If it doesn’t do something about its underwater mortgages, America could sink without trace
Stimulating the economy is all very well in the short term. But the national legacy of unpayable property debt will weigh the US down for years
Sunday 2 October 2011
It’s now more than six years since Alan Greenspan, in the days when he was still known as the “maestro” of the world economy, conceded that there might be a little “froth”, perhaps even a few “local bubbles”, in the American housing market.
Subsequent events showed that he was a master of understatement, but not of much else. The sub-prime frenzy, which had seen cut-price loans to borrowers with dodgy credit histories squeezed through the slice-and-dice operations of Wall Street banks and sold on as top-quality investments, had helped to inflate an almighty bubble right across the US.
When home prices started to decline, it triggered a worldwide credit crunch and what became known as the Great Recession; but it also took a painful toll on American society.
House prices have bounced back marginally from the depths of 2009, but they remain more than 30% below their peak. In some cities, where the boom was at its wildest, prices have fallen even further. In Las Vegas, for example, homes bought at the height of the sub-prime frenzy are now worth 59% less than their purchase price. So it’s not surprising that more than one in five mortgage-holders are in negative equity, and many thousands of Americans have lost their homes.
Even the merest glimpses of Washington, caught between the IMF’s glass-and-steel headquarters and the brownstones of Georgetown on a week-long visit last month, revealed a much larger than usual number of rough sleepers and vagrants huddled in doorways or begging on street corners – just the most visible manifestation of the ongoing social and economic crisis.