the only reason for destroying banks is essentially to regulate them by limiting their power.
Homeownership is even less subject to the rules of creative destruction, unless one is literally leveling homes in a process similar to gentrification–which even then, obviously, has its own social costs. Homes are not an economic engine, or rather they’re not supposed to be. They’re places where people live, grow up, raise families and retire. Turning families out of their homes isn’t like turning them out of a dead-end job with the hope of their landing a more productive, economically efficient job later. It simply means another transplanted or homeless family.
That the big zombie banks should be broken up rather than allowed to stagger on pretending their bad debts will be repaid is without question. That homeowners with no home of repaying their mortgage should have alternatives to walking away, such as own-to-rent or mortgage write-downs, seems intuitive.
But Romney’s stated approach of simply allowing the housing market to bottom out and the banks to go under without government intervention is not only cruel; it’s economically insane. It’s not creative, just destructive. It’s the approach of a man who understands only the business of vulture capital, not the business of running an economy.
It’s proof that the last thing America needs in office is a businessman, or at least one who cut his chops in the financial sector.
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