econscius

Posts Tagged ‘Wall Street Journal’

Bubbles Going Dutch: Mortgages at 125% Loan To Value

In Housing Bubble, Mortgage Interest Deduction, Netherlands on December 5, 2011 at 10:19 pm

Following up on my post about the difficulty of spotting and deflating speculative bubbles [1], there is an interesting article in today’s Wall Street Journal “Mortgage Burden Looms Over Dutch” referring to a possible housing bubble in the Netherlands, home of the most infamous bubble of all: the tulip bulb mania of 1636-7.

We read:

“In the boom years, Dutch banks routinely wrote mortgages that exceeded 125% of the value of the home– covering closing costs, taxes, renovations and even new car purchases on the side.”

Household debt in the Netherlands was more than 240% of disposable income, according to EU statistics agency Eurostat – one of the highest levels of any advanced economy and easily the highest in the Euro zone.” [2] [emphasis added]

Is the Dutch economy in a speculative real estate bubble?  Might it burst and bring down one of Europe’s better performing economies?  The article says some Dutch regulators “see it as a major risk for the economy.”

What caused the Dutch housing bubble?  Lehman?  The article says:

“Economists lay part of the blame for the Netherlands’ high household debt levels on the tax deduction for mortgage interest.”

Sound familiar?

The [mortgage deduction] policy, similar to the U.S., inflates real-estate values, many economists say, and encourages households to take on more debt than they can handle.” 

Here we have regulators identifying a risk.  Surely the examples of Spain, the USA and other nations should serve as a bonus red flag to the Dutch. 

Are the Dutch government and the Dutch people on the case?

“On Tuesday, Dutch Prime Minister Mark Rutte dismissed worries about the Netherlands’ mortgage debt.  ‘It’s not a big issue…if you look at the whole picture’, he said, noting the Dutch “have huge private savings.”

To my ears, the Prime Minister is spouting typical bubble rationalizations.   We always seem to hear ‘look at the entire picture of a fundamentally sound economy.’  His point about private savings is suspect for the obvious reason a debt crisis is usually accompanied by a plunging stock market.  Dutch savings, like American savings in 1929, 2000 or 2008, can shrink very quickly in a stock market collapse, which may move in tandem with other asset declines, such as housing. 

If not the head of the Dutch government, what about the Dutch people who surely have seen what happened in other countries?  “Only 18% of the Dutch public support eliminating the mortgage interest deduction entirely.”  [3] I do not speak Dutch, so I rely on the Wikipedia summary of the literature, which shows a lack of political will to take on the mortgage deduction.

There are obvious parallels with the United States.  Well-intentioned government policies such as the mortgage interest deduction and low interest rates plus increasingly aggressive private bank lending fuel a speculative real estate bubble and excessive debt levels.  As with the United States, a handful of economists and regulators identify a potential problem.  But the public at large, and the politicians who represent them, deny there is a bubble and are unwilling to make the politically tough decisions to head off a potential disaster.  We know how this story usually ends.  The Netherlands is now one of the better EU economies (5% unemployment) and the Dutch can find reasons to believe their current prosperity is real and their home values justified, despite the meltdowns so many other countries have recently experienced.

I cannot predict the future but I think the dyke is about the break and a flood of Dutch housing problems will pour through when their housing bubble bursts.  It is another example of the difficulty of spotting bubbles and actually deflating them.

Aftermath of the flood in Oude-Tonge, Goeree-Overflakkee, Netherlands

[1] https://econscius.wordpress.com/2011/11/29/irrational-exuberance-about-spotting-bubbles/

[2] http://online.wsj.com/article/SB10001424052970203752604576640662346325544.html?KEYWORDS=mortgage+dutch

[3] http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction#Netherlands, retrieved 12/5/2011.

Pictures (tulips, Amsterdam and Dutch inundation from North Sea flood of 1953) from Wikipedia Commons.

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No Check For Grandma? Where’s the Social Security Trust Fund?

In Economy, Obama Administration, Social Security on July 18, 2011 at 3:39 am

President Obama is threatening Social Security checks may not go out in August because of his dispute with Congress over raising the Debt Ceiling. 

As pointed out in yesterday’s Wall Street Journal editorial page, how can this be possible when Social Security has a Trust Fund? [1] The Social Security Administration (“SSA”) website reports an impressive Trust Fund balance of $2,669,215,081 as of June 30, 2011 [2].   What happened to your money?

Haven’t we been told by the editors of the New York Times, Paul Krugman and others that the Trust Fund is solid as a rock and people are “peddling nonsense” to imply otherwise? 

Back in 2005, the New York Times said:

“At a recent press conference, Mr. Bush exaggerated the timing of the system’s shortfall by saying that Social Security would cross the “line into red” in 2018…. If you had a trust fund to pay your bills when your income fell short, would you consider yourself insolvent?”

“In suggesting that 2018 is doomsyear, [Bush] is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.’s – as detractors of Social Security so often claim.” [3]

Just last year, the Times’ strongly opinionated columnist Paul Krugman opined:

“So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.”

“It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.” [4]

How can Mr. Krugman and the New York Times editors square their confidence in the strength of the SSA Trust Fund against President Obama’s “I cannot guarantee that those checks go out on August 3”?   Is the President just playing a game or is the Trust Fund really empty?

The possible absence of Social Security checks results from an unusual structure.  If you have a private sector pension or 401(k), your retirement funds are set aside in a segregated account and the funds are invested in stocks and bonds. 

The Federal Government receives payroll and regular taxes every day and makes accounting entries for Social Security receipts vs. Social Security payouts.  SSA built up an excess of payroll tax receipts over payouts as working Baby Boomers paid in for decades.  This accounting entry comprises the Trust Funds. [5]

The issue with August’s Social Security checks is the Trust Fund is not invested like a normal pension.  Every dollar of Trust Fund surplus is invested in US Treasury obligations, meaning the Trust Fund was already spent for the general use of the Federal Government. [6]  Despite New York Times claims to the contrary, the SSA Trust Fund holds $2.7 Trillion in IOUs.

US government debt has traditionally been such a safe IOU it was called the “risk-free asset” back when I took Finance classes.   Still, even before the current Debt Ceiling controversy, trillion Dollar annual deficits led ratings agencies like Standard & Poor’s in May 2009 to issue warnings about a possible downgrade of US debt. [7]  

Grandma’s Social Security check could be held up not only in August but again in the future after the current Debt Ceiling crisis is settled.  The SSA Trust Fund is simply a very large claimant on future tax receipts of the US Treasury.  The New York Times misunderstood how safe the Trust Fund supposedly is as we now have the spectacle of an American President threatening Social Security payments may not be made on account of the supposedly separate matter of the federal budget deficit.  There is no lockbox; there is no firewall between Social Security and the overall budget.  SSA is not quite “separate”; it is linked to the overall fiscal health of the US government.

Ida May Fuller with the first Social Security check. Source: Wikipedia Commons.

[1] pg. A12, 7/16/11 print edition or http://online.wsj.com/article/SB10001424052702304521304576446250270069780.html?KEYWORDS=trust+fund

[2] http://www.ssa.gov/cgi-bin/investheld.cgi

[3] http://www.nytimes.com/2005/01/10/opinion/10mon1.html?ex=1263099600&en=24a380642da9ba1b&ei=5090&partner=rssuserland

[4] http://www.nytimes.com/2010/08/16/opinion/16krugman.html?adxnnl=1&adxnnlx=1310953732-DNwzINppkFOQn5GdGjvUXQ

[5] Technically there are two Trust Funds: Old Age Survivor (retirement) and Disability.

[6]  http://www.ssa.gov/oact/progdata/fundFAQ.html#n1

[7] http://www.huffingtonpost.com/2009/05/27/moodys-us-governments-aaa_n_208298.html