Bernard Madoff was arrested December 12, 2008 for an alleged $50 billion investor fraud and released on $10 million bail. While the press heralds this as the biggest ponzi scheme in history, it’s a pittance compared to the real estate schemes that have created the present financial crisis.
Like Madoff’s scheme, the house market became dependent on a steady price increase. Buyers were willing to pay high prices with the expectation that they could later sell for a profit.
Eventually, without substantial inflation, houses had to become unaffordable. House prices had reached levels that often required most of a household’s income. Subprimes were just a frantic attempt to continue this pyramid. Like every ponzi scheme, some means must be found to get more money from new “investors” to payoff old.
As a result of constant lobbying by the real estate and banking industry, the government promoted homeownership as the “American Dream.” It subsidized it by mortgage tax deductions, inflation and the willingness of Freddy and Fannie to continually raise the loan bar. After the bailout of the saving and loans in the ‘90s, mortgage lenders came to believe that the Feds would always support rising house prices.
The real estate agent industry and the commercial real estate agent industry, with the acquiescence of a heavily lobbied government, has created the homeowner myth by a constant stream of propaganda. We were told that as the price of goods inflates our savings dwindle, but house prices consistently appreciate and are a hedge against inflation.
Also, we were told that our house is an investment, and, for most of us, our biggest investment. It consumes most of our income. According to this “reasoning,” by building “equity,” we can refinance and reduce our payments, and as our equity grows, we can “trade up.”
We were told that buying any house will “get our foot in the door.” A hole in a wall is thus a “starter,” “fixer-upper,” or a “diamond in the rough.” If we dared to complain about the stratospheric price of houses, we were told, “Hey, it’s just the natural law of supply and demand!” Homeowners were hoodwinked into believing that their home was a nest egg. Houses are not capital goods; they’re consumables.
The real value of property depends on its location – proximity to schools, police, fire, social services, roads and other infrastructure. All of these are paid by taxes, yet many politicians ran on platforms to reduce taxes. Their constituents were led to believe that high mortgage payments were inevitable, and that tax reduction is the only way that they could make ends meet. As tax bases fell, civic programs were cut. The price of the property increased, but it real value declined.
One major difference between Madoff and the mortgage schemes is that Madoff was arrested while the mortgage bankers are being bailed out. Even programs created by the government ostensibly to help homeowners in foreclosure are actually geared to help the mortgage bankers. According to the Congressional Budget Office, the $300 billion “Hope for Homeowners” program begun Oct 1 has not helped a single homeowner!
In my next post I will present ideas on how nationalizing Freddie and Fannie can create a mortgage bank, produce affordable housing, and reduce the risk of foreclosure. I would like this to be an open forum that will solicit ideas and suggestions.
You may alos enjoy:
How Alan Greenspan Tricked America
From Mortgage to Bailout: How Did The Problem Arise?
To Bailout or Not to Bailout: Is Free Market Economics Sustainale?
Photo Credit: woodleywonderworksvia Flickr’s Media Commons
While it’s true that the home crisis dwarfs the Madoff scheme in terms of dollars squandered, at least the process of owning a home provides a measure of utilitarian value, it’s a place to live that over time increases in value. Those who lost their savings to Madoff’s fraud have nothing to show for their efforts but an empty wallet.
While it’s true that the home crisis dwarfs the Madoff scheme in terms of dollars squandered, at least the process of owning a home provides a measure of utilitarian value, it’s a place to live that over time increases in value. Those who lost their savings to Madoff’s fraud have nothing to show for their efforts but an empty wallet.
What most people don’t seem to realize is that houses DON’T appreciate. Like cars and machinery, they depreciate, even with the best of maintenance and care. Systems break down; layouts become obsolete; insulation wears out; new technologies in heating, cooling, insulating (etc.), better meet human needs and wants at a lower cost. Houses depreciate at roughly 1.5% per year.
What rises in value is land. It rises as population rises; it rises as technological advances proceed; it rises as we-the-people invest in the kinds of infrastructure and services that make a community or a state or a country a good place to live.
And sometimes land’s selling price gets detached from its actual value. How? Through changes in lending practices (lower interest rates, lower down payment requirements, lending to less and less able borrowers, etc.). Through scarcity, real or induced. Through land value taxes not being sufficiently high to collect the capitalized value of the land. (That last one is true everywhere, but especially visible and troublesome in California, where in 1978 the voters stupidly and selfishly voted for Proposition 13, which caps property taxes at 1% of the assessed value, and capped assessments at the purchase price plus 2% per year, rather than keeping honest assessments as the basis for taxation.) California is the poster child for poor practice. Unfortunately, the biggest beneficiaries — its well-housed and subsidized seniors — are not the ones receiving the “come-uppance.”
You can read more about this at http://www.wealthandwant.com/ and http://lvtfan.typepad.com/. Look for “boom and bust cycle” and “Proposition 13” among the ~900 themes at the former site.
You might appreciate Mason Gaffney’s papers, featured at http://www.schalkenbach.org/
What most people don’t seem to realize is that houses DON’T appreciate. Like cars and machinery, they depreciate, even with the best of maintenance and care. Systems break down; layouts become obsolete; insulation wears out; new technologies in heating, cooling, insulating (etc.), better meet human needs and wants at a lower cost. Houses depreciate at roughly 1.5% per year.
What rises in value is land. It rises as population rises; it rises as technological advances proceed; it rises as we-the-people invest in the kinds of infrastructure and services that make a community or a state or a country a good place to live.
And sometimes land’s selling price gets detached from its actual value. How? Through changes in lending practices (lower interest rates, lower down payment requirements, lending to less and less able borrowers, etc.). Through scarcity, real or induced. Through land value taxes not being sufficiently high to collect the capitalized value of the land. (That last one is true everywhere, but especially visible and troublesome in California, where in 1978 the voters stupidly and selfishly voted for Proposition 13, which caps property taxes at 1% of the assessed value, and capped assessments at the purchase price plus 2% per year, rather than keeping honest assessments as the basis for taxation.) California is the poster child for poor practice. Unfortunately, the biggest beneficiaries — its well-housed and subsidized seniors — are not the ones receiving the “come-uppance.”
You can read more about this at http://www.wealthandwant.com/ and http://lvtfan.typepad.com/. Look for “boom and bust cycle” and “Proposition 13” among the ~900 themes at the former site.
You might appreciate Mason Gaffney’s papers, featured at http://www.schalkenbach.org/