The problem with a lot of policy is that it is like holding a water balloon: if you see a problem and respond to it, another problem is created somewhere else (just like pinching a water balloon in the spots where it is bulging).
I bring this up for two reasons, and bear with me while I explain.
First, about a month ago I remarked casually that everyone is supposed to know that primary residential real estate (a home you own and live in) is a lousy investment. Many people – including some of you – don’t know that.
Second, Peter has brought up a book he is reading for Harrop’s class called The Wealthy Barber. Peter noted that the book confirms part of what I said (and adds other arguments that I didn’t make, but don’t disagree with).
People get fooled into thinking that primary residential real estate is a good investment by not recognizing or understanding the leverage involved. For example, if you buy a $100K with 20% down, and the value of the house goes up by 10%, you now owe $80K on something worth $110K. That gain is yours, not the lenders, so you’ve made a 50% profit on a 10% appreciation. What leverage does is amplify gains and losses - you get higher returns because you’re taking on extra risk.
So what does all this have to do with policy and water balloons?
After the Great Depression, our government set in place laws and regulations to strongly discourage the use of leverage in the purchase of stocks. This was felt to be a big contributing factor – through margin calls – to the huge stock market (and wealth) declines that started in 1929.
In its place, they created an industry out of thin air – the now defunct savings and loan industry – whose role it was to facilitate the leveraged purchase of primary residential real estate.
So … the economy is the water balloon, and government sanctioned leverage investing is the hand squeezing it. Moving the hand doesn’t change the problem. You’d think they learn.