Somehow my modest insignificant little self can’t help thinking that the London G20 Summit (final communique here) and many national policies adopted to tackle the current economic downturn somehow haven’t been addressing a few core issues related directly to the current crisis. It’s been a useful feel-good and confidence-building event. But if one is to take an stringently rational approach to the crisis one would ask two simple questions: what has immediately caused the crisis? And what needs to be done in the future to avoid a repeat? This the G20 hasn’t done. Come to mind, for example: housing and mortgage policies, global macroeconomic imbalances and related monetary and financial policies.
The G20 has addressed issues like hedge funds or tax havens or boardroom remunerations that certainly deserve discussion, but, honestly, have nothing to do with this crisis. This is easy political-dividend chasing by politicians keen to appear to be tough against those horrible and nasty Rich People who created the mess. (Is there a way to legislate against political scapegoating aimed at earning boni in the form of votes?). The timid IMF reform is a step in the right direction and more than overdue (see this old post). But the topic doesn’ts address the issue I am concerned with here: underrepresentation of emerging markets in the IMF’s boardrooms isn’t an immediate cause of the current crash either. What is more, there is a big problem looming in the background, a taboo, which only Alan Beattie dared to mention directly: what the Chinese want the IMF to do for them, he says, is ” to shut up about the Chinese exchange rate”. For more on global imbalances, please refer to Michael Pettis, or Martin Wolf.
With such thoughts lingering in my gloomy subconscious on a terribly gray and rainy Friday afternoon in Brussels’s Euro-quarter, a welcome diversion: The Economist that arrived by post in our office this morning, with an ideal excuse to procrastinate on the heavy duties still awaiting me before the week-end. It namely talked about housing policies. First, with a refreshengly punchy and provocative leader:
“BANKERS, frauds, predatory insurers: there has been a stampede to punish the villains of the global meltdown. Yet one culprit is not only rarely seen as an offender, but is also being cosseted and protected. Governments’ obsession about home ownership has contributed as much to the meltdown as any moustache-twirling financier.”
… followed by a serious investigation into housing ownership policies in the US and Europe (such as tax credits, buy-to-let policies, subsidies, telling Freddie and Fanny to be less stringent on credit worthiness of homebuyers…) with the conclusion that subsidies and other schemes to favour home ownership can be very damaging and contribute to economic volatility. Here a few abstracts:
“The main economic argument for home ownership is that, in the words of Thomas Shapiro of Brandeis University, “it is by far the single most important way families accumulate wealth”. This argument now looks as weak as house prices.”
“Two pieces of evidence seem to support [the] view [that ownership is always good for you]. The first is that housing has fared better in the crisis than other assets. Share prices are around 50% below their peaks in many countries, so compared with shareowners, homeowners have not done badly. However, home ownership in a downturn has one big disadvantage: most people buy shares outright but homes on margin (ie, they put down a small stake, if anything). If share prices fall by 10%, you lose 10%; if house prices fall by 10%, you may lose your entire savings. The value of American homeowners’ equity in their own houses has slumped from a peak of $12.5 trillion in 2005 to just $8.5 trillion at the end of 2008. This undermines one claim that homeowning is economically beneficial.”
“The other piece of evidence for home ownership’s benefits is that the house-price fall has so far spared most existing homeowners from absolute losses. In America, for example, house prices have fallen back only to where they were in 2004. There were roughly 29m house sales in the United States between 2004 and 2007, compared with 115m households, and anyone who bought before then is probably sitting on a nominal profit. However, as Harvard University’s Martin Feldstein points out, if house prices rise, people feel richer and borrow and spend more. If they feel poorer, they may cut back even if the price of their house has not fallen below what they paid for it.
“Subsidies to home ownership have thus increased economic volatility. They boosted consumption, as homeowners used their houses as collateral to finance consumption or investment.”
“[…]changes to house prices aggravate the economic cycle. Recent research by the IMF finds that a quarter of the 100-odd recessions since 1960 have been associated with house-price busts and that these contractions “are deeper and last longer than other recessions do”.
Anyway, let’s hope indeed that the slightly pepped-up IMF and the new Financial Stability Board decided upon in London will do the job of looking at these issues more closely and induce IMF members to improve their housing policies.