China's Real Estate Bubble

By Eric Vandenbroeck and co-workers

It is the English-speaking world's favorite economic game: property. No other facet of financial life has such a hold on the popular imagination. No other asset-allocation decision has inspired so many dinner-party conversations. The real estate market is unique. Every adult, no matter how economically illiterate, has a view on its future prospects. Even children are taught how to climb the property ladder, long before they have money of their own. And the way we teach them is literally to play a property game.

The game we know today as Monopoly was first devised in 1903 by an American woman, Elizabeth ('Lizzie') Phillips, a devotee of the radical economist Henry George. Her Utopian dream was of a world in which the only tax would be a levy on land values. The game's intended purpose was to expose the iniquity of a social system in which a small minority of landlords profited from the rents they collected from tenants. Originally known as The Landlord's Game, this proto-Monopoly had a number of familiar features - the continuous rectangular path, the Go to Jail corner - but it appeared too complex and didactic to have mass appeal. Indeed, its early adopters included a couple of eccentric university professors, Scott Nearing at Wharton and Guy Tugwell at Columbia, who modified it for classroom use. It was an unemployed plumbing engineer named Charles Darrow who saw the game's commercial potential after he was introduced by friends to a version based on the streets of Atlantic City, the New Jersey seaside resort. Darrow redesigned the board so that each property square had a brightly colored band across it and hand-carved the little houses and hotels that players could 'build' on the squares they acquired. Darrow was good with his hands (he could turn out a single game in eight hours), but he also had the salesman's 'moxie', persuading the Philadelphia department store John Wanamaker and the toy retailer F. A. O. Schwartz to buy his game for the 1934 Christmas season. Soon he was selling more than he could make by himself. In 1935 the board-games company Parker Brothers (which had passed on the earlier Landlord's Game) bought him out.1

The Great Depression might have seemed an unpropitious time to launch what had by now mutated into a game for would-be property owners. But perhaps all that fake multicoloured money was part of Monopoly's appeal. 'As the name of the game suggests,' announced Parker Brothers in April 1935:
the players deal in real estate, railroads and public utilities in an endeavor to obtain a monopoly on a piece of property so as to obtain rent from the other players. Excitement runs high when such familiar proble~ are encountered as mortgages, taxes, a Community Chest, options, rentals, interest money, undeveloped real estate, hotels, apartment houses, power companies and other transactions, for which scrip money is supplied.2

The game was a phenomenal success. By the end of 1935 a quarter of a million sets had been sold. Within four years, versions had been created in Britain (where Waddington's created the London version that I first played), France, Germany, Italy and Austria - though fascist governments were at best ambivalent about its now unapologetically capitalist character.3 By the time of the Second World War, the game was so ubiquitous that British intelligence could use Monopoly boards supplied by the Red Cross to smuggle escape kits - including maps and genuine European currencies - to British prisoners of war in German camps.4 Unemployed Americans and captive Britons enjoyed Monopoly for the same reason. In real life, times may be hard, but when we play Monopoly we can dream of buying whole streets. What the game tells us, in complete contradiction to its original inventor's intention, is that it's smart to own property. The more you own, the more money you make. In the English-speaking world particularly, it has become a truth universally acknowledged that nothing beats bricks and mortar as an investment.

'Safe as houses': the phrase tells you all you need to know about why people all over the world yearn to own their own homes. But that phrase means something more precise in the world of finance. It means that there is nothing safer than lending money to people with property. Why? Because if they default on the loan, you can repossess the house. Even if they run away, the house can't. As the Germans say, land and buildings are 'immobile' property. So it is no coincidence that the single most important source of funds for a new business in the United States is a mortgage on the entrepreneur's house.

Correspondingly, financial institutions have become ever less inhibited about lending money to people who want to buy property. Since 1959, the total mortgage debt outstanding in the US has risen seventy-five fold. Altogether, American owner-occupiers owed a sum equivalent to 99 per cent of US gross domestic product by the end of 2006, compared with just 38 per cent fifty years before. This upsurge in borrowing helped to finance a boom in residential investment, which reached a fifty-year peak in 2005. For a time, the supply of new housing seemed unable to keep pace with accelerating demand. About half of all the growth in US GDP in the first half of 2005 was housing related.5

The English-speaking world's passion for property has also been the foundation for a political experiment: the creation of the world's first true property-owning democracies, with between 65 and 83 per cent of households owning the home they live in. A majority of voters, in other words, are also property owners. Some say this is a model the whole world should adopt. Indeed, in recent years it has been spreading fast, with house price booms not only in the 'Anglosphere' (Australia, Canada, Ireland, the United Kingdom and the United States), but also in China, France, India, Italy, Russia, South Korea and Spain. In 2006 nominal house price inflation exceeded IO per cent in eight out of eighteen countries in the Organization for Economic Cooperation and Development. The United States did not in fact experience an exceptional housing bubble between 2000 and 2007; prices rose further in the Netherlands and Norway.

 

The Property-owning Aristocracy

Home ownership is now the exception only in the poorest parts of Britain and the United States, like the East End of Glasgow or the East Side of Detroit. For most of history, however, it was the exclusive privilege of an aristocratic elite. Estates were passed down from father to son, along with honorific titles and political privileges. Everyone else was a mere tenant, paying rent to their landlord. Even the right to vote in elections was originally a function of property ownership. In rural England before 1832, according to statutes passed in the fifteenth century, only men who owned freehold property worth at least forty shillings a year in a particular county were entitled to vote there. That meant, at most, 435,000 people in England and Wales - the majority of whom were bound to the wealthiest landowners by an intricate web of patronage. Of the 514 Members of Parliament representing England and Wales in the House of Commons in the early 1800s, about 370 were selected by nearly 180 land-owning patrons. More than a fifth of MPs were the sons of peers.

In one respect, not much has changed in Britain since those days. Around forty million acres out of sixty million are owned by just 189,000 families.6 The Duke of Westminster remains the third-richest man in the UK, with estimated assets of £7 billion; also in the top fifty of the 'rich list' are Earl Cadogan (£2.6 billion) and Baroness Howard de Walden (£1.6 billion). The difference is that the aristocracy no longer monopolizes the political system. The last aristocrat to serve as Prime Minister was Alec DouglasHome, the 14th Earl of Home, who left office in 1964 (defeated by, as he put it, 'the 14th Mr Wilson'). Indeed, thanks to the reform of the House of Lords, the hereditary peerage is in the process of finally being phased out of the British parliamentary system.

The decline of the aristocracy as a political force has been explained in many ways. At its heart, however, was finance. Until the 183 os fortune smiled on the elite, the thirty or so families with gross annual income from their lands above £60,000 a year. Land values had soared during the Napoleonic Wars, as the combination of demographic pressure and wartime inflation caused the price of wheat to double. Thereafter, industrialization brought windfalls to those who happened to be sitting on coalfields or urban real estate, while the aristocratic dominance of the political system ensured a steady stream of remuneration from the public purse. As if that were not enough, the great magnates took full advantage of their ability to borrow to the hilt. Some did so to 'improve' their estates, draining fields and enclosing common land. Others borrowed to finance a lifestyle of conspicuous consumption. The Dukes of Devonshire, for example, spent between 40 and 55 per cent of their annual income on interest payments, so enormous were their borrowings during the nineteenth century. 'All that you want,' complained one of their solicitors, 'is the power of self-restraint.'7

The trouble is that property, no matter how much you own, is a security only to the person who lends you money. As Miss Demolines says in Trollope's Last Chronicle of Barset, 'the land can't run away'. - This was why so many nineteenth-century investors - local solicitors, private banks and insurance companies were attracted to mortgages as a seemingly risk-free investment.

By contrast, the borrower's sole security against the loss of his property to such creditors is his income. Unfortunately for the great landowners of Victorian Britain, that suddenly fell away. From the late 1840S onwards, the combination of increasing grain production around the world, plummeting transport costs and falling tariff barriers - exemplified by the repeal of the Corn Laws in 1846 - eroded the economic position of landowners. As grain prices slid from a peak of $3 a bushel in 1847 to a nadir of 50 cents in 1894, so did the income from agricultural land. Rates of return on rural property slumped from 3.65 per cent in 1845 to just 2.51 per cent in 1885.8 As The Economist put it: 'No security was ever relied upon with more implicit faith, and few have lately been found more sadly wanting than English land.' For those with estates in Ireland, the problem was compounded by mounting political unrest. This economic decline and fall was exemplified by the fortunes of the family that built Stowe House, in Buckinghamshire.

There is something undeniably magnificent about Stowe House. With its sweeping colonnades, its impressive Vanbrugh portico and its delightful 'Capability' Brown gardens, it is one of the finest surviving examples of eighteenth-century aristocratic architecture. Yet there is something missing from Stowe today or rather many things. In each of the alcoves of the elliptical Marble Saloon, there was once a Romanesque statue. The splendid Georgian fireplaces in the State Rooms have been replaced by cheap and diminutive Victorian substitutes. Rooms that were once crammed full of the finest furniture now lie empty. Why? The answer is that this house once belonged to the most distinguished victim of the first modern property crash, Richard Plantagenet Temple- Nugent - Brydges-Chandos-Grenville, 6th Viscount Cobham and 2nd Duke of Buckingham.

Stowe was only part of the vast empire of real estate acquired by the Duke of Buckingham and his ancestors, who had propelled themselves from a barony to a dukedom in the space of r 2 5 years by a combination of political patronage and strategic marriage.9 In all, the Duke owned around 67,000 acres in England, Ireland and Jamaica. It seemed a more than adequate basis for his extravagant lifestyle. He spent money as if it might go out of fashion: on mistresses, on illegitimate children, on suing his father-in-law's executors, on buying his way into the Order of the Garter, on opposing the Great Reform Bill and the Repeal of the Corn Laws - on anything he felt was compatible with his standing as a duke of the realm and the living embodiment of The Land. He prided himself on 'resisting any measure injurious to the agricultural interests, no matter by what Government it should be brought forward'. Indeed, he resigned as Lord Privy Seal in Sir Robert Peel's government rather than support Corn Law Repea1.10 By 1845, however - even before the mid-century slump in grain prices, in other words - his debts were close to overwhelming him. With a gross annual income of £72,000, he was spending £I09,qo a year and had accumulated debts of £1,027,282.11 Most of his income was absorbed by interest payments (with rates on some of his debts as high as I5 per cent) and life insurance premiums on a policy that was probably his creditors' best hope of seeing their money.12 Yet there was to be one final folly.

In preparation for a much-sought-after visit by Queen Victoria and Prince Albert in January 1845, the Duke refurbished Stowe House from top to bottom. The entire house was filled with the very latest in luxury furniture. There were even tiger skins in the royal bathroom. Queen Victoria remarked waspishly: 'I have no such splendor in either of my two palaces.' As if that were not enough, the Duke called out the entire Regiment of Yeomanry (at his own expense) to fire welcoming salvoes of artillery as the Queen and her Consort entered his estate. Four hundred tenants lined up on horseback to greet them, as well as several hundred smartly dressed laborers, three brass bands and a special detachment of police brought down from London for the day.13 It was the last straw for the ducal finances. To avert the complete ruin of the family, Buckingham's son, the Marquis of Chandos, was advised to take control of his father's estates as soon as he came of age. After painful legal wrangles, the son won the upper hand.14 In August I848, to the Duke's horror, the entire contents of Stowe House were auctioned off. Now his ancestral stately home was thrown open for throngs of bargain hunters to bid for the plate, the wine, the china, the works of art and the rare books, for all the world (as The Economist sneered) as if the Duke were 'a bankrupt earthenware dealer' .15 The total proceeds from the sale were £75,000. Nothing could better have symbolized the new age of aristocratic decline.

Divorced by his long-suffering, much-betrayed Scottish wife, whose entire wardrobe had been seized by sheriff's officers in London, the Duke was forced to move out of Stowe House into rented lodgings. He eked out his days at his London club, the Carlton, writing a succession of highly unreliable memoirs and incorrigibly chasing actresses and other men's wives. Accustomed to what had once seemed a limitless overdraft facility, he bitterly grumbled that his son allowed him 'scarcely the pay of an officer upon full pay of my own rank who has nothing beyond his own expenses to pay for'.16

In the hour of distress [he] forced his Father into the world, neglected, forsaken & persecuted ... Having got possession of his estates & property, [he] held them to his detriment & loss, & against every principle of honour and justice, & ... lived to witness his Father's dishonor and degradation.17

'You find me poisoned and robbed,' he lamented to anyone at the Carlton who would listen.18 When the Duke finally expired in r86r he was living at his son's expense in the Great Western Hotel at Paddington railway station. Symbolically, his more parsimonious son was by now chairman of the London and Northwestern Railway Company.19 In the modern world, it turned out, a regular job mattered more than an inherited title, no matter how many acres you owned.

The fall of the Duke of Buckingham was a harbinger of a new, democratic age. Electoral reform acts in 1832, 1867 and 1884 eroded what remained of the aristocratic stranglehold on British politics. By the end of the nineteenth century, paying £10 a year in rent qualified you to vote just as legitimately as earning £10 a year from property. The electorate now numbered 5.5 million 40 per cent of adult males. In 1918 that last economic qualification was finally removed and after r928 all adults, male and female, had the vote. Yet the advent of universal suffrage did not mean that property ownership had become universal. On the contrary: as late as 1938, less than a third of the UK housing stock was in the hands of owner-occupiers. It was on the other side of the Atlantic that the first true property-owning democracy would emerge. And it would come out of the deepest financial crisis ever known.

 

Home-owning Democracy

An Englishman's home is his castle, or so the saying goes. Americans, too, know that (as Dorothy says in The Wizard of Oz) there's no place like home - even if the homes do all look rather similar. But the origins of the Anglo-American model of the highly geared home-owning family lie as much in the realm of government policy as in the realm of culture. If the old class system based on elite property ownership was distinctively British, the property-owning democracy was made in America.

Before the 1930s, little more than two fifths of American households were owner-occupiers. Unless you were a farmer, mortgages were the exception, not the rule. The few people who did borrow money to buy their own houses in the 1920S found themselves in deep difficulties when the Great Depression struck, especially if the main breadwinner was among the millions who lost their jobs and their incomes. Mortgages were short-term, usually for three to five years, and they were not amortized. In other words, people paid interest, but did not repay the sum they had borrowed (the principal) until the end of the loan's term, so that they ended up facing a balloon-sized final payment. The average difference (spread) between mortgage rates and high-grade corporate bond yields was about two percentage points

during the 1920s, compared with about half a per cent (50 basis points) in the past twenty years. There were substantial regional variations in mortgage rates, too.20 When the economy nosedived, nervous lenders simply refused to renew. In 1932 and 1933 there were over a half million foreclosures. By mid 1933, over a thousand mortgages were being foreclosed every day. House prices plummeted by more than a fifth.21 The construction industry collapsed, revealing (as in all future recessions of the twentieth century) the extent to which the wider US economy relied on residential investment as an engine of growth. 22 While the effect of the Depression was perhaps most devastating in the countryside, where land prices fell below half of their 1920 peak, the predicament of America's cities was little better. Tenants, too, struggled to pay the rent when all they had coming in was the dole. In Detroit, for example, the automobile industry employed only half the number of workers it had in 1929, and at half the wages. The effects of the Depression are scarcely imaginable today: the abject misery of ubiquitous unemployment, the wretchedness of the soup kitchens, the desperate nomadic search for non-existent work. By 1932 the dispossessed of the Depression had had enough.

On 7 March 1932 five thousand unemployed workers laid off by the Ford Motor Company marched through central Detroit to demand relief. As the unarmed crowd reached Gate 4 of the company's River Rouge plant in Dearborn, scuffles broke out. Suddenly the factory gates opened and a group of armed police and security men rushed out and fired into the crowd. Five workers were killed. Days later, 60,000 people sang 'The Internationale' at their funeral. The Communist Party newspaper accused Edsel Ford, son of the firm's founder Henry, of allowing a massacre: 'You, a patron of the arts, a pillar of the Episcopal Church, stood on the bridge at the Rouge Plant and saw the  workers killed. You did not lift a hand to stop it.' Could anything be done to defuse what was beginning to seem like a revolutionary situation?

In a remarkable gesture of conciliation, Edsel Ford turned to the Mexican artist Diego Rivera, who had been invited by the Detroit Institute of Arts to paint a mural that would show Detroit's economy as a place of cooperation, not class conflict. The site chosen for the work was the Institute's imposing Garden Court, a space which so appealed to Rivera that he proposed to paint not just two of its panels, as had originally been suggested, but all twenty-seven. Ford, impressed by Rivera's preliminary sketches, agreed to fund the entire scheme, at a cost of around $25,000. Work began in May 1932, just two months after the clashes at the River Rouge plant, and by March 1933 Rivera had finished. As Ford well knew, Rivera was a Communist (though an unorthodox Trotskyite who had been expelled from the Mexican Party).23 His ideal was of a society in which there would be no private property; in which the means of production would be commonly owned. In Rivera's eyes, Ford's River Rouge plant was the very opposite: a capitalist society where the workers worked and the property owners, who reaped the rewards from their efforts, just stood and watched. Rivera also sought to explore the racial divisions that were such a striking feature of Detroit, anthropomorphizing the elements necessary to make steel. As he himself explained the allegory:

The yellow race represents the sand, because it is most numerous. And the red race, the first in this country, is like the iron are, the first thing necessary for the steel. The black race is like coal, because it has a great native aesthetic sense, a real flame of feeling and beauty in its ancient sculpture, its native rhythm and music. So its aesthetic sense is like the fire, and its labor furnished the hardness which the carbon in the coal gives to steel. The white race is like the lime, not only because it is white, but because lime is the organizing agent in the making of steel. It binds together the other elements and so you see the white race as the great organizer of the world.

When the murals were unveiled in 1933, the city's dignitaries were appalled. In the words of Dr George H. Derry, president of Marygrove College:

Senor Rivera; has perpetrated a heartless hoax on his capitalist employer, Edsel Ford. Rivera was engaged to interpret Detroit; he has foisted on Mr Ford and the museum a Communist manifesto. The key panel that first strikes the eye, when you enter the room, betrays the Communist motif that animates and alone explains the whole ensemble. Will the women of Detroit feel flattered when they realize that they are embodied in the female with the hard, masculine, unsexed face, ecstatically staring for hope and help across the panel to the languorous and grossly sensual Asiatic sister on the right?24

One city councilor argued that whitewash was too good for the murals, as it could still be removed in future. He wanted Rivera's work to be completely stripped off as 'a travesty on the spirit of Detroit'. That was more or less what happened to Rivera's next commission - to decorate the walls of New York's Rockefeller Center for John D. Rockefeller Jr. - after the artist insisted on including a portrait of Lenin as well as Communist slogans like 'Down With Imperialistic Wars!', 'Workers Unite!' and, most shocking of all, 'Free Money!' These were to be carried by demonstrators marching down Wall Street itself. A scandalized Rockefeller ordered the mural to be destroyed.

The power of art is a wonderful thing. But clearly something more powerful than art was going to be needed to put together a society that had been split in two by the Depression. Many other countries swung to the extremes of totalitarianism. But in the United States the answer was the New Deal. Franklin D. Roosevelt's first administration saw a proliferation of new federal government agencies and initiatives intended to re-inject confidence into the prostrate US economy. In the flood of acronyms the New Deal produced, it is easy to miss the fact that its most successful and enduring component was the new deal it offered with respect to housing. By radically increasing the opportunity for Americans to own their own homes, the Roosevelt administration pioneered the idea of a property-owning democracy. It proved to be the perfect antidote to red revolution.

At one level, the New Deal was an attempt by government to step in where the market had failed. Some New Dealers favored the increased provision of public housing, the model that was adopted in most European countries. Indeed, the Public Works Administration spent nearly 15 per cent of its budget on low-cost homes and slum clearance. But of far more importance was the Roosevelt administration's lifeline to the rapidly sinking mortgage market. A new Home Owners' Loan Corporation stepped in to refinance mortgages on longer terms, up to fifteen years. A Federal Home Loan Bank Board had already been set up in 1932 to encourage and oversee local mortgage lenders known as Savings and Loans (or thrifts), mutual associations like British building societies, which took in deposits and lent to home buyers. To reassure depositors, who had been traumatized by the bank failures of the previous three years, Roosevelt introduced federal deposit insurance. The idea was that putting money in mortgages would be even safer than houses, because if borrowers defaulted, the government would simply compensate thesavers.25 In theory, there could never be another run on a Savings and Loan like the run on the family-owned Bailey Building & Loan which George Bailey (played by Jimmy Stewart) struggled to keep afloat in Frank Capra's classic 1946 movie It's a Wonderful Life. 'You know, George,' his father tells him, 'I feel that in a small way we are doing something important. Satisfying a fundamental urge. It's deep in the race for a man to want his own roof and walls and fireplace, and we're helping him get those things in our shabby little office.' George gets the message, as he passionately explains to the villainous slum landlord Potter after Bailey senior's death:

[My fatMr] never once thought of himself ... But he did help a few people get out of your slums, Mr Potter. And what's wrong with that? Doesn't it make them better citizens? Doesn't it make them better customers? ... You said ... they had to wait and save their money before they even ought to think of a decent home. Wait! Wait for what? Until their children grow up and leave them? Until they're so old and broken-down that they ... Do you know how long it takes a working man to save five thousand dollars? Just remember this, Mr Potter, that this rabble you're talking about ... they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?

This radical affirmation of the virtue of home ownership was new. But it was the Federal Housing Administration that really made the difference for American homebuyers. By providing federally backed insurance for mortgage lenders, the FHA sought to encourage large (up to 80 per cent of the purchase price), long (twenty-year), fully amortized and low-interest loans. This did more than merely revive the mortgage market; it reinvented it.

By standardizing the long-term mortgage and creating a national system of official inspection and valuation, the FHA laid the foundation for a national secondary market. This market came to life in I938, when a new Federal National Mortgage Association - nicknamed Fannie Mae - was authorized to issue bonds and use the proceeds to buy mortgages from the local Savings and Loans, which were now restricted by regulation both in terms of geography (they could not lend to borrowers more than fifty miles from their offices) and in terms of the rates they could offer depositors (the so-called Regulation Q, which imposed a low ceiling). Because these changes tended to reduce the average monthly payment on a mortgage, the FHA made home ownership viable for many more Americans than ever before. Indeed, it is not too much to say that the modern United States, with its seductively samey suburbs, was born here.

From the 1930s onwards, then, the US government was effectively underwriting the mortgage market, encouraging lenders and borrowers to get together. That was what caused property ownership - and mortgage debt - to soar after the Second World War, driving up the home ownership rate from 40 per cent to 60 per cent by 1960. There was only one catch. Not everyone in American society was entitled to join the property-owning party.

In 1941 a real estate developer built a six-foot high wall right across Detroit's 8 Mile district. He had to build it to qualify for subsidized loans from the Federal Housing Administration. The J' loans were to be given out for construction only on the side of the wall where the residents were mainly white. In the predominantly black part of town, there was to be no federal lending, because African-·Americans were regarded as uncreditworthy.26 It was part of a system that divided the whole city, in theory by creditrating, in practice by colour. Segregation, in other words, was not accidental, but a direct consequence of government policy. Federal Home Loan Bank Board maps showed the predominantly black areas of Detroit - the Lower East Side and some so-called colonies on the West Side and 8 Mile - marked with a D and coloured red. The areas marked A, B or C were mainly white. The distinction explains why the practice of giving whole areas a negative credit-rating came to be known as red-lining.27 As a result, when people in D areas wanted to take out mortgages, they paid significantly higher interest rates than the people from areas A to C. In the 1950s, one in five black mortgage-borrowers paid 8 per cent or more, whereas virtually no whites paid more than 7 per cent.28 This was the hidden financial dimension of the Civil Rights struggle.

Detroit was home to successful black entrepreneurs like Berry Gordy, the founder of the Motown record label, which appropriately enough had its very first hit in 1960 with Barrett Strong's 'Money, That's What I Want'. Other Motown stars like Aretha Franklin and Marvin Gaye still lived in the city. Yet throughout the 1960s the prejudice persisted that black neighbourhoods were a bad credit risk. Anger at such economic discrimination lay behind the riots that broke out in Detroit's 12th Street on 23 July 1967. In five days of mayhem after a police raid on a 'blind pig' (an unlicensed bar), forty-three people were killed, 467 injured, over 7,200 arrested and nearly 3,000 buildings looted or burned - a potent symbol of black rejection of a property-owning democracy that still treated them as second-class citizens.29 Even today, you can still see the empty lots that the riots left in their wake. It took regular army troops with tanks and machine-guns to quell what was officially recognized as an insurrection.

As in the 1930S, the challenge of violence brought a political response. In the wake of the Civil Rights legislation of the 1960s, new steps were taken to broaden access to home ownership. In 1968 Fannie Mae was split in two: the Government National Mortgage Association (Ginnie Mae), which was to cater to poor borrowers like military veterans, and a re-chartered Fannie Mae, now a privately owned government sponsored enterprise (GSE), which was permitted to buy conventional as well as government guaranteed mortgages. Two years later', to provide some competition in the secondary market, the Federal Home Loan Mortgage Corporation (Freddie Mac) was set up. The effect was once again to broaden the secondary market for mortgages, and in theory at least to lower mortgage rates. Red-lining on the basis of racial discrimination did not cease overnight, needless to say; but it became a federal offence.30 Indeed, with the Community Reinvestment Act of 1977, American banks came under statutory pressure to lend to poorer minority communities. With the US housing market now underwritten by what sounded like a financial version of the Mamas and the Papas - Fannie, Ginnie and Freddie - the political winds were set fair for the property-owning democracy. Those who ran Savings and Loans could live by the comfortable 3-6-3 rule: pay 3 per cent on deposits, lend money at 6 per cent and be on the golf course by 3 o'clock every afternoon.

The rate of home ownership caught up more slowly with the representation of the people on the other side of the Atlantic. In post-war Britain the conventional wisdom among Conservative as well as Labour politicians was that the state should provide or at least subsidize housing for the working classes. Indeed, Harold Macmillan sought to out-build Labour with a target of 300,000 (later 400,000) new houses a year. Between 1959 and 1964, roughly a third of new houses in Britain were built by local councils, rising to half in the subsequent six years of Labour rule. The ugly and socially dysfunctional tower blocks and housing 'estates' that today blight most of Britain's cities can be blamed on both parties. The only real difference between Right and Left was the readiness of the Conservatives to deregulate the private rental market, in the hope of encouraging private landlords, and the equal and opposite resolve of Labour to reimpose rent controls and stamp out 'Rachmanism' (exploitative behavior by landlords), exemplified by Peter Rachman, who used intimidation to evict the sitting tenants of rent-controlled properties, replacing them with West Indian immigrants who had to pay market rents.31 As late as I97I, fewer than half of British homes were owner-occupied.

In the United States, where public housing was never so important, mortgage interest payments were always tax deductible, from the inception of the federal income tax in 1913 .32 As Ronald Reagan said when the rationality of this tax break was challenged, mortgage interest relief was 'part of the American dream'. 'f It played a much smaller role in Britain until 1983, when a more radically Conservative government led by Margaret Thatcher introduced Mortgage Interest Relief At Source (MIRAS) for the first f 30,000 of a qualifying mortgage. When her Chancellor of the Exchequer Nigel Lawson sought to limit the deduction (so that multiple borrowers could not all take advantage of it for a single property), he soon 'ran up against the brick wall of Margaret [Thatcher]'s passionate devotion to the preservation of every last ounce of mortgage interest relief'.33 Nor was MIRAS the only way that Thatcher sought to encourage home ownership. By selling off council houses at bargain-basement prices to a million and a half aspirant working-class families, she ensured that more and more British men and women had a home of their own. The result was a leap in the share of owner-occupiers from 54 per cent in 1981 to 67 per cent ten years later. The stock of owner-occupied properties has soared from just over I I million in 1980 to more than 17 million today.34

Up until the 1980s, government incentives to borrow and buy a house made a good deal of sense for ordinary households. Indeed, the tendency for inflation rates to rise above interest rates in the late 1960s and 1970S gave debtors a free lunch as the real value of their debts and interest payments declined. While American home purchasers in the mid seventies anticipated an inflation rate of at least 12 per cent by 1980, mortgage lenders were offering thirty-year fixed-rate loans at 9 per cent or less.35 For a time, lenders were effectively paying people to borrow their money. Meanwhile, property prices roughly trebled between 1963 and 1979, while consumer prices rose by a factor of just 2.5. But there was a sting in the tail. The same governments that avowed their faith in the 'property-owning democracy' also turned out to believe in price stability, or at least lower inflation. Achieving that meant higher interest rates. The unintended consequence was one of the most spectacular booms and busts in the history of the property market.

 

From S & L to Subprime

Take a drive along Interstate 30 from Dallas, Texas, and you cannot fail to notice mile after mile of half-built houses and condominiums. Their existence is one of the last visible traces of one of the biggest financial scandals in American history, a scam that made a mockery of the whole idea of property as a safe investment. What follows is a story not so much about real estate as about surreal estate.

Savings and Loan (S&L) associations - the American version of Britain's building societies - were the foundation on which America's property-owning democracy had come to rest. Owned mutually by their depositors, they were simultaneously protected and constrained by a framework of government regulation.36 Deposits of up to $40,000 were insured by government for a premium of just one twelfth of one per cent of total deposits. On the other hand, they could lend only to home buyers within fifty miles of their main office. And from 1966, under Regulation Q, there was a ceiling of 5.5 per cent on their deposit rates, a quarter of a per cent more than banks were allowed to pay. In the late 1970s, this sleepy sector was hit first by double-digit inflation which reached 13.3 per cent in 1979 - and then by sharply rising interest rates as the newly appointed Federal Reserve Chairman Paul Volcker sought to break the wage-price spiral by slowing monetary growth. This double punch was lethal. The S&Ls were simultaneously losing money on long-term fixed-rate mortgages, because of inflation, and haemorrhaging deposits to higher interest money market funds. The response in Washington from both the Carter and Reagan administrations was to try to salvage the entire sector with tax breaks and deregulation,~' in the belief that market forces could solve the problem.37 When the new legislation was passed, President Reagan declared: 'All in all, I think we hit the jackpot.'38 Some people certainly did.

On the one hand, S&Ls could now invest in whatever they liked, not just long-term mortgages. Commercial property, stocks, junk bonds: anything was allowed. They could even issue credit cards. On the other, they could now pay whatever interest rate they liked to depositors. Yet all their deposits were still effectively insured, with the maximum covered amount raised from $40,000 to $100,000. And, if ordinary deposits did not suffice, the S&Ls could raise money in the form of broke red deposits from middlemen, who packaged and sold 'jumbo' $IOO,OOO certificates of deposit.39 Suddenly the people running Savings and Loans had nothing to lose - a clear case of what economists call moral hazard.40 What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the Commissioner of the California Department of Savings and Loans: 'The best way to rob a bank is to own one.'41 Some S&Ls bet their depositors' money on highly dubious projects. Many simply stole it, as if deregulation meant that the law no longer applied to them. Nowhere were these practices more rife than in Texas.

When they weren't whooping it up at their Southfork-style ranches, the Dallas property cowboys liked to do their deals at the Wise Circle Gril1.42 Regulars for Sunday brunch included Don Dixon, whose Vernon S&L was nicknamed Vermin by regulators,43 Ed McBirney of Sunbelt ('Gunbelt') and Tyrell Barker, owner and CEO of State Savings and Loan, who liked to tell property developers: 'You bring the dirt, I bring the money.'44 One individual who brought both dirt and money was Mario Renda, a New York broker for the Teamsters Union who allegedly used Savings and Loans to launder Mafia funds. When he needed more cash, he even advertised in the New York Times:

MONEY FOR RENT: BORROWING OBSTACLES NEUTRALIZED BY HA.ING US DEPOSIT FUNDS WITH YOUR LOCAL BANK: NEW TURNSTILE APPROACH TO FINANCING.45

 

If you want to build a property empire, why not just say so?

For one group of Dallas developers, it was Empire Savings and Loan that offered the perfect opportunity to make a fortune out of thin air - or, rather, flat Texan earth. The surrealism began when Empire chairman Spencer H. Blain Jr. teamed up with James Toler, the mayor of the town of Garland, and a flamboyant high school dropout turned property developer named Danny Faulkner, whose specialty was extravagant generosity with other people's money. The money in question came in the form of brokered deposits, on which Empire paid alluringly high interest rates. Faulkner's Point, located near the bleak artificial lake known as Lake Ray Hubbard, twenty miles east of Dallas, was the first outpost of a property empire that would later encompass Faulkner Circle, Faulkner Creek, Faulkner Oaks - even Faulkner Fountains. Faulkner's favorite trick was 'the flip', whereby he would acquire a plot of land for peanuts, and then sell it on at vastly inflated prices to investors, who borrowed the money from Empire Savings and Loan. One parcel of land was bought by Faulkner for $3 million and sold just a few days later for $47 million. Danny Faulkner claimed to be illiterate. He was certainly not innumerate.

By 1984 development in the Dallas area was out of control. There were new condos under construction for miles along Interstate 30. The city's skyline had been transformed with what locals referred to as 'see-through' office buildings - see-through because they were still mostly empty. The building just kept on going, paid for by federally insured deposits that were effectively going straight into the developers' pockets. On paper at least, the assets of Empire had grown from $12 million to $257 million in just over two years. By January 1984 they stood at $309 million. Many investors never even got a chance to view their properties close up; Faulkner would simply fly them over in his helicopter without landing. Everyone was making money: Faulkner with his $4 million Learjet, Toler with his white Rolls-Royce, Blain with his $4,000 Rolex - not to mention the property appraisers, the sports star investors and the local regulators. There were gold bracelets for the men and fur coats for the wives.46 'It was', one of those involved acknowledged, 'like a money machine, and all of it was geared to what Danny needed. If Danny needed a new jet, we did a land deal. If Danny wanted to buy a new farm, we did another. Danny ran the whole thing for Danny, right down to the last detail.,47 The line between thrift and theft is supposed to be a wide one. Faulkner & Co. reduced it to a hair's breadth.

The trouble was that the demand for condos on Interstate 30 could never possibly have kept pace with the vast supply being built by Faulkner, Blain and their cronies. By the early 1980s estate agents were joking that the difference between venereal disease and condominiums was that you could get rid of VD. Moreover, the mismatch between the assets and liabilities of most Savings and Loans had now become disastrous, with ever more long-term loans being made (to insiders) using money borrowed short-term (from outsiders). When the regulators belatedly sought to act in 1984, these realities could no longer be ignored. On 14 March Edwin]. Gray, then chairman of the Federal Home Loan Bank Board, ordered the closure of Empire. The cost to the Federal Savings and Loan Insurance Corporation, which was supposed to insure S&L deposits, was $300 million. But this was just the beginning. As other firms came under scrutiny, legislators hesitated, particularly those who had received generous campaign contributions from S&Ls.  Yet the longer they waited, the more money got burned. By 1986 it was clear that the FSLIC was itself insolvent.

In 1991, after two trials (the first of which ended with a hung jury), Faulkner, Blain and Toler were convicted of civil racketeering and looting $ 165 million from Empire and other S&Ls through fraudulent land deals. Each was sentenced to twenty years in jail and ordered to pay millions of dollars in restitution. One investigator called Empire 'one of the most reckless and fraudulent land investment schemes' he had ever seen.48 Much the same could be said for the Savings and Loans crisis as a whole; Edwin Gray called it 'the most widespread, reckless and fraudulent era in this nation's banking history'. In all, nearly five hundred S&Ls collapsed or were forced to close down; roughly the same number were merged out of existence under the auspices of the Resolution Trust Corporation set up by Congress to clear up the mess. According to one official estimate, nearly half of the insolvent institutions had seen 'fraud and potentially criminal conduct by insiders'. By May 1991, 764 people had been charged with a variety of offences, of whom 550 were convicted and 326 sentenced to jail. Fines of $8 million were imposed.49 The final cost of the Savings and Loans crisis between 1986 and 1995 was $153 billion (around 3 per cent of GDP), of which taxpayers had to pay $124 billion, making it the most expensive financial crisis since the Depression.50 Strewn all over Texas are the archaeological remains of the debacle: derelict housing estates, built on the cheap with stolen money, and subsequently bulldozed or burned down. Twenty-four years later, much of the 1-30 corridor is still just another Texan wasteland.

For American taxpayers, the Savings and Loans debacle was a hugely expensive lesson in the perils of ill-considered deregulation. But even as the S&Ls were going belly up, they offered another very different group of Americans a fast track to megabucks. To the bond traders at Salomon Brothers, the New York investment bank, the breakdown of the New Deal mortgage system was not a crisis but a wonderful opportunity. As profit hungry as their language was profane, the self-styled 'Big Swinging Dicks' at Salomon saw a way of exploiting the gyrating interest rates of the early 1980s. It was the chief mortgage trader Lewis Ranieri at Salomon who stepped up when desperate Savings and Loans began to sell their mortgages in a vain bid to stay solvent. Needless to say, 'Lou' bought them up at rock bottom prices. With his broad girth, cheap shirts and Brooklyn wisecracks, Ranieri (who had started working for Salomon in the mailroom) personified the new Wall Street, the antithesis of the preppie investment bankers in their Brooks Brothers suits and braces. The idea was to reinvent mortgages by bundling thousands of them together as the backing for new and alluring securities that could be sold as alternatives to traditional government and corporate bonds - in short, to convert mortgages into bonds. Once lumped together, the interest payments due on the mortgages could be subdivided into 'strips' with different maturities and credit risks. The first issue of this new kind of mortgage-backed security (known as a collateralized mortgage obligation) happened in June 1983.51 It was the dawn of a new era in American finance.

The process was called securitization and it was an innovation that fundamentally transformed Wall Street, blowing the dust off a previously sleepy bond market and ushering in a new era in which anonymous transactions would count for more than personal relationships. Once again, however, it was the federal government that stood ready to pick up the tab in a crisis. For the majority of mortgages continued to enjoy an implicit guarantee from the government-sponsored trio of Fannie, Freddie or Ginnie, meaning that bonds which used those mortgages as collateral could be represented as virtually government bonds, and hence 'investment grade'. Between 1980 and 2007 the volume of such GSE-backed mortgage-backed securities grew from $200 million to $4 trillion. With the advent of private bond insurers, firms like Salomon could also offer to securitize so-called nonconforming loans not eligible for GSE guarantees. By 2007 private pools of capital sufficed to securitize $2 trillion in residential mortgage debt. 52 In 1980 only 10 per cent of the home mortgage market had been securitized; by 2007 it had risen to 56 per cent.

It was not only human vanities that ended up on the bonfire that was 1980s Wall Street. It was also the last vestiges of the business model depicted in It's a Wonderful Life. Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream - because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist. The full implications of this transition for ordinary homeowners would become apparent only twenty years later.
We tend to assume in the English-speaking world that property is a one-way bet. The way to get rich is to play the property market. In fact, you're a mug to invest in anything else. The remarkable thing about this supposed truth is how often reality gives it the lie. Suppose you had put $100,000 into the US property market back in the first quarter of 1987. According to either the Office of Federal Housing Enterprise Oversight index or the Case-Shiller national home price index, you would have roughly trebled your money by the first quarter of 2007, to between $275,000 and $299,000. But if you had put the same money into the S&P 500 (the benchmark US stock market index), and had continued to reinvest the dividend income in that index, you would have ended up with $772,000 to play with, more than double what you would have made on bricks and mortar. In the UK the differential is similar. If you had put £100,000 into property in 1987, according to the Nationwide house price index, you would have more than quadrupled your money after twenty years. But if you had put it in the FTSE All Share index you would be nearly seven times richer. There is, of course, an important difference between a house and a stock market index: you cannot live inside a stock market index. (On the other hand, local property taxes usually fall on real estate not financial assets.) For the sake of a fair comparison, allowance must therefore be made for the rent you save by owning your house (or the rent you can collect if you own two properties and let the other out). A simple way to proceed is simply to strip out both dividends and rents. In that case the difference is somewhat reduced. In the two decades after 1987 the S&P 500, excluding dividends, rose by a factor of just over five, still comfortably beating housing. The differential is also narrowed, but again not eliminated, if you add rental income to the property portfolio and include dividends on the stock portfolio, since average rental yields in the period declined from around 5 per cent to just 3.5 per cent at the peak of the real estate boom (in other words, a typical $100,000 property would have brought in an average monthly rent of less than $416).53 In the British case, by contrast, stock market capitalization has grown less slowly than in the US, while dividends have been a more important source of income to investors. At the same time, restrictions on the supply of new housing (such as laws protecting 'greenbelt' areas) have bolstered rents. To omit dividends and rents is therefore to remove the advantage of stocks over property. In terms of pure capital appreciation between 1987 and 2007, bricks and mortar (up by a factor of 4.5) out-performed shares (up by a factor of just 3.3). Only if one takes the story back to 1979 do British stocks beat British bricks.

There are, however, three other considerations to bear in mind when trying to compare housing with other forms of capital asset. The first is depreciation. Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since the Second World War have been far less volatile than stock markets (not least because of the transactions costs associated with the real estate market). Yet that is not to say that house prices have never deviated from a steady upward path. In Britain between I989 and I995, for example, the average house price fell by I8 per cent or in real, inflation-adjusted terms by more than a third (37 per cent). In London the real decline was closer to 47 per cent. 54 In Japan between I990 and 2000, property prices fell by over 60 per cent. And, of course, in the time that I have been writing this book, property prices in the United States - for the first time in a generation - have been going down. And down. From its peak in July 2006, the Case-Shiller 'composite 20' index of home prices in twenty big American cities had declined I5 per cent by February 2008. In that month the annualized rate of decline reached I3 per cent, a figure not seen since the early 1930s. In some cities - Phoenix, San Diego, Los Angeles and Miami - the total decline was as much as a fifth or a quarter. Moreover, at the time of writing (May 2008), a majority of experts still anticipated further falls.

In depressed Detroit, the housing slide started earlier, in December 2005, and had already dragged house prices down by more than ten per cent when I visited the city in July 2007. I went to Detroit because I had the feeling that what was happening there was the shape of things to come in the United States as a whole and perhaps throughout the English-speaking world. In the space of ten years, house prices in Detroit - which probably possesses the worst housing stock of any American city other than New Orleans - had risen by nearly 50 per cent; not much compared with the nationwide bubble (which saw average house prices rise 18o per cent), but still hard to explain given the city's chronically depressed economic state. As I discovered, the explanation lay in fundamental changes in the rules of the housing game, changes exemplified by the experience of Detroit's West Outer Drive, a busy but respectable middle-class thoroughfare of substantial detached houses with large lawns and garages. Once the home of Motown's finest, today it is just another street in a huge sprawling country within a country: the developing economy within the United States,55 otherwise known as Subprimia.

'Subprime' mortgage loans are aimed by local brokers at families or neighbourhoods with poor or patchy credit histories. Just as jumbo mortgages are too big to qualify for Fannie Mae's seal of approval (and implicit government guarantee), subprime mortgages are too risky. Yet it was precisely their riskiness that made them seem potentially lucrative to lenders. These were not the old thirty-year fixed-rate mortgages invented in the New Deal. On the contrary, a high proportion were adjustable-rate mortgages (ARMs) - in other words, the interest rate could vary according to changes in short-term lending rates. Many were also interest-only mortgages, without amortization (repayment of principal), even when the principal represented IOO per cent of the assessed value of the mortgaged property. And most had introductory 'teaser' periods, whereby the initial interest payments - usually for the first two years - were kept artificially low, back-loading the cost of the loan. All of these devices were intended to allow an immediate reduction in the debt-servicing costs of the borrower. But the small print of subprime contracts implied major gains for the lender. One particularly egregious subprime loan in Detroit carried an interest rate of 9.75 per cent for the first two years, but after that a margin of 9.I25 percentage points over the benchmark short-term rate at which banks lend each other money: conventionally the London interbank offered rate (Libor). Even before the subprime crisis struck, that already stood above 5 per cent, implying a huge upward leap in interest payments in the third year of the loan.

Subprime lending hit Detroit like an avalanche of Monopoly money. The city was bombarded with radio, television, direct mail advertisements and armies of agents and brokers, all offering what sounded like attractive deals. In 2006 alone, subprime lenders injected more than a billion dollars into twenty-two Detroit ZIP codes. In the 48235 ZIP code, which includes the FOO block of West Outer Drive, subprime mortgages accounted for more than half of all loans made between 2002 and 2006. Seven of the twenty-six households on the 5IOO block took out subprime loans.56 Note that only a minority of these loans were going to first-time buyers. They were nearly all refinancing deals, which allowed borrowers to treat their homes as cash machines, converting their existing equity into cash. Most used the proceeds to pay off credit card debts, carry out renovations or buy new consumer durables. Elsewhere, however, the combination of declining long-term interest rates and ever more alluring mortgage deals did attract new buyers into the housing market. By 2005,69 per cent of all US households were home-owners, compared with 64 per cent ten years before. Around half of that increase can be attributed to the subprime lending boom. Significantly, a disproportionate number of subprime borrowers belonged to ethnic minorities. Indeed, I found myself wondering as I drove around Detroit if subprime was in fact a new financial euphemism for black. This was no idle supposition. According to a study by the Massachusetts Affordable Housing Alliance, 55 per cent of black and Latino borrowers in metropolitan Boston who had obtained loans for single-family homes in 2005 had been given subprime mortgages, compared with just 13 per cent of white borrowers. More than three quarters of black and Latino borrowers from Washington Mutual were classed as subprime, compared with just 17 per cent of white borrowers.57 According to the Department of Housing and Urban Development (HUD), minority ownership increased by 3.1 million between 2002 and 2007.

Here, surely, was the zenith of the property-owning democracy. The new mortgage market seemed to be making the American dream of home ownership a reality for hundreds of thousands of people who had once been excluded from mainstream finance by credit-rating agencies and thinly veiled racial prejudice.

Criticism would subsequently be leveled at Alan Greenspan for failing adequately to regulate mortgage lending in his last years as Federal Reserve chairman. Yet, despite his notorious (and subsequently retracted) endorsement of adjustable-rate mortgages in a 2004 speech, Greenspan was not the principal proponent of wider home ownership. Nor is it credible to blame all the excesses of recent years on monetary policy.

'We want everybody in America to own their own home,' President George W. Bush had said in October 2002. Having challenged lenders to create 5.5 million new minority homeowners by the end of the decade, Bush signed the American Dream Down payment Act in 2003, a measure designed to subsidize first-time house purchases among lower income groups. Lenders were encouraged by the administration not to press subprime borrowers for full documentation. Fannie Mae and Freddie Mac also came under pressure from HUD to support the subprime market. As Bush put it in December 2003: 'It is in our national interest that more people own their home.'58 Few 4issented. Writing in the New York Times in November 2007, Henry Louis ('Skip') Gates Jr., Alphonse Fletcher University Professor at Harvard and Director of the W. E. B. Du Bois Institute for African and African-American Research, appeared to welcome the trend, pointing out that fifteen out of twenty successful African-Americans he had studied (among them Oprah Winfrey and Whoopi Goldberg) were the descendants of 'at least one line of former slaves who managed to obtain property by 1920'. Heedless of the bursting of the property bubble months before, Gates suggested a surprising solution to the problem of 'black poverty and dysfunction' - namely 'to give property to the people who had once been defined as property':

Perhaps Margaret Thatcher, of all people, suggested a program that might help. In the 1980s, she turned 1.5 million residents of public housing projects in Britain into homeowners. It was certainly the most liberal thing Mrs Thatcher did, and perhaps progressives should borrow a leaf from her playbook     A bold and innovative approach to the problem of black poverty    would be to look at ways to turn tenants into homeowners ... For the black poor, real progress may come only once they have an ownership stake in American society. People who own property feel a sense of ownership in their future and their society. They study, save, work, strive and vote. And people trapped in a culture of tenancy do not ... 59

Beanie Self, a black community leader in the Frayser area of Memphis, identified the fatal flaw in Gates's argument: 'The American Dream is home ownership, and one of the things that concerns me is - while the dream is wonderful - we are not really prepared for it. People don't realize you have a real estate industry, an appraisal industry, a mortgage industry now that can really push to put people into houses that a lot of times they really can't afford. '60

As a business model subprime lending worked beautifully - as long as interest rates stayed low, as long as people kept their jobs and as long as real estate prices continued to rise. Of course, such conditions could not be relied upon to last, least of all in a city like Detroit. But that did not worry the subprime lenders. They simply followed the trail blazed by mainstream mortgage lenders in the 1980s. Instead of putting their own money at risk, they pocketed fat commissions on signature of the original loan contracts and then resold their loans in bulk to Wall Street banks. The banks, in turn, bundled the loans into high-yielding residential mortgage-backed securities (RMBS) and sold them on to investors around the world, all eager for a few hundredths of a percentage point more return on their capital. Repackaged as collateralized debt obligations (CD Os), these subprime securities could be transformed from risky loans to flaky borrowers into triple-A rated investment-grade securities. All that was required was certification from one of the two dominant rating agencies, Moody's or Standard & Poor's, that at least the top tier of these securities was unlikely to go into default. The lower 'mezzanine' and 'equity' tiers were admittedly more risky; then again, they paid higher interest rates.

The key to this financial alchemy was that there could be thousands of miles between the mortgage borrowers in Detroit and the people who ended up receiving their interest payments. The risk was spread across the globe from American state pension funds to public health networks in Australia and even to town councils beyond the Arctic Circle. In Norway, for example, the municipalities of Rana, Hemnes, Hattjelldal and Narvik invested some $I20 million of their taxpayers' money in CDOs secured on American subprime mortgages. At the time, the sellers of these 'structured products' boasted that securitization was having the effect of allocating risk 'to those best able to bear it'. Only later did it turn out that risk was being allocated to those least able to understand it. Those who knew best the flakiness of subprime loans - the people who dealt directly with the borrowers and knew their economic circumstances - bore the least risk. They could make a 100 per cent loan-to-value 'NINJA' loan (to someone with No Income No Job or Assets) and sell it on the same day to one of the big banks in the CDO business. In no time at all, the risk was floating up a fjord.

In Detroit t)1e rise of subprime mortgages had in fact coincided with a new slump in the inexorably declining automobile industry that cost the city 20,000 jobs. This anticipated a wider American slowdown, an almost inevitable consequence of a tightening of monetary policy as the Federal Reserve raised short-term interest rates from I pet cent to 5)1.; per cent; this had a modest but nevertheless significant impact on average mortgage rates, which went up by roughly a quarter (from 5.34 to 6.66 per cent). The effect on the subprime market of this seemingly innocuous change in credit conditions was devastating. As soon as the teaser rates expired and the mortgages reset at new and much higher interest rates, hundreds of Detroit households swiftly fell behind with their mortgage payments. As early as March 20°7, about one in three subprime mortgages in the 48235 ZIP code were more than sixty days in arrears, effectively on the verge of foreclosure. The effect was to burst the real estate bubble, causing house prices to start falling for the first time since the early 1990s. As soon as this began to happen, those who had taken out 100 per cent mortgages found their debts worth more than their homes. The further house prices fell, the more homeowners found themselves with negative equity, a term familiar in Britain since the early 1990s. In this respect, West Outer Drive was a harbinger of a wider crisis of the American real estate market, the ramifications of which would rock the financial system of the Western world to its foundations.

On a sultry Friday afternoon, shortly after arriving in Memphis from Detroit, I watched more than fifty homes being sold off on the steps of the Memphis courthouse. In each case it was because mortgage lenders had foreclosed on the owners for failing to keep up with their interest payments. Not only is Memphis the bankruptcy capital of America. By the summer of 2007 it was also fast becoming the foreclosure capital. (It is an important feature of American law that in many states --though not all-- mortgages are generally 'no recourse' loans, meaning that when there is a default the mortgage lender can only collect the value of the property and cannot seize other property (e.g. a car or money in the bank) or put a lien on future wages. According to some economists, this gives borrowers a strong incentive to default.)

Over the last five years, I was told, one in four households in the city had received a notice threatening foreclosure. And once again subprime mortgages were the root of the problem. In 2006 alone subprime finance companies had lent $460 million to fourteen Memphis ZIP codes. What I was witnessing was just the beginning of a flood of foreclosures. In March 2007 the Center for Responsible Lending predicted that the number of foreclosures could reach 2.4 million.61 This may turn out to have been an underestimate. At the time of writing (May 2008), around 1.8 million mortgages are in default, but an estimated 9 million American households, or the occupants of one in every ten single-family homes, have already fallen into negative equity. About I I per cent of subprime ARMs are already in foreclosure. According to Credit Suisse, the total number of foreclosures on all types of mortgages could end up being 6.5 million over the next five years. That could put 8.4 per cent of all American homeowners, or 12.7 per cent of those with mortgages, out of their homes.62

Since the subprime mortgage market began to turn sour in the early summer of 2007, shockwaves have been spreading through all the world's credit markets, wiping out some hedge funds and costing hundreds of billions of dollars to banks and other financial companies. The main problem lay with CDOs, over half a trillion dollars of which had been sold in 2006, of which around half contained subprime exposure. It turned out that many of these CDOs had been seriously over-priced, as a result of erroneous estimates of likely subprime default rates. As even triple-A-rated securities began going into default, hedge funds, that had specialized in buying the highest-risk CDO tranches were the first to suffer. Although there had been signs of trouble since February 2007, when HSBC admitted to heavy losses on US mortgages, most analysts would date the beginning of the subprime crisis from June of that year, when two hedge funds owned by Bear Stearns  were asked to post additional collateral by Merrill Lynch, another investment bank that had lent them money but was now concerned about their excessive exposure to subprime-backed assets. Bear bailed out one fund, but let the other collapse. The following month the ratings agencies began to downgrade scores of RMBS CDOs (short for 'residential mortgage-backed security collateralized debt obligations', the very term testifying to the over-complex nature of these products). As they did so, all kinds of financial institutions holding such assets found themselves staring huge losses in the face. The problem was greatly magnified by the amount of leverage (debt) in the system. Hedge funds in particular had borrowed vast sums from their prime brokers - banks - in order to magnify the· returns they could generate. The banks, meanwhile, had been disguising their own exposure by parking subprime-related assets in off-balance-sheet entities known as conduits and strategic investment vehicles (SIV s, surely the most apt of all the acronyms of the crisis), which relied for funding on short-term borrowings on the markets for commercial paper and overnight interbank loans. As fears rose about counterparty risk (the danger that the other party in a financial transaction may go bust), those credit markets seized up. The liquidity crisis that some commentators had been warning about for at least a year struck in August 2007, when American Home Mortgage filed for bankruptcy, BNP Paribas suspended three mortgage investment funds and Countrywide Financial drew down its entire $II billion credit line. What scarcely anyone had anticipated was that defaults on subprime mortgages by low-income households in cities like Detroit and Memphis could unleash so much financial havoc:" one bank (Northern Rock) nationalized; another (Bear Stearns) sold off cheaply to a competitor in a deal underwritten by the Fed; numerous hedge funds wound up; 'write-downs' by banks amounting to at least $ 3 18 billion; total anticipated losses in excess of one trillion dollars. The subprime butterfly had flapped its wings and triggered a global hurricane.

Among the many ironies of the crisis is that it could ultimately deal a fatal blow to the government-sponsored mother of the property-owning democracy: Fannie Mae.63 One consequence of government policy has been to increase the proportion of mortgages held by Fannie Mae and her younger siblings Freddie and Ginnie, while at the same time reducing the importance of the original government guarantees that were once a key component of the system. Between the 1955 and 2006 the proportion of non-farm mortgages underwritten by the government fell from 35 to 5 per cent. But over the same period the share of mortgages held by these government-sponsored enterprises rose from 4 per cent to a peak of 43 per cent in 2003.64 The Office of Federal Housing Enterprise Oversight has been egging on Fannie and Freddie to acquire even more RMBS (including subprime-backed securities) by relaxing the rules that regulate their capital assets ratio. But the two institutions have only $84 billion of capital between them, a mere 5 per cent of the $ 1.7 trillion of assets on their balance sheets, to say nothing of the further $2.8 trillion of RMBS that they have guaranteed.65 Should these institutions get into difficulties, it seems a reasonable assumption that government sponsorship could turn into government ownership, with major implications for the federal budget.

So no, it turns out that houses are not a uniquely safe investment. Their prices can go down as well as up. And, as we have seen, houses are pretty illiquid assets - which means they are hard to sell quickly when you are in a financial jam. House prices are 'sticky' on the way down because sellers hate to cut the asking price in a downturn; the result is a glut of unsold properties and people who would otherwise move stuck looking at their For Sale signs. That in turn means that home ownership can tend to reduce labour mobility, thereby slowing down recovery. These turn out to be the disadvantages of the idea of property-owning democracy, appealing though it once seemed to turn all tenants into homeowners. The question that remains to be answered is whether or not we have any business exporting this high-risk model to the rest of the world.

 

As Safe as Housewives

Quilmes, a sprawling slum on the southern outskirts of Buenos Aires, seems a million miles from the elegant boulevards of the Argentine capital's centre. But are the people who live there really as poor as they look? As Peruvian economist Hernando de Soto sees it, shanty towns like Quilmes, despite their ramshackle appearance, represent literally trillions of dollars of unrealized wealth. De Soto has calculated that the total value of the real estate occupied by the world's poor amounts to $9.3 trillion. That, he points out, is very nearly the total market capitalization of all the listed companies in the world's top twenty economies and roughly ninety times all the foreign aid paid to developing countries over between 1970 and 2000. The problem is that the people in Quilmes, and in countless shanty towns the world over, do not have secure legal title to their homes. And without some kind of legal title, property cannot be used as collateral for a loan. The result is a fundamental constraint on economic growth, de Soto reasons, because if you can't borrow, you can't raise the capital to start a business. Potential entrepreneurs are thwarted. Capitalist energies are smothered.66

A large part of the trouble is that it is so bureaucratically difficult to establish legal title to property in places like South America. In Argentina today, according to the World Bank, it takes around thirty days to register a property, but it used to be much longer. In some countries - Bangladesh and Haiti are the worst - it can take closer to three hundred days. When de Soto and his researchers tried to secure legal authorization to build a house on state-owned land in Peru, it took six years and eleven months, during which they had to deal with fifty-two different government offices. In the Philippines, formalizing home ownership was until recently a r68-step process involving fifty-three public and private agencies and taking between thirteen and twenty-five years. In the English-speaking world, by contrast, it can take as little as two days and seldom more than three weeks. In de Soto's eyes, bureaucratic obstacles to securing legal ownership make the assets of the poor so much 'dead capital ... like water in a lake high up in the Andes - an untapped stock of potential energy'. Breathing life into this capital, he argues, is the key to providing countries like Peru with a more prosperous future. Only with a working system of property rights can the value of a house be properly established by the market; can it easily be bought and solji; can it legally be used as collateral for loans; can its owner be held to account in other transactions he may enter into. Moreover, excluding the poor from the pale of legitimate property ownership ensures that they operate at least partially in a grey or black economic zone, beyond the reach of the state's dead hand. This is doubly damaging. It prevents effective taxation. And it reduces the legitimacy of the state in the eyes of the populace.

Poor countries are poor, in other words, because they lack secure property rights, the 'hidden architecture' of a successful economy. 'Property law is not a silver bullet,' de Soto admits, 'but it is the missing link ... Without property law, you will never be able to accomplish other reforms in a sustainable manner.' And poor countries are also more likely to fail as democracies because they lack an electorate of stakeholders. 'Property rights will eventually lead to democracy,' de Soto has argued, 'because you can't sustain a market-oriented property system unless you provide a democratic system. That's the only way investors can feel secure.'67

To some - like the Maoist terrorist group Shining Path, who tried to assassinate him in 1992 in a bomb attack that killed three people - de Soto is a villain.68 Other critics denounced him as the Rasputin behind the now disgraced Peruvian President Alberto Fujimori. To others, de Soto's efforts to globalize the propertyowning democracy have made him a hero. Former President Bill Clinton has called him 'probably the greatest living economist', while his Russian counterpart, Vladimir Putin, has called de Soto's achievements 'extraordinary'. In 2004 the American libertarian think-tank the Cato Institute awarded him the biennial Milton Friedman Prize for work that 'exemplifies the spirit and practice of liberty'. De Soto and his Institute for Liberty and Democracy have advised governments in Egypt, El Salvador, Ghana, Haiti, Honduras, Kazakhstan, Mexico, the Philippines and Tanzania. The critical question is, of course, does his theory work in practice?

Quilmes provides a natural experiment to find out if de Soto really has unraveled the 'mystery of capital'. It was here in 1981 that a group of 1,800 families defied the military junta then ruling Argentina by occupying a stretch of wasteland. After the restoration of democracy the provincial government expropriated the original owners of the land to give the squatters legal title to  their homes. However, only eight of the thirteen landowners accepted the compensation they were offered; the others (one of whom settled in 1998) fought a protracted legal battle. The result was that some of the Quilmes squatters became property owners by paying a nominal sum for leases, which, after ten years, became full deeds of ownership; while others remained as squatters. Today you can tell the owner-occupied houses from the rest by their better fences and painted walls. The houses whose ownership remains contested are, by contrast, seedy shacks. As everyone (including 'Skip' Gates) knows, owners generally take better care of properties than tenants do.

There is no doubt that home ownership has changed people's attitudes in Quilmes. According to one recent study, those who have acquired property titles have become significantly more individualist and materialist in their attitudes than those who are still squatting. For example, when asked 'Do you think money is important for happiness?', the property owners were 34 per cent more likely than the squatters to say that it was.69 Yet there seems to be a flaw in the theory, for owning their homes has not made it significantly easier for people in Quilmes to borrow money. Only 4 per cent have managed to secure a mortgage.70 In de Soto's native Peru, too, ownership alone doesn't seem to be enough to resuscitate dead capital. True, after his initial recommendations were accepted by the Peruvian government in 1988, there was a drastic reduction in the time it took to register a property (to just one month) and an even steeper 99 per cent cut in the costs of the transaction. Further efforts were made after the creation of the Commission for the Formalization of Informal Property in 1996 so that, within four years, 1.2 million buildings on urban land had been brought into the legal system. Yet economic progress of the sort de Soto promised has been disappointingly slow. Out of more than 200,000 Lima households awarded land titles in 1998 and 1999, only around a quarter had secured any kind of loans by 2002. In other places where de Soto's approach has been tried, notably Cambodia, granting legal title to urban properties simply encouraged unscrupulous developers and speculators to buyout - or turf out - poor residents.71

Remember: it's not owning property that gives you security; it just gives your creditors security. Real security comes from having a steady income, as the Duke of Buckingham found out in the 1840s, and as Detroit homeowners are finding out today. For that reason, it may not be necessary for every entrepreneur in the developing world to raise money by mortgaging his house. Or her house. In fact, home ownership may not be the key to wealth generation at all.

I met Betty Flores on a rainy Monday morning in a street market in El Alto, the Bolivian town next to (or rather above) the capital La Paz. I was on my way to the E1 Alto offices of the micro finance organization Pro Mujer, but I was feeling tired because of the high altitude and suggested we stop for some coffee. And there she was, busily brewing up and distributing pots and cups of thick, strong Bolivian coffee for shoppers and other stall-keepers throughout the market. I was immediately struck by her energy and vivacity. In marked contrast to the majority of indigenous Bolivian women, she seemed quite uninhibited about talking to an obvious foreigner. It turned out that she was in fact one of Pro Mujer's clients, having taken out a loan to enlarge her coffee stall - something her husband, a mechanic, had not been able to do. And it had worked; I only had to look at Betty's perpetual motion to see that. Did she plan any further expansion? Yes indeed. The business was helping her put their daughters through school.

Betty Flores is not what would conventionally be thought of as a good credit risk. She has modest savings and does not own her own home. Yet she and thousands of women like her in poor countries around the world are being lent money by institutions like Pro Mujer as part of a revolutionary effort to unleash female entrepreneurial energies. The great revelation of the microfinance movement in countries like Bolivia is that women are actually a better credit risk than men, with or without a house as security for their loans. That certainly flies in the face of the conventional image of the spendthrift female shopper. Indeed, it goes against the grain of centuries of prejudice which, until as recently as the 1970s, systematically rated women as less creditworthy than men. In the United States, for example, married women used to be denied credit, even when they were themselves employed, if their husbands were not in work. Deserted and divorced women fared even worse. When I was growing up, credit was still emphatically male. Microfinance, however, suggests that creditworthiness may in fact be a female trait.

The founder of the micro finance movement, the Nobel prize winner Muhammad Yunus, came to understand the potential of making small loans to women when studying rural poverty in his native Bangladesh. His mutually owned Grameen ('Village') Bank, founded in the village of Jobra in 1983, has made microloans to nearly seven and a half million borrowers, nearly all of them women who have no collateral. Virtually all the borrowers take out their loans as members of a five-member group (koota), which meets on a weekly basis and informally shares responsibility for loan repayments. Since its inception, Grameen Bank has made micro loans worth more than $ 3 billion, initially financing its operations with money from aid agencies, but now attracting sufficient deposits (nearly $650 billion by January 2007) to be entirely self-reliant and, indeed, profitable.72 Pro Mujer, founded in 1990 by Lynne Patterson and Carmen Velasco, is among the  most successful of Grameen Bank's South American imitators." Loans start at around $200 for three months. Most women use the money to buy livestock for their farms or, like Betty, to fund their own micro-businesses, selling anything from tortillas to Tupperware.

By the time I tore myself away from Betty's coffee stall, the Pro Mujer offices in £1 Alto were already a hive of activity. I found it hard not to be impressed by the sight of dozens of Bolivian women, nearly all in traditional costume (each with a miniature bowler hat, pinned at a jaunty angle), lining up to make their regular loan payments. As they told stories about their experiences, I began wondering if it might just be time to change an age-old catchphrase from 'As safe as houses' to 'As safe as housewives'. For what I saw in Bolivia has its equivalents in poor countries all over the world, from the slums of Nairobi to the villages of Andhra Pradesh in India. And not only in the developing world. Microfinance can also work in enclaves of poverty in the developed world - like Castlemilk, in Glasgow, where a whole network of lending agencies called credit unions has been set up as an antidote to predatory lending by loan sharks (of the sort we encountered in Chapter I). In Castlemilk, too, the recipients of loans are local women. In both £1 Alto and Castlemilk I heard how men were much more likely to spend their wages in the pub or the betting shop than to worry about making interest payments. Women, I was told repeatedly, were better at managing money than their husbands.

Of course, it would be a mistake to assume that micro finance is the holy grail solution to the problem of global poverty, any more than is Hernando de Soto's property rights prescription. Roughly two fifths of the world's population is effectively outside the financial system, without access to bank accounts, much less credit. But just giving them loans won't necessarily consign poverty to the museum, in Yunus's phrase, whether or not you ask for collateral. Nor should we forget that some people in the microfinance business are in it to make money, not to end poverty.73 It comes as something of a shock to discover that some microfinance firms are charging interest rates as high as 80 or even 125 per cent a year on their loans - rates worthy of loan sharks. The justification is that this is the only way to make money, given the cost of administering so many tiny loans.

Glasgow has come a long way since Scotsman Adam Smith wrote the seminal case for the free market, The Wealth of Nations, in 1776. Like Detroit, it rose on the upswing of the industrial age. The age of finance has been less kind to it. But in Glasgow, as in North and South America, and as in South Asia, people are learning the same lesson. Financial illiteracy may be ubiquitous, but somehow we were all experts on one branch of economics: the property market. We all knew that property was a one-way bet. Except that it wasn't. (In the last quarter of 2007, Glasgow house prices fell by 2. I per cent. The only consolation was that in Edinburgh they fell by 5.8 per cent.) In cities all over the world, house prices soared far above what was justified in terms of rental income or construction costs. There was, as the economist Robert Shiller has said, simply a 'widespread perception that houses are a great investment', which generated a 'classic speculative bubble' via the same feedback mechanism which has more commonly affected stock markets since the days of John Law. In short, there was irrational exuberance about bricks and mortar and the capital gains they could yield.74

This perception, as we have seen, was partly political in origin. But while encouraging home ownership may help build a political constituency for capitalism, it also distorts the capital market by forcing people to bet the house on, well, the house. When financial theorists warn against 'home bias', they mean the tendency for investors to keep their money in assets produced by their own country. But the real home bias is the tendency to invest nearly all our wealth in our own homes. Housing, after all, represents two thirds of the typical US household's portfolio, and a higher proportion in other countries. 75 From Buckinghamshire to Bolivia, the key to financial security should be a properly diversified portfolio of assets. 76 To acquire that we are well advised to borrow in anticipation of future earnings. But we should not be lured into staking everything on a highly leveraged play on the far from risk-free property market. There has to be a sustainable spread between borrowing costs and returns on investment, and a sustainable balance between debt and income.

These rules, needless to say, do not apply exclusively to households. They also apply to national economies. The final question that remains to be answered is how far - as a result of the process we have come to call globalization - the biggest economy in the world has been tempted to ignore them. What price, in short, a subprime superpower?

Just ten years ago, during the Asian Crisis of I997-8, it was conventional wisdom that financial crises were more likely to happen on the periphery of the world economy - in the so-called emerging markets (formerly known as less developed countries) of East Asia or Latin America. Yet the biggest threats to the global financial system in this new century have come not from the periphery but from the core. In the two years after Silicon Valley's dot-com bubble peaked in August 2000, the US stock market fell by almost half. It was not until May 2007 that investors in the Standard & Poor's 500 had recouped their losses. Then, just three months later, a new financial storm blew up, this time in the credit market rather than the stock market. As we have seen, this crisis also originated in the United States as millions of American households discovered they could not afford to service billions of dollars' worth of subprime mortgages.
 

1.   Philip E. Orbanes, Monopoly: The World's Most Famous Game - And How It Got That Way (New York, 2006), pp. 10-71.

2.    Ibid., p. 50.

3.    Ibid., pp. 86£.

4.    Ibid., p. 90.

5.    Robert J. Shiller, 'Understanding Recent Trends in House Prices and Home Ownership', paper presented at Federal Reserve Bank of Kansas City's Jackson Hole Conference (August 2007).

6.    http://www.canongate.net/WhoOwnsBritain/Do TheMathsOnLand Ownership.

7.    David Canna dine, Aspects of Aristocracy: Grandeur and Decline in Modern Britain (New Haven, 1994), p. 170.

8.    I am grateful to Gregory Clark for these statistics.

9.    Frederick B. Heath, 'The Grenvilles, in the Nineteenth Century: The Emergence of Commercial Affiliations', Huntington Library Quar­terly, 25, I (November 1961), p. 29.

10.    Heath, 'Grenvilles', pp. 32f.

11.    Ibid., p. 35.

12.    David Spring and Eileen Spring, 'The Fall of the Grenvilles', Huntington Library Quarterly, 19, 2 (February 1956), p. 166.

13.    Ibid., pp. 177f.

14.    Details in Spring and Spring, 'Fall of the Grenvilles', pp. 169-74.

 15.    Ibid., p. 185.

16.    Heath, 'Grenvilles', p. 39.

17.    Spring and Spring, 'Fall of the Grenvilles', p. 183.

18.    Heath, 'Grenvilles', p. 40.

19.    Ibid., p. 46.

20.    Ben Bernanke, 'Housing, Housing Finance, and Monetary Policy', speech at the Kansas City Federal Reserve Bank's Jackson Hole Conference (31 August 2007).

21.    Louis Hyman, 'Debtor Nation: How Consumer Credit Built Postwar America', unpublished Ph.D. thesis (Harvard University, 2007), ch.1.

22.    Edward E. Leamer, 'Housing and the Business Cycle', paper pre­sented at Federal Reserve Bank of Kansas City's Jackson Hole Con­ference (August 2007).

23.    Saronne Rubyan- Ling, 'The Detroit Murals of Diego Rivera', History Today, 46, 4 (April 1996), pp. 34-8.

24.    Donald Lochbiler, 'Battle of the Garden Court', Detroit News, 15 July 1997·

25.    Hyman, 'Debtor Nation', ch. 2.

26.    Thomas J. Sugrue, The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit (Princeton, 1996), p. 64. 27. Ibid., pp. 38-43.

28.    Hyman, 'Debtor Nation', ch. 5.

29.    Sugrue, Origins of the Urban Crisis, p. 259.

30.    For a recent case in Detroit, see Ben Lefebvre, 'Justice Dept. Accuses Detroit Bank of Bias in Lending', New York Times, 20 May 2004.

31.    Glen O'Hara, From Dreams to Disillusionment: Economic and Social Planning in 1960s Britain (Basingstoke, 2007), ch. 5.

32.    Bernanke, 'Housing, Housing Finance, and Monetary Policy'. See also Roger Loewenstein, 'Who Needs the Mortgage-Interest Deduction?', New York Times Magazine, 5 March 2006.

33.    Nigel Lawson, The View from No. II: Memoirs of a Tory Radical (London, 1992), p. 821.

34.    Living in Brita!n: General Household Survey 2002 (London, 20°3), p. 30: http://www.statistics.gov.uk/cci/nugget.asp?id=82I.

35. Ned Eichler, 'Homebuilding in the 1980s: Crisis or Transition?', Annals of the American Academy of Political and Social Science, 465 (January 1983), p. 37.

36.    Maureen O'Hara, 'Property Rights and the Financial Firm', Journal of Law and Economics, 24 (October 1981), pp. 317-32.

37.    Eichler, 'Homebuilding', p. 40. See also Henry N. Pontell and Kitty Calavita, 'White-Collar Crime in the Savings and Loan Scandal', Annals of the American Academy of Political and Social Science, 525 (January 1993), pp. 31-45; Marcia Millon Cornett and Hassan Teh­ranian, 'An Examination of the Impact of the Garn-St Germain Depository Institutions Act of 1982 on Commercial Banks and Savings and Loans', Journal of Finance, 45, I (March 1990), pp. 95-111.

38.    Henry N. Pontell and Kitty Calavita, 'The Savings and Loan Indus­try', Crime and Justice, 18 (1993), p. 211.

39.    Ibid., pp. 208f.

40.    F. Stevens Redburn, 'The Deeper Structure of the Savings and Loan Disaster', Political Science and Politics, 24, 3 (September 1991), P·439·

41.    Pontell and Calavita, 'White-Collar Crime', p. 37.

42.    Allen Pusey, 'Fast Money and Fraud', New York Times, 23 April 1989.

43.    K. Calavita, R. Tillman, and H. N. Pontell, 'The Savings and Loan Debacle, Financial Crime and the State', Annual Review of Sociology, 23 (1997), p. 23·

44.    Pontell and Calavita, 'Savings and Loans Industry', p. 215.

45.    Calavita, Tillman and Pontell, 'Savings and Loan Debacle', p. 24.

46.    Allen Pusey and Christi Harlan, 'Bankers Shared in Profits from 1--30 Deals', Dallas Morning News, 29 January 1986.

47.    Allen Pusey and Christi Harlan, '1-30 Real Estate Deals: A "Virtual Money Machine"', Dallas Morning News, 26 January 1986.

48.    Pusey, 'Fast Money and Fraud'.

49.    Pontell and Calavita, 'White-Collar Crime', p. 43. See also Kitty Calavita and Henry N. Pontell, 'The State and White-Collar Crime: Saving the Savings and Loans', Law Society Review, 28, 2 (1994), PP.297-324.

50.    The losses were initially feared to be higher. In 1990 the General Accounting Office foresaw costs of up to $ 500 billion. Others esti­mated costs of a trillion dollars or more: Pontell and Calavita, 'Sav­ings and Loan Industry', p. 203.

51.    For a vivid account, see Michael Lewis, Liar's Poker (London, 1989), PP·78-124·

52.    Bernanke, 'Housing, Housing Finance, and Monetary Policy'.

53. Morris A. Davisa, Andreas Lehnert and Robert F. Martin, 'The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing', Working paper (December 2007).

54.    Shiller, 'Recent Trends in House Prices'.

55.    Carmen M. Reinhart and Kenneth S. Rogoff, 'Is the 2007 Sub-Prime Financial Crisis So Different? An International Historical Compari­son', Draft Working Paper (14 January 2008).

56.    Mark Whitehouse, 'Debt Bomb: Inside the "Subprime" Mortgage Debacle', Wall Street journal, 30 May 2007, p. AI.

57.    See Kimberly Blanton, 'A "Smoking Gun" on Race, Subprime Loans', Boston Globe, 16 March 2007.

58.    'U.S. Housing Bust Fuels Blame Game', Wall Street journal, 19 March 2008. See also David Wessel, 'Housing Bust Offers Insights', Wall Street journal, 10 April 2008.

59.    Henry Louis Gates Jr., 'Forty Acres and a Gap in Wealth', New York Times, 18 November 2007.

60.    Andy Meek, 'Frayser Foreclosures Revealed', Daily News, 21 Sep­tember 2006.

61.    http://www.responsiblelending.org/page.jsp?itemID=320 320 3 I.

62.    Credit Suisse, 'Foreclosure Trends - A Sobering Reality', Fixed Income Research (23 April 2008).

63.    See Prabha Natarajan, 'Fannie, Freddie Could Hurt U.S. Credit', Wall Street journal, 15 April 2008.

64.    Economic Report of the President 2007, tables B-n and B-76: http:// www.gpoaccess.gov/eop/.

65.    George Magnus, 'Managing Minsky', UBS research paper, 27 March 2008.

66.    Hernand~ de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (London, 2001).

67.    Idem, 'Interview: Land and Freedom', New Scientist, 27 April 2002.

68.    Idem, The Other Path (New York, 1989).

69.    Rafael Di Tella, Sebastian Galiani and Ernesto Schargrodsky, 'The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters', Quarterly journal of Economics, 122, I (February 2007), PP.209-41.

70.    'The Mystery of Capital Deepens', The Economist, 26 August 2006.

71.    See John Gravois, 'The De Soto Delusion', Slate, 29 January 200S: http://state.msn. comlidl2I I2 79 2/.

72.    The entire profit is transferred to a Rehabilitation Fund created to cope with emergency situations, in return for an exemption from corporate income tax.

73.    Connie Black, 'Millions for Millions', New Yorker, 30 October 2006, pp.62-73.

74.    Shiller, 'Recent Trends in House Prices'.

75. Edward L. Glaeser and Joseph Gyourko, 'Housing Dynamics', NBER Working Paper 12787 (revised version, 31 March 2007).

76.    Robert J. Shiller, The New Financial Order: Risk in the 21st Century (Princeton, 2003).

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