While factors such as endemic corruption in Chinese banking as well as the E.U.’s single-currency system introduce their own sets of risks, American housing still ranks as the focal point of dysfunction in the global financial system, according to a recent commentary.
In an online piece published August 20,
The Economist noted that the sheer size of the American housing segment—valued at $26 trillion, greater than the U.S. stock market—is backed by “the planet’s biggest concentration of financial risk.”
“When house prices started tumbling in the summer of 2006, a chain reaction led to a global crisis in 2008-09. A decade on, the presumption is that the mortgage-debt monster has been tamed. In fact, vast, nationalised, unprofitable and undercapitalised, it remains a menace to the world’s biggest economy,” the analysis argued.
And despite the $1.2 trillion in core capital that the American banking system currently holds as a cushion against unforeseen losses, taxpayers shouldn’t rest easy.
“That trillion-dollar capital buffer exists to protect banks, but much risk lies elsewhere. That is because, since the 1980s, mortgage lending in America has been mainly the job of the bond market, not the banks as in many other countries,” the commentary noted.
The U.S. mortgage segment does not seem to have learned its lessons from the previous crisis, as conditions are now ripe for a global collapse stemming from an American housing market crash.
“The size, design and availability of mortgages is now decided by official fiat. Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. Since the government mortgage machine need not make a profit or have safety buffers, well-run private firms cannot compete, so many banks have withdrawn from making mortgages. If there is another crisis the taxpayer will still have to foot the bill, which could be 2-4% of GDP.”
Thus, immediate reforms are paramount to stave off the worst effects of such a meltdown,
The Economist said.
“The simplest approach would be to give it the same medicine as the regulators administered to the banks. The nationalised mortgage firms that guarantee the bonds—and are thus in hock if the market collapses—should be forced to raise their capital buffers and increase their fees until they make an adequate profit.”
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