It sounded so simple: give state-owned assets to the people. After all, what better foundation for a property-owning democracy than a campaign of privatisation encompassing housing? An economic theory says that markets can’t function without mortgages, because it’s only by borrowing against their assets that entrepreneurs can get their businesses off the ground. But what if mortgages are bundled together and sold off to the highest bidder?
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It’s the English-speaking world’s favourite game… property. And today the stakes in the game are higher than ever. The original property game we know today as Monopoly was actually invented back in 1903 to expose the unfairness of a social system where a small minority of landlords screwed the majority of tenants. 30 years later, an unemployed plumber named Charles Darrow patented a new version of the game, with the board based on the streets here in Atlantic City. It was Darrow who introduced the little houses and hotels.
What the game of Monopoly tells us, contrary to its inventor’s intentions. Is that it’s smart to own property. And if it’s smart to own property, it’s even smarter to lend money to the people who own property. That’s because the phrase, “Safe as houses” has a rather special meaning in the world of finance. What it means is there’s nothing safer than to lend money to people who own real estate. Why? Well, because if they default on the loan, you can always repossess the property. Even if they run away, the house can’t.
What’s more, the English-speaking world’s obsession with property has been the foundation for a unique economic and political experiment – the property-owning democracy. Some say it’s a model the whole world should adopt. The growth of property ownership gave rise to a new era in the history of finance. On the back of property, literally trillions of dollars have been borrowed, some of it by so-called sub-prime borrowers – people who’d previously been content to rent rather than own their homes. So it’s come as rather a shock to millions of people that real estate is fundamentally no different from any other financial asset. Its price can go down as well as up. It turns out that no amount of financial alchemy can turn little suburban boxes into treasure chests with roofs. Which raises the question, is property really as safe as houses?
Or could it be that we’ve let our love affair with real estate get completely out of proportion?
Safe as Houses
Property ownership was once the preserve of an aristocratic elite. Estates were passed down from father to son, along with titles and political privileges. Everyone else was a mere tenant, paying rent to their landlord. Even the right to vote in elections was originally a function of property ownership.
In one respect, not much has changed in Britain since those days. Of 60 million acres of British land, around 40 million are owned by just 189,000 families. The difference is that they no longer monopolise the political system. Indeed, thanks to reform of the House of Lords, the hereditary peerage is being phased out of Parliament. Now, you can explain the decline of the aristocracy in many ways. But, as far as I’m concerned, the main driver was finance.
Until the 1830s, fortune smiled on the British land-owning elite – the 30 or so families with gross annual income from their lands above £60,000 a year – roughly £150 million pounds today. With such vast property assets backing them and income from agriculture booming, it was hard to see how the aristocracy could fail to flourish. Yet, by ignoring a fundamental truth about property, they ensured their own decline. Like many of us today, the great magnates saw the value of their property as a cash cow and used it to borrow to the hilt… often more than the property was worth. What they’d failed to understand is that property is only a security to the person who lends you money. As a borrower, you still have to earn the money to pay back the loan. And for the great landowners of Victorian Britain, that suddenly became a very difficult thing to do. Nowhere was the pain more acute than here in the heart of rural Buckinghamshire.
There’s something undeniably magnificent about this huge, neoclassical palace – Stowe House – arguably the greatest private residence built in England in the 18th century. Just look at these extraordinary scagliola pillars or the stunning elliptical piaster ceiling. And yet there seems to be something missing. Or rather many things. Because once in each of these alcoves there was a Roman statue. The exquisite Georgian fireplaces have been ripped out and replaced by bog-standard ones like this. Why? How did this most stately of stately homes become a mere shell of its former self? The answer is that this house belonged to the principal victim of the first modern property crash – Richard Plantagenet Temple-Nugent-Brydges-Chandos-Grenville, 2nd Duke of Buckingham.
Stowe was only part of the Duke’s vast empire of real estate. In all, he owned around 67,000 acres in England, lreland and Jamaica. These immense properties seemed more than adequate to back his extravagant lifestyle. And he spent money as if it might go out of fashion on mistresses, on illegitimate children, on anything that he felt was compatible with his standing as a Duke of the Realm. By 1845, the jig was up. Grain prices had begun their long slide downwards, and so had the income from agricultural land. Rural property prices plummeted. Suddenly, the aristocracy found that their borrowings had outrun the value of their estates. The Duke was spending far more than his income and most of that was being absorbed by interest payments. But there was to be one final bout of conspicuous consumption.
In preparation for a visit by Queen Victoria and Prince Albert, the Duke decided to splash out and refurbish Stowe House from top to bottom. 15 saloons were stuffed full of the most expensive furniture that money could buy. The floorboards were groaning under the weight of Genoa velvet, embroidered satin and gold brocade. When the Queen saw the results, she commented rather waspishly, “I am sure I have no such splendid apartments in either of my palaces.” Sadly, the cost of this mega-makeover proved to be the final straw for the ducal finances.
In August 1848, to the Duke’s horror, his son had the entire contents of Stowe House auctioned off. Now, his ancestral stately home was thrown open for throngs of bargain-hunters to bid for the silver, the wine, the china. Today, Stowe is a private boarding school. It’s a poignant symbol of the transience of landed wealth. In the modern world, it turned out, a regular job and a steady income mattered more than an inherited title – no matter how many acres you owned.
Divorced by his long-suffering and much-betrayed Scottish wife, whose entire wardrobe had been seized by Sheriffs Officers in London, the Duke was finally forced to relinquish Stowe and move into rented accommodation. He eked out his days at his club, the Carlton, writing a succession of highly unreliable memoirs and incorrigibly chasing actresses and other men’s wives. The fall of the Duke of Buckingham was a kind of harbinger for a new democratic age in which every adult would be given the vote whether they owned a stately home or paid rent for a humble flat. As aristocratic fortunes from agriculture declined, so the franchise was widened.
Yet the advent of universal suffrage didn’t mean that property ownership had become universal. On the contrary, as recently as 1938, less than a third of the UK housing stock was in the hands of owner-occupiers. It was on the other side of the Atlantic that the first true property-owning democracy would emerge. And it would emerge from the biggest financial crisis ever seen.
An Englishman’s home is his castle and Americans know that there’s no place like home too, even if all the homes are rather similar. Today we take the universal right to own our own home for granted. But before the 1930s, no more than two-fifths of American households were owner-occupiers. If the old class system, based on elite property-ownership was distinctively British, the revolution that created a new property-owning democracy was born out of a great American financial crisis. When the Depression struck in 1929, the US economy nose-dived. The minority of people who did own their own homes couldn’t afford the mortgage payments. Tenants too struggled to pay the rent when all they had coming in was the dole.
Nowhere were the effects of the Depression more painful than in Detroit. Soon the automobile industry here employed only half the number of workers it had in 1929, and at half the wages. By 1932, the dispossessed of Detroit had had enough. On March 7th, 5,000 workers laid off by the Ford Motor Company marched to the factory to demand unemployment relief. What followed would force Americans to completely rethink their attitude to property ownership. As the unarmed crowd reached Gate 4 of the company’s River Rouge plant in Dearborn, scuffles broke out. Suddenly, the factory gates opened and a phalanx of police and security men rushed out and fired into the crowd. Five workers were killed. Days later, 60,000 people sang The lnternationale at their funeral. The Communist Party newspaper accused Edsel Ford, son of the firm’s founder, Henry, of allowing a massacre. Could anything be done to defuse what was beginning to seem like a revolutionary situation, pitting the seriously propertied Fords against their property-less ex-employees? In a remarkable gesture of conciliation, Edsel Ford turned to a Mexican artist named Diego Rivera. He invited him to paint a mural that would show Detroit’s economy as a site of cooperation, not class conflict.
Diego Rivera was a lifelong Communist. His ideal was of a society in which there would be no private property, in which the means of production would be commonly owned. In his eyes, Ford’s River Rouge plant was the very opposite, a capitalist society in which the workers worked and the property owners, who reaped the rewards of their efforts, merely watched.
When the murals were unveiled in 1933, the city’s dignitaries were appalled. They saw them as Communist propaganda, “a travesty on the spirit of Detroit”.
The power of art is a wonderful thing. But it was clearly going to take something rather more powerful than art to heal a society so deeply split by the Depression. Other countries turned to the extremes of totalitarianism. But in the United States the answer was the New Deal. And that included a New Deal on housing. In radically increasing the number of Americans who could hope to own their own homes, the Roosevelt administration pioneered the idea of a property-owning democracy. It proved to be the perfect antidote to Red revolution.
In effect, the government would rig the housing market to incentivise Americans to become property owners. Customers at local mortgage lenders, known as savings and loans, the equivalent of British building societies, would have their deposits guaranteed by the Government even if a bank went bust. Crucially, a new Federal Housing Administration was set up to offer larger, longer and lower-interest loans. After the 1930s, most mortgages in the United States were fixed for 20 or 30 years. A new Federal National Mortgage Association, nicknamed Fannie Mae, was set up to create a nationwide market for home loans.
This couple is going through a model house now. The husband, apparently, isn’t very keen about it all, but his wife is entranced by such convenient features as the sturdy built-in ironing board.
By reducing the monthly cost of a mortgage, these reforms made home-ownership possible for many more Americans than ever before.
They both would like to have this place for their very own. Too bad they can’t afford it. Ah! But maybe they can. For according to this sign, they can buy this house with monthly payments that are less than they now spend for rent!
It’s not too much to say that the modern United States, with its seductively samey suburbs, was born out of these New Deal reforms.
From the 1930s then, the US Government effectively underwrote the mortgage market, bringing borrowers and lenders together. And that was the reason for the big explosion in property ownership and mortgage debt in the decades after World War II. There was just one catch – not everyone in American society had an invitation to the property-owning party. When these houses were built in Detroit back in 1941, whether you got the money or not for a mortgage depended on which side of this divide you lived.
It was a real estate developer who built this six-foot high wall right through the middle of Detroit’s 8 Mile district. He had to build it in order to qualify for loans from the Federal Housing Administration. The loans were to be given for construction on that side of the wall, which was a predominantly white neighbourhood. On this side, on the black side, there was to be no federal credit, because African Americans were regarded as fundamentally uncreditworthy.
It was part of a system that divided the whole city – in theory by credit-rating, in practice by colour. Segregation, in other words, wasn’t accidental, but a direct consequence of federal policy.
This map by the Federal Home Loan Board shows the predominantly black areas of Detroit, the lower east side and so-called colonies like the one we’re in now in Birwood-Griggs, marked with a letter D and coloured red. You can see why the practice of giving whole neighbourhoods a negative credit rating came to be known as “red-lining”. The result was that when people from round here needed mortgages, they had to pay significantly higher interest rates than the folks in the white part of town.
Half a century later, the two categories of borrowers would come to be known euphemistically as prime and sub-prime. But in the 1960s, this divide was the hidden financial dimension of the Civil Rights struggle. Blacks were to be excluded from the new property-owning society. There would be a heavy price to pay for this exclusion. On July 23rd 1967, property in Detroit literally went up in flames.
Four days of rioting, looting and arson rocked the city of Detroit in the worst outbreak of urban racial violence this year.
Anger at economic discrimination spilled over into five days of rioting that left 43 people dead. Significantly, most of the violence was directed not against people, but against property. Nearly 3,000 buildings were looted or burned. The real lesson for policy makers was that excluding ethnic minorities from the property-owning democracy was a fast track to trouble. To make people feel like stakeholders in the social status quo, you had to make them property owners. Indeed, widening home ownership might even turn the malcontents into conservatives.
This was a lesson that Margaret Thatcher was quick to learn. Here in Britain, the idea of the property-owning democracy became a keystone of 1980s Conservatism. By selling off council housing at bargain-basement prices, Thatcher ensured that more and more British couples had a home of their own. That also meant that more people than ever had mortgages.
Up until the 1980s, government incentives to borrow money and buy a house made pretty good sense for the average British family. Interest rates were relatively low in the ’60s and ’70s, and the inflation rate tended to creep up, so that the real value of mortgage debt tended to fall. But there was a sting in the tail. The very same governments that professed their faith in the property-owning democracy were also committed to fighting inflation, and that meant raising interest rates. The British and American policy of encouraging people to take out mortgages and then cranking up interest rates led in the late ’80s to one of the most spectacular booms and busts in the property market’s history. It was to the ’80s what the sub-prime meltdown has been in our own time – the first, but not the last time that America’s mortgage market has gone stark raving mad.
To many of us, it’s come as a shock that a crash in the American property market could trigger a major financial crisis. In fact, as so often in the ascent of money, it’s happened before. In March 1984, American government regulators received a copy of a video showing mile after mile of half-built houses and condominiums along interstate 30, just outside Dallas in Texas. You can still see the empty slabs today.
The investigation triggered by these un-built homes would expose one of the biggest financial scandals of all time – a scam that would make a mockery of the idea of property as a safe form of investment. This isn’t a story about real estate – more like surreal estate.
Savings and loan associations – America’s building societies – were not only central to Roosevelt’s New Deal on housing. By the 1970s, they were the foundation of America’s property-owning democracy.
Then, in the 1970s, the savings and loan industry was hit first by double-digit inflation and then by higher interest rates.
It was a lethal double punch for institutions that were forbidden by law to raise the rates they paid to savers, and which were receiving interest payments from local mortgage borrowers that had been fixed decades before. The response in Washington was to remove nearly all these restrictions. When deregulation was enacted in 1982, President Reagan was cock-a-hoop.
[President Reagan] All in all, I think we hit the jackpot.
Well, some people certainly did. Liberated from the old constraints, the people running savings and loans suddenly saw a chance to make some serious money from the once boring business of mortgage lending. By raising savings rates, they could attract much more money from depositors. Then they could use these deposits as the basis for as many loans as they liked. Crucially, though, one thing didn’t change. Savers’ deposits were still insured by the government. It was an invitation to a gigantic free lunch for financial cowboys.
This is the Wise Circle Grill just outside Dallas, filled every lunchtime with local citizens of unblemished integrity. Twenty years ago, the clientele was rather different.
The city of Dallas had more than its fair share of fraudulent savings and loans, and this was where the Dallas property cowboys came to hang out. The Wise Circle Grill was the place to have brunch when they weren’t whooping it up on their Southfork-style ranches. It was all very, very 1980s. To one group of Dallas developers, the Empire Savings and Loan Association offered the perfect opportunity to make money out of thin air… or rather, out of flat, Texan land. The surreal saga of Empire Savings and Loans began when chairman Spencer Blain teamed up with a flamboyant high-school dropout turned property developer named Danny Faulkner, whose speciality was extravagant generosity… with other people’s money. The money in question came in the form of deposit accounts on which Empire paid alluringly high interest rates.
This is Faulkner Point, one of the very first developments that Danny Faulkner ever built, and it spawned a veritable empire of Faulkner Crest, Faulkner Creek, Faulkner Crescent, Faulkner Fountains, Faulkner Oaks. Danny Faulkner’s favourite trick was “the flip”. He’d buy some parcel of land for peanuts, and then sell it on to naive investors who got the money lent to them by – you’ve guessed it – Empire Savings and Loans. Danny Faulkner may have claimed that he was illiterate, but he certainly wasn’t innumerate.
Many investors never even got a chance to view their properties close up. Faulkner would simply fly them over in his helicopter without landing. By 1984, property development in Texas was out of control, paid for by government-guaranteed deposits that were effectively going straight into the pockets of the developers. On paper at least, the assets of Empire had grown from $12 million to $257 million in just over two years.
The trouble was that the demand for condos by Interstate 30 could never possibly have kept up with the vast supply that was being generated by Faulkner, Blain and their cronies. When the regulators finally blew the whistle in 1984, that reality could no longer be escaped, and hundreds of the buildings that they erected ended up being bulldozed or burnt to the ground. Today, 24 years on, it’s still a Texan wasteland.
In 1991, Faulkner and Blain were both convicted and jailed for fraud. One investigator called Empire “one of the most reckless “and fraudulent land investment schemes in American history.” In all, nearly 500 savings and loans collapsed. According to one official estimate, nearly half had seen “criminal conduct by insiders”. The full cost of the crisis was $153 billion, making it one of the most expensive financial crises in American history. And the federal government which had deregulated the savings and loans in the first place had to pick up the bill, which is another way of saying that taxpayers forked out.
It was the first clear sign that there might be a downside to the idea of the property-owning democracy. Yet the savings and loans crisis was a mere tremor compared with the property earthquake that would strike the US market 20 years later. Savings and loans was an all-American crisis. But the sub-prime quake would shake the entire world of finance to its very foundations. When this wall was built to divide white homeowners from black renters in the 1940s, black families found it virtually impossible to get mortgages. Sixty years later, that had all changed. “We want everybody in America to own their own home,” President George W. Bush declared in October 2002, challenging lenders to create 5.5 million new minority homeowners by the end of the decade. Positively encouraged by the federal government to relax lending standards, mortgage companies swarmed into areas like this one, offering all kinds of alluring deals. Because so many of the new borrowers had patchy credit histories, these loans came to be known as “sub-prime”. That made you a perfect candidate for a NINJA loan. The problem was that behind low introductory payments, these new mortgage loans were very different from the old, 30-year fixed-rate repayment loans of the past.
Since the 1980s, the housing game has radically changed throughout the English-speaking world. Mortgages are for shorter and shorter durations and more and more borrowers are opting for interest-only mortgages. That makes households far more sensitive than they were to interest-rate hikes.
So how come the lenders didn’t worry that these sub-prime borrowers were almost certain to default if interest rates rose? The answer to that question and the key to the sub-prime crisis was another “S” word… Securitization.
Instead of putting their own money at risk, sub-prime lenders immediately sold the loans on to banks here, in and around Wall Street. And the banks then securitized the loans, which means they bundled them together and then sliced and diced them so that at least the top tier could be classified as triple-A-rated, “investment grade” securities. And the banks then sold these securities to investors 1,000 miles away from Detroit who were happy to pay for just a few extra hundredths of a percentage point in interest.
The key to securitization was the distance between the mortgage borrowers in, say, Detroit, and the people who ended up receiving their interest payments. By the time small towns in Norway bought these securities, they had no idea what was really behind their investment.
Financial alchemy? Well, it was a business model that worked beautifully as long as interest rates stayed low, people kept their jobs, and real-estate prices continued to rise.
Unfortunately, none of these things happened in Detroit. In 2006 alone, sub-prime lenders injected more than a billion dollars into those areas of the city where home values were already falling and unemployment and mortgage rates were already rising. Where Detroit led, other cities soon followed.
It’s Thursday at noon and I’m witnessing a twice-daily ritual here on the steps of the Memphis Courthouse. About 30 homes are about to be auctioned off here, and the reason is that the mortgage lenders have foreclosed on the homeowners for failing to keep up with their interest payments. 2926 South Radford Avenue… Memphis is really becoming Foreclosure City these days. In the past five years, something like one in four households has received a notice threatening them with foreclosure.
Since the sub-prime mortgage market began to turn sour in the early summer of 2007, shockwaves have been spreading through all the world’s financial markets, wiping out hedge funds, obliterating venerable investment banks and costing the survivors hundreds of billions of dollars. Remember that pillar of the 1930s New Deal mortgage market, Fannie Mae? With its younger brother, Freddie Mac, it grew to own or guarantee around half of all American home loans. In September 2008, Fannie and Freddie were effectively nationalised to avoid a complete collapse of the mortgage market. Established Wall Street names like Bear Stearns, Lehman Brothers and Merrill Lynch have vanished. Unlike savings and loans, this crisis extends right around the world. The four Norwegian municipalities of Rana, Hemnes, Hattfjelldal and Narvik, which had invested their citizens’ taxes in sub-prime backed securities, are now sitting on an investment worth roughly 15% of what they paid for it – a loss of $100 million.
In the English-speaking world, we tend to think of property as a one-way bet. The simplest way of getting rich is to play the property market. In fact, you’d be a mug to invest your money in anything else.
But the remarkable thing about this supposed “truth” is how often reality gives it the lie. For like stock markets, property can soar in value only to crash in the most spectacular way. In Britain, between 1989 and 1995, the average house price fell by 18%. But that was nothing compared with what happened here in Japan.
The view’s good. Very Austin Powers decor. I’m loving that. Oh, that’s the boiler. OK, well, let’s cut to the chase. How much is this place going to cost if I put the money down now?
So that would be close to $2 million.
OK, that’s like a million… a million pounds buys me this bijou apartment in Tokyo. But this is a smart neighbourhood, right?
That may sound like a lot, but in recent Japanese history, it’s a real bargain. Between 1985 and 1990, property prices in Japan rose by a factor of roughly three. Banks fell over themselves to ride this wave. But it wasn’t a wave. It was a bubble. And in 1990 it burst. Prices here in Tokyo fell… by 75%, wiping out all the previous gains.
This costs £1 million now. How much did it cost back in 1990, at the peak of the property bubble?
So roughly three times the value.
So close to… possibly $6 million.
£3 million. Wow! We think we’ve had a property crash in the West, but this is a real property crash.
So no, property isn’t a uniquely safe investment. House prices can go down as well as up. And as assets go, houses are pretty illiquid, which means you can’t unload them in a hurry if you get into a financial jam. And that, pretty much, is the downside of the idea of a property-owning democracy. The question now is whether we English-speakers have any business trying to export our model to the rest of the world.
The real flaw in the property-owning democracy, as recent events have proved, is that the housing market, like any asset market, is prone to booms and busts. But maybe there’s another way of looking at property – as a means of unlocking new wealth by providing collateral for aspiring entrepreneurs. Could property ownership be the answer to the problems of the world’s poorest countries? You’ve heard of sub-prime borrowers. Well, welcome to a sub-prime country… Argentina, where economic underachievement has been a way of life for a century. These slums on the outskirts of Buenos Aires seem a million miles from the elegant boulevards of the Argentine capital’s centre. But are people here really as poor as they look? One man didn’t believe so. Peruvian economist Hernando de Soto saw the shabby residences like these in developing countries all over the world as representing literally trillions of dollars of unrealised wealth.
The problem is that the people who live here, and in countless shanty towns around the world, don’t have secure legal title to their homes. That’s bad, because without a legal title to property, you can’t use it as collateral to borrow money. And if you can’t borrow money, then you can’t possibly raise the capital you need to start a business.
Part of the trouble is that in poor countries, it’s a bureaucratic nightmare to establish secure legal title to property. It can take months – sometimes years – longer than in the English-speaking world.
For Hernando de Soto, breathing financial life into all this dead capital is the key to providing the poor with a more prosperous future.
The shanty town of Quilmes, on the southern outskirts of Buenos Aires, provides a natural experiment to test De Soto’s theory. On one side of the town, there are some of the most squalid slums I’ve ever seen. But just a few miles away, it’s a very different story.
It was in the early 1980s that a group of squatters here lobbied the government for secure legal title to their homes. They were successful, and those willing to pay a nominal rent were granted leases which, after 20 years, converted into full ownership. You can tell they’re owner-occupied by the fact that there’s a fence, the walls are painted, there’s even a rather excitable guard dog. After all, owners tend to look after properties better than tenants. And some of the owners here are even realising the value of their properties by putting them up for sale.
Yet there seems to be a flaw in the theory, for owning their own homes hasn’t made it significantly easier for people here to borrow money. Just 4% of them have managed to secure a mortgage.
The reality is that owning property doesn’t give you security – it just gives your creditors security. Real security comes from having an income, as the Duke of Buckingham discovered in the 1840s, as Detroit homeowners are discovering today, and as I suspect the people of Quilmes would probably agree. For that reason, it probably isn’t necessary for every entrepreneur in the developing world to take out a mortgage on his home or, for that matter, on her home. In fact, property ownership may not be the key to wealth-generation at all.
This is Betty Flores. She runs a small coffee shop in El Alto, a poor suburb of the Bolivian capital, La Paz. Betty is one of an increasingly large number of women around the world who have borrowed money with no security at all. She’s the personification of an extraordinary new financial movement known as microfinance.
Did you borrow the money to set up this coffee stand?
Yes, to make the… the stand. She borrowed money to make the stand.
Has she paid it all back?
She’s paid it off a long time ago.
Oh, I see.
Stories like Betty’s point to one of the great revelations of the microfinance movement in a country like Bolivia. It turns out that women are actually a better credit risk than men, with or without a home as security for the loan. It all rather flies in the face of the conventional image of the spendthrift female.
These women are hardly what you would call good financial risks. They probably have just a few dollars between them. Yet with no security, they are being lent money. Here in Bolivia, lenders have come to realise that creditworthiness may in fact be a female trait.
Carmen Velasco set up Pro Mujer to provide finance to poor but enterprising women. Because the loans are unsecured by property, the challenge is to get the women to pay them back… but they do.
[Carmen Velasco] From day one, they have to know that they have to repay on time, that they have interest rates and they have to save. So it’s a process of learning, and at the beginning it’s very difficult, because they are not used to handling a loan. But little by little, they get used to it, and they feel so proud when they repay.
I must say, I’m hugely impressed by what I’m seeing here at Pro Mujer. You can sense in this hive of activity the transformation that microfinance has brought into these women’s lives. And behind me you can see the bottom line… women lining up to repay their loans punctually. Maybe it’s time to change that old catch phrase from “as safe as houses” to “as safe as housewives”.
Of course, it would be a mistake to assume that microfinance is some kind of economic magic bullet. Just giving out loans won’t necessarily consign poverty to the museums. But then, betting everything on the house won’t do that, either.
Financial illiteracy may be rampant, but somehow we were all experts on one branch of economics – the property market. We all knew that property was a one-way bet. Except that it wasn’t. All over the world, it seems, property prices are falling… from Memphis to Santiago, from London to La Paz.
Encouraging home ownership may well create a political constituency for capitalism. But it also distorts the capital market by persuading people to bet the house on… well, the house. People need to borrow money, of course, to start up businesses or to buy expensive assets. But it seems dangerous to lure them into staking everything on the far from risk-free property market. From Buckinghamshire to Bolivia to bonny Scotland, the key is to strike the right balance between debt and income.
And next week I’ll be suggesting that the entire world economy is in the process of getting that balance perilously wrong.