Monday, September 22, 2014

The House of Debt: A Book That Deserves to be Talked About

There were three major books in economic this summer. First came the Flash Boys, then hot on its heels was the doorstop of Piketty’s Capitol.  Then there was House of Debt. 

Each book had its readers and it policy prescription, but House of Debt was overshadowed by everyone who had read Piketty having to write a think-piece on it. Everyone else, as the kindle stats seemed to show, stopped around page 30. (I for one made it all the way to page 100 or so before I realized that the idle readings that I had during work pretty much summed up Piketty’s argument). 

But I digress. In house of debt the authors pretty convincingly show  that a special feature of the debt build-up in the middle of the aughts was responsible for the long bust and recovery. (I am inclined to be convinced for two reasons. First, I have long been of the mind that the bad guys of the crash who were let off too easily were the ratings agencies. The face of my crisis is Moody’s, S&P, and Fitch. Secondly, I am easily convinced by the things I read. I was not fun to be around after I finished “My Struggle” and not the Norwegian novel, you dig?) So here’s the thing. The borrowing was the problem to the authors because the junior claims on the mortgages – the home occupiers – were the party with the biggest stake in the house in terms of a wealth effect. The homeowners lost their equity and stopped their spending. 

The bailouts thus went to the wrong people.  The banks lost some of the value of their investments when they went underwater, but the people who put in the down payment to move in. It was funny how we went from a party pushing an ownership society in homes (and the social security) to demonizing those people who bought into the rhetoric and tried to join that ownership society. You a cable-television blow-hard on a trading floor being cheered for mocking the idea of trying to get in on the rising home price escalator. It is nice to know that Cuccenelli et al were not complicit in the boom or the bust. 

So we come around and ask, “How do we not let this happen again?”. As much as I hate putting out the old fires instead of building so the fires don’t happen, the authors have a very good actionable idea that will never be considered – share both the risk and reward of mortgages. Instead of having the borrower take all the risk, they would instead have a percentage of the value of the house equal to the original investment. You have a house worth 100K and you put 20% down, and it loses 20% if its value, you are not wiped out, but you still own 20% of 80K. The loan is then figured on the current value of the home. To compensate lenders, you give them some of the upside if houses appreciate. 

What this allows is for people to stay in their home and incentives for them to keep paying on the homes and keep maintaining the homes and to arrest the downward spiral that happens when houses start being foreclosed and emptying out by people who lost all stake in the neighborhood.  (Alternately, domino effect. Whatever you call it, it is a spooky cycle). Will this be enacted? Most likely not, especially with how Piketty took all the air out of the room on any other proposals this summer. However, it has more chance of happening than a globally adjudicated wealth tax, pace Piketty. House of Debt deserves to be talked about.