Category Archives: Business & Finance

Encouraging Home Ownership at the Expense of Sound Public Policy

In the recent mortgage crisis, much blame was laid at the feet of America’s financial institutions. Many finger-pointers completely disregard the key role U.S. government policy played in the debacle.

For decades the government has pushed home ownership as a social panacea, much to the detriment of other elements of public policy.

I recently reviewed Niall Ferguson’s Ascent of Money. Chapter 5, “Safe as Houses” provides detail:

Since the New Deal, the federal government has provided various guarantees—from deposit insurance to the explicit backing of Fannie Mae, Freddie Mac, and Ginnie Mae—to encourage mortgage lending.  At best this primes the pump when liquidity gets, well, less liquid.  At worst this encourages irresponsible lending, because, after all, the government (taxpayers) will bail us out.

By providing federally backed insurance for mortgage lenders, the FHA sought to encourage large (up to 80 per cent of the purchase price), long (twenty-year), fully amortized and low-interest loans. This did more than merely revive the mortgage market; it reinvented it.

…From the 1930s onwards…the US government was effectively underwriting the mortgage market… That was what caused property ownership—and mortgage debt—to soar after the Second World War.

—pp. 247 ff.  Continue reading Encouraging Home Ownership at the Expense of Sound Public Policy

Review: Ferguson’s Ascent of Money

Niall Ferguson, The Ascent of Money: A Financial History of the World (New York: Penguin, 2008).

Niall Ferguson gives us an important and readable history of the financial institutions that have shaped the world.

In his introduction, Ferguson shares some startling statistics: horrendously high percentages of Americans have demonstrated gross ignorance of how their credit cards work and a majority fail to understand the foundational concept of compound interest.  A disturbingly large minority of respondents in Britain could not determine whether a £30 discount were better than 10% off £250, nor could they appreciate the impact of an inflation rate higher than their savings account’s interest rate.

We cannot afford such ignorance:

Despite our deeply rooted prejudices [against financiers], money is the root of most progress. …Financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evolution of credit and debt was as important as any technological innovation in the rise of civilisation…

…Behind every great historical phenomenon, there lies a financial secret…

Ferguson, in a brief, but compelling narrative, demonstrates the financial forces behind the lasting influence of the Roman empire, the Crusades, the fall of the Aztecs, the European Renaissance, the fall of the Spanish empire, and so on.

The core of his book traces the history of coinage, bonds, stocks, insurance, the politically driven push for home ownership, and finally the growing tension in America’s financial system and the concurrent rise of China. Continue reading Review: Ferguson’s Ascent of Money

America on the Brink?

In the current issue of Foreign Affairs, Niall Ferguson’s “Complexity and Collapse: Empires on the Edge of Chaos” argues that societies end suddenly, not through a protracted “decline and fall”.

While most historical postmortems seek direct causal links between calamity and loosely related events decades removed, Ferguson says societies are more complex systems—adaptive and chaotic—susceptible to shock through the unintended consequences of seemingly trivial actions.

His example:

Over the last three years, the complex system of the global economy flipped from boom to bust —all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions.

Ferguson argues that previous societal collapses can be similarly linked to contemporaneous fiscal disruption—and asks whether the United States might be the next society to push itself over the brink. Continue reading America on the Brink?