Wednesday, June 29, 2005

A Gucci Handbag To Celebrate Victory Over Global Warming

The Economist:
The lesson from recent experience in Australia, Britain and the Netherlands is that, contrary to conventional wisdom, a big rise in interest rates is not necessary to make house prices falter. This is bad news for America. Even if prices there initially just flatten rather than fall, this will hurt consumer spending as the impulse to borrow against capital gains disappears. It is by encouraging such borrowing that rising house prices have given a bigger boost to America's economy than elsewhere. Two-fifths of all American jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag.
It's true that American house prices have soared. I am contemplating relocating to South Florida - the job offer I have expects me to relocate. The cost of a house in that area is mind-boggling. I am giving the idea a good think. My hesitation is a concern that the timing for buying in a high market is all wrong.

Many Americans have used equity financing to fund lifestyles or higher education. Rising house prices have provided more headroom for borrowing. Home equity loans are tax deductible in the US, making this a very attractive financing option.

However, there are many homeowners who will essentially see all their remaining equity vanish should house prices fall sufficiently. Before we all go pointing fingers at the irresponsible homeowners that partied it up, we should also give consideration to the lender.

That's right, we need a borrower and a lender to set up this scenario. I point to the growing lack of patience in society as the enabler of this precariousness. Not patient enough to save for that new boat, the homeowner is rewarded by the bank that is not patient enough with its bottom line that it limits the credit to build a reasonable margin of safety. And driving the bank's myopic attention to the quarter-to-quarter results? The investors and analysts. As more and more people delegate their investment decisions to the fund managers via IRA's and 401(k)'s, those fund managers shorten the horizon.

Saving for the boat instead of borrowing to have it now makes all the difference.

All of this mumbling is merely one facet of my general thesis about what drives the world today: gratification - also known by the younger crowd as 'fun'. We want our fun right now, regardless of the long term consequences. And problems? Let's go for the fast solutions, and get back to having more fun. Terrorists distracting us from fun? Give them what they want. Queers acting up? Let them get married and pretend to have families. Don't like the Pope? Too Catholic? Embrace statism instead.

These urges to reach for quick fixes leads to ill-conceived contraptions such as Kyoto. "Now that Kyoto is signed, global warming is fixed, so I guess I can go shopping to celebrate".