Living in the Bubble (E) - must read!

verfasst von Cosa, 21.02.2003, 11:08

-->moin,

dies ist nicht nur ein ziemlich langer Text und dann auch noch ohne"Bildchen" ;-) aber er lohnt sich zu lesen.

Zunächst wird die aktuelle Immobilien-Bubble mit Zahlen unterlegt, dann das amerikanische Hypothekenwesen erläutert und zu guter Letzt auf die Bedeutung der Schulden u.a. Hypothekenschulden für den Einzelnen wie auch für die US-Gesellschaft eingegangen.....



<font size="4">Living in the Bubble </font>

Government guarantees, global capital flows, and a consumption binge add up to
a national mortgage crisis.

By Robertson Morrow

From the security of their own homes, many sneer at the get-rich-quick crowd that lost money
when the tech bubble burst. But many who would throw stones are living in glass houses' barely
maintained by fragile second mortgages.

The brash sales pitches, reckless spending, and short-sighted decisions that fueled the dot coms' rise
and fall have taken over the mortgage market. Everyone now knows about the tech bubble
because it has already burst; fewer recognize its near neighbor, the mortgage bubble because they
are living in it.

In the third quarter of last year, home mortgages increased at a record annual pace of $724
billion-accounting for 70 percent of the entire increase in personal and corporate debt. Increased
home mortgage borrowing has reached levels almost twice that of corporate borrowing during the
bubble years.

Generations have bought homes by borrowing 80 percent and paying it down over 30 years. No
longer. Now the American home is just one more credit line to be tapped. The problem is not that
we have been assuming larger mortgages in order to live in larger houses that we can afford
because of larger incomes. The problem is that Americans have had roughly the same incomes and
the same houses but have been mortgaging a larger percentage of those values.

As a percentage of personal income, mortgage debt has risen from 51 percent 25 years ago to over
100 percent today. In the last 5 years, mortgage debt has risen by 60 percent, or $2.2 trillion, an
amount roughly the same as the profits of every American corporation for the last five years and
twice China's exports to the entire world.

One problem with borrowing all this money is that people might not be able to pay it back. Another
is that, for the foreseeable future, Americans will be spending a large proportion of their income on
debt service. This will constrain consumer spending - two-thirds of the economy - which will retard
economic growth for the remainder of the decade. Slow economic growth will inhibit income
growth, preventing us from earning our way out of the hole into which we have dug ourselves.

Moreover, at some point, we will exhaust the supply of money available using homes as collateral. In
2001 and 2002, Americans extracted $300 billion in cash from their existing homes through
refinancing and home equity loans. This infusion of cash is what has fueled rising consumer
spending in the face of recession.

Why did a rational capitalist society choose to lend people too much money, and why did rational
capitalist Americans choose to borrow more than was good for them?

Three reasons: The first is that the federal government dominates mortgage borrowing. The second
is that modern finance has made it easier to succumb to the human temptation to borrow now and
worry later. The third is that foreigners have - perhaps naïvely - been willing to lend Americans
whatever we wanted. In short, American capitalism has been corrupted by government subsidies,
value-free modern finance, and globalization.

The principal ways that government subsidizes mortgages are the Federal Housing Administration
and the Government Sponsored Enterprises: Ginnie Mae, Fannie Mae, and Freddie Mac. These
institutions raise money in the capital markets that is recycled into home mortgages. They are
subsidized because government guarantees their debts either explicitly or implicitly.

These federal guarantees encourage people to overextend by making borrowing cheaper than it
otherwise would be. As always, when government subsidizes something, we get too much.

American capitalism historically contained constraints on the natural human propensity to borrow.
But in the last twenty years, these limits have been systematically destroyed in the name of creating a
more efficient financial system. We now have a system with greater technical efficiency but also one
that gives borrowers far more rope with which to hang themselves - if they are inclined to try.

Witness the conversion of the humble home mortgage into an exotic and liquid financial instrument
plugged into the global money markets. Twenty-five years ago, most mortgages were issued by
local banks from money raised through local deposits. Today, most mortgages are marketed by a
variety of institutions from national banks like Citibank to mortgage-only companies like Ditech. But
the money actually comes, via various intermediaries, from Wall Street and other money markets.
Mortgages are bundled into financial instruments that are traded all over the world like stocks or
bonds. This conversion has produced a financial system in which it is easier for available capital to
flow to people who can pay the best price to use it. The downside is that it has removed the
traditional restraints on the propensity to go into debt.

American capitalism was never structured to deliver absolute economic freedom. Rather, it was based
on things like the traditional wisdom that debt is a temptation - not something deserving of the
neutral attitude implied by value-free modern finance. The American system once focused on the
accumulation of wealth. It was a truism of traditional bourgeois culture that owning was better than
owing, and all prosperous people believed this.

Today, the dynamic of value-free modern finance has twisted capitalism from the accumulation to
the consumption of wealth. As Americans have increased their debt to finance the greatest consumer
spending spree in the history of the world, we have become one of the most indebted people on the
planet.

Near the center of this degeneration is the transformation of the home mortgage from a means of
savings to a means of spending. The American mortgage enabled our parents to move from
property renters to homeowners. After thirty years,"burning the mortgage" was a rite of passage to
true financial independence.

Today, extracting cash from homes has become a great hidden slush fund supporting current levels
of consumer spending and, therefore, the American economy generally. Mortgage pushers offer
cash-out refinancing and home equity loans. One new type of mortgage automatically increases the
home equity credit line based on monthly mortgage repayments and quarterly increases in the
appraised value of the house.

Several false justifications excuse this ominous increase in mortgage debt. First, since mortgage debt
is tax-deductible, Americans are told they are simply being tax-efficient in taking on more mortgage
debt to win a tax deduction in a world in which rising taxes make any tax deduction increasingly
valuable. But this explanation is unpersuasive because non-deductible consumer debt is also
increasing rapidly.

Second, because of immigration-driven competition, zoning restrictions, and Giuliani-style crime
reductions in central cities, house prices have risen, and Americans are cashing out. But lending has
risen faster than home prices. Ten years ago, the total of all mortgages (including small mortgages
originated decades ago), was 35 percent of the value of mortgaged houses. In the third quarter of
last year, it was 48 percent.

Independent of this increase in loan-to-value, there are conceptual reasons American should not
ramp up their mortgages in response to inflation in the value of their homes.

Homeowners who respond to a rise in real estate prices by increasing their debt by the same amount
tell themselves that if their house inflates by $50,000 and they add $50,000 to their mortgage, they
are in the same financial position as before. This is false. If one assumes a $50,000 debt at six percent,
it is perfectly cancelled out if one simultaneously acquires a $50,000 asset at six percent, for example,
a risk-free $50,000 bond. But $50,000 of inflation in the price of your house is not a bond.

1. It does not generate cash flow. The debt you have acquired demands a six percent cash flow
from you, so it can only be balanced by something that gives the same cash flow to you. A tasty
chunk of house price inflation gives you no cash flow, however much gratification it may give you
at cocktail parties.

2. It is not liquid. You have a debt payable only in actual money. Your house is not money but
something that can converted into money only with substantial time and effort. That is why real
estate is illiquid, unlike shares of IBM. Worse, you cannot sell only the inflation in your house's value
or only part of the house.

3. The increase may not be $50,000. When you actually do sell your house, the market may have
dropped. Lots of Houstonians in 1983 thought that the recent rise in the value of their houses was
locked in. By 1988, they knew better. (Average Houston house prices declined about 20 percent
from 1983 to 1988.)

4. Transaction costs bleed you at every turn. Not only is it expensive to sell a house, but then you
also have to find some place else to live.

As a result, inflation in the value of a house does not counterbalance an expanding mortgage the
way many think it does. Even financial institutions, which should know better, have been promoting
this illusion in order to make money.

This inflation in house prices also has a dark side that most people forget: when housing prices go
up, your current house goes up in price, but your next house probably does too. So any financial
gains you make must be balanced against an increase in your future costs. Of course, if you sell out
of Silicon Valley and move to Utah, you can profit, but this requires reducing your consumption of
three scarce commodities: location, location, location.

An indispensable aspect of the debt binge is the willingness of foreigners to lend us the money. Not
only is 20 percent of mortgage debt sold to foreign banks and other foreign buyers outright, but
modern finance has made all liquid instruments de facto fungible. Even when foreigners buy other
American financial assets, they are propping up a market of which mortgages are a part. Take the
foreign buyers out of the equation and the whole thing collapses, and plentiful, cheap mortgage
debt is no longer available to Americans.

Without foreign buyers, the wave of cash-out refinancing and home equity loans would reverse,
and we would return to the normal mode of gradually paying down mortgages.

The foreign-debt bubble, and therefore the mortgage bubble, is a necessary consequence of our
trade deficits. When we run a trade deficit, foreigners are giving us their goods not in exchange for
our goods but in exchange for something else of value. Subject to trivial quibbles, this can only be
two things. The first is foreign investment: when we give them a factory in America or a claim on a
factory in America. The second is debt.

The ratio between foreign investment and foreign debt is an empirical matter, with debt taking the
majority today. But the fundamental principle that trade deficits must produce ownership or
indebtedness is a matter of basic economic definitions. It does not depend, as some would have us
believe, on differing economic theories. Bluntly put, there is no theoretical way to make the problem
go away.

Thus one necessary consequence of the present trade mess is that America is inexorably becoming a
nation of debtors and other nations - principally Japan and her Asian imitators - nations of creditors.
What this really means is that an entire society (ours) has become biased in favor of consuming
things, while others have become biased in favor of owning things.

Capitalism requires a balance between two contradictory impulses: to be rich, which means to own
things, and to live well, which means to consume things. In a traditional national economy, it is
impossible for an entire society to become warped towards debt-driven consumption for the simple
reason that every debtor creates a creditor within the same society. For every person who prefers
to live well by borrowing money and spending it, there must be someone who hoards resources so
as to have that money on hand to lend him. It is possible for such a society to become viciously split
between debtors and creditors - this was indeed a real issue in American politics in 1890 with the free
silver controversy - but it is impossible for a self-contained society to lose the balance between
debtors and creditors.

Globalization undoes this salutary restraint by making it possible for a preponderance of the creditors
to be in one nation and a preponderance of the debtors in another. An entire nation can become a
decadent playboy if another nation is willing to become a miser. Obviously, this imbalance is not
sustainable in the long run, but it can go on for years before the dénouement occurs. Given the
ingrained cultural tendencies of different nations, it is no accident that America has slid into the role
of profligate while nations like Japan play the lender.

The mostly national character of our economy used to restrain the vice of debt; globalization gives it
free rein. It is thus clear that the existence of real national economies, with real but quantitatively
limited links to other economies, is a key principle in the maintenance of a healthy society. It is no
accident that those nations that are the most globalized and know it, like Singapore, have ruthless
government policies, like mandatory retirement savings, designed to mitigate this problem. Neither is
it an accident that the economy of Europe was first integrated by Nazi architect Albert Speer.
Because this is impossible in a free society like America, we must either go back to the national
economy or give up our freedoms. This explains one of the notoriously shabby paradoxes of
globalization: that it claims to expand freedom but is in fact always accompanied by a growth in
regulation.

The global money market is a fickle lover. Once money stops blowing into a debt bubble, the
bubble bursts, and no financial intervention can restore it. Just ask the Malaysians, the Russians, the
Argentineans, or the U.S. telecommunications industry.

What does this mean for the individual homeowner? The imprudent will suffer. Debt will become
harder to assume, housing costs will fall, and consumer spending will sag. Those who refinanced to
extract cash, took out a second mortgage, bought more house than they could afford, or failed to
save, risk deep financial pain when the housing bubble bursts. Homebuyers depend on their jobs to
make their mortgage payments, and the economic contraction caused by a squeeze on consumer
spending will put those jobs in jeopardy. Even the prudent will suffer due to the irresponsibility of
others: one's financial mistakes are not solely one's own business.

Risk to the global financial system is even greater. For the first time in financial history, a major
debtor nation owes its debt in its own currency. This means that rather than exporting goods to buy
foreign currency to repay that debt, we can just print the money. We inflate the dollar to pay off
foreigners in money that is not worth very much. Creditors will oppose destroying the dollar, but
they lack the political clout of millions of American debtors. This opens the possibility of major
inflation or polarization of the American political system between those serving the interests of
foreign creditors and those representing American mortgage-holders. Neither is an attractive
possibility, for either means the U.S. economy should be prepared to take a bubble bath.

Quelle

Grüsse
Cosa

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• Living in the Bubble (E) - must read! - Cosa, 21.02.2003, 11:08