Whoops! Why Everyone Owes Everyone and No One Can Pay - funny and well-written economics book

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37 Responses to “Whoops! Why Everyone Owes Everyone and No One Can Pay - funny and well-written economics book”

  1. Anonymous says:

    > It’s no accident that the us military machine has been much more aggressive and expansive since the Federal Reserve printing press was created

    American Indians would likely disagree with you there. The US spent the whole 19th century conquering the western frontier for European settlers. There was no need to bother about a war with Spain until the west had been fully settled.

  2. joeygsb says:

    Lanchester’s arguments sound very similar to those offered by Alex Blumberg and Adam Davidson in their EXCELLENT series on NPR. If you want a great explanation, presented in understandable terms, of what caused the Great Recession, listen to episode 355 of “This American Life” http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355 Listening to this is time well-spent.

  3. Anonymous says:

    “I don’t see anything in your description of Lanchester’s narrative about the US Federal Reserve keeping interest rates artificially low and fueling monetary and credit inflation”

    The thing to keep in mind is that at a certain stage those policies offered the appearance of success. The dotcom bubble came before the housing bubble. If the housing bubble had been discouraged by monetary policy then we would probably be talking about 2 simultaneous types of crashes in September 2001, only one of them involving jet planes. That might actually have been better since then maybe some of the Teabaggers might have been more focused on a critical look at the Bush administration. But all of that was delayed for several years as the housing bubble rose to replace the dotcom bubble. So now people will have to look around for a new bubble to replace that one.

  4. Anonymous says:

    > None of these three have anything to do with the “free market” or capitalism.

    Actually, everything in this chain reflects very well the crisis of overproduction and declining rates of profit which Karl Marx brilliantly laid out more than a century ago. Marx did not spend his time thinking about underdeveloped countries like Russia or China in the 19th century. His theorizing was all about the crisis which should eventually occur under highly developed capitalism.

    All of these speculative booms, whether we mean the dotcom bubble which came earlier or the more recent housing bubble, arise because in an economy that is so fully developed as our own it is no longer so easy to come up with a new product and make a fortune from sales. If dishwashers were not yet invented then I’d think that the best way to make a fortune would be to come up with some machine that can clean dishes without someone having to stand over a sink. Or maybe if there were no laundry machines invented yet, then that would be the real way to go with investing your money to build.

    But when the economy has already such a huge oversurplus then people look for speculations which are less well based. Or else they hoard the money which they’ve gotten and begin withdrawing it from the economy. Or they come up with other options which transfer the problem into a new form. The attempts by Greenspan to encourage the housing market had some short-term logic to them. But they really could only postpone and transform the nature of the problem rather than solving it.

  5. Camp Freddie says:

    I don’t know what rent is like the the USA, but in most places it will be about equal to a 25-30 year mortgage repayment at about 5% interest.
    I know that my mortgage has always been much cheaper than rent (since next door have an identical rented house). Of course, I may not be laughing if we get some crazy rate hikes from a bankrupt government.

    Economically you need to work out the difference between your mortgage repayments and the rent on an equivalent property. If rent is cheaper then you need to guess whether investing the difference would result in more money than the value of the property in 25-30 years time.
    Then you need to assign a value to the extra mobility you get from renting and the convenience/annoyance of having a landlord to fix (or maybe ‘fix’) problems with the house.

    I think the illiquidity of home ownership is often the killer, especially if you [want to] move jobs and can’t or don’t want to pay for the extra commute.

  6. Andrew Katz says:

    I highly recommend Lanchester’s novels as well. In particular, “The Debt to Pleasure” is dark and hilarious.

    He’s got a huge range, and I’ve yet to read anything by him that isn’t beautifully written, erudite and thought provoking.

  7. Camp Freddie says:

    Seriously?
    Tennants and homeowners pay the same property taxes in the UK. I don’t know any landlords that will cut your lawn. Taking care of the place isn’t exactly expensive.
    A landlord generally has his own mortgage on the property, and will pay higher rates than a homeowner (and while many landlords will own a property outright, they will want a return on investment equal to to mortgage rates.) They aren’t going to lose money by charging lower rent than they have to pay in upkeep.
    I know several landlords who basically use rent to pay off the mortgage and pay for repairs. They make no profit (so no income tax!), but get a house to sell when they retire (minus capital gains tax, but hey – no free lunch). The landlord just takes his mortgage payment, adds some extra for wear/tear repairs (and takes the rest from tennant’s deposits) and charges that as rent.

    Rent gives you the advantage of mobility and massively reduced exposure to rate/price fluctuations (though your rent will tend to follow the trend in rates and house prices). You will pay extra on average, in the long run, for renting. The average house-buyer pays less (often much less), but runs the risk of being the guy who ‘bought at the wrong time’, and pays much more.

  8. Anonymous says:

    > But I think we’ve just been through a period where the advantages of renting were massively understated and the disadvantages of owning were massively overstated.

    While that may also be true, it should be emphasized that this latest was not a consequence of people trying to own the house lived in. That’s the type of lie which David Horowitz and other scoundrels have tried to push when claiming that ACORN and things like it were at the root of the housing crisis. The housing crisis occurred because of a speculative boom which was not driven by poor people taking out loans on easy credit in order to buy a place to live in.

    I can remember as far back as the 1990s lots of middle-class careerists were hoping to catapult themselves into the ranks with Donald Trump by real estate speculation. The idea talked about was that you buy a place which is selling cheap and you spruce it up a bit, then sell it for a price high enough to recoup the costs and net a profit. When the dotcom bubble burst a lot of people who had been ignoring the real estate option moved over to that one. Once a speculative market has been heated up far enough, it has to crash.

    If we simply had people all trying to own their own home where they live, without anyone speculating by buying homes which they plan to sell later at a higher price, then this would never have occurred. Whatever the pros of renting may be, the bubble arose from other causes than people not wanting to rent a place where they live. You could say that there was a problem with the fact that people who owned multiple homes had bought not with the intent of renting but of reselling. If more of those who bought up a lot of homes at cheap rates had done so with a firm intent of owning and renting then the speculation would have died out sooner. The fact was that many homes were bought with the specific purpose of selling them anew after a few years. That’s how speculation grows.

  9. jrochest says:

    “1) Rent forever. That’s money you will never be getting back.”

    No, that’s money that you’re using to pay for a place to live; it’s not wasted.

    It makes sense to buy if the overall cost of ownership (mortgage, taxes, condo fees, upkeep expenses) is close to or less than rent.

    When you’re paying more to own than you are to rent, you’re losing money on a monthly basis and will certainly lose when you come to sell.

  10. Anonymous says:

    I have the solution. We all need to stop paying any debt related bills: mortgages, credit cards, car payments, etc. And that should do it!

  11. Anonymous says:

    @flytch buy smartly and you’ll pay off the home sometime in the future

    A bit simplistic.

    In my area my rent is cheaper than my neighbours recurring costs of property taxes, utilities, maintenance, and condo fees, let alone his additional cost of a mortgage. There are no houses below a million dollars near us. So I invest my money that would normally go towards a mortgage into my retirement plan.

    Unless you live in the U.S. your mortgage is not tax deductible, unlike many retirement plans throughout the world which are legal tax shelters. Now if you are betting that your house will increase in value and want to take a chance that you will make a profit that might be a wise strategy. In Canada and Australia it is currently a very good approach, but as we have seen in many places in the U.S you can lose also big time when the value is far lower than what you paid for.

    There is definitely a case to buy a house but depending on where you live and your income it is not a clear cut case.

    On a side note my commute to work is less than 10 minutes without a car, while my co-worker is almost 3 hours a day, and even though he has a beautiful and affordable house he hardly see his family

  12. Anonymous says:

    Book is called I.O.U. in the US too, and it is fantastic.

  13. Anonymous says:

    Tried to buy an electronic or audio version of the book online, but it’s only for sale in the USA or Canada. Could someone help to find the downloadable version

  14. Anonymous says:

    It’s true about a house being a highly leveraged asset that appreciates along with the economy and all that, but what are the other choices? As I see it:

    1) Rent forever. That’s money you will never be getting back.

    2) Buy or build a house that you can afford with cash on hand. This might work, but only if you buy in a remote area with no employment prospects.

    I’ll stick with my 30 year fixed mortgage. It may not be perfect, but at least someday, thirty years from now, I’ll have something to show for it. If I just rented the whole time I wouldn’t have anything.

    • Anonymous says:

      This is the argument that is always given for buying, and the author’s point is that it is almost always wrong.

      You will be paying the interest on your house over the length of the loan – just like rent, this is money you are never getting back. If your house appreciates just as fast as the economy grows, then you have not made any money off your money – the interest you have paid is exactly like rent (and typically is far more each month than you would have paid to rent). Although the income tax deduction may make a difference in the overall calculation, you would typically be better off if you had rented and invested the money you would be saving by not having a mortgage – at the end of 30 years you would have liquid assets worth much more than your house.

    • Ernunnos says:

      Renters have plenty to show for it: years living under a roof. And if they rent wisely, they enjoyed more flexibility (being able to move quickly to take a new job) which might well leave them with more money than a person who took on debt (and property taxes, and insurance, and maintenance) to buy a house. Not to mention avoiding the risk that (despite many assurances to the contrary) real estate would actually go down, leaving them upside-down.

      There are advantages and disadvantages to both. I’ve got a mortgage myself, and it’s allowing me to do things like install solar power that I couldn’t do if I were renting. But I think we’ve just been through a period where the advantages of renting were massively understated and the disadvantages of owning were massively overstated.

      It’s time to bring back some balance.

  15. Anonymous says:

    It’s MONEYGEDDON, not “econopocalypse!”+

  16. Shodai says:

    “Alas, Lanchester is also a downer. At the risk of giving away the ending, he concludes with a compelling argument that the UK economy is likely to be roadkill for a very long time as…”

    Will this be the final nail in the coffin that causes me to seek another nation state to live in?

    Anyway, thanks for the recommendation Cory, i’ll definitely look into reading this.

    • turn_self_off says:

      sorry to say, but all nations, except maybe north korea and iran, have hitched their economies to the USA economy…

  17. veritasnoctis says:

    Cory,

    I don’t see anything in your description of Lanchester’s narrative about the US Federal Reserve keeping interest rates artificially low and fueling monetary and credit inflation, which in turn fueled the housing bubble upon which the infamous credit default swaps were built. Does Lanchester talk about how the US federal government began to seriously push for affordable housing for all during the Clinton administration? The Clinton administration (particularly Cuomo and HUD), Congress (with its Community Reinvestment Act), and Fannie and Freddie (two essentially government corporations), in addition to the Fed, were root causes behind the sub-prime mortgage crisis. Does Lanchester mention how the US federal government stepped in and screwed up the already existing non-government regulatory structure of the financial markets? Before, investors paid the rating agencies to evaluate a company they were thinking of investing in; after, companies paid the rating agencies to evaluate and rate themselves – this, of course, created a conflict of interest in which the rating agencies were being paid by the very companies they were rating. It’s the main reason why these “too-big-to-fail” failing companies were still rated AAA and such like right up until the moment they collapsed. I recommend reading Thomas Woods’s Meltdown, if you haven’t already.

  18. Zebra05 says:

    The book is called I.O.U. in Canada.

  19. flytch says:

    being a land lord is like opening a bank account and letting someone else deposit money in it :)

    rent if that’s what you like to do… but you’ll rent the rest of your life… buy smartly and you’ll pay off the home sometime in the future… I bought my first house when I was 36, Sold it and bought my second when I was 41… now when I’m 51 I will have my current house paid off… no mortgage… no payments!!!!! try that with renting…

    • hijukal says:

      @flytch buy smartly and you’ll pay off the home sometime in the future

      Except that, where I live, in order to buy (particularly for first-timers) you need to move miles from anywhere worth living, and work like a dog for the privilege. I know people working six day weeks just so they can keep their house. Meanwhile, I pay less than half to have a roof over my head.

      In fact, there’s no way I could afford to buy a house in the area in which I live, unless both my wife and I worked full time (we do), had no dependents (we don’t) and did nothing other than spend all our time at home (we don’t), never going out or just generally enjoying ourselves (we do).

  20. Anonymous says:

    so, basically we need to have people who can do math, & actually get the right answers, to be in charge of the financial system?

    what a radical concept! XD

    (fyi @ moderator: the recaptcha thing seems to run a little glitchy on chrome/winxp. i swear it wasn’t there the first time i tried to post this o__0 ….& now it keeps giving me errors, when i know i’ve typed in the correct text)

  21. Anonymous says:

    John Lanchester wrote one of my favorite books ever, The Debt to Pleasure, where he proved himself very knowledgeable about cooking and French cuisine. It seems he is a writer of many talents. I will definitely look into this book.

  22. Anonymous says:

    …your house is a highly leveraged asset that appreciates at the same rate as the overall economy,

    Not mine, hoss. I have improved it relentlessly – not by “interior decoration” or investing in “curb appeal” but by decreasing the amount of energy needed to maintain it. That has included insulation, ductwork, gas piping, furnace & water heater replacement, etc. all performed by yours truly with the kids handing me wrenches and so forth. I use a lot of recycled and found materials so my costs are low (you’d be surprised how much perfectly good insulation you can scrounge from dumpsters).

    is difficult to liquidate,

    People offer to buy my houses before I’m ready to sell ‘em. Seriously. I don’t even need a real-estate agent, I don’t even have to put up a “for sale” sign.

    and if you manage it, you need to buy another house that has appreciated right alongside of it or find yourself homeless

    Yeah, OK, he tore my ass on that one.

  23. Rindan says:

    You pay a lot when you buy that renters don’t. It isn’t just your mortgage. It is your property taxes, repairing the property, upkeep for stuff like lawns, and just your bleeding time taking care of the damned place. The cost of a house is a lot higher than just the mortgage.

    If nothing else, renting gives you mobility. If my job moved to the other side of the city, I wouldn’t commit to a 1.5 hour commute. I would just shrug and move to the fun cool hip place on the south side of the city.

    As an added bonus, because I am mobile, I accumulate very little in the way of stuff. It is one car load to move my stuff, and one more car load to move my limited furniture. There is something pretty liberating about not being bogged down by decades of accumulated crap that all home owners seem to collect.

    To each their own, but I personally think that renting is a pretty spiffy deal on its own. The fact that the so called ‘econopocolypse’ means pretty much next to nothing to me unless I lose my job is just gravy.

    • bkad says:

      You pay a lot when you buy that renters don’t. It isn’t just your mortgage. It is your property taxes, repairing the property, upkeep for stuff like lawns, and just your bleeding time taking care of the damned place. The cost of a house is a lot higher than just the mortgage.

      Maybe I’m misunderstanding something, but aren’t all these costs just folded into rent anyway? You still pay a mortgage, it’s just somebody else’s mortgage. You still pay property taxes — where I live, renters are allowed to deduct a portion of their rent payments from the state income taxes, the assumption being that this went to property tax. You still pay for upkeep; it’s just someone else doing the actual work. You save the time in having to manage the property yourself, but nothing is for free.

      Speaking about my own tastes (not economics): it’s a different decision as one gets closer to the big cities. In my view, the main advantages of owning would be

      • Less noise from neighbors
      • Less smell from neighbors
      • Needed repairs and maintenance would actually be done
      • Complete freedom to repaint, even re-arrange interior walls as desired
      • Privacy
      • More outdoor living space

      In this case, even if owning costs more (I’m not convinced) you get far more value.

      Closer to cities, you have condos and multi-unit dwellings and all that. Owning an apartment like that wouldn’t seem to convey any of these advantages. I’d still have noisy, smell, neighbors, apathetic maintenance staff, no privacy and no outdoor space. And on top of that, the purchase price would be much higher…

      Maybe that’s the key: Where property costs dominate the monthly housing costs, maybe it makes more sense to rent. Where property costs are a minor part of the monthly housing costs, maybe it makes more sense to buy.

      • Rindan says:

        Of course renters still “pay” for those things. The difference is that what a renter pays is pretty clear and upfront. All too often, people compare the rent price with mortgage like they are equivalent. As a renter, the cost I pay to live is rent + utilities (which gets split between 4 people) and nothing else. Rent and mortgage are not equivalent. The equivalent if you want to measure which is a “better deal” is rent + utilities vs mortgage + utilities + taxes + repair + time spent on repair + crippled mobility.

        So, my point isn’t that renters don’t pay for those things through their rent, it is that home owners often don’t take such things into account and do a straight up mortgage vs rent comparison.

        I’m not saying that owning is bad, just that the fiscal sense in it is often highly overvalued because people look at mortgage like it is the only cost in owning a home.

        I might change my mind if I start spawning, but for now, I have nothing but the deepest pity for my co-workers that drive over an hour to work, have flipped mortgages, and can’t get people to visit them because they live in the ass end of nowhere because that is the only place where they can afford a house. Too each their own though.

  24. Broken Window says:

    You have probably also read “Crash Proof: How to Profit from the Coming Economic Collapse” by Peter Schiff from 2007? It was a quite accurate prediction and description of the ongoing and worsening collapse. There are also lots of his talks on youtube.

  25. zyodei says:

    I feel that the many analysis that ignore any active (rather than passive) government responsibility for this crisis to be ignoring the elephant in the room.

    For instance the NPR analysis cited above is quite good and interested reading, but in assigning 100% blame to private forces does not tell the whole story.

    Yes, greedy bankers got carried away, greedy homeowners got carried away, regulatory capture was a big problem, and the repeal of glass-steagal did contribute to this.

    But there are several ways that the government contributed to this:

    1) The artificially low interest rate from 2000-2005. This accelerated the housing bubble. Money was so cheap that it was stupid not to go get a loan and borrow a house. The information provided by a market calculated interest rate is crucial to a functioning free economy- if you can set this arbitrarily, the market is deprived of a key signal it needs to make correct decisions.

    2) The long-term policies to get everyone into a house. As you cite above, houses are illiquid, inflexible, expensive to maintain, and can be volatile -for many people, not as good a housing choice as renting. But various rules have encouraged everyone to be a homeowner. This has artificially inflated the prices of houses in the long run, and created the illusion that houses are an infallible asset.

    3) The “moral hazard” of bailouts. The big banks had precedent to believe that they would be bailed out if things went south. From the S&L crisis to LTCM, the US has a history of saving politically connected “too big to fail” banks. And these bankers, with Goldman Sachs exec Paulson in the treasury post (and Obama’s team under their sway too) had every reason to believe they would be bailed out. Was it really a result of colossal stupidity and institutional blindness that caused the collapse? In part, but this was willful blindness caused by a tacit knowledge of the way things are – the they had to fold their hand, they had every reason to believe that Uncle Sam would come down and push a bunch of poker chips back in their direction to keep them in the game.

    etc.

    None of these three have anything to do with the “free market” or capitalism. The very opposite, in fact – corporations acting with government partnership and support is the very definition of fascism, and in many ways we have a fascist financial system.

    Yes, bubbles happen. Yes, they can be very financially distressing. But in a healthy market system, the bad actors will be flushed out, firms that made bad decisions will go bankrupt and the directors will get real jobs, and the side effects will not last long. We had various panics and crashes in the 1800s, but we never had a depression or long term recession until the creation of the Federal Reserve and the subsequent expansion of the state in the early 20th century.

    The “too big to fails” are too big to fail in a large part because of their cozy relationship with the government and the federal reserve. The Fed itself is an institution that impoverishes the millions to engorge the politically connected few – and has an awful track record of “maintaining economic stability and controlling inflation” since it was founded. Indeed, nothing could be more dangerous socially or economically than giving monopolistic control over money and interest rates to a tiny cabal of electorally unaccountable quasi-public/quasi-private bankers.

    It’s no accident that the us military machine has been much more aggressive and expansive since the Federal Reserve printing press was created, it’s a story that has happened time and time again throughout history, from the Romans to the Ottomans to the British – devalue the currency to invade the neighbors. It’s also no accident that the economy has been generally more unstable and prone to long term recessions in that time.

    One flag that populists all around the world, from progressives to “tea partiers,” should be rallying around in response to this crisis is an end to central banking.

  26. Anonymous says:

    Isn’t it amazing how every individual economic crash has a unique cause, yet they happen once every decade, almost like clockwork?

    If economics were really a ‘science’ Occam’s Razor would apply, and we would all be able to see exactly how the game is rigged.

    • Anonymous says:

      Isn’t it amazing how every bushfire has a unique cause, yet they happen once every decade, almost like clockwork?

      If chemistry were really a ‘science’ Occam’s Razor would apply, and we would all be able to see exactly how the game is rigged.

  27. Broken Window says:

    @Anon#9:
    Crashes are caused by false booms. False booms are caused by false credit. False credit is caused by false economic policies. False economic policies are caused by politicians, who think more of their banker friends and short term popularity, than long term stability.

    • Anonymous says:

      If you paid rent every month *and* put something in a savings account, you’d have the same monthly expenses, and also something left at the end.

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