– Elena Panaritis is an institutional economist. She spearheaded property rights reform while working at the World Bank, and lectures at Insead, The Wharton School and Johns Hopkins University-SAIS. A social entrepreneur, she now heads the investment advisory firm Panel Group. Her recent book is “Prosperity Unbound: Building Property Markets with Trust”. The views expressed are her own. —
In his speech to Congress, President Obama spoke of how the proper response to the economic crisis is not just a matter of immediate fixes, but also an opportunity to make investments that will serve the nation’s long-term interests. The same idea should govern the housing recovery plan. Otherwise, we get nothing more than a crutch when we need a cure.
As much as short-term help is needed to keep more people from foreclosure, there is a big opportunity to get to the end of the crisis by starting at the beginning of the problem. The conventional wisdom is that subprime mortgages represent the beginning. In fact, the beginning goes back much further. The current crisis stems from the absence of a system that provides stability to the value of properties in the United States.
Instead, real estate “value” in the United States continues to be set through speculation, and that undermines the security – that is, the underlying asset – when mortgages are traded as part of complex financial instruments. We cannot ignore a simple truth of economics: if we are going to treat mortgages as securities, then they must be secured by the tangible asset: namely, land and buildings. To do otherwise has proven to be a recipe for disaster.
The opportunity before the U.S. government with a housing recovery plan is to set up a new system that will keep us from ever getting to this crisis point again. How? The devil is in the details.