Traveling The Road to Serfdom


house

This, too, is an illusion.

This post borrows from the famously titled book by Friedrich Hayek, The Road to Serfdom. In his landmark critique, Hayek laid out the reasons why government-directed socialism would lead to the impoverishment of society. Maybe more of us should be reading such books these days instead of watching American Idol.

A couple of weeks ago I also posted an article here on the “feudalization” of capitalism. In that article I explained how feudalism was based on the narrow ownership and control of land, while feudal capitalism would be based on the concentrated ownership and control of financial capital. But, of course, financial capital is only good for the economic power it provides over real resources, and now we are seeing that applied rather transparently. From a recent news report:

After quite a bit of bingeing — and more than a little purging — the private equity real estate market appears to be finding a bit of equilibrium, even after poor performance and regulatory changes have thinned the ranks of dealmakers in the sector.

This month’s issue of Private Equity Analyst takes a look at how a number of buyout firms, some with dedicated real estate funds and some without, are positioning themselves to profit from a nascent real estate recovery, even as fundraising for real estate funds remained well off its 2008 high of $139.9 billion.

Private equity real estate funds raised an aggregate $54.9 billion last year, and a further 451 funds are currently on the road chasing $148 billion According to data provider Preqin.

Leading the charge of successful fund raises in 2012 was the Blackstone Group, which held a final close on $13.3 billion for Blackstone Real Estate Partners VII LP in the fourth quarter of 2012. The fund’s predecessors, including the $11 billion Blackstone Real Estate Fund VI LP raised in 2007, were top performers in the portfolio of the New Jersey Division of Investment.

The changing investment landscape has led Blackstone to shift Fund VII into some previously-untapped territory, namely, the single-family housing market. The firm created a company called Invitation Homes to buy foreclosed homes, fix them up and rent them to families.  So far it has put about $2.6 billion to work in that space, amassing a portfolio of 16,000 homes.

The housing/financial bubble, bust, and nascent recovery is transferring the ownership of housing and land to an ever-narrower group of financial plutocrats – those the popular press refer to as the 1%. If you think Democrats (Obama or anyone else) or Republicans in Washington are doing anything to prevent this, you’re fooling yourself. They are all, through the Federal Reserve, promoting it.

Can’t afford your house because of the massive credit bubble we engineered? Okay, we’ll let Blackstone partners buy it out from under you with the cheap credit we’ve provided them and then they’ll rent it back to you! Problem solved. When the day comes when the real value of these assets results in much higher prices, Blackstone will sell it back to you or somebody else for a tidy profit. In the meantime, the steady devaluation of the dollar will make us one-percenters much richer and you serfs much poorer. Neat trick, eh?

This tragic state of affairs all resulted from an historic scam to turn homes into speculative trading assets. It would be wrong to blame just the 1%. Everyone who thought flipping houses was a great way to get rich (and they’re coming back in force) is complicit in this scam. As are the politicians and housing industry lobbyists who promote housing tax subsidies. If house prices were stable and based on fundamental economic relationships to incomes and rents, there would be no profit to be had by trading them and we might all live easier with a lot more financial security.

Instead, we are surely truly traveling down Hayek’s Road to Serfdom.

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