Mortgages, Debt, And Democracy

For decades government policymakers have celebrated—and actively promoted—rising prices for homes.  

Escalating housing costs have pressured buyers for many, many years, but reasonable concerns about how many were being priced out of the market with each passing year have been largely ignored because higher and higher home prices are the holy grail of economic theorists.  Any worries about the sustainability of skyrocketing home valuations that are totally dependent on an ever shrinking pool of those able and willing to afford onerous mortgages and high property taxes have long been relegated to the peculiar oblivion suffered by any idea that threatens the profits of a large and powerful industry and contradicts governmental groupthink.

Whether they actually believed (or deviously proposed) that increases in housing prices would produce a wealth effect stimulating overall consumer spending and improving the personal finances of individual home buyers, the real estate industry, state and federal agencies, and banks have spent decades encouraging Americans to borrow till it hurts in order to support a sickening upward spiral in mortgage costs.  Real estate is, according to the experts and pundits, an investment guaranteed to pay off—much like a Vegas slot machine rigged to always spew jackpot winnings—so one should be thrilled to go deeper and deeper into debt in order to become a homeowner.

Whether the so-called wealth effect is more of a benefit to individual buyers or for the agents and lenders who gleefully skim their profits right off the top is an open question, but there is no doubt that at the present time the American housing industry is floating on a stupendous sea of over $14 trillion of residential mortgage debt and the promise—or hope—that borrowers will be able to continue to make these payments over the many decades of their loan terms.  Commercial real estate is, due to our post-Covid work from home reality, yet another source of concern as more and more office space goes vacant, but these borrowers generally hold much more sway over their lenders due to the size and complexity of their loans.

Whether we are speaking of residential or commercial real estate, the concern—more of a terror, really—is that at some point in the future many borrowers will be either unable or unwilling to continue to make payments due to adverse economic conditions, increases in property taxes and maintenance costs, and the stunning rise in energy costs now turning heating and cooling a home or building into a daily trauma.  Worse yet, and we are already seeing this happen in cities across America, should home and office prices enter a period of sustained decline and put borrowers into a situation where they are paying off a loan that is far in excess of their property’s market value, we could see a game of economic chicken that will shake America’s financial system to its very core.

We saw an example of what can happen when borrowers rebel this past summer in China, where hundreds of thousands of people went on a residential “mortgage strike” and refused to make their monthly payments.  The conditions in this case were perhaps unique—a collapse in home sales, stalled property developments, and a hefty dose of corrupt business practices—but their unpaid indebtedness immediately turned into a financial crisis that forced the Chinese government to pour vast sums of public money into national banks and private lenders in order to forestall an economic meltdown that could have quickly turned into street protests threatening the political order of the entire country.  

The wealth effect can, as was amply demonstrated, quickly turn into the poverty cascade.  Mortgage debts that are not readily or willingly repaid demonstrate how the magic of leverage can turn into a toxic tsunami that will destroy everyone in its path and threaten the stability of governments when those loans are not continually serviced.

History is littered with individuals, businesses, and countries that failed because they could not repay their debts, and we often forget that our financial systems are built upon the faith in the future that encourages steady repayments rather than deliberate strategic defaults.  No rational individual or business is going to makes payments on a loan if they suspect that others do not share their belief in the continued economic health of their local market or country and the long term wisdom of their purchase.  If those concerns become fears—and those fears later mutate into a widespread panic—a systemic collapse that freezes supply chains, halts lending, and causes a liquidity crisis can happen with extraordinary speed.  

For example, this past spring and summer, Sri Lanka, a nation of 22 million people, found itself in a debt trap that made it impossible to finance imports of food and fuel, leading to the fall of their government and shocking hardships for its citizens.  Long encumbered by inept bureaucrats and a corrupt, insular government that watched out for its own interests instead of instituting desperately needed reforms—a situation that might sound familiar to many Americans—Sri Lankans suddenly found themselves unable to find basic life necessities such as gasoline to run their automobiles and were trapped under the thumb of predatory international lenders.

A nation’s destruction, we must always remember, can come about through a promissory note just as readily as through a war—no matter how large or how powerful that nation might be.

Defaulting mortgage loans and the foreclosures and turmoil sure to follow might be the fuse that sets off a systemic shock at some point, but the fuel for the fire is the dry tinder of debts heaped all around us right up to our noses.  Our federal government, state governments, local governments, businesses of every size and type, and America’s citizens all fight their own daily battles with balance sheets—and most are losing.

The cumulative personal debts of individual Americans are now spiraling up into the region of $24 trillion, and the total of unfunded government liabilities—money promised but not yet provided to meet future obligations and entitlements—now stands around $200 trillion.  Clearly, this is an unsustainable and catastrophic situation that calls into stark question the long-term financial viability of our nation, which is a topic most politicians prefer to avoid while they continue to propose hundreds of billions of dollars of money we don’t have for programs that are long on ideology and short on practicality.  Our heedless rush into national insolvency could easily cause our collective futures to sink into default and despair—and rattle the foundations of our democracy—sooner than we might think.

It is, of course, possible that we will be able to juggle and jiggle our way along and avoid a bone crushing financial crisis in the near future, but hoping and praying is not much of a long term plan.  It is more likely that, should we continue as we have, a crash starting with bad real estate loans and spreading throughout our broader economy like ripples from a rock throw into a pond will land upon us, and the many decades of reckless fiscal mismanagement, wild speculative excesses, and blindly pandering political leadership that have placed us in this situation will reach their inevitable conclusion.  The ongoing student loan debacle and the eviction moratoriums imposed due to the economic catastrophe caused by the Covid-19 shutdowns and lockdowns, which were papered over with $5 trillion of additional government borrowing, are a small preview of the desperate measures we might soon need when the bills for our profligacy and stupidity finally come due.

It is not too late to avoid disaster, but time is running very, very short.

Although major pain and dislocation cannot be avoided, it is still possible for America to change course and return to some semblance of financial and national health, but it will require us to act quickly and ruthlessly to excise the deep-seated rot at the centers of our political, cultural, educational, and social systems.

First, we must discard the idea that government is the solution to every problem in our country.  Many pie-the-sky government interventions have, in fact, created innumerable problems by rewarding incompetence, incentivizing dysfunction, and erasing marketplace discipline.  Armies of bureaucrats create more destruction than armies of soldiers, and they are inherently incapable of fostering the self-reliance and self-control that are necessary for both individual and societal success.  

The reality is that the size and scope of every aspect of our bloated government must be drastically and permanently reduced to that which is affordable and demonstrably effective at securing the blessing of a peaceful and productive nation.  We can expect loads and loads of shrill complaints that will compare this to Armageddon, but the price of inaction is far, far worse.

In addition, we must return to rewarding intelligence, achievement, and initiative in our schools and colleges, which has been fundamentally abandoned in favor of social engineering and facile group therapy.  Teaching subject content, evaluating the acquisition of knowledge and skills by students, instilling habits of hard work and self-regulation, discouraging disruptive and anti-social behaviors, providing mature role models and mentors, and helping students to form realistic life goals and plans must be the sole focus of all our educational institutions.  To continue on our present course is a prescription for a nation that is increasingly ignorant, unhappy, and aimless.

Finally, we must pass term limits at every level of elective office, reform and simplify our outlandishly complex tax code, and flush out the grafters and grifters who routinely turn public service into a vehicle for personal enrichment.  

The level of official corruption in government—most of which goes unpunished—is a disgrace that saps our national strength and ensures that the worst amongst us are able to cling to power while they line their own pockets and those of their friends and family members at taxpayer expense.  Americans are neither blind nor stupid, and there are very good reasons we look at our elected officials and their appointed lackeys with utter contempt.  I can think of nothing that would more quickly restore national pride and faith in our nation than seeing the crooks ensconced in Washington and our state capitals marched off in handcuffs on their ways to long and unpleasant prison sentences.

Will our nation be able to change direction quickly enough to head off our self-inflicted doom?  This is the question that will be answered over the next couple of election cycles, and we should know by the end of 2024 whether we have the will and resolve to save ourselves from ourselves.