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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