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Simon Constable
Feb. 18, 2010, 12:01 a.m. EST · Recommend (8) · Post:
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By Simon Constable
NEW YORK (MarketWatch) -- Americans, watch out! Your property rights are under attack.
While so far it is only a minor problem, that's no reason to get complacent. The impact could be years of slower economic growth.
Here's why such rights matter, and how they are being eroded:
"Property rights are fundamental to capitalism and the efficient allocation of capital," explains Neil Gelfand, a portfolio manager at hedge-fund River Crescent Capital, Suffolk, Va.
President Obama hailed the economic stimulus package Wednesday, while Republicans used the Recovery Act's one-year birthday to renew complaints that it hasn't lived up to its billing. WSJ's Louise Radnofsky and Dow Jones's Mike Reid join the News Hub to discuss.
The reason is simple. If investors don't know what they own, or can't be sure of defending their property rights, then they either won't invest or alternatively they will demand higher rates of return when they do.
It goes for both tangible and intellectual rights.
The net impact tends to be dual -- lower levels of investment and higher interest rates, neither of which is conducive to faster economic growth.
One instance of a weakened right to property comes as a result of some types of government-sanctioned housing rescue plans. It seems to have turned property rights for lenders topsy-turvy.
For instance, when banks reduce the principal owed on a first mortgage, the second mortgage is frequently left untouched.
That's backwards. The first mortgage holder is supposed to be "more" secure than the second mortgage holder. But that's not the case in many of these so-called cram-downs. Read "How banks can win from being second"
Another example of bondholder rights being thrown for a loop comes as a result of a government bailout, this time in the auto industry. In this particular case, when the government stepped in with new loans they pushed the pre-existing lenders down the food chain.
In simple terms, the rights of the bondholders were diluted.
A final example which I am keeping my beady eye on is inflation.
That happens when a government prints so much paper money that the buying power of the currency declines. In the case of Zimbabwe paper money becomes worthless.
OK, so this hasn't actually happened yet in the U.S. But I think some sort of higher inflation will materialize. When it does and that purchasing power of U.S. money has diminished, it will in many ways be like a property right has been diminished.
These examples might seem academic and marginal, but that doesn't mean they are of no consequence.
"It is changes at the margin that move markets," says River Crescent's Gelfand.
And at least for the time being, capital markets are still important to future growth.
Simon Constable is a Dow Jones Newswires columnist and host of the News Hub Web Show. This column first appeared on Dow Jones Newswires.
- 1100cc | 9:14 a.m. Today9:14 a.m. Feb. 18, 2010
Is the economy so good now that it's bad for Wal-Mart Stores Inc.?
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