First 100 days: A fix for the housing crisis
– 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.
It’s no accident that other countries, even those that trade mortgages as financial instruments (such as Australia and Canada) have avoided the levels of off-the-cuff valuation of property we’ve seen in the United States. The reason is that other countries have standardized the information needed to determine the genuine value of real estate and hence mortgage valuation.
This information – actual boundaries, property transfers, claims, liens, and so on – is made available to everyone. The system is sound and transparent. And where do they keep this information? In national property registries, which maintain all the data, in a standardized format, that buyers and sellers need to undertake transactions related to real property.
Fed unleashes greatest bubble of all
– John Kemp is a Reuters columnist. The views expressed are his own –
Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.
Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.
THE ASYMMETRIC EXPERIMENT
Bubble mania is no accident. It is the direct consequence of the Fed’s asymmetric response to shifts in asset prices. Pressed to “lean against the wind” and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred.
Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed’s job to second-guess asset allocation decisions of professional investors.
Even if bubbles could be identified, they argue, pricking them would require swingeing rate rises that would inflict widespread damage on the rest of the economy.
I cant help but read the hundreds upon hundreds of posts much like the ones on this board claiming the ultimate bankruptcy of the largest economy (and largest tax base) in the world. There is no doubt that the housing bubble represents the largest challenge facing the U.S. since the second world war as far as hardships are concerned. However, any student of economics and history for that matter will take note of the real effects of fiscal stimulus. Yes the national debt has skyrocketed with the bailouts, but a bankrupt country’s debt will not be issued at less than 1% rates. Are these rates artificially conceived? Maybe, but no less real. And inflation really is of no concern at this point. I would hope for some inflation right now as this would certainly drive some of the loads of cash into assets that protect inflation- stocks, commodities and could possibly stabilize housing prices somewhat. The Chinese have benefited in terms of relative economic power. But it has not and will not successfully decouple from a strong relationship with the U.S. As for the goldbug survivalist crowd- it has proven to be an historically wrong sided bet against the collapse of civilization. Sure things have changed, but countries adapt and do not collapse within a framework of a few financially troubling years. Britain successfully re-engaged with a globalized world following the second world war and their dissolution of the world’s superpower, as the U.S. will most certainly do in the coming years. However, the U.K. still remains and economically and politically to this day even after the “collapse” of their empire. We will spend less – probably good, be a world leader- Obama is good start, and we will quite possibly looked upon with amazement in the years ahead that we were able to “print” our way out of this mess.
interesting article, perhaps i don’t fully understand “Title Insurance” but Title has to register everything with their local county anyways so what’s missing? what is getting recorded at one and not another?
In regards to your value comment i’d have to agree. However real estate, while tangible and physical, is so tough to put a value on. I think we are about to hit dire times come May 1st when Fannie & Freddi require all appraisers be in house. Now the banks who are lending the money get to decide what your house is worth and based on that give you an interest rate. The current system allows the bank to REVIEW an appraisal and make a judgment not force a value upon a borrower for their own interest. Dire times lay ahead.