Sunday, February 12, 2006

2/12/06 The Home-Equity ATM of Blue-State Liberals and the Lopsided Inequitable Funding of American Education 1311 words

According to a January 19 story in IBD newspaper, estimated gross home equity extraction in the U.S. ran at a $990 billion annual rate in the third quarter. That’s equal to an incredible 11% of disposable personal income by my calculation.

The article quotes no less an authority than Greenspan in a very rare Fed paper he co-authored in Sept: "It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction." The article notes that “Greenspan said in October that home equity withdrawals might explain much of the decline in the personal savings rate, which has turned negative in recent months.”

With average worker real earnings now once again resuming a thirty-three year 16% downtrend, and, relative to previous economic expansions, employment growth still lagging and business investment mediocre, the U.S. consumer, hence global economy, has been critically dependent the past five years on home equity extraction from the real estate ATM.

A one-paragraph digression. The motto of my new blog is to try to be “hopefully fair, honest, respectful, responsible, and slightly thought-provoking." Since I was critical, hopefully respectfully and responsibly, of Pres. Bush’s economic policies in my first two articles, it seems only fair to attempt to hold up for honest scrutiny in my next articles liberals in the blue states.

In a previous article, I looked at how energy is anything but a “free market,” despite Pres. Bush’s apparent professed belief to the contrary. The same of course is true for real estate. These two markets are intricately linked, with U.S. consumption of oil and everything else dependent on enormous speculative capital gains in real estate.

Those huge home equity gains were created by deliberately, drastically distorting the “free market” allocation of real resources and capital by: Greenspan’s previous three-year policy of deeply negative real interest rates (directly through lower mortgage rates and indirectly through asset allocation shifts); $200 billion per year in tax subsidies on mortgage interest and capital gains; the explosive growth of multi-trillion dollar government-sponsored entities implicitly guaranteeing the massive mortgage-backed securities market; zoning laws hindering development to protect property values.

These policies were justified both explicitly as government support of home ownership and as necessary for economic stabilization following the collapse of the huge TMT equity bubble in 2000. Significant changes in these market-distorting government policies would of course have strong negative effects on the real estate market. (Demographic factors, such as immigration and family formation, did not change so suddenly as to be able to explain the sharp speculative price surge. Increased demand for second homes was spurred less by baby-boomer demographics, more by speculative “paper wealth” created for existing homeowners.)

Most home owners of course fully realize that real estate is a highly rigged game in their favor, not a “free market,” that’s one of the key reasons to own a home. Nevertheless I think that most still prefer to believe that that they somehow have “earned” their lottery-like gains in home equity the past five years or so through their own hard work in diligently paying their mortgage, at least the interest if not principal. And I suspect that almost all homeowners implicitly strongly expect the government to do everything in its power to support their home values, their version of the infamous “Greenspan put” in the capital markets that I discussed in a previous article.

Some of the more speculative real estate players even seem to harbor the belief that they are cowboys/girls riding the suburban free ranges in their gas-guzzling multi-SUV families, and that their speculative gains are justly due to their risk-taking. Of course with such massive government support of the real estate market, nothing could be further from the truth, but it’s a comforting delusion for those who still miss the closing of the American frontier more than a century ago (even then government policies strongly favored real estate speculation).

We want to make it very clear that Americans do work very hard for what they have. The problem, however, lies with what they work at, due to distorted market incentives from the global speculative financial system.

Nor are we “blaming” homeowners for seeking to prosper from the speculative capital gains created by the global financial system, whose main beneficiaries are the huge financial entities and those who work in them. It just makes simple common sense to go for the “free lunch” offered by global speculative finance, if there doesn’t seem to be any cost. And it is just human nature to unconsciously deny or rationalize away what’s really going on if it clashes with one’s strongly held beliefs and values.

Here’s one example. Public school funding in the U.S. is mainly tied to local property values and thus extremely unequal. (Ruled constitutional in 1973 by the Supreme Court. Ironically, the Court evidently discovered in the Constitution the "right" to remain poorly educated at the very same time that it was also unearthing previously hidden Constitutional "rights" re abortion and privacy, admissibility of evidence in courts, etc., all of which blue-state liberals cheered and now hold sacrosanct.)

Thus, government promotion of massive real estate speculation is de facto by far the single most important education policy of the U.S., which in this "information age" of intense global competition makes it one of the most important and influential of all government policies.

Huge home equity gains fund well-groomed suburban public school campuses (property tax revolt notwithstanding), pay private schooling fees and out-of-control college expenses. I think it’s safe to say that without their parents’ home equity ATM, most students in the U.S. would get an even worse education than they already do. (Recall that the elite has been calling for major educational reform at least since the official 1983 report, “A Nation at Risk,” with little to show for it, for reasons discussed in a previous article.)

The funding of education by real estate speculation has the seemingly undeniable effect of greatly stacking the odds against school children living in poor neighborhoods, obviously inconsistent with the image of America as the fair land of opportunity and the Bush Administration preaching of global democracy. (Perhaps not too surprisingly, and some might claim not even accidentally, income/wealth inequality in the U.S., already at both historical and developed nation highs, is increasing, while upward mobility is decreasing and actually lower than in parts of Europe, evidently according to one recent study.)

Yet in this day of ultra-competitive child-rearing, an effect of both globalization and compulsive conspicuous consumption, blue-state liberals in regions of rampant real estate speculation, such as California and areas in and around New York, Boston, Washington D.C., while supportive of some government programs attempting to at least partially mitigate the worst effects of this hopelessly lopsided educational playing field, would simply never consider the core issues of local funding of education greatly subsidized by government-created home-equity “paper wealth.”

Like everyone else, good liberals simply unconsciously deny or rationalize these policies as an unquestioned given, because to do otherwise would create too much “cognitive dissonance” with their belief system as being more compassionate and caring than “red-state rednecks."

(Perhaps we will discuss in a later article the huge long-term negative political consequences of the blue-state liberals 1970s embrace of court-ordered busing and affirmative action as solutions for these education problems, from which they have yet to politically recover today. But suffice to say for now that Bush/Cheney were re-eletected in 2004 more due to rising real estate, rather than cultural, values, notwithstanding the views of both David Brooks at the NYT on the "right" and Sen. Hillary Clinton supposedly on the "left.")

To be continued in my next article, including a discussion of blue-state liberal support of "fair trade" buying of t-shirts and coffee.