Saturday, October 13, 2007

Round and round

"from the Chrysopoeia ('Gold Making') of Cleopatra during the Alexandrian Period in Egypt. The enclosed words mean 'The All is One.'"

Here's a piece by Brian Pretti yesterday, on the Federal Reserve and its attempts to shore up the system with interest rate cuts.

His prose is a little sparky and luxuriant, but his point is that even though the official interest rate may drop, the lending market has become more bearish and there may be higher rates (or more stringent terms) for riskier loans. He feels that lending has not previously enjoyed the discipline of a proper open market, which is why pension funds ended up buying pigs in pokes (subprime packages dressed up as a form of reasonably secure bond).

But why is so much wealth tied up in housing, anyway? I've previously suggested that lenders like to put money into houses because they rise in value, yet that rise is mainly the result of increased lending. It's what looks like an infinite loop, but there are other factors involved, that will lead to braking and possible breakdown.

Over a long period, house prices have increased:

a) because wages tend to increase faster than RPI; but in a global economy, Western wages are stalling; and in an ageing population, social costs (and therefore taxes) are rising.

b) because, sometime after WWII, we moved from a pattern of one significant income earner per couple, to two, who could bid more as DINKYs (dual income, no kids yet); but unless we learn to live as threesomes (TRINKYs) or in larger communes (FAMILIES), this driver has gone as far as it can.

c) because interest rates fell a long way, so people could service much larger mortgages; but now interest rates can't go up much, without widespread repossessions and bankruptcies - of registered voters. And whenever things get difficult, the temptation will be to drop rates further, which expands the lending and ultimately tightens the noose.

d) because lenders got rich and reckless in the boom; they might have offloaded the loans, but they may still have to pay a price for their deceits.
Meanwhile, we have diverted money into real estate that should have been powering business: R&D, startups, expanding small firms. Instead, large concerns are wiping out their potential successors: shopkeepers' children are stacking shelves for hypermarkets.
Democracy is rooted in a degree of economic independence and social equality. In effect, by permitting excessive concentration of capital, we are in danger of enslaving the next generation: the first of the "mind-forged manacles" is the limiting of their aspirations.


dearieme said...

It's just occurred to me: houses have become money - stores of value, units of account, but not yet a very good means of exchange, though "flippers" were trying even that. The reason is that constraints - especially of planning permission - means that the housing stock can grow at only a limited rate - just as, classically, gold stocks could grow at only a limited rate (in their case, about 2% per annum). This is in contrast to "fiat" money, which can grow at any old rate that a government decrees, and is therefore likely (guaranteed?) eventually to become worthless. So The People have been opting for housing as money, just as the postwar Germans once opted for cigarettes or nylons. Once they had a good Deutschmark, they went back to using paper money which their Central Bank was careful not to over-print. But we can't trust our central bank/government, nor can the Yanks theirs, so houses it is. Hows about that?


DM: I agree, in that people tell themselves that "you can't lose with bricks and mortar". They have stopped believing in pension funds and the probity of the government and are looking for something with intrinsic value.

But currency that is inhabited is more difficult to pass round. Also, houses rot and crumble, requiring expensive maintenance (often by half-qualified rogues). Local governments tax them to pay for collective local services, or seize them to pay for your long-term care; national government carves a piece off in "death duties" (though we've had a little back-pedalling there, recently).

Besides, the "exchange rate" of houses is volatile, since house prices are pumped up with credit. If it were not for personal ties, many more people would disinvest in over-valued British houses and move abroad.

The investor today is like the hare: it has no permanent home, but must rely on its fleetness to evade predators.