What are the most dysfunctional parts of the global financial system? China’s banking industry, you might say, with its great wall of bad debts and state-sponsored cronyism. Or the euro zone’s taped-together single currency, which stretches across 19 different countries, each with its own debts and frail financial firms. Both are worrying. But if sheer size is your yardstick, nothing beats America’s housing market.
It is the world’s largest asset class, worth $26 trillion, more than America’s stockmarket. The slab of mortgage debt lurking beneath it is the planet’s biggest concentration of financial risk. When house prices started tumbling in the summer of 2006, a chain reaction led to a global crisis in 2008-09. A decade on, the presumption is that the mortgage-debt monster has been tamed. In fact, vast, nationalised, unprofitable and undercapitalised, it remains a menace to the world’s biggest economy.
Unreal estate
The reason the danger passes almost unnoticed is that, at first sight, the housing market has been improving. Prices in America have crept back up towards their all-time high. As a result, the proportion of households with mortgage debts greater than the value of their property has dropped from a quarter to under a tenth. In addition, while Europe has dithered, America has cleaned up its banks. They have $1.2 trillion of core capital, more than double the amount in 2007, which acts as a buffer against losses. The banks have cut risk and costs and raised fees in order to grind out decent profits. Bosses and regulators point to chastened lenders and boast that the problem of banks “too big to fail” has been solved. Taxpayers, they say, are safe.
Only in their dreams. That trillion-dollar capital buffer exists to protect banks, but much risk lies elsewhere. That is because, since the 1980s, mortgage lending in America has been mainly the job of the bond market, not the banks as in many other countries. Loans are bundled into bonds, guaranteed and sold around the world. Investors on Wall Street, in Beijing and elsewhere own $7 trillion-worth.
When those investors panicked in 2008, the government stepped in and took over the bits of the mortgage-guarantee apparatus it did not already control. It was a temporary solution, but political gridlock has made it permanent. Now 65-80% of new mortgages are stamped with a guarantee from Uncle Sam that protects investors from the risk that homeowners default. In the heartland of free enterprise the mortgage system is worthy of Gosplan.
by The Economist | Read more:
It is the world’s largest asset class, worth $26 trillion, more than America’s stockmarket. The slab of mortgage debt lurking beneath it is the planet’s biggest concentration of financial risk. When house prices started tumbling in the summer of 2006, a chain reaction led to a global crisis in 2008-09. A decade on, the presumption is that the mortgage-debt monster has been tamed. In fact, vast, nationalised, unprofitable and undercapitalised, it remains a menace to the world’s biggest economy.
Unreal estate
The reason the danger passes almost unnoticed is that, at first sight, the housing market has been improving. Prices in America have crept back up towards their all-time high. As a result, the proportion of households with mortgage debts greater than the value of their property has dropped from a quarter to under a tenth. In addition, while Europe has dithered, America has cleaned up its banks. They have $1.2 trillion of core capital, more than double the amount in 2007, which acts as a buffer against losses. The banks have cut risk and costs and raised fees in order to grind out decent profits. Bosses and regulators point to chastened lenders and boast that the problem of banks “too big to fail” has been solved. Taxpayers, they say, are safe. Only in their dreams. That trillion-dollar capital buffer exists to protect banks, but much risk lies elsewhere. That is because, since the 1980s, mortgage lending in America has been mainly the job of the bond market, not the banks as in many other countries. Loans are bundled into bonds, guaranteed and sold around the world. Investors on Wall Street, in Beijing and elsewhere own $7 trillion-worth.
When those investors panicked in 2008, the government stepped in and took over the bits of the mortgage-guarantee apparatus it did not already control. It was a temporary solution, but political gridlock has made it permanent. Now 65-80% of new mortgages are stamped with a guarantee from Uncle Sam that protects investors from the risk that homeowners default. In the heartland of free enterprise the mortgage system is worthy of Gosplan.
by The Economist | Read more:
Image: David Parkins
