Friday, April 30, 2010

The Madness of the "Ownership Society"

George w. Bush's mad dream was what he called the "ownership society" in which every man and woman possible would own their own home - or two. It became a fetish that turned into reality engorged on cheap money and limitless debt. Toward the end of America's real estate binge, two out of three new mortgages written in California were "interest only."

It wasn't only America that went mad with the illusion of imagined wealth. Greece, Portugal, Iceland, even Ireland fell into the trap. For a while everybody imagined themselves to be rich and, until reality set in, lived the grand dream. Now that dream has turned into a nightmare. BBC News says that the inevitable sag has left Ireland with one house in five standing empty and no buyers on the horizon:

David McWilliams is the man who coined the phrase "ghost estate" when he wrote about the first signs of a disastrous over-build in Ireland back in 2006.

Now, it is a concept the whole country is depressingly familiar with. Most Irish people have one on their doorstep - an ugly reminder, says the economist and broadcaster, of wounded national pride.

"Emotionally, we have all taken a battering," he says. "Like every infectious virus, the housing boom got into our pores. You could feel it.

"You'd go to the pub and people would be talking about what house they'd bought. And now a lot of people, myself included, think 'God, we were conned'."

...But hindsight is a wonderful thing. Only a few years ago, developers feeding money into local government coffers were getting free rein to build row upon row of five-bedroom detached houses on the green outskirts of towns nobody had even thought of commuting from before.

Banks were throwing money at members of the public who saw these houses either as an escape to a better lifestyle or an investment route to riches.

Builders from eastern Europe were working overtime to create homes, the value of which was sometimes three times what it is now.

...Ciaran Cuffe is the Green Party minister of state in charge of the audit [of empty and incomplete housing]. "It's one heck of a challenge", he says, "because we have the legacy of many years of poor planning, and an economy that was overheated, paid far too much attention to construction and was more interested in the quantity than the quality of homes".
He says Ireland's perceived wealth was part of the problem.

"I think there was a view that demand would continue indefinitely at a time when we had very high levels of immigration.

"People thought the housing was needed not only for the people of Ireland but also for others that had come here, and that this golden goose would continue to lay golden eggs for ever."

"I certainly think demolition could be part of the solution in cases where we have housing estates that are unoccupied, that are miles away from where people want to live and that were badly built in the first place."

And indeed, many of Ireland's ghost estates are in the unlikeliest, most isolated places.
It is strange, looking down vast rows of immaculate new-builds, taking in their optimistically-planted front gardens and peering through curtain-less windows into unwanted granite-topped fitted kitchens, to comprehend the fact that they might never be occupied.

Perhaps generations to come will look back on this, the first decade of the 21st century, as the time the West took leave of its senses.


Anyong said...

Reminiscent of what took place in the down turn of 1873. We still are not learning from history. It is however, not over the top to believe it is a person's right to live with a roof over their head.

The Mound of Sound said...

Ireland went utterly crazy. They got swept up in this "Celtic Tiger" business and thought the world would flock to their island. They built massive housing estates for people who hadn't even arrived. I recall reading of one notable Irish housing developer who was, momentarily, fabulously rich. Last I heard he went under.

Fortunately in Canada we've avoided getting swept up in bubble economics, largely due to the fiscal Calvinism of people like Paul Martin. If we have any sense we'll stick to that prudence.

Bubble economies reveal that wealth can be notional, completely imaginary but debt is as solid as concrete. People wind up blinded by their perceived wealth and stop seeing their mounting debt until the bubble bursts well after it's too late.

Some believe the United States is now addicted to the bubble economy. They suggest the only way out of its current and all-pervasive debt crisis is the next bubble. Is that mad? Yes.

Okie said...

It's all well and good to analyze the end result Mound, but the questions no one answers is why? To what end? It seems to me, and has for some time, even before the October crises, that we were becoming a bubble Nation. A country placing it's trust in a wave of unsupportable economics and lifestyles.

Money doesn't evaporate, it went somewhere. Who has it, who engineered this, and what are their long term intentions?

IMHO, it was one of, if not the greatest confidence scheme of modern times. Many Western nations and a number of their supporting regimes now sit perched on the edge of the abyss, and there are no clear answers. There are some very dark possiblilities looming though.

Care to speculate?

Re: Paul Martin, sorry I can't share your admiration. He extended the governments arm of taxation to the EI funds without a mandate to do so, and enjoyed the latitude of a very low currency which was not challenged by our major trading partner. Might have had something to do with a reward for NAFTA.

The overall policies of the 3 amigos from Power Corp, led us to where we are now. A nation of peoples, deeply in debt. A nation of peoples, who for the most part, could be assessed as living in indentured servitude.

The Mound of Sound said...

Canada, ironically, benefits from our long lamented complaint of being "hewers of wood and drawers of water" - a resource nation. Our resource based economy shielded us from the bubble effects endemic to financialized economies such as the Americans'.

Money doesn't disappear but wealth certainly does. Remember the "" bubble? Essentially valueless companies became notionally worth vast millions but the wealth came in the form of stock certificates, often printed right in the companies' stationery rooms. They weren't currency as such but if people are willing to buy them it doesn't make any difference.

Wealth is indeed notional, unlike debt. My house has tripled in price over the years but so has every comparable house in this neighbourhood. On the basis of my book value I'm notionally wealthier but my house is still worth only as much as the house next door and not a dime more. Its real value hasn't increased at all and, if real estate plummets, it will retain its real value and lose only its notional value.

Debt, however, remains constant and immune to fluctuations in notional value.

The US real estate boom created trillions in dollars of notional wealth and, when the bubble burst, Americans lamented that trillions of dollars in wealth had been wiped out. Yes but it was never more than fictional wealth. At the time, however, that fictional wealth was sufficiently real to allow American homeowners to amass enormous debt which is why so many of them today are said to be "underwater."

Compared to our OECD counterparts,
Canada fared very well during the recession. Our individual, municipal, provincial and federal debt levels would be the envy of those down south.

Personally, I reaped the unexpected financial benefits of downsizing that was driven mainly by environmental concerns. Smaller house, single economy car, fewer possessions, no debt and, despite my changed ways and all that I gave up, I do without nothing that really matters. It's amazing the amount of crap and clutter we tie around our own necks. But it's not my place to preach for I was a pretty wild consumption sinner in my day.

Anyong said...

Here is an interesting site regarding the history of the banking and corporate systems and how they have manipulated the general public since 1775 in the US to make billions. It is called the Zietgeist Film and is located on the third part of the film. Some of the information we already know to be true.

Anonymous said...

It should have been...

Zeitgeist: Addendum

Okie said...

Being "hewers of wood and drawers of water" isn't so bad as long as there is lot's of wood and water and it will serve us well to manage those things outside of Nafta. Even with our abundant resources, we are of course still very much associated with the fortunes of those who seek our wood and water, and thus the situation we have.

Transfering of not only bank debt, but supporting the overall lifestyle and economic model with almost non existent interest rates, which in effect is using the savings and necessary income sources of those who worked, saved and planned but have reached an age where they can now only plan. Planning is of course very difficult when the entire economic model requires being artificially supported. One of very few choices now available to them is to enter the markets along with gamblers.

Which brings me to bubble syndrome, money and wealth. It is those who create and profit large from the creation of the nominal wealth you explain that concern me. Assets of course are varied but in terms of stocks, and many debt intstruments they have become some of the most volatile and where the most money is made and lost. The inherent problem that has developed is allowing those who create and trade those assets the latitude to decide on and implement vehicles which allow them to make money going both ways. Then what they do with that money becomes a concern, particularly when they have engineered the rise of institutions too big to fail and have profited handsomely from that rise, they can personally step away with fortunes intact while leaving governments few options as in the case of what we have just witnessed. Then positioned as they are, they then can partake in profiting from the socially funded rise from the ashes, when and where they wish.

The Goldman Sachs situation is bringing some of this out in the open, but sadly people have now become so conditioned to these excesses, that few seem shocked and more infuriating is that the executives seem to genuinely feel they did nothing wrong.

It is the concentration of the wealth and the power that represents which I feel is the most frightening aspect. With this concentration, a reality is evolving where the people of Western democracies are no longer in control. The influence exerted by those who have concentrated the wealth among themselves subverts Democratic process and free market economy.

One reality I find especially disheartening is what has happened to agriculture, and things that are still taking place. It is a sad reflection when the control of and realization of profits from agricultural production, lies with those who play the futures market, and the processing and marketing links in the chain. Even our supply management system often fails the producers, and in effect results in a system where their losses are assessed and then they are given back a percentage of those losses which often is only enough to keep the wolf from the door for a while yet. In the meantime, the net worth of the farming operations continues to decline. This often results in a situation where even the remaining asset values decline significantly because there is no one to buy them given the overall economic climate for that industry. As example, a couple of years ago there were 300 operating hog farms in Nova Scotia. Now there are 30, and I doubt they have much of a resale value.

Then there's the personal debt levels to fuss over, the indentured servitude..