This month the Department of Justice announced what they claim is a “win” for the American people. The federal government fined Citigroup $7 billion for alleged misdeeds in the housing market. $4 billion of the “settlement” goes directly to Uncle Sam, and another $2.5 billion must be paid into various programs that allegedly help those hurt by the economic downturn. The Department of Justice also snuck complicated—and detrimental—housing policies into the settlement. One of those programs makes Citibank finance a minimum of $180 million on “Affordable Rental Housing,” a benign sounding name for price controlled housing.
Although the average American believes the legal system was created to protect property rights and enforce contracts, this “settlement” shows the legal system acting like a judge and jury and lawmaking body rolled into one. The government is viewing Citibank like a piggybank that they can take from or force to pay for social programs.
Here is how the “Affordable Rental Housing” programs work. Each new development must have 20 percent of units under price controls so they are “affordable” to households that make 50 percent of median income, or 40 percent of units under price controls so they are “affordable” to households that make 60 percent of median income. A building also must have a “land use restriction agreement” that imposes those price controls for at least 30 years.
Benjamin Powell and I have studied below market housing mandates and found numerous problems. Price controlled units are more likely to be poorly maintained and cause conflict between building owners and renters. When a building owner can charge certain tenants market rates, but not others, that also leads to differential treatment between neighbors. Certain residents also resent that not everyone pays the market price, and others have debates about the levels of amenities in a building. Price controls on housing also make developing new units less attractive in the long run. Almost every single economist agrees that price controls on housing decrease the quantity and/or quality of housing, but I doubt the Department of Justice consulted with any economists when mandating this “settlement.”
If anyone thought that courts stuck to enforcing contracts and protecting property rights, they should pay close attention. The Citigroup settlement is part of a worrisome trend in the court decision-making process. Legislative agendas are being passed by judges, who must undergo neither an economic analysis nor a legislative process.
Last year when JP Morgan Chase was forced to pay $22 billion for their alleged wrongs leading up to the 2008 economic downturn, The Wall Street Journal and New York Post correctly described the settlement as “The Morgan Shakedown” and “Extorting Morgan.” The same is true with this Citibank settlement.
Economist Fred McChesney has described how government often threatens and extracts money from companies. With this settlement, most of the money is going directly to the government, not those allegedly harmed by Citibank’s supposed wrongdoings, and the rest of it is going to poorly thought out mandates. Do we really want the Department of Justice acting as judge and jury for a large scale wealth transfer and mandate for price controls on housing? It’s not wonder that many businesses are moving their headquarters and their focus on business outside the United States. Anti-business policies are not good for an economy.
Instead of blindly trusting government as an institution that creates and protects property rights, the public needs wake up and recognizing the Department of Justice for what it is, a large violator of private property rights.
Stringham is an associate professor of business economics at Texas Tech University and author of the book, Private Governance, forthcoming with Oxford University Press.