I wonder how much of the $6.3 trillion market for home loan bonds (“Bush’s subprime mortgage freeze stymies bond market”, Bloomberg, December 7, 2007) represents the failure of suburban sprawl as an economic engine for the US economy.
Sprawl is the unsustainable growth model that bond investors are fleeing as if their hair were on fire. What an irony it would be, if the free market kills suburbia.
Far from being what the market wants, sprawl is a Ponzi scheme that depended on the securitization of mortgages into pools mixing form, content and risk into an unrecognizable hash. It was great bait–“what the market wants”–until the trawler nets came up empty.
A complete analysis of what percentage of subprime trouble is represented by low density, scatter housing has not been published. By 2005, this much is clear: the multi-billion dollar market for production homebuilders had been saturated. Mortgage brokers stimulated by egregious compensation practices were fishing in the final pool that had not dried up: prospects who could scarcely afford to rent, much less buy a home.
True to form, the fine print on those hundreds of billions of sprawl-linked bonds did not include anything like the true costs of sprawl: aquifers destroyed to plow more production homes on poor topsoil, wetlands gobbled up at a fearsome rate, putting drinking water supplies for whole cities at risk, not to mention the role of gas-guzzling automobiles as an priori condition of long commutes from tract housing to places of work.
The Growth Machine in the United States depends on the externalization of true costs and on bond buyers being agnostic. All that mattered was the assurance of ratings agencies and bond insurance to cover any unforeseen damages.
There may be a good reason for Treasury secretary Hank Paulson to seek a broad based, global solution that parses the subprime mortgage crisis for well-meaning, God fearing and gullible home owners—based on renegotiating with those who can afford to pay teaser home loan rates for some limited period of time.
But the stickiness of government intervention in the contract obligations between bond holders and issuing banks is not lost on investors, especially foreign credit holders whose confidence in the United States is badly eroded by malfeasance in the execution of US foreign policy.
The Bush administration adamantly denies that there is any connection between these two areas of public policy. But the world-wide credit crisis, triggered by the home loan mortgage industry and Wall Street financial engineers, is unlike anything the global economy has ever experienced.
In our global village, the relationship of trust is not likely to be helped by the Bush administration and Congress spinning government intervention as a release-valve for limitations of the free market, involving so much wealth. It all comes across as theft.
And so there is a window of opportunity for a national debate on how to reform, not just the mechanics of securitization and assurances and lending practices, but the whole enchilada: regulating the financial engineers and the operating rules for the Growth Machine.
It is important for the American public to get the big picture: on the one side, you have the Growth Machine pounding the table against government interference, regulations, and taxation. On the other side, you have the same forces that have used government interference, regulations and taxation to promote a Ponzi scheme as a social benefit–sprawl–connecting financial engineers, bond holders and oblivious taxpayers.
Which is worse: a bankrupt deal for which billions of dollars of bonuses have already been banked, contributing to massive inequities in American society, or the bankrupt deal for which taxpayers will ultimately be held accountable, while the instigators are left to bank more fees and commissions for an unsustainable model of growth? Shouldn’t the equation change?
It would be a shame if the 2008 election in the United States failed to expose the social engineers for who they are and what they represent. But that will take a candidate for president to stand up to the Growth Machine. It will take a candidate who will patiently explain it is time for a truly new direction.