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The True Origins of This Financial Crisis

Com­ment by J Perry:  There is a very plau­si­ble argu­ment that efforts to redis­trib­ute wealth to improve home own­er­ship rates among lower income and minori­ties were han­dled in such a way that when com­bined with some rather inno­v­a­tive secu­ri­ti­za­tion of sub-prime mort­gages, the result was a toxic con­coc­tion of leg­is­la­tion and risk.  I con­tend that lenders have not all of the sud­den become more greedy.  Rather, with a Fed­eral man­date to make risky loans and a profit vehi­cle in place for them to reap good prof­its, they did what lenders have always done…make loans.  In other words, the banks become will­ing dupes in a delib­er­ate plan which resulted in a very clever and mas­sive redis­tri­b­u­tion of wealth amount­ing to tril­lions of dol­lars from hard­work­ing Amer­i­cans into the hands of these risky bor­row­ers.  Yet the aver­age “Joe” still walks around scratch­ing his head or blam­ing it on the “failed poli­cies” and “loose reg­u­la­tion” of the last admin­is­tra­tion.  Iron­i­cally, it was the reg­u­la­tion of the wrong kind that cre­ated the mess and the strong defense of these reg­u­la­tory poli­cies by lib­eral or “pro­gres­sive”  mem­bers of Con­gress that thwarted attempts to pre­vent the disaster.

PLEASE READ THIS CAREFULLY AND FORWARD TO A FRIEND.  If you don’t agree then please comment…

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THE ARTICLE:

The True Ori­gins of This Finan­cial Crisis

By Peter J. Wal­li­son from the Feb­ru­ary 2009 issue

Two nar­ra­tives seem to be form­ing to describe the under­ly­ing causes of the finan­cial cri­sis. One, as out­lined in a New York Times front-page story on Sun­day, Decem­ber 21, is that Pres­i­dent Bush exces­sively pro­moted growth in home own­er­ship with­out suf­fi­ciently reg­u­lat­ing the banks and other mort­gage lenders that made the bad loans. The result was a bank­ing sys­tem suf­fused with junk mort­gages, the con­tin­u­ing losses on which are drag­ging down the banks and the econ­omy. The other nar­ra­tive is that gov­ern­ment pol­icy over many years–particularly the use of the Com­mu­nity Rein­vest­ment Act and Fan­nie Mae and Fred­die Mac to dis­tort the hous­ing credit sys­tem– under­lies the cur­rent cri­sis. The stakes in the com­pet­ing nar­ra­tives are high. The diag­no­sis deter­mines the pre­scrip­tion. If the Times diag­no­sis pre­vails, the pre­scrip­tion is more reg­u­la­tion of the finan­cial sys­tem; if instead gov­ern­ment pol­icy is to blame, the pre­scrip­tion is to ter­mi­nate those gov­ern­ment poli­cies that dis­tort mort­gage lending.

There really isn’t any ques­tion of which approach is fac­tu­ally cor­rect: right on the front page of the Times edi­tion of Decem­ber 21 is a chart that shows the growth of home own­er­ship in the United States since 1990. In 1993 it was 63 per­cent; by the end of the Clin­ton admin­is­tra­tion it was 68 per­cent. The growth in the Bush admin­is­tra­tion was about 1 per­cent. The Times itself reported in 1999 that Fan­nie Mae and Fred­die Mac were under pres­sure from the Clin­ton admin­is­tra­tion to increase lend­ing to minori­ties and low-income home buyers–a pol­icy that nec­es­sar­ily entailed higher risks. Can there really be a ques­tion, other than in the fevered imag­i­na­tion of the Times, where the push to reduce lend­ing stan­dards and boost home own­er­ship came from?

The fact is that nei­ther polit­i­cal party, and no admin­is­tra­tion, is blame­less; the hon­est answer, as out­lined below, is that gov­ern­ment pol­icy over many years caused this prob­lem. The reg­u­la­tors, in both the Clin­ton and Bush admin­is­tra­tions, were the enforcers of the reduced lend­ing stan­dards that were essen­tial to the growth in home own­er­ship and the hous­ing bubble.

THERE ARE TWO KEY EXAMPLES of this mis­guided gov­ern­ment pol­icy. One is the Com­mu­nity Rein­vest­ment Act (CRA). The other is the afford­able hous­ing “mis­sion” that the government-sponsored enter­prises (GSEs) Fan­nie Mae and Fred­die Mac were charged with fulfilling.

As orig­i­nally enacted in 1977, the CRA vaguely man­dated reg­u­la­tors to con­sider whether an insured bank was serv­ing the needs of the “whole” com­mu­nity. For 16 years, the act was invoked rather infre­quently, but 1993 marked a deci­sive turn in its enforce­ment. What changed? Sub­stan­tial media and polit­i­cal atten­tion was show­ered upon a 1992 Boston Fed­eral Reserve Bank study of dis­crim­i­na­tion in home mort­gage lend­ing. This study con­cluded that, while there was no overt dis­crim­i­na­tion in banks’ allo­ca­tion of mort­gage funds, loan offi­cers gave whites pref­er­en­tial treat­ment. The method­ol­ogy of the study has since been ques­tioned, but at the time it was highly influ­en­tial with reg­u­la­tors and mem­bers of the incom­ing Clin­ton admin­is­tra­tion; in 1993, bank reg­u­la­tors ini­ti­ated a major effort to reform the CRA regulations.

In 1995, the reg­u­la­tors cre­ated new rules that sought to estab­lish objec­tive cri­te­ria for deter­min­ing whether a bank was meet­ing CRA stan­dards. Exam­in­ers no longer had the dis­cre­tion they once had. For banks, sim­ply prov­ing that they were look­ing for qual­i­fied buy­ers wasn’t enough. Banks now had to show that they had actu­ally made a req­ui­site num­ber of loans to low– and moderate-income (LMI) bor­row­ers. The new reg­u­la­tions also required the use of “inno­v­a­tive or flex­i­ble” lend­ing prac­tices to address credit needs of LMI bor­row­ers and neigh­bor­hoods. Thus, a law that was orig­i­nally intended to encour­age banks to use safe and sound prac­tices in lend­ing now required them to be “inno­v­a­tive” and “flex­i­ble.” In other words, it called for the relax­ation of lend­ing stan­dards, and it was the bank reg­u­la­tors who were expected to enforce these relaxed standards.

The effort to reduce mort­gage lend­ing stan­dards was led by the Depart­ment of Hous­ing and Urban Devel­op­ment through the 1994 National Home­own­er­ship Strat­egy, pub­lished at the request of Pres­i­dent Clin­ton. Among other things, it called for “financ­ing strate­gies, fueled by the cre­ativ­ity and resources of the pri­vate and pub­lic sec­tors, to help home­own­ers that lack cash to buy a home or to make the pay­ments.” Once the stan­dards were relaxed for low-income bor­row­ers, it would seem impos­si­ble to deny these ben­e­fits to the prime mar­ket. Indeed, bank reg­u­la­tors, who were in charge of enforc­ing CRA stan­dards, could hardly dis­ap­prove of sim­i­lar loans made to better-qualified borrowers.

Sure enough, accord­ing to data pub­lished by the Joint Cen­ter for Hous­ing Stud­ies of Har­vard Uni­ver­sity, from 2001 through 2006, the share of all mort­gage orig­i­na­tions that were made up of con­ven­tional mort­gages (that is, the 30-year fixed-rate mort­gage that had always been the main­stay of the U.S. mort­gage mar­ket) fell from 57.1 per­cent in 2001 to 33.1 per­cent in the fourth quar­ter of 2006. Cor­re­spond­ingly, sub-prime loans (those made to bor­row­ers with blem­ished credit) rose from 7.2 per­cent to 18.8 per­cent, and Alt-A loans (those made to spec­u­la­tive buy­ers or with­out the usual under­writ­ing stan­dards) rose from 2.5 per­cent to 13.9 per­cent. Although it is dif­fi­cult to prove cause and effect, it is highly likely that the lower lend­ing stan­dards required by the CRA influ­enced what banks and other lenders were will­ing to offer to bor­row­ers in prime mar­kets. Need­less to say, most bor­row­ers would pre­fer a mort­gage with a low down pay­ment require­ment, allow­ing them to buy a larger home for the same ini­tial investment.

The prob­lem is summed up suc­cinctly by Stan Liebowitz of the Uni­ver­sity of Texas at Dallas:

From the cur­rent hand­wring­ing, you’d think that the banks came up with the idea of looser under­writ­ing stan­dards on their own, with reg­u­la­tors just asleep on the job. In fact, it was the reg­u­la­tors who relaxed these standards–at the behest of com­mu­nity groups and “pro­gres­sive” polit­i­cal forces.… For years, ris­ing house prices hid the default prob­lems since quick refi­nances were pos­si­ble. But now that house prices have stopped ris­ing, we can clearly see the dam­age done by relaxed loan standards.

The point here is not that low-income bor­row­ers received mort­gage loans that they could not afford. That is prob­a­bly true to some extent but can­not account for the large num­ber of sub-prime and Alt-A loans that cur­rently pol­lute the bank­ing sys­tem. It was the spread­ing of these looser stan­dards to the prime loan mar­ket that vastly increased the avail­abil­ity of credit for mort­gages, the spec­u­la­tion in hous­ing, and ulti­mately the bub­ble in hous­ing prices.

IN 1992, AN AFFORDABLE hous­ing mis­sion was added to the char­ters of Fan­nie and Fred­die, which–like the CRA–permitted Con­gress to sub­si­dize LMI hous­ing with­out appro­pri­at­ing any funds. A 1997 Urban Insti­tute report found that local and regional lenders seemed more will­ing than the GSEs to serve cred­it­wor­thy low– to moderate-income and minor­ity appli­cants. After this, Fan­nie and Fred­die mod­i­fied their auto­mated under­writ­ing sys­tems to accept loans with char­ac­ter­is­tics that they had pre­vi­ously rejected. This opened the way for large num­bers of non­tra­di­tional and sub-prime mort­gages. These did not nec­es­sar­ily come from tra­di­tional banks, lend­ing under the CRA, but from lenders like Coun­try­wide Finan­cial, the nation’s largest sub-prime and non­tra­di­tional mort­gage lender and a firm that would become infa­mous for con­sis­tently push­ing the enve­lope on accept­able under­writ­ing standards.

Fan­nie and Fred­die used their afford­able hous­ing mis­sion to avoid addi­tional reg­u­la­tion by Con­gress, espe­cially restric­tions on the accu­mu­la­tion of mort­gage port­fo­lios (today total­ing approx­i­mately $1.6 tril­lion) that accounted for most of their prof­its. The GSEs argued that if Con­gress con­strained the size of their mort­gage port­fo­lios, they could not afford to ade­quately sub­si­dize afford­able hous­ing. By 1997, Fan­nie was offer­ing a 97 per­cent loan-to-value mort­gage. By 2001, it was offer­ing mort­gages with no down pay­ment at all. By 2007, Fan­nie and Fred­die were required to show that 55 per­cent of their mort­gage pur­chases were LMI loans and, within that goal, 38 per­cent of all pur­chases were to come from under­served areas (usu­ally inner cities) and 25 per­cent were to be loans to low-income and very-low-income bor­row­ers. Meet­ing these goals almost cer­tainly required Fan­nie and Fred­die to pur­chase loans with low down pay­ments and other defi­cien­cies that would mark them as sub-prime or Alt-A.

The decline in under­writ­ing stan­dards is clear in the finan­cial dis­clo­sures of Fan­nie and Fred­die. From 2005 to 2007, Fan­nie and Fred­die bought approx­i­mately $1 tril­lion in sub-prime and Alt-A loans. This amounted to about 40 per­cent of their mort­gage pur­chases dur­ing that period. More­over, Fred­die pur­chased an ever-increasing per­cent­age of Alt-A and sub-prime loans for each year between 2004 and 2007. It is impos­si­ble to fore­cast the total losses the GSEs will real­ize from a $1.6 tril­lion port­fo­lio of junk loans, but if default rates on these loans con­tinue at the unprece­dented lev­els they are show­ing today, the num­ber will be stag­ger­ing. The losses could make the $150 bil­lion S&L bailout in the late 1980s and early 1990s look small by comparison.

The GSEs’ pur­chases of sub-prime and Alt-A loans affected the rest of the mar­ket for these mort­gages in two ways. First, it increased the com­pe­ti­tion for these loans with private-label issuers. Before 2004, private-label issuers–generally invest­ment and com­mer­cial banks–specialized in sub­prime and Alt-A loans because GSEs’ finan­cial advan­tages, espe­cially their access to cheaper financ­ing, enabled them to box private-label com­pe­ti­tion out of the con­ven­tional mar­ket. When the GSEs decided to ramp up their pur­chases of sub-prime and Alt-A loans to ful­fill their afford­able hous­ing mis­sion, they began to take mar­ket share from the private-label issuers while simul­ta­ne­ously cre­at­ing greater demand for sub-prime and Alt-A loans among mem­bers of the orig­i­na­tor community.

Sec­ond, the increased demand from the GSEs and the com­pe­ti­tion with private-label issuers drove up the value of sub-prime and Alt-A mort­gages, reduc­ing the risk pre­mium that had pre­vi­ously sup­pressed orig­i­na­tions. As a result, many more mar­gin­ally qual­i­fied or unqual­i­fied appli­cants for mort­gages were accepted. From 2003 to late 2006, con­ven­tional loans (includ­ing jumbo loans) declined from 78.8 per­cent to 50.1 per­cent of all mort­gages, while sub­prime and Alt-A loans increased from 10.1 per­cent to 32.7 per­cent. Because GSE pur­chases are not included in these num­bers, in the years just before the col­lapse of home prices began, about half of all home loans being made in the United States were non-prime loans. Since these mort­gages aggre­gate more than $2 tril­lion, this accounts for the weak­ness in bank assets that is the prin­ci­pal under­ly­ing cause of the cur­rent finan­cial crisis.

In a very real sense, the com­pe­ti­tion from Fan­nie and Fred­die that began in late 2004 caused both the GSEs and the private-label issuers to scrape the bot­tom of the mort­gage bar­rel. Fan­nie and Fred­die did so in order to demon­strate to Con­gress their abil­ity to increase sup­port for afford­able hous­ing. The private-label issuers did so to main­tain their mar­ket share against the GSEs’ increased demand for sub-prime and Alt-A prod­ucts. Thus, the grad­ual decline in lend­ing standards–beginning with the revised CRA reg­u­la­tions in 1993 and con­tin­u­ing with the GSEs’ attempts to show Con­gress that they were meet­ing their afford­able hous­ing mission–came to dom­i­nate mort­gage lend­ing in the United States.

FEDERAL HOUSING INIATIVES are not the only cul­prits in the cur­rent mort­gage mess–state-based res­i­den­tial finance laws give home­own­ers two free options that con­tributed sub­stan­tially to the finan­cial cri­sis. First, any home­owner may, with­out penalty, refi­nance a mort­gage when­ever inter­est rates fall or home prices rise to a point where there is sig­nif­i­cant equity in the home, enabling them to extract any equity that had accu­mu­lated between the orig­i­nal financ­ing trans­ac­tion and any sub­se­quent refi­nanc­ing. The result is so-called cash-out refi­nanc­ing, in which home­own­ers treat their homes like sav­ings accounts, draw­ing out funds to buy cars, boats, or sec­ond homes. By the end of 2006, 86 per­cent of all home mort­gage refi­nanc­ings were cash-outs, amount­ing to $327 bil­lion that year. Unfor­tu­nately, this meant that when home prices fell, there was lit­tle equity in the home behind the mort­gage and fre­quently lit­tle rea­son to con­tinue mak­ing pay­ments on the mortgage.

The will­ing­ness of home­own­ers to walk away from their “under­wa­ter” mort­gages was increased by the des­ig­na­tion of mort­gages as “with­out recourse” in most states. In essence, non-recourse mort­gages mean that default­ing home­own­ers are not per­son­ally respon­si­ble for pay­ing any dif­fer­ence between the value of the home and the prin­ci­pal amount of the mort­gage oblig­a­tion, or that the process for enforc­ing this oblig­a­tion is so bur­den­some and time-consuming that lenders sim­ply do not bother. The homeowner’s oppor­tu­nity to walk away from a home that is no longer more valu­able than the mort­gage it car­ries exac­er­bates the effect of the cash-out refinancing.

Tax laws fur­ther ampli­fied the prob­lems of the hous­ing bub­ble and dimin­ished lev­els of home equity, espe­cially the deductibil­ity of inter­est on home equity loans. Inter­est on con­sumer loans of all kinds–for cars, credit cards, or other purposes–is not deductible for fed­eral tax pur­poses, but inter­est on home equity loans is deductible no mat­ter how the funds are used. As a result, home­own­ers are encour­aged to take out home equity loans to pay off their credit card or auto loans or to make the pur­chases that would ordi­nar­ily be made with other forms of debt. Con­se­quently, home­own­ers are encour­aged not only to bor­row against their homes’ equity in pref­er­ence to other forms of bor­row­ing, but also to extract equity from their homes for per­sonal and even busi­ness pur­poses. Again, the reduc­tion in home equity has enhanced the like­li­hood that defaults and fore­clo­sures will rise pre­cip­i­tously as the econ­omy con­tin­ues to contract.

Bank reg­u­la­tory poli­cies should also shoul­der some of the blame for the finan­cial cri­sis. Basel I, a 1988 inter­na­tional pro­to­col devel­oped by bank reg­u­la­tors in most of the world’s devel­oped coun­tries, devised a sys­tem for ensur­ing that banks are ade­quately cap­i­tal­ized. Bank assets are assigned to dif­fer­ent risk cat­e­gories, and the amount of cap­i­tal that a bank holds for each asset is pegged to the asset’s per­ceived risk­i­ness. Under Basel I’s tiered risk-weighting sys­tem, AAA asset-backed secu­ri­ties are less than half as risky as res­i­den­tial mort­gages, which are them­selves half as risky as com­mer­cial loans. These rules pro­vided an incen­tive for banks to hold mort­gages in pref­er­ence to com­mer­cial loans or to con­vert their port­fo­lios of whole mort­gages into an MBS port­fo­lio rated AAA, because doing so would sub­stan­tially reduce their cap­i­tal requirements.

Though the banks may have been ade­quately cap­i­tal­ized if the mort­gages were of high qual­ity or if the AAA rat­ing cor­rectly pre­dicted the risk of default, the grad­ual decline in under­writ­ing stan­dards meant that the mort­gages in any pool of prime mort­gages often had high loan-to-value ratios, low FICO scores, or other indi­ca­tors of low qual­ity. In other words, the Basel bank cap­i­tal stan­dards, applic­a­ble through­out the world’s devel­oped economies, encour­aged com­mer­cial banks to hold only a small amount of cap­i­tal against the risks asso­ci­ated with res­i­den­tial mort­gages. As these risks increased because of the decline in lend­ing stan­dards and the bal­loon­ing of home prices, the Basel cap­i­tal require­ments became increas­ingly inad­e­quate for the risks banks were assum­ing in hold­ing both mort­gages and MBS portfolios.

PREVENTING A RECURRENCE of the finan­cial cri­sis we face today does not require new reg­u­la­tion of the finan­cial sys­tem. What is required instead is an appre­ci­a­tion of the fact–as much as law­mak­ers would like to avoid it–that U.S. hous­ing poli­cies are the root cause of the cur­rent finan­cial cri­sis. Other players–greedy invest­ment bankers; incom­pe­tent rat­ing agen­cies; irre­spon­si­ble hous­ing spec­u­la­tors; short­sighted home­own­ers; and preda­tory mort­gage bro­kers, lenders, and borrowers–all played a part, but they were only fol­low­ing the eco­nomic incen­tives that gov­ern­ment pol­icy laid out for them. If we are really seri­ous about pre­vent­ing a recur­rence of this cri­sis, rather than increas­ing the power of the gov­ern­ment over the econ­omy, our first order of busi­ness should be to cor­rect the destruc­tive hous­ing poli­cies of the U.S. government.

top­ics:
Global Finan­cial Cri­sis, Hous­ing Bubble

Peter J. Wal­li­son is the Arthur F. Burns Fel­low in Finan­cial Pol­icy Stud­ies at the Amer­i­can Enter­prise Insti­tute. Karen Dubas of AEI assisted Mr. Wal­li­son in the prepa­ra­tion of this article.


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What is a “Culture of Democracy”?

by John Perry

That is not the same ques­tion as “What is democ­racy”, or “What is a demo­c­ra­tic soci­ety”.  Rather I mean to ask, “What is the psy­che of a pop­u­la­tion that desires free­dom?   I like the descrip­tion ten­dered by George Will that the cre­ation of democ­racy is an organic process.  In Mr. Will’s char­ac­ter­i­za­tion, you can no more build a democ­racy than you can  build an orchid.  It will only occur if the right con­di­tions exist and then it must grow from a pop­u­la­tion of peo­ple.  It’s not some­thing to be constructed.

Con­sider for a moment the pro­found suc­cess of the founders of the United States.  Why was this group of men so suc­cess­ful in cre­at­ing a form of self-government that is unmatched in the his­tory of all human endeavor?  What inspired them to cre­ate a sys­tem of gov­ern­ment which pro­vides lib­erty and pros­per­ity not only to its cit­i­zenry but also improves the stan­dard of liv­ing in many other coun­tries, many which hold quite dif­fer­ent views of human rights and eco­nomic free­doms?  I think the answer lies in the cen­turies of events that con­di­tioned a group of com­mon men to seize an oppor­tu­nity to throw off the shack­les of tyranny and to cre­ate a sys­tem that would rec­og­nize that all men are created equal.

Could it be the req­ui­site ele­ments for a cul­ture of democ­racy are the love of lib­erty and the fear of tyranny?  And what hap­pens when a healthy fear of gov­ern­ment power is miss­ing from a soci­ety?  After more than 200 years, generations of Amer­i­cans have enjoyed the pro­tec­tion and secu­rity of liv­ing under a con­sti­tu­tion­ally lim­ited gov­ern­ment.  Con­sid­er­ing human nature, isn’t it under­stand­able or even pre­dictable that most of our pop­u­la­tion would become com­pla­cent, unwor­ried or unaware that the great­est threat to lib­erty is from those whom we elect to govern?

The wis­dom of our fore­fa­thers was borne not from genius.  It was borne from a prac­ti­cal fear of rulers and despots.  Our sys­tem of gov­ern­ment was con­structed to ensure that no per­son or party would dom­i­nate the gov­er­nance of the peo­ple in order to guar­an­tee the max­i­mum pos­si­ble indi­vid­ual lib­erty in a free society.

Like air and water are needed to sus­tain life,  so it is that a love of lib­erty and fear of oppres­sion are nec­es­sary to sus­tain a democracy.

Drive-thru

Q: Have you heard about McDon­alds new Obama Value Meal?
A: Order any­thing you like and the guy behind you has to pay for it.

Outsourcing Poverty

by J Perry

Min­i­mum wage laws should be abol­ished. These laws are both absurd and hyp­o­crit­i­cal to any­one giv­ing it a moment’s hon­est reflec­tion. What pos­i­tive effect does it have to help our econ­omy or improve the human con­di­tion? I’ve heard it argued as a moral imper­a­tive that we estab­lish and main­tain a gov­ern­ment man­dated min­i­mum wage. Of course, if there are no jobs avail­able at or above this wage that has been arbi­trar­ily deter­mined by politi­cians to buy votes, then a per­son who would be oth­er­wise will­ing to work is barred from the work­force and handed some­thing for noth­ing in exchange for his dig­nity. If you would argue that it would be wrong to allow that per­son to work at a lower wage then let’s be hon­est with ourselves.

No one I know has any prob­lem buy­ing goods from China or any of the other coun­tries with lower wages than ours. In fact, it is vital to our country’s econ­omy, health­care, tech­nol­ogy, and even defense. We have and will con­tinue to out­source any­thing that can be made more cheaply else­where. How much dis­cus­sion is there about the moral dilemma of buy­ing goods made by peo­ple earn­ing less than min­i­mum wage beyond U.S. bor­ders? Does any­one care? Would it not be bet­ter to allow these goods to be made within the U.S. where at least these work­ers’ civil lib­er­ties have the pro­tec­tion of the U.S. Con­sti­tu­tion? What we have done is say that the bot­tom ech­e­lon of our econ­omy will be out­sourced for no appar­ent rea­son than to buy the votes of labor union mem­bers. It has noth­ing to do with moral­ity and one could eas­ily say that min­i­mum wage laws them­selves are immoral. I sup­pose it does allow us to enjoy an arti­fi­cially clean soci­ety. It allows us to pre­tend that these work­ers don’t exist while the truth is we’ve only out­sourced poverty beyond our sight.

The costs on soci­ety are immense. Much of the wel­fare cost in this coun­try is unnec­es­sary. We pay peo­ple to do noth­ing, even restrict them from work­ing, while we hap­pily pay low income work­ers in third world coun­tries to make the goods and com­po­nents that we need.  How much sense is this?  Does this seem right to you?

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Conversations with Jim Comstock

June 9, 1975

by David Peyton

Jim Com­stock, edi­tor of The West Vir­ginia Hill­billy, sits in the second-floor work­room of his Rich­wood, W. Va., offices, watch­ing the traf­fic move slowly through the main street.

The line of pas­sen­ger cars and pickup trucks is bro­ken occa­sion­ally by a log­ging truck mov­ing hard­wood from the sur­round­ing moun­tains to a mill where it will be processed for fur­ni­ture or paneling.

It is a sunny day in late April. The lower river val­leys dis­play spring blos­soms and green­ery. But in Rich­wood, a town of about 4,000 on the Cherry River, cold moun­tain air keeps most buds in their win­ter cocoons.

Rich­wood is a moun­tain town filled with moun­tain peo­ple and moun­tain mem­o­ries. Com­stock, who was born on nearby Hin­kle Moun­tain, is the edi­tor of a weekly news­pa­per that has chron­i­cled events in West Vir­ginia for nearly 30 years.

The Hill­billy has become a new tra­di­tion. Nearly every­one in the state has heard of it and it’s quoted often. But its sag­ging cir­cu­la­tion proves more peo­ple quote it than sub­scribe to it.

Those who fol­low The Hill­billy read it pri­mar­ily for the reg­u­lar fea­ture on the last page of the tabloid — an out­pour­ing of humor, pathos and other thoughts from the mind of its editor.

Some­times it’s sim­ple humor such as the time the edi­tor wrote the story of the moun­tain farmer and his wife who had just paid the mort­gage on their small farm.

“Oh, Pa,” the wife said, “it’s just that we have all this and there’s our two daugh­ters a-layin’ out there in the cemetery.”

The man looked sad, too, Com­stock said, and just stared down at the floor.

“I know it, Ma,” he said. “And I know I oughtn’t to say it, but to tell you the truth, I’d a heap rather they was dead.”

Some­times Com­stock writes with the plain­spo­ken beauty of a coun­try edi­tor. On the death of Mar­i­lyn Mon­roe, he wrote:

“The girl who lived across the street from us all got tired and wanted to go to bed and sleep. I hope her dreams are all nice dreams, like maybe grow­ing up in a lit­tle town with a mother to love her and teach her, and a father to wor­ship her, and then to find a prince charm­ing who, after they have planned and worked together, will get her a lit­tle two-bedroom cas­tle and a baby or two, and share with her a nice, long, unevent­ful life of being a very, very happy nobody.”

Some­times the truth, accord­ing to Com­stock, hurts too much to be funny. Once he told the story of another Rich­wood res­i­dent who vis­ited his daugh­ter, a school­teacher, in another town. The daugh­ter was apolo­getic because on her tight bud­get, she could not afford real but­ter. All she had was margarine.

“The fel­low told her not to take it so hard,” Com­stock wrote. “He said all she had to do was find some­body who was on the sur­plus com­mod­ity list and trade him out of his but­ter, because but­ter is one thing that the gov­ern­ment has a lot of, and usu­ally a fam­ily gets more than it can use and they barter a bit with their butter.”

Com­stock pointed out to his read­ers that here was a fam­ily earn­ing money, but doing with­out but­ter so it could pay taxes to buy but­ter for peo­ple who weren’t mak­ing money and there­fore weren’t pay­ing taxes.

“He laughed…telling me about it,” Com­stock wrote, “and I laughed, too. And then we stopped laugh­ing and just looked at each other, because sud­denly, it wasn’t funny any more.”

Some­times the entire last page is devoted to prais­ing sim­ple moun­tain joys. Who else but Com­stock could write reams about the joys of hog slaugh­ter­ing and make it sound poetic?

When Sharon Rock­e­feller (Mrs. John D. Rock­e­feller IV) came to West Vir­ginia, Com­stock devoted the last page of his news­pa­per to giv­ing her friendly hints on how to be a moun­tain housewife.

He reminded her that “Corn dodger isn’t worth a rap with­out crack­lins. Restau­rants don’t know that, and that’s why corn dodger isn’t fit for the hounds in restaurants.”

He pro­vided Mrs. Rock­e­feller with the secret for gath­er­ing the best poke greens and how to choose the best sas­safras for tea. He reminded her that not all moun­tain peo­ple eat moun­tain cook­ing. “They’ll tell you that ‘Pos­sum is eaten only by white trash,’ and then go off to the Green­brier and eat snails,” he wrote.

Most of Comstock’s life has been devoted to telling about moun­tain life as he sees it. Unashamedly he has made fun of moun­tain peo­ple and the “out­siders” who come to West Vir­ginia with mis­sion­ary zeal. Dur­ing the 1960 Kennedy-Humphrey pres­i­den­tial pri­mary in West Vir­ginia, he wrote about the two con­tenders and their use of West Vir­ginia as a spring­board to the pres­i­dency. He did it through a myth­i­cal fam­ily com­posed of Ma, Pa, Sis, and Fid­dlin’ Clyde. Mak­ing light of some of West Virginia’s most infa­mous polit­i­cal shenani­gans, he proudly pro­claimed (with tongue in cheek) that Pa had decided he couldn’t bring him­self to sell his vote to a Catholic.

Com­stock is intense about Appalachia, although he doesn’t con­sider him­self an expert on the peo­ple and cul­ture (a trait which seems com­mon among those who are best suited to be called experts).

Com­stock says the old-style Appalachian cul­ture is gone, leav­ing the moun­tains with a form of mutated Appalachian cul­ture, not at all like the old, but still out of step with the rest of Amer­ica in many, many ways.

“I grew up on Hin­kle Moun­tain where peo­ple rep­re­sented a cer­tain sub­cul­ture all their own. Well, one time an Aus­trian fam­ily moved in. We couldn’t help but see the dif­fer­ence at first. But sooner or later they became assim­i­lated. They attended our moun­tain wakes. They were Catholics, but they took their kids out of Catholic schools. Why? Because of what we were, I sup­pose. Appalachi­ans were like the Chi­nese. We even­tu­ally con­quered every­body we came in con­tact with.”

That still holds true to a lesser extent, Com­stock says. Is it because the Appalachian peo­ple are so strong, their cul­ture so tenacious?

“No, I think it’s because the Appalachian sub­cul­ture is so basi­cally good. In Appalachia, for instance, you sel­dom find peo­ple who take advan­tage of oth­ers. You take all the big deals — tak­ing money and going off to Switzer­land. That’s not done by Appalachi­ans,” he says.

He sur­veys the quiet street out­side his win­dow again. “Just recently, it was reported that there was a mur­derer loose. Police reported he was on his way to Rich­woods. The author­i­ties came around warn­ing peo­ple to look their doors. Can you imag­ine that? Peo­ple hav­ing to be told to lock their doors at night? I leave my keys in the car fre­quently. I never lock it at night and never in this world have I lost any­thing in Richwood.”

No mat­ter how “basi­cally good” the cul­ture is, it’s chang­ing, due in large mea­sure to tele­vi­sion, Com­stock believes.

“I had a girl come here and scrub the office the other day,” he says. “Back in the old days, all one ever needed was a mop, a mop bucket, some water and soap pow­ders. Well, my Lord, she had a list of things she needed that came to $42. And they were all brand names she knew from TV. She was speak­ing a strange lan­guage. Now her whole life is shaped, not by her fam­ily or the things she has heard from them, but from the tube in her liv­ing room. And she lis­tens to com­mer­cials more than any­thing. And her chil­dren eat the no-good fun foods. Her corn flakes must sparkle and crackle. She has for­got­ten how to feed her fam­ily, if she ever knew.”

Destruc­tion of cul­tural dif­fer­ences by mass media is wide­spread, Com­stock believes. “All cul­tures are being destroyed by the media. I sus­pect Brook­lyn has lost most of its dialect, its old cus­toms. Portnoy’s com­plaint of the ages will be some­thing else. It will be against the media.

Gov­ern­ment runs a close sec­ond to the media in forc­ing change, Com­stock says. If the gov­ern­ment isn’t forc­ing change, it keeps the cul­ture in an uproar so that the cul­ture changes by degrees.

“We have gov­ern­ment experts that come down here and study us and want to change us, make us like every­body else. Then we have more gov­ern­ment experts come right on their heels and want us to pre­serve our culture.

“We’ve spent a great deal of money teach­ing Appalachi­ans the arts and crafts of the old peo­ple — weav­ing for instance. Well, they went to Africa and found mas­ter weavers who beat any­thing. They could weave water­tight roofs from the fronds of the palm tree. Well, the gov­ern­ment peo­ple were absolutely shocked at that, so the gov­ern­ment is teach­ing the peo­ple to use mod­ern roof­ing mate­ri­als. We call it civ­i­liza­tion. At home we’re teach­ing peo­ple to weave who don’t know how to weave. Mean­while, in Africa, for those who could weave and make prac­ti­cal use of their weav­ing, it wasn’t any good.”

“But you know and I know that some­day the gov­ern­ment will find the last old man or old woman among the Africans who knows how to weave. And he or she will be hired to teach the rest how to weave roofs.”

Com­stock says he remem­bers 1960 when “(John F.) Kennedy came down here and found us a for­got­ten peo­ple. The idea was to change us, to get us into the main­stream. Well, now the idea is to get out of the main­stream, because we’re not sure it’s good to be in the main­stream any more.”

The lead­ers aren’t all to blame for the demise of the cul­ture. The peo­ple of Appalachia have wanted to be in the main­stream. In mov­ing in that direc­tion, they have aban­doned old ways, Com­stock says.

“When I was a child, we moved to a farm. On this farm was a num­ber of lit­tle houses and build­ings. In one was an old loom. Another had bul­let molds. Every­thing in those build­ings was absolutely Smith­son­ian. Well, before I got to col­lege, we had destroyed every­thing on the place. I made a sled out of the loom. I remem­ber. Nobody ever told us the loom should be saved. My peo­ple were too close to it to rec­og­nize its worth. They were part of the gen­er­a­tion that wanted to forget.

“I remem­ber at that time my father brought home a knit­ting machine. He was try­ing to hold on to the new because he didn’t want to be old-fashioned. My mother was glad to get rid of the old ways. She was glad to get rid of that loom, glad she didn’t have to sit at it hour after hour. She was glad to have it torn up. She felt liberated.”

Com­stock calls these arti­facts of the old cul­ture the “tan­gi­bles,” and in recent years, much of his works out­side the news­pa­per pro­fes­sion, has been to pre­serve the relics of days gone by. He was instru­men­tal in sav­ing the Cass Scenic Rail­way, a nar­row gauge log­ging train, which once car­ried tim­ber out of the moun­tains near Rich­wood. Today it car­ries tourists to the top of some of the most spec­tac­u­lar moun­tains in the state. He was also a lead­ing force behind the restora­tion of Pearl Buck’s birth­place, another pop­u­lar West Vir­ginia tourist attraction.

The edi­tor is involved in Richwood’s annual Ramp Fes­ti­val, a spring gath­er­ing devoted to a native onion-like plant that is eaten in the spring. The eat­ing of ramps is more of a cer­e­mony with West Vir­ginia high­landers than it is a meal. The cus­tom goes back two centuries.

Com­stock believes that by pre­serv­ing the tan­gi­bles, gen­er­a­tions of Appalachi­ans to come can learn about the past and per­haps be per­suaded to pre­serve some of the cul­tural intangibles.

“Nobody in West Vir­ginia should be per­mit­ted to tear any­thing down until some­body from the state has had a chance to check it for preser­va­tion qual­i­ties,” he says. “Over in Mar­lin­ton, for exam­ple, there’s an orig­i­nal toll house, a build­ing where they used to col­lect tolls from those trav­el­ing over the first roads in this part of the coun­try. No one from the state seems inter­ested in pre­serv­ing it, but in some states they’re build­ing repli­cas of their old toll houses.”

He tells the story of a mar­ble fac­tory in Bridge­port, W. Va. “You know, West Vir­ginia was once the Mar­ble capi­tol of the world. Well, a man came up to me and said that the plant, which made the first mar­bles in West Vir­ginia, was clos­ing. He wanted to give the mar­ble machine that made the first mar­bles in the state to the state gov­ern­ment. Well, I called the Gov­er­nor and pleaded with him for the state to get the machine. I called again and again. The gov­er­nor wasn’t inter­ested. Finally, the man who owned the machine said the Owens Illi­nois Glass Co. was giv­ing him $5,000 for the machine. They wanted to put it in a museum, and the museum wasn’t in West Virginia.”

West Vir­ginia gar­den clubs raised the money for the preser­va­tion of the Pearl Buck Birth­place. After it was pur­chased, the fed­eral gov­ern­ment gave $100,000 for its restoration.

Com­stock says he sees a great deal of this lack of respect for tan­gi­bles in the young.

“A kid doesn’t respect a book any more. Because of mass pro­duc­tion, they’re cheap. And a school­book means so lit­tle to a young­ster. After all, most school­books don’t belong to the chil­dren. They belong to the school sys­tem that pur­chased them. There’s no pride of own­er­ship. And what about the hot lunch pro­gram at schools? That means there’s no pride of ‘vit­tles’ any more. It used to be impor­tant what you brought in your lunch. My wife used to bring cold ham on a bis­cuit. My Lord, there’s noth­ing more edi­ble, or eatable.”

If the tan­gi­ble rem­nants of the cul­ture are pre­served, Com­stock says, they can form the basis for teach­ing the young about Appalachian cul­tures. This, he admits, is “catch­ing on,” but not fast enough to his liking.

“I’d like to see every town in West Vir­ginia have a lit­tle museum. A place where one could go to charge his bat­ter­ies, so to speak.” But he thinks that’s unlikely, because for every per­son who’s aware of his cul­tural back­ground, there are a hun­dred Appalachi­ans still try­ing to live it all down.

The writer him­self is part of the new wave of cul­tural aware­ness. He is con­stantly asked to speak before groups about Appalachian her­itage. At each oppor­tu­nity, Com­stock impresses upon the audi­ence the need to pre­serve the her­itage through preser­va­tion of the old “things.”

And yet, this wave of aware­ness both­ers him. Unlike his mother and father who sim­ply lived in the cul­ture with­out being aware of it, the mod­ern Appalachian is being bom­barded with pro­grams designed to make him aware of his cul­tural her­itage. Com­stock believes this forces the entire cul­ture into a very crit­i­cal stage.

“If you’re aware of who you are, you start los­ing it or keep­ing it. It’s a point of no return.”

Com­stock Quotes from the Hillbilly

On Appalachian Poverty: “We have eaten of the fruit that Eve did, served by the same caterer, and learned our naked­ness. We didn’t know we were impov­er­ished and under­priv­i­leged until we were told, and we took to our beds from the shock of it and had to be fed through the veins. That’s what hap­pened to us.”

“Every day for a month old Doc Hyer had been deliv­er­ing babies all over Nicholas and Web­ster Coun­ties. Every time he asked the poor girl who it was it turned out to be Morty Mar­tin. It made old Doc Hyer mad. And when the Widow Wil­son had triplets and her daugh­ter had twins, Doc hunted Morty down to have it out with him. He cussed him out for a while and then he said, ‘Great balls of fire, man, how could you do such a thing?’ Morty said shucks, it wasn’t noth­ing, he just got him a bicycle.”

“There’s a test for a real coun­try edi­tor. Ask him how long a hair­cut is and he will tell you it is three gal­ley proofs long. When a coun­try edi­tor goes to the bar­ber chair he stuffs his pock­ets full of proofs, so that if he has to wait he won’t waste time. And when he gets in the chair he still won’t waste time. He’ll read proofs and that’s why he knows that a hair cut is three gal­ley proofs long.”

ON SPRING IN APPALACHIA: “One would never get down on paper what Spring means, that is, one whose Springs were inter­meshed with a farm, a poor, hand-scrabble farm in my lit­tle cor­ner of Appalachia. Sas­safras tea comes back to me, pun­gent and over­pow­er­ing. And poke greens, a thing at which so many peo­ple have turned their noses up, and yet which there is no delight that is gas­tronomiker than. And ramps, too, if one is for­tu­nate enough to have lived in that spe­cial rich part of Appalachia. But spring, all in all, is a lurk­ing thing in old bones, not some­thing you write about. It is dif­fer­ent things to dif­fer­ent peo­ple but there are dap­pled chinks of it, lit­tle half-remembered sniffs of it, that make the world kin. And bet­ter. And now, let us be off, as House­man wrote, to see the pear tree in bloom, because of our three-score years and tent there is but lit­tle room…Yes, let’s!”

“The Widow Crotchet never missed a tes­ti­mo­nial meet­ing at the church near her home and she never missed a time to get up and tes­tify her unwor­thi­ness to serve the Lord along­side the oth­ers who were more ade­quately pre­pared. She came into the house of the Lord this par­tic­u­lar time and sat down and when most of those present had tes­ti­fied, she got up and told how unwor­thy she was. ‘I ought not to be up here with you peo­ple. I am so unwor­thy that I ought to be back behind the door.’ When she sat down, Brother Crook­shanks got up and said; ‘I too am unwor­thy of the Lord’s grace and ten­der mer­cies. I orta be back there behind the door with the Widow Crotchet.’”

“It is Calvin Coolidge’s good des­tiny that he, who did noth­ing because he strove to do noth­ing for us, lives on in an unfor­get­table quote: ‘When a great num­ber of peo­ple are not work­ing, a state of unem­ploy­ment exists. One won­ders if fate might not be equally kind to Pres­i­dent Lyn­don John­son and let him live, not by his acts alone, but by that haunt­ing remark, ‘For the first time in his­tory, prof­its are higher than ever before.’”

“Lute Farby always said in time of eco­nomic stress a man with a big fam­ily had to do a heap of thinkin’ to keep them from starvin’. What he did, he said, was pay his kids a quar­ter if they wouldn’t eat no sup­per at night and then charge them a quar­ter for their break­fast in the mornings.”

“The men who came in to look the land over, with an eye to mak­ing a lot of money from a coal mine, were impressed with the for­ma­tion of rock strata. They said it was the pret­ti­est thing they ever saw. Uncle Ezra Hin­der­gast told them it was not only the pret­ti­est, but also the old­est, because it was one bil­lion and three years old. The min­ing engi­neer asked him how he could nar­row it down like that and he told them: Dr. Price, the geol­o­gist from West Vir­ginia Uni­ver­sity, told him it was a bil­lion years old, he said. And it was three years ago come June that Dr. Price was here.”

Received in New York on June 9, 1975.

©1975 Dave Peyton

Dave Pey­ton is an Ali­cia Pat­ter­son Foun­da­tion award win­ner on leave from The Hunt­ing­ton Adver­tiser (West Vir­ginia). This arti­cle may be pub­lished with credit to Mr. Pey­ton, The Hunt­ing­ton Adver­tiser, and the Ali­cia Pat­ter­son Foundation.

Money, Greed, and God: Why Capitalism is the Solution and Not the Problem

(Harper­One, 2009)

BOOK FORUM
Wednes­day, Novem­ber 4, 2009
Noon

Fea­tur­ing the author, Jay Richards, with com­ments by Doug Bandow, Senior Fel­low, Cato Insti­tute, and author, Beyond Good Inten­tions: A Bib­li­cal View of Pol­i­tics. Mod­er­ated by Daniel Gris­wold, Direc­tor of the Cen­ter for Trade Pol­icy Stud­ies, Cato Insti­tute, and author, Mad about Trade: Why Main Street Amer­ica Should Embrace Glob­al­iza­tion.

The Cato Insti­tute
1000 Mass­a­chu­setts Avenue, NW
Wash­ing­ton, DC 20001


 

The fall of com­mu­nism con­clu­sively demon­strated that cap­i­tal­ism is the bet­ter eco­nomic sys­tem. Free mar­kets are unsur­passed in their abil­ity to pro­vide mate­r­ial bounty, but in the after­math of the eco­nomic cri­sis some ask, are they moral? Even Pope Bene­dict is said to have retreated from his predecessor’s strong sup­port for the mar­ket econ­omy in the lat­est papal encycli­cal, Car­i­tas in Ver­i­tate. 

Jay Richards takes on the crit­ics of cap­i­tal­ism in his new book, Money, Greed, and God: Why Cap­i­tal­ism Is the Solu­tion and Not the Prob­lem. He argues that mar­kets, though imper­fect, are a nat­ural out­growth of God’s cre­ation and an impor­tant tool for help­ing the poor and dis­ad­van­taged. Com­ment­ing on Richards’ pre­sen­ta­tion is Cato Insti­tute Senior Fel­low Doug Bandow, also the author of Beyond Good Inten­tions: A Bib­li­cal View of Pol­i­tics. Mod­er­at­ing the dis­cus­sion is Daniel Gris­wold, the Cato Institute’s direc­tor of the Cen­ter for Trade Studies.

You may learn more about CATO by vis­it­ing  http://www.cato.org

Who I am

by John Perry

Don’t mis­take me for one of  those writ­ers and pro­fes­sional thinkers that are so pro­found that a room’s aver­age IQ is raised sev­eral points at the moment they enter.  I never attended an east­ern school with guys whose names ended with “III”.  If there is any “old money” in my ances­try it’s been long for­got­ten and buried in a cof­fee can behind an out­house in some remote moun­tain holler.  Addi­tion­ally, I’m not the same John Perry that is a widely pub­lished and con­tro­ver­sial edi­to­ri­al­ist.  There are sev­eral liv­ing John Per­rys in my fam­ily and many, many more in the region of my family’s heritage.

My fam­ily is from the moun­tains of Appalachia, namely West Vir­ginia and East­ern Ken­tucky.  I had grand­fa­thers and great-grandfathers on both sides of my fam­ily that worked in coal mines, raised tobacco, kept live­stock,  hunted squir­rels, and worked pretty much any­thing else that would allow a god-fearing man to put food on his table.  The hard work of these indi­vid­u­als and the over­all eco­nomic pros­per­ity of the last cen­tury allowed my father’s gen­er­a­tion to pur­sue higher edu­ca­tion and improved stan­dards of liv­ing for their chil­dren.  My gen­er­a­tion was char­ac­ter­is­ti­cally less moti­vated and less ambi­tious hav­ing been raised in the com­forts of post-war sub­ur­bia and aspired to enjoy the fruits of their labor.  The free­doms we enjoy are mostly taken for granted, and squan­dered by most.

I’m two gen­er­a­tions removed from the Great Depres­sion but feel it’s fad­ing influ­ence in my own life as my own core val­ues have been faintly shaped by this fusion of inde­pen­dent moun­taineer her­itage, eco­nomic hard­ship, sav­ing for later, and hard work.  Help­ing each other is eas­ier than try­ing to go it alone, and never ask the gov­ern­ment for any­thing unless you have to.  Nobody owes you a thing, and as my grand­fa­ther told me, ” always be good to people”.

I’ve worked in fac­to­ries all of my life mak­ing things that peo­ple want for investors who want to make money. I’ve also applied these ethics and feel that my employ­ers,  my fam­ily and soci­ety has ben­e­fited.   Most of these years I’ve man­aged peo­ple who are also from com­mon ances­try,  but as diverse in eth­nic­ity as in per­son­al­ity.  Because my father broke from the tra­di­tion of moun­tain liv­ing, my own life has been geo­graph­i­cally var­ied.  I’ve lived and worked in dif­fer­ing regions of the U.S. with a small amount of time spent work­ing in other coun­tries.  In the last three decades I’ve observed human behav­ior in this set­ting and like to think I know a bit about people.

Over the years the smaller obser­va­tions of peo­ple, their moti­va­tion, val­ues and accom­plish­ments,  have blended with the larger view of lib­erty and eco­nomic free­dom to shape a world view that I now feel com­pelled to share with any­one that cares to lis­ten.  I’m not a writer, but I fig­ure I can mud­dle my way through the blogoshere.

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