This week’s book learning is part 11 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5, 6, 7, 8, 9, 10)
Property ownership is a recent phenomenon. Until a 100 years ago, only the aristrocracy owned land. The consistent nature of war in Europe meant the price of food (and thus, the price of land) was consistently high. However, as peace time came in, land’s value began going down while the aristocracy lived way beyond their means leading to a gradual loss of property over time.
The concept of a “property owning democracy” was created in America. Moves by Franklin D Roosevelt lead to governments protecting mortgages leading to the set up of FANNY MAE. Initially, there was segregation in the policy as African Americans paid higher interest. By the 1970s, the set up of FREDDIE MAC made discrimination a crime. Margaret Thatcher followed suit in the UK and the rest of the world followed.
But, the US ran into all sorts of trouble in the 1980s thanks to de-regulating SNLs or “Savings and Loans” corporations that enabled people to buy property. Since they effectively insured SNLs, SNL scams were all over the place and cost the US more than 150 billion dollars. Around the same time, Salomon brothers’ bond traders reinvented mortgages by bundling them all together and converting them into “bonds” by sub-dividing them into strips that mature at different times – giving birth to a “collateralized debt obligation” or CDO.
Sketch by EB
These CDOs marked a shift from a world where there was a link between interest givers and payers. Previously, home owners paid interest to their lenders. Now, the lenders bought securities from the big banks meaning home owners paid their interest to someone who didn’t even know they existed.
Additionally, since these mortgage based securities were actually guaranteed by the US government, their credit ratio was equivalent to US treasury bonds! Thus, more and more “sub-prime mortgages” (risky loans given to folks with dodgy credit history) were given away leading to more people “buying” houses they couldn’t afford. The disconnect between lenders and interest givers meant banks took larger and larger risks… until that fateful day in 2008 when Lehman Brothers declared bankruptcy triggering the global meltdown.
A Learning a Day 