Memo to Tea Party: The major social battle raging during the time of the American Revolution was over the proper uses of money and credit. Not getting government out of the economy.

"I got debts that no honest man can pay ... "

~~Bruce Springsteen, "Atlantic City"

O. Max Gardner III, a patrician lawyer in Shelby, North Carolina, has started a movement for resisting home mortgage foreclosures.

In what Reuters describes as "legal jiu jitsu," Gardner teaches techniques for using a bank's lumbering hugeness to enable people to stay in their homes long after banks want them gone. He's not alone. A foreclosure resistance movement has gained national traction in the past year. The Times has reported on local sheriffs' refusals to evict, and in an especially pointed act of guerilla theater, Patrick Rodgers of Philadelphia recently turned the tables on Wells Fargo by starting a foreclosure against the bank's local mortgage office. According to ABC News, the bank had not paid Rodgers a court-ordered judgment it sustained in the process of failing to respond to his demand under the Real Estate Settlement Procedures Act (RESPA) for information about his mortgage. Rodgers thought his foreclosure gesture would at least get the bank's attention.

The foreclosure resistance movement understandably disconcerts those who are concerned above all about fulfilling legal contracts and taking what the Tea Party-connected right calls "personal responsibility" for the inability to make mortgage payments. Yet the resistance has strong precedents in the same founding-era America to which the Tea Party constantly appeals. Conflicts not between American colonists and the British government but between small-scale American debtors and big-time American creditors illuminate struggles that continue today.

It can be hard to envision an early America seething with conflict between ordinary, hardworking Americans, stifled in their efforts to get ahead, and the rich, predatory Americans who stifled them. Prevailing historical fantasies of pre-Revolutionary America conjure a modestly thriving yeomanry, along with craftsmen, small businesspeople, and merchants participating together in a representative civics. In this fantasy, income and wealth disparities look minor and manageable; slavery and women's subjugation are terrible deviations from an ethos of liberty shared more or less democratically by free Americans of all types. The main problem for everyone is the restrictive influence of the British elements in government. The rosy narrative has it that a revolution dedicated to freedom of trade and thought and the proposition that all men are created equal will launch this society on a grand progress, embattled but irresistible, toward a democracy that includes everybody.

Of course many historians have added troubling nuance to that picture; some have debunked it entirely. Certain history students, possibly over-interpreting the work of Howard Zinn, routinely reduce famous American founders to self-interested hypocrites. Yet across the political spectrum, fuzziness about founding-era economics, credit and monetary policy persists. The fuzziness helps today's populist right cast nativism and unfettered markets as essentially American.

The possibly startling fact is that the major social battle raging before, during, and after the American Revolution was over the proper uses of money and credit in American life. For ordinary people of the period, these were hardly abstractions. The only real money in 18th-century America was metal -- silver and gold coin from England, Spain, and Mexico -- and for long, terrible periods, money was rarely seen by ordinary people. Small farmers and artisans, wanting to survive and improve their lot, had to borrow. Merchants, gaining access to metal through imperial trading networks, used their money to make money, becoming lenders. Well before the Revolution, Americans defined themselves in practical terms either as "debtors" -- poor and working people in small-scale enterprise -- or "creditors" -- well-heeled merchants growing their money by lending it.

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Workings of the debtor-creditor relationship will sound unpleasantly familiar. Merchants had the money supply conveniently sewn up. Small farmers and artisans had to post the land and shops they hoped to develop as collateral for the credit they needed. Merchants might set interest rates as high as twelve percent -- per month. Default, often predictable at the loan's outset, subjected borrowers to foreclosures, which in bad times were epidemic. Families became indigent while their land, tools, and homes were snapped up at bargain prices, often by the merchants themselves, who speculated in land as well, and were building immense parcels. The rich got richer.

Is it any wonder that ordinary people viewed this disastrous economic predicament not as some incidental fallout from vigorous free-market competition, but as an egregious, systemic injustice with political, moral, even spiritual implications? They were being held back, exploited, and even ruined by a monopoly on money and credit. And unlike today's populist right, founding-era Americans did not imagine that government's simply leaving markets alone would create new and exciting opportunities for them. They believed their governments should make laws to restrain the overwhelming power of the creditors' metal and protect those who labored and produced goods from those who planned dynasties of descendants living in luxurious idleness.

And remember: unless people had property in excess of certain amounts, they couldn't vote. Whig elites -- the ones who became patriot leaders, lionized today -- axiomatically equated the right of representation with property. It took even more property to run for office. Legislatures erected counties to ensure that representation favored the rich and the cities. They placed cash fees on every imaginable transaction, paralyzing working people's efforts to pursue legal recourse and enriching lawmakers' friends and families appointed as collectors and administrators. Roads and other infrastructure built at public expense (and by coerced labor taxes) served the merchant interest, not the people's. Hardly an embryonic American democracy, representative colonial governments were monopolized by forces that small-scale debtors and tenant farmers could only view as a creditor conspiracy to exploit their labor, prevent their participation, and take what stuff they had.

­So they organized in vociferous protest. "Mob" is a loaded term; "crowd" is perhaps more fair, and early American crowd action should be understood as a tactic, in the absence of access to the franchise, for pressuring and even changing government. One of the most famous outbreaks occurred in the 1760's in North Carolina, when ordinary people briefly had a few champions in the legislature. They forcibly closed courts, tore down corrupt officials' homes, and finally went to war against the provincial government. Royal Governor William Tryon put that rebellion down -- but the King's appointee was more sympathetic to the people's plight than upscale American legislators and merchants were.

Crowds could be flamboyantly scary and even violent, but they did not run amok, merely venting. In carefully organized disruptions, people moved en masse into courthouses where debt cases were heard, shutting down a judicial process they considered unjust. They felled huge trees across roads to prevent sheriffs from repossessing homes. They enforced no-buy covenants when foreclosed property went up for auction. They staged daring rescues of prisoners held on debt charges. Serving on juries in debt cases, they refused to convict. Well before the famous Stamp Act riots and other acts of resistance to new British trade laws, American life involved orchestrated crowd actions to prevent financial injustice and push government to act on behalf of ordinary people. After the Revolution, the event known as Shays' Rebellion became only the most famous of the debtor uprisings that continued the people's struggle in a new political context.

While emulating Shaysite and other debtor crowd actions today would pose an interesting counter-demonstration to Tea Party efforts, the question this history really raises has to do with what Americans want from their government. Do we really want to roll back "nanny state" protections like RESPA, for example, under which an ordinary citizen like Patrick Rodgers was able to interrogate his bank? RESPA is but one detail in a program -- and a power -- that our ancestors painfully lacked.

Tea Party history insists ordinary, hard-working Americans of the founding era wanted nothing more than to reduce government and keep it out of economic markets. But what those Americans really wanted can be gleaned from their terminology. The rich called them rioters. The people called themselves regulators.

**Check out our series on the foreclosure crisis, Foreclosure 411.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

Despite what governors like Scott Walker say, there's little correlation between union membership and troubled state budgets.

Amid all the public debate about how states are being bled dry by militant public unions, you wouldn't know that we just had a major housing bubble across the country followed by a financial system near-collapse and the most prolonged downturn since the Great Depression. Chris Hayes addressed this opportunism of those ignoring of the housing crisis to push long-standing right-wing priorities in the opening segment of The Rachel Maddow show last night, and I think it's worth looking deeper.

John Side posts some graphs of state budget shortfalls against public union density on his site The Monkey Cage:

And:

A commenter summarized the general finding:

I just coded the data "TheRef" posted to distinguish between states with no collective bargaining law and states with some sort of law (0=no law, 1=anything else) and used this to predict the 2011 shortfall as a percentage of budget. I have no idea if this coding is appropriate, but it should provide a rough estimate.

While the relationship was positive (like the r coefficient in the post) it explained less than 2% of the variance (R^2 = .017). This is actually less explained variance than that explained in the above post (.19*.19 = .04), though this could be due entirely to the linear compared to categorical nature of the predictors. Just to note, the unstandardized beta was 3.08.

Interesting, if not that significant. You know what is interesting, significant and recent? A multi-trillion dollar housing bubble.

I'm going to do the same graph with Total Shortfall as Percent of FY11 Budget from the CBPP (table four) as well as negative and near negative equity as percentage of mortgages, Q3 2010 from CoreLogic. Negative equity is correlated with all kinds of other bad things like unemployment, but from my point of view it's a good first approximation for how the housing bubble devastated a community. The more the bubble popped, the more people were hit by falling house prices, the more negative equity grows as a percent of mortgages. (Especially since Case-Shiller took their data to subscription only, and even then, I'm not sure there's a particularly better state-level approximation -- thoughts?)

Graph:

Significant (t-stat of 3.53), and it's significant with or without that outlier in the upper-right corner (Nevada). The mechanisms for how this contributes is important -- is it unemployment? Is it that state governments with a larger housing bubble got more confident and spent as if all those property taxes were on their way? Are there other important, causal mechanisms? These are all good and crucial questions for us to answer, ones we should take up when we finish scapegoating teachers.

Mike Konczal is a Fellow at the Roosevelt Institute.

In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free? In the first part, Christopher Papagianis, Managing Director of the New York City office at the think tank e21, argues for full privatization with direct government subsidies to ensure access to credit for all. **Read part two here.

1. What are the GSEs and what went wrong with them?

Fannie and Freddie buy and guarantee mortgages, converting the mortgage payments into guaranteed cash flows for MBS notes and standardizing the notes to enhance investor acceptance and market liquidity. Before they blew up, their investors would capture the guarantee fees on the mortgages and pass through the rest of the mortgage payments to MBS holders. They also used their ability to issue implicitly guaranteed debt to build massive portfolios of the same mortgage-backed securities (MBS) they issued. These portfolios were the source of huge profits during the boom years. The profits came from the gap between the yields on mortgages and the interest rate Fannie and Freddie paid on their own borrowings, which was just slightly greater than Treasury rates thanks to government sponsorship.

The analytical challenge before us is that the most egregious excesses of the previous GSE model are not what precipitated all the taxpayer losses. For example, the first instinct of many reformers would be to ensure that the GSEs (or their successors) are never again able to build big mortgage portfolios. Once a pool of mortgages was converted into GSE-guaranteed MBS notes, there was no need for them to then issue additional debt to repurchase the guaranteed MBS. These big portfolios served "no credible purpose" aside from a profit center for GSE shareholders and management. The second instinct would probably be to strictly limit the mortgages that would qualify for purchase or guarantee.

While both make sense and would have made for sound reform in 2005, focusing on these two issues now more or less ignores the big lessons from the 2006-2010 market meltdown. Of the GSEs' combined $226 billion in losses, over $166 billion (73%) came from the guarantee business. The investment portfolio accounts for just $21 billion (9%) of losses. Had the investment portfolios been eliminated in 2005, the GSEs would have still suffered losses from guaranteed mortgages that would have wiped out their capital base several times over.

For many, the challenge ahead seems to be designing a strategy that maintains a government guarantee for mortgage credit risk while attenuating some of the more egregious elements of the old GSE model. The problem with operating under this framework, however, is that it was the mispricing that arose from the government guarantee itself that really turned out to be the big source of taxpayer losses.

2. Is there a role for the government in the housing market?

Yes. Today, almost all of the new mortgage originations in this country are done with some government involvement. In addition, the government dedicates roughly $300 billion each year to directly subsidize housing, split roughly evenly between tax subsidies and direct government spending. In all, it cuts across several agencies and over 28 different programs to support both homeowners and renters. Given all of the current support that's in place, the real question is how can we comprehensively rationalize the role for government in the housing market.

Unlike the fairly straightforward accounting and (on-budget) treatment of all the different tax provisions related to housing, the subsidies on the spending side are more complex and confusing. On behalf of taxpayers, the federal government issues, guarantees, and insures mortgages. Taxpayers subsidize the redevelopment and sale of vacant properties and foreclosed homes. They subsidize housing vouchers, a public housing program, and at least eight more block grant initiatives for rental housing. The budgetary costs of these programs are measured in three different ways - on a cash flow basis, on a present value basis, and on a present value basis adjusted for market risk. Without an apples-to-apples comparison, it is nearly impossible for policymakers to compare the effectiveness of these programs and to allocate scarce budgetary resources in ways that do the most good.

With regards to Fannie and Freddie, there appears to be a consensus now that the inherent flaw of the "government-sponsored" business was a lack of transparency and accountability in the allocation of the underlying subsidy: profits went to private shareholders and losses were socialized, or ultimately covered by taxpayers. As policymakers review housing subsidies and consider alternatives, they must be careful to make clear the risks and costs of subsidizing housing investment. Government loan guarantees can appear to be low cost since they pay out only if a borrower defaults and official estimates often exclude a premium for market risk. But we have learned that such guarantees are contingent on an accurate assessment of the various risks involved and they can be extremely expensive if those risk assessments are wrong or if the defaults all occur at the same time. Improperly scored loan guarantees also create a moral hazard, as the implementing agencies can assume too much risk by lowering their lending standards over time.

Where possible, it would be more transparent and far more efficient for Congress to deliver housing-related subsidies directly to the homeowner. This is the primary way the government subsidizes food with food stamps or charity through the tax code. Private financial institutions then would no longer have the ability to capture some of that subsidy for their managers and shareholders, as Fannie and Freddie did for so many years. Direct subsidies would also reduce the risk of another economic crisis.

3. What does your plan do to fix the problems?

The government has a terrible track record for pricing guarantees correctly. There are other ways to subsidize housing if that's what Congress and others would like to do. Providing housing-related subsides directly to the individual is probably the only way to avoid the moral hazard that comes with a mortgage guarantee.

Therefore, it appears as though the most promising path for Congress is to commit to a credible strategy that puts the GSEs in receivership and liquidates their operations over a 5 to 7 year period. Taxpayers would cover any shortfalls so no creditor loses anything in a wind-down or is tempted to sell their securities. In the future, Congress would keep Federal Housing Administration (FHA) mortgages available for borrowers under certain income and mortgage loan thresholds and leave the rest of the market to the private sector.

4. Given that there are many plans, what is the strength and weaknesses of your approach?

The strength is little to no moral hazard moving forward. We stop obscuring just how much taxpayers are put at risk by indirectly or implicitly subsidizing housing.

The weakness is that without some other actions by Congress, mortgage costs would presumably go up, as the old guarantees would now be paid for directly by mortgage borrowers.

However, Congress does have some options if it wants to try and offset some of this cost increase. Several scholars have suggested subsidizing interest rates on certain loans or providing a flat housing credit. (See Charles Calomiris and Raj Date for more on how interest rates could be subsidized through swaps. See Josh Rosner for more on how the mortgage interest rate deduction could be reformed to reward building equity over adding more debt and how establishing clear securitization disclosures could help re-start this market.)

5. What will the mortgage market look like if your plan is enacted, for both people who want to lend money and people who want to buy a home?

In the future, prospective homebuyers would still work with banks and brokers to find the best loan for the price. And since nobody is talking about winding down Fannie or Freddie tomorrow, the private market could be folded back into the equation steadily over time. This would give the securitization market time to develop. Obviously, you'd want to make sure reforms were in place as this happened so that the future system would be equipped with the information required to evaluate/measure credit risk over time. Perhaps a covered bonds market could also be started as well. Portfolio lending would also likely increase.

6. Will there be 30-year, fixed loans in the future? What are the consequences of this?

Yes. First, FHA will still offer its 30-year product. Second, I think that 30-year fixed loans will still be available in the private market for borrowers who can extend a meaningful downpayment. The jumbo mortgage market is probably a good analog.

Borrowing in general, however, will probably cost more because there will be no under-priced government guarantee involved to shield investors from losses. This means that some borrowers who qualified for certain loans during the boom would face new and real trade-offs. Put more bluntly, credit would (and should) not be as readily available - compared with the boom years.

Surely, some individuals (or families) will end up renting. Others will save more so they can extend a larger downpayment or purchase a less expensive home.

7. Hasn't TARP taught us that the government will always be some sort of implicit backstop? How can the government ever credibly commit to not jumping in at the last moment?

By this logic, the government should just come out and guarantee most large institutions or even asset classes.

There is a fundamental question that people need to ask when they think about GSE reform and the future of housing finance. Is it in the long-run interests of the economy to provide continued credit support for housing (at least at the current pre-crisis magnitude)? Housing is a form of consumption and its continued subsidization diverts capital from other more productive uses.

This question is also wrapped up in the Too Big To Fail issue. The GSEs proved to be TBTF. Several of the top big banks were also deemed TBTF. In a world without Fannie and Freddie, there is a risk that investors will just assume that the government will step in and protect the banks that are necessary to maintain a liquid mortgage market. I am concerned about this.

Yet, while I do not think Congress solved the TBTF issue with the Dodd-Frank law, I still hold out hope that it will find a solution. I guess I'm not pessimistic enough to concede defeat and just assume that the government will be better off by explicitly taking on all the tail risk in the housing market.

8. If we go with full privatization, we'll see the private securitization market grow as a percentage of total mortgages. But didn't private securitization markets fail in many ways over the past 10 years? Didn't hedge funds and middle-men make a lot of loans that went bad and increased volatility, and won't that happen again?

It is not a foregone conclusion that securitization will be re-born. The alternative to securitization markets - and shadow banking generally - has always been the traditional banking model of funding mortgages through deposits. It may be that the low-cost guarantee written by the GSEs made the traditional banking model uneconomic and that the elimination of this guarantee will make banks more willing to hold loans on balance sheet. We should not be so quick to write off the possibility of greater on-balance sheet lending. The GSEs' portfolios, for example, are a perfect example of its profit potential. The challenge for private lenders had been managing the interest rate risk and attracting funds of sufficiently low-cost to compete with the GSEs.

The future of securitization is likely to be much better than many anticipate. There is little evidence of systematic mis-rating of mortgage-backed security (MBS). The big problems came with CDOs and other re-securitization products. For example, why is it unreasonable for $75 million of a $100 million deal with 400 (high credit quality) mortgages with an average principal balance of $250,000 to receive a AAA rating? For investors in this tranche to suffer losses, half of the mortgages would have to default and suffer loss rates of 50% on average. Subordination of this magnitude is likely to suffice in all but the worst housing environments, as is seen by the surprisingly strong performance of the GSEs' subprime portfolios. Will a CDO market re-start and create new problems? Perhaps, but there does not seem much appetite for mezzanine ABS CDOs at the moment and it seems reasonable to believe the next blow-up will occur elsewhere, given investors' and rating agencies' experience (and new information demands) with regards to these products.

Christopher Papagianis is Managing Director of the New York City office at the think tank e21.

Who will have the guts to fix our broken political and economic system, as we did in the New Deal era?

It's hard to imagine the present American economy getting healthy without the housing market being fixed. Even a Dow at 36,000 would have limited impact with housing prices down another 10-20%, as very few in America have any wealth in the stock market, if they have any savings at all. Much of it is in their homes, and that continues to get eaten away. So Chris Whalen's Reuters piece accompanying his downgrading of Wells Fargo due to the continuing mortgage fiasco -- Yves Smith continues with best coverage on this issue -- is well worth the read.

Whalen makes an excellent point about the courts and mortgage crisis. He writes:

The US banking industry would have been far better off if they had allowed sane bankruptcy reform to be enacted with respect to restructuring of first mortgages. Over-burdened home owners could discharge unsecured debt and modify mortgage loans under the watchful eye of bankruptcy judges, who understand how to balance debtor and creditor rights.

Instead banks seeking foreclosure now face state court judges, who are elected by the people in their communities and not used to the intricacies of Wall Street finance. State courts are taking a much harsher line with banks than would federal bankruptcy judges. Banks seeking to conduct foreclosures are being met by a phalanx of judges that now say "show me the mortgage note and prove you are the one with the right to foreclose or I will not act on your pleadings."

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This is a lesson in American democracy 101 -- the separation of powers. The genius of the American system was not to centralize power in DC, but to separate it -- with three branches of government, but also balancing DC with the states, localities, and finally the ultimate power in the citizen, we the people. The agrarian era architecture of our government set up by America's founders always had a hard time dealing with the new industrial era and its most powerful and insidious creation, the corporation. In the 1930s, in response to the crisis of the national/global economy created by the industrial corporation, the New Deal was born, and liberals en masse headed to DC to rule briefly for a few decades. This lasted until the modern corporation and its entrenched interests could gain control, making present DC both eminently corrupt and dysfunctional, a fact our remaining liberals continue to either ignore or discount.

Matt Taibbi has an excellent piece documenting the most open and not even the most egregious of crimes committed by banking and finance, which the complicit powers of DC ignore. No one goes to jail. It reminds me of the California Energy scam 10 years ago, where again no one went to jail and the Clinton FERC sat on its hands as the people of California were fleeced by multiple energy companies and Wall Street. The fact is the American system is broken, but paradoxically its redemption lies in restoring and evolving the system. At this point, what is missing most is courage.

It is time to think much larger than worrying every day about what happens in DC and to liberals. I can only point to a piece in the LA Times yesterday regarding Egypt:

Not wanting to be left out of the future government, two competing groups of young activists are meeting with the military and distancing themselves from longtime opposition figures they regard as inept and weakened from years of oppression by Egyptian security forces.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.