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Be Your Own Financial Adviser: The Comprehensive Guide to Wealth and Financial Planning by Jonquil Lowe

AltaVista, asset allocation, banking crisis, BRICs, buy and hold, correlation coefficient, cross-subsidies, diversification, diversified portfolio, estate planning, fixed income, high net worth, money market fund, mortgage debt, mortgage tax deduction, negative equity, offshore financial centre, Own Your Own Home, passive investing, place-making, Right to Buy, risk/return, short selling, zero-coupon bond

Triodos bank www.triodos.co.uk Yahoo Finance http://uk.finance.yahoo.com Z01_LOWE7798_01_SE_APP.indd 408 05/03/2010 09:51 Index 130/30 funds 329 absolute return funds 328–9 active funds 309–11 additional voluntary contribution (AVC) in defined benefit pensions 195 mis-selling of 52 in ocupational pensions 201–2 adjustable excess in PMI premiums 124 advisory investments advice 48 all-in-one mortgage 165 annual management charge on investment funds 308–9 Annual Percentage Rate (APR) 33 annuities capital protection 238–9 choice of 232–40 in defined contribution scheme 231 income drawdown 241–3 increasing 235–7, 243 investment-linked 237–8, 244 level annuities 233 and pension schemes 185 rates 233–5 short-term 232, 239 staggered buying of 243 annuity with guarantee 101, 239 aspirations of financial planning 6–9 asset allocation 299–304 correlations 301 Z01_LOWE7798_01_SE_INDX.indd 409 funds 324 rebalancing 303–4 Association of Tax Technicians 52 attitudes to financial planning 8–9 balance sheet, household 17–21 Bank of England base rate (1984–2009) 172 bankruptcy 35 beliefs and financial planning 8–9 benefits advice 53 bereavement benefits 95–7 after retirement 96–7 before retirement 95–6 beta 299 Beveridge system 177 bonds 285–9 as asset 300 confusion over 254 interest rates 285–6 redemption 286 risk 287–8 borrowing 31–5 APR 33 BSE Sensex 298 buying power, inflation on 29 capital gain or loss on shares 289 capital gains, taxation of 263 capital gains tax 347–8 in UK tax system 371–80 05/03/2010 09:50 410 Index capital outlay on mortgages 150–3 capital protection annuity 238–9 capital risk in investments 253, 255–9 on residential property 330 capital shares 316 capitation schemes for dental treatment 128–9 capped-rate mortgage 162, 164 cash and carry investments 314 cash as asset 300 cashback mortgage 164 chargeable gain 268 Chartered Institute of Taxation 52 child tax credit 97 child trust funds (CTF) 274–6 children, and intestacy 339 circumstances and financial planning 8–9 Citizens Advice 53 civil partner, and intestacy 339 co-payment of PMI premiums 124 cohabitees, protecting 354 collaborative financial planning 38 collectibles 332–3 commercial property as income source 303 commission payments 42 in DIY financial planning 53–4 commodities 324 compensation from financial advisers 59–60 Competition Commission 44 on payment protection insurance 84–5 complaints against financial advisers 58–9 complete DIY financial planning 37 complex investment funds 327–9 guaranteed products 327–8 protected products 327–8 Z01_LOWE7798_01_SE_INDX.indd 410 comprehensive state provision of longterm care 137 Consumer Price Index (CPI) 28 contributory employment and support allowance (ESA) 73 council rented housing security 105 council tax benefit 98 covered call funds 329 critical illness insurance 80–3 core conditions 81 and term insurance 108–9 cross-holdings, return on 318 Crown, and intestacy 339 DAX index 298 dealing charges 288 death in service 99 debt 13, 31–5 debt relief orders 35 decreasing term insurance 110 deferred-care plans 139 deferred period in IP insurance 78 defined benefit pension schemes 99 in occupational pensions 195–7 other choices 230–1 tax-free cash 228–30 defined contribution pension schemes 99 new scheme from 2012 205 in occupational pensions 197–8 other choices 231 personal pensions 206 tax-free cash 227–8 delegated financial planning 38 dental treatment 126–30 capitation schemes 128–9 insurance 129 private, costs 128 resources for 126–7 self-paying 127–8 stress testing and review 129–30 05/03/2010 09:50 Index derivatives 325–7 disability, protection from 72–88 employer, help from 75 plan for 75–85 critical illness insurance 80–3 Holloway plans 79–80 income protection insurance 76–9 state, help from 72–4 state provision of long-term care 133 stress testing and review 86–8 disclosure of material facts 82 discounted-rate mortgage 161, 163–4 discretionary management investments 48 discretionary trusts 340 diversification of investments 295–9 amount needed 296–9 and risk 296–7 dividends and income tax 266 on shares 289 DIY financial planning 37 and commission 53–4 Dow Jones Industrial Average 298 downsizing 246 emergency funds 84, 279 employer, help from disability protection 75 family protection 99–102 lump sum payments 99–100 survivor pensions 100–2 unemployment protection 69–70 employer contributions to pension schemes 186 employment and support allowance (ESA) 68 sickness or disability protection 72–3 endowment mis-selling 51 Z01_LOWE7798_01_SE_INDX.indd 411 411 endowment mortgage 158, 159, 160 energy saving measures 16 equities as assets 300 equity – emerging markets 324 equity – sector funds 324 equity – UK shares 323 equity global shares 324 equity income shares 323 equity release 46, 247–9 choosing 251 home reversion 249 and inheritance planning 354 lifetime mortgages 247–8 stress test and review 249–50 and tax 250 escalating annuity 236 estate, reducing inheritance tax on bypassing the estate 350–1 limiting growth of 352–3 estate planning advice 52–3 ethical savings products 284–5 ethical investment funds 323 European Economic Area (EEA) 116, 118 European Health Insurance Card (EHIC) 118 exchange-traded funds 319–20 execution-only investments advice 48 extra pension option 221–3, 224–5 family, provision for assessing needs 89–105 employer, help from 99–102 housing security 104–5 protection calculator 94–5 protection level 91–5 protection period 91 savings, pensions, insurances 103–4 state, help from 95–8 assessing protection gap 105–6 05/03/2010 09:50 412 Index family, provision for (continued) budget template 92–3 implementation 106–12 family income benefit 109 life insurance 112 maximum policy protection 111–12 term insurance 107–11 stress testing and review 112–13 financial advisers commission payments 42 expectations of 38–53 on benefits 53 equity release 46 estate planning 52–3 on insurance 44–5 on investments 47–50 money guidance 42–4 on mortgages 45–6 overall planning 41–2 on pensions 46–7 Retail Distribution Review 50–2 summary 39–41 taxation 52–3 protection under 54–61 compensation 59–60 complaints 58–9 financial planning 4–27 approaches to 37–8 aspirations 6–9 building the plan 22 execution of 24–6 framework for 5 resources for 10–21 review of 27 stress test of 22–3 Financial Services Authority and Money Guidance 42–4 on mortgages 166–7 product comparisons 25, 166 Retail Distribution Review 50–2 fixed-income bonds 323 Z01_LOWE7798_01_SE_INDX.indd 412 fixed-rate (long term) mortgage 162 fixed-rate (short term) mortgage 162, 163 flexible mortgage 164 frequency of payment of PMI premiums 123 friendly society plans 276–7 FTSE100 index 298 full underwriting of private medical insurance 121 fund-of-funds 324 futures 325–7 gearing 315 genetic tests for IP insurance 79 for life insurance 108 goals of financial planning 6–8 gold 331–2 grossing up 265 group discounts in PMI premiums 124 group personal pension scheme (GPPS) 203 guaranteed equity bonds 282–3 guaranteed investment products 327–8 health discount in PMI premiums 124 hedge funds 328–9 hedging with options 326–7 high income, taxation of 9 Holloway plans 79–80, 84 home reversion 249 Homeowners Mortgage Support Scheme 169 household budget 10–13 balance sheet 17–21 improvements to 13–16 template for 11–12 housing equity, using 244–51 05/03/2010 09:50 Index equity release schemes 247–9 resources 246 price inflation 147 rent or buy 146–9 rented 146–9 see also own home housing benefits 98 housing costs, help with 98 housing security and family protection 104–5 and intestacy 339 hurdle rate 317 hybrid pension schemes 199 Icelandic banks 55 immediate-care plan, long-term 138–9 In-the-driving-seat financial planning 38 income fall in and mortgages 168–70 protecting from sickness or disability 72–88 from unemployment 67–72 see also high income; low income income-based employment and support allowance (ESA) 73 income-based jobseeker’s allowance 98 income drawdown 102 in defined contribution scheme 231 for retirement 241–3, 244 income protection insurance 76–9, 84 exclusions 77 income risk and investments 253, 259–60 on residential property 231 income shares 316 income support 98 income tax and dividends 266 on inheritance 348–9 Z01_LOWE7798_01_SE_INDX.indd 413 413 gifts to minor children 348–9 gifts you still benefit from 349 and life insurance 266–9 and savings 264–6 in UK tax system 358–69 tax-free and taxable income 359–60 increasable term insurance 110 increasing annuities 235–7, 243 increasing term insurance 110 independent advisers 49, 50 Independent financial advisers (IFAs) 41 index-linked gilts 258 Indian banks 55 individual savings accounts (ISAs) 272–4 and pension schemes 275 Individual Voluntary Agreement (IVA) 35 inflation and buying power 29 impact of 28–31 and income protection 86 inflation risk 255–60 inheritance capital gains tax 347–8 income tax 348–9 gifts to minor children 348–9 gifts you still benefit from 349 reducing tax 350–4 bypassing the estate 350–1 cohabitees, protecting 354 equity release 354 estate, limiting growth of 352–3 lifetime gifts 351–2 tax-free bequests 351 using nil-rate band 351 stress testing and review 355 and tax 341–9 basics 342–4 05/03/2010 09:50 414 Index inheritance (continued) on estate 344 gifts with reservation 346–7 lifetime gifts 344–6 workings of 343 trusts 340–1 who inherits 335–40 intestacy 338–9 wills if there is no will 337 reasons for 339–40 Institute of Financial Planning 41 insurance choosing and buying 87–8 costs 87 for dental treatment 129 and family protection 103–4 life insurance 112 term insurance 107–11 for long-term care 139–40 insurance advice 44–5 insurance policies 103 interest-in-possession trusts 340 interest-only mortgage 158, 246 interest rate decisions on mortgages 160–4 intestacy 338–9 in Scotland 338 investing in new companies 277–8 investment advice 47–50 investment clubs 314 investment element in Holloway plans 80 investment funds 307–24 active and passive 309–11 choice of 323–4 complex 327–9 forms 312–22 information about 311 pros and cons of using 307–9 investment-linked annuities 237–8, 244 Z01_LOWE7798_01_SE_INDX.indd 414 investment trusts 314–16 investment-type life insurance 106 investments bonds 285–9 buying and selling 288–9 collectibles as 332–3 diversification of 295–9 amount needed 296–9 and risk 296–7 gold as 331–2 ‘low-risk’ 23 mis-selling of 51–2 ranked by risk and return 256 real return since 1908 257 residential property as 330–1 in shares 289–91 taxation of 260–78 Irish banks 55 Islam Shariah-compliant mortgages 168 Shariah-compliant products 284–5 Islamic insurance 80 Jobcentre Plus 68 Jobseeker’s allowance (JSA) 67–8 joint-life-last-survivor annuity 101–2, 239–40 joint ownership of savings 103–4 LAUTRO 45 Lehman Brothers 23 level annuities 233 leverage 20–1, 315, 316 effects of 21 life insurance 106–7 buying 112 and income tax 266–9 regular-premium policies 267 single-premium policies 267–9 as investment 320–2 life-of-another insurance 111 life savings, lost 23 05/03/2010 09:50 Index lifestyling funds 306, 324 lifetime annuity 232 lifetime gifts, reducing inheritance tax 351–2 lifetime mortgages 247–8 liquidity risk 253, 255–9 on residential property 330 loan-to-valuation mortgages 153 lodgers 246 long-term care 130–41 choosing 141 deferred-care plans 139 and housing equity 245 immediate-care plan 138–9 insurance for 139–40 and pension schemes 211 self-paying 138 state provision 131–7 stress testing and review 141 low income and debt 32–3 housing grants and loans 246 income-based ESA 73 NI credits 189 saving for retirement 206 sickness or disability protection 84 and state benefits 15, 95 and support for mortgages 169 unemployment, protection from 68 lump sum payments from deferred state pension 221, 223–5 for family protection 99–100 after retirement 100 death in service 99 means-tested benefits 98 method of payment of PMI premiums 123 Money Guidance 42–4 money guidance advice 42–4 Money Management 82 money market funds 323 monthly outlay on mortgages 154–6 moratorium underwriting of private medical insurance 121 mortgage advice 45–6 mortgage indemnity guarantee 153 mortgage payment protection insurance 84 Mortgage Rescue Scheme 169 mortgage-to-rent schemes 170 mortgages 150–75 capital outlay 150–3 choosing 156–65 all-in-one mortgage 165 interest rate decisions 160–4 types 158–60 monthly outlay 154–6 resources 156, 157 review 173–5 and secured loans 45–6, 145 Shariah-compliant mortgages 168 shopping around 166–7 stress testing 168–73 income, fall in 168–70 negative equity 173 payments, rise in 171–3 multi-tied advisers 49 mutual principle in Holloway plans 79 market risk 297 market value reduction on insurance policies 322 maximum policy family protection 111–12 National Health Service 114 dental treatment charges 127 waiting times 116 National Insurance 67 and pension contributions 177 Z01_LOWE7798_01_SE_INDX.indd 415 415 05/03/2010 09:50 416 Index National Insurance (continued) and credits 188–9 to state pension 190 in UK tax system 370–71 National Savings and Investments (NS&I) 257–8 negative equity 20, 173, 248 NHS continuing care, long-term 135 nil-rate band in inheritance 342–3 reducing tax 351 no claims discount PMI premiums 123 no-negative equity guarantee 247 non-priority debts 34 non-taxpayers 264 and ISAs 273 nursing home, long-term care in 134–5 occupational pensions 47, 194–206 amount of pension 199–201 compensation 61, 215 complaints 61 closure of 214–15 defined benefit schemes 195–7 defined contribution schemes 197–8 hybrid schemes 199 increasing deferring retirement 203 extra contributions 201–2 salary sacrifice 202–3, 204 other schemes 203–5 tax-free cash 227–30 when eligible 199 when starting 225–6 open-ended investment companies (OEIC) 313–14 options 325–7 hedging with 326–7 speculating with 327 ordinary shares 291 Z01_LOWE7798_01_SE_INDX.indd 416 own home advantages and disadvantages 149 long-term care in 131–4 mortgage for 150–75 owner occupied housing security 104 partnership in state provision of long-term care 137 unmarried, and intestacy 338–9 passive funds 309–11 pay-out in Holloway plans 78 in IP insurance 78 payment protection insurance for sickness or disability protection 83–5 for unemployment 70–1 payments, rise in and mortgages 171–3 pension calculator 180, 182, 183 pension credit 98 pension schemes 99 and changing jobs 213–14 and ISAs 275 joining 196 and long-term care 211 new scheme from 2012 205–6 tax treatment of 184 as tax wrappers 184, 210 see also occupational pensions; personal pensions; state pensions pensions advice on 46–7 and family protection 103–4 and housing equity 245 increasing deferring pension 194 deferring retirement 203 extra contributions 192–3, 201–2 05/03/2010 09:50 Index salary sacrifice 202–3, 204 switching from married women’s reduced rate 193–4 resources 182–7 review 213–15 changing jobs 213–14 pension scheme closure 214–15 saving for 177–82 before-tax income 179 and spending 179 targets 179–83 stress testing 211–12 see also occupational pensions; personal pensions pensions, mis-selling of 51 pensions funds 103 as investment 320–2 personal pensions 47, 206–11 amount of pension 211 tax-free cash 227–30 tax relief and contributions 185–6, 207 when eligible 211 when starting 225–6 planned debt 13 polarisation 49 potentially exempt transfers (PETs) in inheritance 342–3 pre-owned assets tax 349 precipice bonds mis-selling 52 preference shares 290 premium bonds 282–3 premiums in IP insurance 78 in private medical insurance 122–3 in term insurance 107–8 priority debts 34 private health care 115–26 costs 120 medical insurance 120–5 Z01_LOWE7798_01_SE_INDX.indd 417 417 resources for 118–19 self-paying 119–20 stress testing and review 125–6 private medical insurance 120–5 choosing 124–5 cost of 122–4 coverage 121 how it works 121–2 switching policies 124–5 private rented housing security 105 property as asset 300, 324 protected investment products 327–8 protection-only life insurance 106 protection under financial advisers 54–61 compensation 59–60 complaints 58–9 public sector pension schemes 99 reducing balance loan 158, 159 redundancy 69–70 relationship breakdown and pension schemes 212 relatives, and intestacy 339 renewable term insurance 110–11 Rent-a-Room Relief 15, 359 rented housing 146–9 advantages and disadvantages 149 repayment mortgage 158 repossession 169 residential home, long-term care in 134–6 residential property as investment 330–1 Retail Distribution Review 50–2 Retail Prices Index (RPI) 28 retirement before-tax income 179 bereavement benefits after retirement 96–7 05/03/2010 09:50 418 Index retirement (continued) before retirement 95–6 and carrying on working 218–19 changing nature of 216–19 choices 220–44 deferring state pension 220–5 extra pension option 221–3 starting occupational pension 225–6 tax-free cash 226–30 deferring 203 lump sum payments after 100 spending in 179 stress testing and review 243–4 tax-free lump sum 186 retirement income 187–211 occupational pensions 194–206 see under own entry personal pensions 206–11 see under own entry state retirement pensions 187–94 see under own entry return on cross-holdings 318 risk balancing 256–60 in diversification 296–7 and return 254–6 timeframe and 253–4 risk aversion 8 RPI-linked annuity 236 salary sacrifice in ocupational pensions 202–3, 204 sale-and-rent-back schemes 170 savings bonds 285–9 and family protection 103–4 and income tax 264–6 products 280–2 premium bonds 282–3 savings accounts and bonds 279–82 Z01_LOWE7798_01_SE_INDX.indd 418 Shariah-compliant products 284–5 structured products 282–3 taxation of 260–78 for unemployment protection 70 savings accounts and bonds 279–82 savings CTF 275 savings Gateway 277 savings income, tax-free 264 savings income paid gross 265–6 savings income paid net 264 Scotland dying intestate 338 personal care in 134 secured loans and mortgages 45–6, 145 self-invested personal pensions 210– 11 self-pay route for dental treatment 127–8 for long-term care 138 for private health care 119–20 separated spouse, and intestacy 339 shared equity scheme on mortgages 169–70 shares 289–91 preference or ordinary 290 Shariah-compliant mortgages 168 Shariah-compliant products 284–5 short-term annuity 232, 239 shortfall risk 260 sickness, protection from 72–88 main statutory benefits 74 see also under disability, protection from single-life annuity 101 social fund grants and loans 98 Society of Trust and Estate Practitioners (STEP) 53 specific risk 297 speculation with options 327 split-capital investment trusts 316–19 05/03/2010 09:50 Index spread 288 stakeholder CTF 276 stakeholder pension schemes 205, 208–10 stamp duty land tax 150, 152 standard-variable rate mortgage 161, 164 starting-rate taxpayers 264 and ISAs 274 state, help from disability protection 72–4 family protection 95–8 bereavement benefits 95–7 means-tested benefits 98 tax credits 97–8 low income 15, 84 unemployment protection 67–8 state earnings-related pension scheme (SERPS) 189, 191 state provision of long-term care 131–7 capital limits for assistance 136 changes to 136–7 in own home 131–4 in residential home 134–6 state retirement pensions 187–94 additional pension scheme 189–92 amount of pension 192 basic pension 187–8 couples, rules for 189 increasing deferring pension 194 extra contributions 192–3 switching from married women’s reduced rate 193–4 NI contributions and credits 188–9 state second pension scheme (S2P) 189–90, 191–2 statutory sick pay 75 stock-and-shares CTF 276 structured products 283–4 Z01_LOWE7798_01_SE_INDX.indd 419 419 student loans 31–2 survivor pensions 100–2 taper relief in CGT 345 target dating funds 306, 324 tax credits and family protection 97–8 in UK tax system 381–6 tax-free bequests 351 ‘tax-free’ investments 271 tax-free lump sum at retirement 186 in defined benefit pension 228–30 in defined contribution pension schemes 227–8 tax-free savings income 264 tax relief on pension contributions 185 tax wrappers incentive schemes 270–8 child trust funds 274–6 friendly society plans 276–7 individual savings accounts 272–4 investing in new companies 277–8 savings Gateway 277 for investments 261 pension schemes as 185–6, 210 taxation advice on 52–3 of capital gains 263 on inheritance 347–8 income tax on inheritance 348–9 gifts to minor children 348–9 gifts you still benefit from 349 and inheritance tax 342–7 basics 342–4 on estate 344 gifts with reservation 346–7 lifetime gifts 344–6 reducing 350–4 workings of 343 on residential property 231 05/03/2010 09:50 420 Index taxation (continued) of savings and investments 260–78 taxpayers and ISAs 274 types 262–3 term insurance 106–11 and critical illness insurance 108–9 family income benefit 109 premiums 107–8 types 107–11 terminal bonus in insurance policies 322 third-way products 243 tied advisers 49, 50 time and diversification 304–7 total expense ratio of investment funds 309 tracker funds 319–20 tracker rate mortgage 161, 164 transaction-only debt 13 transparency, lack of in insurance policies 322 trusts, inheritance 340–1 UK tax system capital gains tax 371–80 income tax 358–69 tax-free and taxable income 359–60 National Insurance 370–1 tax collection 380 tax credits 381–6 unemployment, protection from 67–72 Z01_LOWE7798_01_SE_INDX.indd 420 employer, help from 69–70 plan for 70–1 payment protection insurance 70–1 savings 70 state, help from 67–8 stress testing and review 71–2 unit-linked fund 238 unit trusts as investment fund 313–14 unmarried partner, and intestacy 338–9 value-for-money in pension schemes 211, 212 wealth, managing derivatives 325–7 diversification 295–307 asset allocation 299–304 of investments 295–9 over time 304–7 investment funds 307–24 stress testing and review 333–4 whole-of-life insurance fund 321 widowed parent’s allowance 96 wills 104 if there is no will 337 reasons for 339–40 with-profits fund 238, 321 working tax credit 97 zeros 316–17 05/03/2010 09:50

For many households, leverage is likely to be highest in the earlier half of working life and diminish as retirement approaches. High leverage may suggest a household that is vulnerable to falling asset prices that could turn net worth negative. The consequences of this are most easily understood in the context of housing: if you have a high mortgage relative to the market price of your home, a fall in house prices can tip you into ‘negative equity’ (where your mortgage exceeds the value of your home). Negative equity is not a problem, provided you do not need to sell the home. Similarly negative net worth is not an immediate problem, but becomes one if you have to sell assets, which then turns paper losses into real losses. High leverage may also mean the household is vulnerable to factors such as increases in interest rates which will push up the amount it spends each month servicing its loans (unless they have been taken out at a fixed rate).

You can see that there are relatively few periods when prices have fallen and, when they have, the fall has usually been relatively short-lived – just a year or two. When you are buying a home with a mortgage, there are broadly two ways in which you can try to protect yourself from negative equity: OO put down a larger rather than smaller deposit when you buy; OO if you have to move home, consider renting out your old home and using that income to rent somewhere yourself, in order to defer the sale. (But see Chapter 10 for some issues to think about if you are renting out a property.) Review If any of the changes discussed under Stress testing – a fall in your income, a rise in your monthly payments or a fall in house prices that pushes you into negative equity – materialise, they should always trigger a review of your plan. If you have built in some of the protective measures discussed above, this will be the time to claim state benefits or claim on insurance, dip into savings or cut back your spending.


pages: 202 words: 72,857

The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy by John Lee

8-hour work day, Albert Einstein, barriers to entry, Bernie Madoff, butterfly effect, buy low sell high, California gold rush, Donald Trump, financial independence, high net worth, intangible asset, Kickstarter, Mark Zuckerberg, negative equity, passive income, payday loans, self-driving car, Snapchat, Stephen Hawking, Steve Jobs, stocks for the long run, stocks for the long term, Tony Hsieh, Y2K

Even when there is a slump in the property market, you are better off investing in property than stocks. When the property market slows down people start to rent rather than buy, and the average price of rent goes up. It becomes a landlord's market. It doesn't even matter if you're temporarily in negative equity, because your rental income will still be coming in. (A note about negative equity: In the case of a residential property the bank cannot force you to sell the property as long as you keep paying the mortgage repayments, even if you are in negative equity. The rules are slightly different for a commercial property; if you are in negative equity, the bank will ask you to increase your equity to maintain your loan-to-value ratio. Your loan can only represent a maximum percentage of the value of the property [usually 80 percent]. For instance, if you bought the property for £100,000 with a £20,000 deposit, you'll have a mortgage of £80,000.

Li Ka-shing Limitations Lincoln, Abraham Lloyd, Alan Loans deal making process and as property investment strategy Vince’s stories See also Mortgages Lockout agreements Lopez, Steve Los Angeles Times Lotteries Luck Malaysia, off-plan property investment in Marketing Market niches Market positioning Market value Marley, Bob Marlow, Ben Marriage Maslow, Abraham The Matrix Mayer, Bob Media Mentors Meritocracy Messiah-Harlock, Rosie Microsoft Mindsets abundant fear miserly See also More money mindset Miserly mindset Monetary wealth, relationship with moral wealth Money happiness and need money to make a lot of money myth as power spending to make money undesirable truths about value of See also Wealth Moral wealth, relationship with monetary wealth More money mindset infinite amount of money assurance key concepts life goal planning taking control over own money wealth education Mortgages Golden Rules for John’s stories negative equity impact strategies for truth about Vince’s stories Motivational tools Needs, Maslow’s hierarchy of Negative equity Negative people Negotiation Net asset value (NAV) Networking Network Property Buyers Net worth A New Earth (Tolle) Nietzsche, Friedrich Off-plan property Opportunities, becoming aware of Osbourne, George Outliers (Gladwell) Parallel universe perspective characteristics of wealthy people excuses failure getting and spending money higher education learning curve limits to achievement money and happiness overview of savings taking action Paranoid sellers Parenting Passive income generation Pensions People skills Perspective Philanthropy.

Value investing (and all we are doing here is applying value investing to property) is simple: Buy low, sell high. But people fail because they let their emotions get in the way: for example, they'll get a big tip about a stock and buy it despite the fact that it is overvalued, then become distraught when the tip doesn't pay off. Similarly, in the property market people get seduced by pretty houses and spend too much, then balk as the market dips a bit and they slip into negative equity. It's actually one of the biggest mistakes people make when getting into the property business: living vicariously through their business. They shop for pretty properties and fall in love with these properties. The property is not important; the deal is important. If it's a good deal (i.e., you are able to buy it at a decent percentage below its market value), then buy the property. If it's not a good deal, then don't.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

As house prices rise, so does their ‘net wealth’ – that is, the paper value of homes and the land beneath them, once mortgage debt has been subtracted. This can make households feel that they are in position to continue spending, even if their debts are increasing in ratio to their incomes. However, if there is a serious economic shock to the economy or a rise in interest rates, households may struggle to keep up with the repayments. This may lead to both a fall in consumption and negative equity and defaults. The latter will most likely lead to a fall in domestic and commercial property prices, bank lending contracting, recession and, potentially, a financial crisis as the feedback cycle goes into reverse. Just as house prices can rise more quickly than the rest of the economy, so they can fall, particularly where more speculative investors engage in firesales of property with distressed debt (Shleifer and Vishny, 2011).

Secondly, interest rates were progressively lowered by the government during the period. Thirdly, the cost of interest was being subsidised as tax relief on mortgage interest was granted at the borrower’s marginal, i.e. highest, rate up to a £30,000 limit. Between the late 1970s and the mid-1980s, the tax relief per mortgagor in real terms rose by 50% (Davies, 2002, p. 438). The bubble eventually burst in the house price crash of 1990. This left many borrowers in ‘negative equity’ – around 20% at its peak according to a recent estimate (Aron and Muellbauer, 2016) – where the price of their houses was below what they owed on their mortgage. This amplified and prolonged the severe recession of the following three years, which involved many more job losses than the 2007–8 crisis. The collapse in the housing market in the early 1990s led to a large number of repossessions and a collapse in business lending.

In the EU all mortgage loans are ‘full recourse’ loans, which means that, following a default, the lender can foreclose the secured asset and also has recourse to the borrower, meaning that the lender can also collect the debt from the borrower’s unsecured personal assets and from their future income. In contrast, in many US states mortgage loans are ‘non-recourse’ loans, which means that, following a default, the lender can foreclose and sell the property, but has no recourse to the borrower’s personal assets or future income. If the property is in negative equity at the point of default, the shortfall between the mortgage and the property value is borne by the lender (Harris and Meir, 2015). This difference has a crucial impact on the incentives facing borrowers who are struggling to make repayments. As Harvard economist Martin Feldstein points out: The ‘no recourse’ mortgage is virtually unique to the United States. That’s why falling house prices in Europe do not trigger defaults, since the creditors’ potential to go beyond the house to other assets or to a portion of payroll earnings is enough to deter defaults.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

"Robert Solow", Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, business cycle, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

For many households during the Great Recession, the value of their homes dropped below the amount still owed on the mortgage. Home owners then became “underwater” or “upside-down” on their mortgage and actually had negative equity in their home. If they chose to sell, they had to pay the difference between the mortgage and the sale price to the bank. Faced with this dire circumstance, home owners could either stay in their homes and owe the bank more than their homes were worth, or walk away and let the bank foreclose. Many chose to stay. In 2011, 11 million properties—23 percent of all properties with a mortgage—had negative equity.4 Even though we know these numbers well, we are still shocked as we write them. They are truly stunning and worth repeating: home owners in 1 out of every 4 residential properties with a mortgage in the United States were underwater.

Mortgage Default Crisis,” Quarterly Journal of Economics 124 (2009): 1449–96; Atif Mian and Amir Sufi, “Household Leverage and the Recession of 2007–2009,” IMF Economic Review 58 (2010): 74–117; and Atif Mian, Kamelesh Rao, and Amir Sufi, “Household Balance Sheets, Consumption, and the Economic Slump,” Quarterly Journal of Economics, forthcoming. 4. CoreLogic Press Release, “CoreLogic Third Quarter 2011 Negative Equity Data Shows Slight Decline but Remains Elevated,” November 29, 2011, http://www.corelogic.com/about-us/news/corelogic-third-quarter-2011-negative-equity-data-shows-slight-decline-but-remains-elevated.aspx. 5. Daniel Hartley, “Distressed Sales and Housing Prices,” Federal Reserve Bank of Cleveland Economic Trends, February 24, 2012. 6. Atif Mian, Amir Sufi, and Francesco Trebbi, “Foreclosures, House Prices, and the Real Economy” (working paper no. 16685, NBER, May 2012). 7.

If the mortgage payment were linked to the exact value of Jane’s house, she would have a perverse incentive to hurt the home’s value through neglect in order to reduce the payment. This moral hazard problem is important and explains why equity-like contracts should be made contingent on a measure of asset performance outside the control of the borrower. 14. CoreLogic estimates $822 billion in negative equity of 12.1 million home owners in the first quarter of 2010. Our debt write-off is significantly less because the decline in house prices is less severe in the SRM scenario with the avoidance of foreclosures. 15. See also Xia Zhou and Christopher Carroll, “Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States,” B.E. Journal of Macroeconomics 12, no. 2 (2012). 16.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

The 2,000,000 construction workers who lost their jobs were among those injured by the popping.7 Meanwhile, despite a collapse in the number of new houses being built,8 the stock of homes available for sale is still well above its historical average.9 In America, in 2010, some 23.1% of homes were in negative equity,10 and more than a quarter are currently in negative equity or near-negative equity.11 Every tick downwards in house prices will drag ever greater tranches of the US population into that frightening and unwanted position. Perhaps most scary of all, there are between 1.5 and 2 million homes not yet on the market but where the mortgages are delinquent or foreclosure proceedings have taken place. Those homes will, one day, need to be sold.12 When that great dam of selling activity finally bursts, the effect on house prices will be catastrophic. Finally, all this‌—‌the negative equity, the distressed sales, the unsold homes, the falling prices‌—‌is happening while the Fed desperately attempts to keep the great American Ponzi scheme alive for as long as possible.

To date, there has been carnage in the subprime market, but relatively little blood spilled in the prime or commercial markets. That precarious calm, however, is unlikely to last. Further dips in the price of housing will start to generate huge cracks even in the prime market. Those cracks will, in turn, cause a wave of distress sales‌—‌foreclosures, and homeowners seeking to escape the burden of negative equity‌—‌and those sales will force prices lower still. In short, though the government’s housing debts are unquestionably real, the associated assets are anything but. So we should strike out $75 trillion and replace the figure with something over $80 trillion … but even this total still represents only actual liabilities, not contingent ones. A contingent liability is one that may or may not be incurred, depending on how things pan out.

Subprime mortgages have turned delinquent in huge numbers. Prime mortgages have remained relatively unaffected.13 I’m not certain that it will happen‌—‌no one can predict the future with perfect accuracy‌—‌but the likelihood is that gathering economic pressures will start to place the prime housing market under pressure. Delinquencies will rise. Distressed sales will rise. Prices will fall. Negative equity will become even more common. As interest rates increase from their historic lows and as ‘teaser rate’ mortgages click through to their full-price level, things will only get worse. In more and more households across the country, wives and husbands will look at each other across the dinner table, asking why the heck they’re struggling to pay the mortgage when the loan is worth tens of thousands more than the house.


pages: 299 words: 83,854

Shortchanged: Life and Debt in the Fringe Economy by Howard Karger

big-box store, blue-collar work, corporate social responsibility, credit crunch, delayed gratification, financial deregulation, fixed income, illegal immigration, labor-force participation, late fees, London Interbank Offered Rate, low skilled workers, microcredit, mortgage debt, negative equity, New Journalism, New Urbanism, offshore financial centre, payday loans, predatory finance, race to the bottom, Silicon Valley, Telecommunications Act of 1996, telemarketer, underbanked, working poor

Or it may require a cosigner, to create the impression that monthly payments will be made, even though the lender knows that the cosigner will not help. In other cases, a borrower may be required to sign a blank loan application into which the lender inserts false information, such as a nonexistent job. In more extreme cases, predatory lenders have forged loan documents.37126 NEGATIVE EQUITYNegative equity” is a relatively new financial ploy that allows homeowners to borrow up to 125% of the loan value of their home. For example, if a property is appraised at $100,000, the homeowner can borrow 125% of the value of the home, giving him a mortgage balance of $125,000, or $25,000 more than the property is worth. If a homeowner is forced to move because of a job, health problems, or other reasons, he won’t be able to sell the home without adding money to pay off the existing loan.

However, the foreclosure of a 125% LTV home will not generate sufficient funds to pay off the loan, and the homeowner will remain legally liable for the shortfall. For example, if a home sells for $100,000, the seller’s costs at closing might include $7,000 for real estate broker fees (calculated at 7%); approximately $3,000 in sundry closing costs; and an unknown amount for repairs resulting from a home inspection. At most, the seller’s proceeds will total $90,000. If the seller has a negative-equity loan of $125,000, he will be forced to pay the extra $35,000 out of pocket. A HUD-endorsed variation of refinancing is a reverse mortgage for senior citizens, called a Home Equity Conversion Mortgage (HECM). This option allows the elderly to unlock the equity they have in their property by borrowing against it. Elderly homeowners receive payments from lenders monthly, all at once in a lump sum, or as a line of credit.

(foreclosure scam), 140–141 Department of Justice (DOJ), 49 Direct Telephone Company, 101 discounting practices (auto loans), 151–152, 153 Discount Tire, 165 Discover, 48 discrimination, 56, 89 disputes, arbitration, 119–120 Dollar Financial Corporation, 8, 88 downstreaming, 123 DPI Teleconnect, 101 Driven to Succeed, 171 DriveTime, 157 Earned Income Tax Credit (EITC), 23, 24, 80–81, 209 e-commerce, 26 economic phases (1989–1993), 21240 Economic Policy Institute, 22 economic stratification theory, 36–37 educating consumers, 202–204 electronic bill paying, 92 Employer Identification Number (EIN), 189 Engelkins, Lisa, 75 Equifax, 189 equity HELOCs (home equity lines of credit), 122 home equity, 120–127 Home Equity Conversion Mortgage (HECM), 126–127 Home Ownership and Equity Protection Act (HOEPA), 5 negative equity, 126–132 shared (SAM loans), 117–118 stripping, 123–126 upside down, 30–31, 121 European markets for fringe economy, 213–214 evolution of fringe economy, 103–105 Experian, 189 exportation of America’s fringe economy, 213–214 Express Cash, 67 EZCORP, 213 EZ Pawn, 8, 67 Fair Share plans, 175, 176, 178, 181–182, 191 Famous Pawn, 67 Fannie CLAC, 170 Fannie Mae (Federal National Mortgage Association), 113, 125, 211 Fast Cash pawnshop, 69–70 Federal Deposit Insurance Corporation (FDIC), 7, 78, 85, 202, 206–207 federal regulations, 200–202 Federal Reserve Bank, 14, 91, 93, 111–112 Federal Reserve Board (FRB), 5, 202 Federal Trade Commission (FTC), 202 Feehan, Daniel, 9–10 fees alternative phone market companies, 101–102 bounced-check/overdraft, 78, 207–208 check-cashing outlets, 90, 91 credit cards, 52, 57–58, 58–59, 61 debt settlement, 187–188 Get-A-Fone, 100–101 inequality of, 106–107 mortgage, 115–116, 119, 123 pawnbrokers, 67–68 payday loans, 73–74 post-paid cell phone service, 102–103 refinancing/home equity, 120 regulating, 142 FICO (Fair Isaac Company) score, 46–48, 115 file segregation, 189–190 financial institutions, mainstream, 12–15 Financial Liberty accounts (Legacy Bank), 209 Financial Service Centers of America (FiSCA), 14–15, 104 financing used cars, 148–154 First Accounts program (U.S.


Not Working by Blanchflower, David G.

active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, Boris Johnson, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, estate planning, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, illegal immigration, income inequality, indoor plumbing, inflation targeting, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta analysis, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, Own Your Own Home, p-value, Panamax, pension reform, plutocrats, Plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

By doing so, these voters de facto limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers” (2018, 3). Negative equity may prevent people from moving because they are locked in. Moreover, even where there isn’t negative equity it is perfectly possible that a lower credit score makes it hard for many individuals to obtain the mortgage they currently have on another property. Nationally, according to Zillow, five million homeowners, or 10.5 percent of those with a mortgage, were underwater at the end of 2016, down from 13.1 percent of homeowners a year earlier. More than 55 percent of homeowners in negative equity are more than 20 percent underwater. 14 Negative equity in 2016 was substantial in several rust-belt towns including East Stroudsburg, Pennsylvania (29%); Racine, Wisconsin (23%); Toledo, Ohio (14%); Battle Creek, Michigan (17%); and Scranton, Pennsylvania (17%).15 Negative equity impacts mobility, making it hard, or even impossible, for people to move.

My limo driver taking me to a TV studio in Naples, Florida, one day told me he moved to southwest Florida in 2007 and can’t move even if he wanted to because the value of his house has fallen dramatically and is still well below the size of his mortgage. He is stuck. Table 4.2. Annual U.S. Geographical Mobility Rates, by Type of Movement, 1950–2016 (%) Table 4.2 shows the big decline in mobility in the United States. In part this has to do with having negative equity. The table shows that the proportion of adults who move in any one year has essentially halved since 1950. This is true for movements within the same county, between counties in the same state, and to different states. Indeed, on November 16, 2016, the U.S. Census Bureau reported that the percentage of Americans moving over a one-year period fell to an all-time low of 11.2 percent in 2016. 10 Among those who moved, 42 percent said they moved for a housing-related reason, such as wanting a new or better home/apartment.

More than 55 percent of homeowners in negative equity are more than 20 percent underwater. 14 Negative equity in 2016 was substantial in several rust-belt towns including East Stroudsburg, Pennsylvania (29%); Racine, Wisconsin (23%); Toledo, Ohio (14%); Battle Creek, Michigan (17%); and Scranton, Pennsylvania (17%).15 Negative equity impacts mobility, making it hard, or even impossible, for people to move. Chevalier and Lardeux (2017) found evidence of a positive correlation between the homeownership rate and the unemployment rate in France using the French census from 1968 to 2011. They found that a 10percentage-point rise in local homeownership increased the unemployment rate by around 1 percentage point. They argue that part of the explanation is that spatial mismatch and workers’ immobility reduce their access to information to new jobs, therefore limiting their ability to search for jobs and lowering the exit rate from unemployment. Andrews and Sánchez (2011) have noted that homeownership rates have increased significantly in many OECD countries over recent decades.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

But one bubble eventually burst in the early 1990s, and the same process seemed to repeat in early 2008. Eventually, prices rise so far (or interest rates go up) that first-time buyers are shut out of the market. As the prospect of easy profits vanishes, speculators also lose heart. And the banks and building societies also become more cautious about lending. As house prices fell, many mortgages became worth more than the homes they are secured on – a state known as ‘negative equity’ (see Chapter 15). Negative equity faces lenders with a tricky dilemma. Once borrowers default on their interest payments, societies have the right to reclaim the asset, i.e. the house. But selling the house would not provide enough cash to pay off the loan. Furthermore, the more homes the societies repossessed, the more empty homes there were on the property market, depressing house prices and giving an extra twist to the downward spiral.

But these difficulties were dwarfed in the early 1990s and then again in 2007–8 by the problem of negative equity. Most homeowners (particularly first-time buyers) own only a small proportion of their house. The rest is covered by the mortgage. The mortgage lender does not care whether the house rises or falls in price; it wants the amount of the loan to be repaid in full. Supposing a homeowner buys a house for £100,000 with a deposit of 5 per cent and borrowing the remaining 95 per cent from a building society. If the house falls 10 per cent in value (to £90,000), the homeowner still owes the building society £95,000. But he cannot sell the house to repay the debt since he would not raise enough money. He is trapped in ‘negative equity’. The 1980s boom in prices was repeated in the early years of the twenty-first century.


Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, time value of money, transaction costs, Y2K, zero-coupon bond

In fact, Mead Johnson boasts the group's highest return on sales and has investment grade ratings (medium to high Triple-B). For this company, the DuPont analysis is meaningful only up to the point of return on assets, as Mead Johnson's positive net income divided by its negative equity produces a negative figure, implying that the profitable company has a negative return on equity. The Mead Johnson Nutrition case is just an extreme case of a phenomenon observed with several companies in Exhibit 14.7. They have low, although not negative, equity balances, resulting in spectacularly higher returns on equity, for example, Campbell Soup (78.79 percent) and Hershey (60.51 percent). In part, those results reflect the two companies’ employment of the comparatively high financial leverage within the industry.

Consider a firm that is deriving huge earnings from a trademark that has no accounting value because it was developed internally rather than acquired. The present value of the profits derived from the trademark would be included in the economist's definition of equity but not in the accountant’s, potentially creating a gap of billions of dollars between the two. The contrast between the economist's and the accountant's notions of equity is dramatized by the phenomenon of negative equity. In the economist's terms, equity of less than zero is synonymous with bankruptcy. The reasoning is that when a company's liabilities exceed the present value of all future income, it is not rational for the owners to continue paying off the liabilities. They will stop making payments currently due to lenders and trade creditors, which will in turn prompt the holders of the liabilities to try to recover their claims by forcing the company into bankruptcy.

If the company runs into a patch of bad luck, recording net losses for several years running and writing off selected operations, the book value of its assets may fall below the value of its liabilities. In accounting terms, the result is negative shareholders’ equity. The economic value of the assets, however, may still exceed the stated value of the liabilities. Under such circumstances, the company has no reason to consider either suspending payments to creditors or filing for bankruptcy. The Western Union Company's September 2006 spin-off from First Data Corporation demonstrated that negative equity in an accounting sense is not synonymous with insolvency. In connection with the spin-off, the provider of money transfer services distributed approximately $3.5 billion to First Data in the form of cash and debt securities. Net of other events during the period, shareholders’ equity fell to –$314.8 million on December 31, 2006, from $2.8 billion one year earlier. By producing solid earnings over the next three years, Western Union boosted shareholders’ equity to $353.5 million by December 31, 2009.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, selection bias, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

Maiden Lane II and III addressed these issues, respectively, by purchasing the underlying collateral from AIG and its counterparties and canceling the CDS contracts that AIG owed against them. This eliminated the risk that these contracts would continue to result in additional margin calls that would further drain AIG’s cash. Seven: Into the Fire 1 hardworking homeowners who were underwater: A home is “underwater” or has “negative equity” when the mortgage debt on the home exceeds its value. Thus, a $100,000 home with a $120,000 mortgage would have negative equity of $20,000. 2 Bank shareholders had no idea whether they would face substantial dilution: When a firm increases its number of shares of common stock, existing shareholders are “diluted,” meaning they own a smaller percentage of the future profits of the company. For example, if a firm with one million shares outstanding needs to raise $1 million at $1 per share, it would issue one million additional shares.

Treasury Department (Treasury) includes TARP, temporary guarantee program for money market funds, agency MBS purchase program, and gross draws under GSE preferred stock purchase agreements. 3 changed the trajectory of the recovery: 11 million households—22 percent of mortgage borrowers—were underwater, of which three quarters were current on their mortgage payments. A large share of the money spent to eliminate negative equity would have been directed to current borrowers, and as a result the overall economic impact of that would be very small. My economics team figured that increases to wealth from the reduction of negative equity would result in only an annual three- to five-cent increase in GDP for every dollar spent on debt reduction; by contrast, a dollar of stimulus used to increase income would have at least ten times that effect in the year it was received. Ten: The Fight for Reform 1 This was a necessary condition, though not a sufficient condition: As discussed in chapter 3, low interest rates were only partly a function of monetary policy.

That was short of the program’s initial target, but by 2014, another twenty-three million U.S. homeowners would refinance their mortgages outside of HARP, a huge though unheralded stimulus. Our final goal, helping vulnerable families stay in their homes, was more complicated. By the fall of 2009, two million U.S. mortgages were in foreclosure and another seven million were at serious risk of foreclosure. About eleven million homeowners were underwater—one in every five mortgages—with a total of about $700 billion in negative equity. Our resources could make an important difference in the lives of some vulnerable families, but they were far too limited to fix America’s housing problems, much less its larger economic problems. It was also going to be extremely difficult to decide whom to help and how to help them. Even after the horrific recession, roughly nine out of ten homeowners were still paying their mortgages on time, often at significant hardship and sacrifice.


pages: 93 words: 24,584

Walk Away by Douglas E. French

business cycle, Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, Robert Shiller, Robert Shiller, the market place, transaction costs, unbiased observer, wealth creators

And if mortgagees walk away en masse, will they be responsible for destroying modern American society? Despite the millions of homeowners whose primary asset is now a debilitating liability, the number of foreclosures doesn’t match the under-water estimates. First American Core Logic estimated that nearly a third of all mortgages (32.3% exactly) were under water in June of 2009.... That’s 15.2 million loans, and the negative equity position totaled $3.4 trillion. A Deutsche Bank report predicted that by 2011 nearly half of all mortgaged Americans, or 25 million homeowners, would be “under water.” In a number of former boom cities, the vast majority of homeowners are already under water. A number of towns, primarily in the central valley of California, have current percentage of underwater homeowners exceeding 80%. Eighty-one (81) percent of all homeowners in Las Vegas were estimated to be under water, 70% of those in the Miami Beach area and 68% of homeowners in Phoenix owe more than their homes are worth.

* * * CHAPTER TEN * * * Conclusion “Economic interventionism is a self-defeating policy,” Ludwig von Mises wrote in Bureaucracy. “The individual measures that it implies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter.” Professor White argues that the current negative equity problem is “market failure,” but of course this isn’t a market failure at all, but the result of decades of continuous government intervention to promote individual home ownership and the financing of those homes. These policies have led to government standardization of neighborhoods and virtually a complete government takeover of the financing of homes. Government guarantees have become the entire secondary mortgage market and gave birth to the securitization of mortgages that provided the incentive for lenders to relax underwriting guidelines going into mortgage transactions and the disincentive for lenders to negotiate with borrowers as market conditions and circumstances changed.


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

It is also more likely to make you properly wealthy in the medium to long-term. If the only investment you have in your life is property then you are missing out on substantial opportunities to grow your money – and your financial situation is fundamentally imbalanced. NEGATIVE EQUITY I do appreciate that some people reading this may be suffering from negative equity. For those who don’t know the term, this means that if you were to sell your house you would end up with less than you need to pay your mortgage back. I can only imagine just what a horribly stressful situation this is to be in. If you are in negative equity, it may not be immediately obvious that you can benefit from moving home. What you decide to do will be an intensely personal decision, based on your own specific circumstances. Being completely honest, if I found myself in that position today I would be very worried about two things: The very real risk that interest rates are likely to increase in the years ahead.

In a bull market, you are able to use other people’s money to grow your wealth. This has benefitted many people in the English-speaking world over the last few decades – or at least the ones who ensure they take profits and sell those properties before the market peaks. If you have borrowed to purchase an asset and that asset then falls in value, you end up with nothing to repay your loan. We discussed this briefly when we looked at negative equity. It can be a very painful situation, which is one of the reasons that people can go very wrong with property investment. As a general rule, the fact that you can borrow money in order to buy a property means there are opportunities for the smart investor to make great money doing so. It is crucial, however, to make sensible assumptions about what might happen to the value of what you buy and to the cost of the money you borrow.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

., in which case you might well be under a legal obligation to go into receivership—would be to simply ignore the question and keep going. You’d hope to be able to pay your bills as they fell due and hang on for grim life until your house price recovered. As we speak, hundreds of thousands of people across the United Kingdom—around the world—are doing precisely that. The current estimate of the number of people in the United Kingdom with “negative equity” is 900,000. A business can’t have negative equity; if it does, it is insolvent. But businesses can and do have considerably different levels of equity, and it often makes their businesses look different in an instantly recognizable, at-a-glance way. At business school, they play a game—sorry, “undertake an exercise”—in which students are given balance sheets and asked to determine what type of business the company is in.

Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.”10 What the banks want to be able to do is what most of us would do in comparable circumstances. Indeed, it’s what a good few of us, myself included, have done in the past, during previous busts in the property market. When that happens, you just wait. Perhaps some of us are in the dreaded position of having the famous “negative equity,” as described above. In their case they can sell and take a loss, if they can afford to—or they can just wait. Carry on living, and wait for prices to recover, and even if they don’t they still have somewhere to live. That’s what the banks would like to do about their toxic prices: wait for them to become nontoxic. If they were forced to value their assets today for the prices they could get today—a practice known as “mark to market,” which is supposedly enforced on most kinds of assets—some of them would be insolvent.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, Thales of Miletus, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Oldfield abandoned his Russian adventure and headed back to London. That first abrupt experience gave him a feel for his own levels of risk tolerance. It also educated him on how mortgage markets in general work. One feature of the housing-finance market in particular bothered him: home ownership requires both the borrowers and the lenders to take on an awful lot of risk. Borrowers must face up to the possibility of unemployment, negative equity, and rising interest rates; lenders must cope with the threat of defaulting borrowers and declining asset values. It so happened that a friend of Oldfield’s had written a report in the mid-2000s for the Australian government on mortgage markets, which contained ideas on how to address that problem. And what Oldfield has been trying to do in the years since—first in Australia and then in Britain with a new venture called Castle Trust that is backed by J.

He can sell the house, pay off the debt, and still walk away with 50 percent of his initial deposit. But in the second example, the same downward move in prices wipes out the entire deposit. In the run-up to the crisis, of course, people were often putting down much less than a 10 percent deposit. With only a tiny sliver of their own capital to protect them, and in some cases not even that, many American home owners were quickly pushed into negative equity when property prices fell: in other words, the amount they owed the bank was more than the value of their own home. Being under water on other financial assets is not pleasant, but it is at least possible to calibrate a response. When stock prices fall, for instance, borrowers can sell some of the shares to raise whatever is needed to keep their heads above water. There is no equivalent with property: you can’t decide to sell off your spare bedroom and keep the rest of the house.

But this issue does help to explain the value of collateral in resolving many of the hurdles that financial instruments face, especially ones that stretch over many years. It is much easier for mortgage providers to bet on someone’s future earnings when there is an immovable bit of security (a house) on hand to provide backup in the event of default. Collateral can also help the borrower, and not just by reducing the cost of borrowing. Provided he is not in negative equity, a mortgage holder has the option of getting rid of his debts by selling his property and paying back the bank. Collateral offers the borrower an exit route. Human capital, the economic value embodied in each of us, is the ultimate illiquid asset. It will clearly take a lot of time for the concept of human-­capital contracts to become a routine part of the financing landscape. It is easier to make this model work for people who have already graduated and want to raise money for the next stage of their careers than to extend it to the financing of undergraduate degrees, where the amount of data that can be drawn on to predict future income is necessarily lower.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

Recession and the Prospect of Recovery The latest recession has been characterized by certain features that set it apart from previous recessions. The US and the UK, as well as many of the eurozone countries, have a high debt to GDP ratio, as well as large current budget deficits. Households have also been highly indebted, with their principal asset – houses – depreciating in value and thus facing negative equity. Banks required recapitalization in the US and the UK. It looks likely that this experience will be repeated in the eurozone countries. There are also global imbalances at play, with many “emerging” economies having large surplus foreign exchange reserves and the developed countries, especially the US, indebted to them. The lackluster recovery has become a contentious issue, with some arguing that its fragility is a result of the cautious fiscal response by governments wedded to cutting budget deficits rather than boosting fiscal spending.

The argument that the recession would have been much worse had there not been a sustained policy of keeping interest rates low is a counterfactual which is difficult to disprove. The low interest rates which have persisted have given households room to deleverage slowly rather than being forced into mortgage foreclosures, as has happened in earlier recessions. This may have eased the pain of holding negative equity. Many firms – Zombie firms, as they are called – have avoided bankruptcy thanks to the historically low interest rates. But then, at the same time, it has also postponed the required adjustment to correct the core problem of too much debt. This leads to the problem of a stock disequilibrium. Let me explain. If I borrow, my borrowing is a flow which adds to my stock of debt. Budget deficit is a flow while public debt is a stock.

Joseph (i) Meade, James (i) mean (i) measurement of capital debate (i) mechanization, of weaving (i) Meiselman, David (i) Menger, Carl (i) mercantilism (i), (ii), (iii) Mexico see crises, Mexican microeconomics (i) Middle East, post-World War I (i) Mill, John Stuart (i) Mitchell, Wesley Clair (i) Mitterand, François (i) modeling (i), (ii) macro-200 new classical economics (i) see also econometric modeling Modigliani, Franco (i) monetarism (i) control of money supply (i) deficit reduction demands (i) effects of (i) political support (i) monetarists (i) monetary policy Bundesbank (i) role of (i) as tool for recovery (i), (ii) monetary theory (i) money circulation (i) effect on economic system (i) motives for demand (i) role of (i) as scaling variable (i) money balances (i), (ii) money changers (i) money cranks (i) money price level (i) money problem (i) money supply (i), (ii) money wages flexibility/rigidity (i) and inflation (i) rates of increase (i) and unemployment (i), (ii) see also real wages; wages monopolies, grants of (i) monopoly power (i) Moore, Henry (i) mortgages (i), (ii), (iii) securitization (i) subprime (i), (ii) moving data, and unique static equilibrium (i) “Mr Keynes and the ‘Classics’: A Suggested Interpretation” (Hicks) (i) multiplier-accelerator model (i) multiplier process (i), (ii) Friedman’s challenge (i) Myrdal, Gunnar (i), (ii) Monetary Equilibrium (i) national data (i) National Debt (i) natural rate of interest (i) natural rate of unemployment (i) negative equity (i) neoclassical economics (i) neoclassical-Keynesian synthesis (i) new classical economics (i) attitude to modeling (i) modeling (i) time series data (i) new classical macro model (i) new classical model (i) aggregate demand and aggregate supply (i) policy implications (i) new normality (i) Newcomb, Simon (i) newly-industrialized economies (i) Newton, Isaac (i), (ii), (iii) Nixon, Richard (i), (ii), (iii) Nobel Prize (i), (ii), (iii), (iv), (v), (vi) nominal level (i) non-inflationary continuous expansion (NICE) (i), (ii) normal distribution (i) North America, Declaration of Independence (i) Northern Rock (i) oil shock (i) “On the High Price of Bullion’’ (Ricardo) (i) one-to-one jobs (i) O’Neill, Jim (i) open economy (i) opportunity cost (i) optimism/pessimism (i) options (i) Osborne, George (i) Ottoman Empire (i) Overend & Gurney (i) oversaving (i), (ii), (iii), (iv), (v), (vi) Overstone, Lord (i) Paish, Frank (i) paper currency, withdrawal (i) parameters (i) partial equilibrium theory (i), (ii) Paterson, William (i) Pax Britannica (i) per capita incomes (i) perfect markets see under markets Phillips, A.


pages: 301 words: 77,626

Home: Why Public Housing Is the Answer by Eoin Ó Broin

Airbnb, carbon footprint, Celtic Tiger, financial deregulation, housing crisis, Kickstarter, land reform, mortgage debt, negative equity, open economy, passive investing, quantitative easing, Right to Buy, Ronald Reagan, the built environment

In a section on the stability of the system the following observation was made: One group of observers consider that the Irish housing market displays a strong instability and irrationality, amounting to a ‘bubble’ that is likely to burst when the irrational expectations and exuberance that drives the market turn from positive to negative. Then, the upward spiral of asset values, wealth appreciation and demand will turn into a downward spiral of falling prices, negative equity and market withdrawal.51 While the report went on to note that ‘more optimistic observers do not fear for the stability of the housing system’ it is clear that the report’s extensive support for greater provision of social and affordable housing was intended as both a warning of and a protection against the fear of recession. The Council argued strongly for an increase in social housing output not just as a means for meeting social housing need but ‘in view of the likely easing of private demand over time … an increase in social housing output could contribute to the goal of delivering a soft landing for the housing sector’.52 The report’s detailed discussion of the relative merits and risks of ‘dualist’ versus ‘unitary’ housing systems and its advocacy of cost rental as a means of both meeting affordable housing need and stabilising the system overall were far-reaching.53 Housing in Ireland stopped short of advocating a ‘unitary’ housing model closer to those of Germany, Austria and some Scandinavian countries.

Others took advantage of generous Section 23 tax reliefs when purchasing buy-to-let mortgages. However, a lack of appreciation that being a landlord is an active investment requiring a significant allocation of time rather than passive investment, had meant that many landlords did not fully understand the scale of the undertaking they were engaging in. In addition to the large number of semi-professional landlords there are those for whom renting emerged from necessity as negative equity prevented them from selling their initial family home when up-sizing. Caught in this bind they rented out their own home while either paying a second mortgage secured with the collateral of the first house or becoming renters themselves moving into larger private rental accommodation. The regulatory context in which landlords and tenants operate is complex. The 2004 Residential Tenancies Act, which deals with issues of tenure, rent setting and dispute resolution, has been subject to three separate sets of amendments in 2009, 2015 and 2016 as well as a range of consequent regulations introduced by way of statutory instrument.

., 29 legislation for Building Control, 209–10 Lemass, Seán, 30 lending limits of the Local Loans Fund, 48 Lewis, Eddie, 80–1 LIHAF (Local Infrastructure Housing Activation Fund), 104–5, 197, 201 living patterns in the nineteenth century, the, 14–15 Local Authorities, the, 21, 24, 31, 34, 59, 61, 82, 86, 90, 159, 173–4, 175, 178, 203, 205, 206, 240; and affordable homes, 61, 126, 162–3, 179; and allocation schemes, 179; and certification of projects, 212–13; and cost rental housing, 161; and current and capital expenditure funding of, 28, 106, 171, 172, 173; and development costs, 198; and direct build, 174; and economic rents, 29; and the Help to Buy scheme, 197; and homelessness, 61, 92, 108, 123; and housing provision, 36, 37, 40, 62, 64–5, 71, 96, 103, 104, 118, 164, 175, 244; and infrastructure, 39; and inspection rates for building standards, 128, 183, 184, 185, 190, 194, 210, 212; and maintenance services, 207; and mortgages, 61, 125–6; and RAS (Rental Accommodation Scheme), 74, 78, 79; and retrofitting programmes, 230; and social ‘polarisation’ and ‘segregation,’ 56–7; and the Traveller community, 232, 233, 238; and triennial social housing needs assessments, 58; and vacant properties, 120–1, 225; and waiting lists, 167; and zoning and planning, 217, 219, 220 Local Government (Planning and Development) Act (1963), the, 37 Local Infrastructure Housing Activation Fund, the, 126, 196–7 Local Loans Fund, the, 28, 33, 48 Lockout of 1913, the, 20 Logos, 4 long-term leasing, 86, 89, 96, 103, 108, 118, 141, 177 long-term tenure and rental stability, 194 long-term vacant Council properties, 120–1 Maastricht Treaty, the, 67 MacEntee, Seán, 32, 35 Mahon Tribunal report, the, 215, 216, 220 Marino, Dublin and public housing, 23 ‘market failure’ to describe the housing crisis, 1, 3 marketisation of the housing sector, xiii–xiv Markievicz, Constance, 27 Marshall Aid Programme, the, 33 McCreevy, Charlie, 217 McDowell, Michael, 153 McEnroe, Juno, 115 McGilligan, Patrick, 22 McVerry, Fr Peter, 93, 134 mental health support for the homeless, 99 Mercy Law Centre, 153–4 mica block, 208–9 Minton, Anna, 75 mixed-income communities (see affordable purchase housing model) mixed tenure, 164, 165, 166–7 Monaghan, Philip, 31 Moran, John, 141 Morgan, Arthur, 156 mortgage lending in Britain, 54–5 mortgages: and affordable housing measures, 63, 79–80, 169; allowances for Council tenants, 61; and arrears, 95, 97, 100, 101, 103, 184, 245; and households on lower incomes, 169–70; and lending and standardisation of banking regulation, 67–9, 139; and mortgage credit, 56, 68, 139; and mortgage interest tax relief, 48, 52, 75–6, 185, 193 Mulcahy, Richard, 22 Municipal Tenants Association, the, 29 Murphy, Eoghan, 116–17, 118, 120–1, 122–3, 124–5, 129–32, 136, 156, 219 Murphy, Mary, 146, 153 Murphy, Timothy, 33 MyHome.ie, 113 NAMA (National Asset Management Agency), 89, 95, 111, 140, 147 NARPS (National Asset Residential Property Services), 89 National Building Agency, the, 37 National Homeless & Housing Coalition, the, 244 National Housing Strategy 2011–2016 (report), 234 National Oversight and Audit Commission, the, 120; Local Authority Performance Indicator Report, 190 national planning and regional balance, 216–18, 220 National Planning Network as statutory plan, the, 218, 219 National Spatial Strategy and decentralisation, the, 217 National Women’s Council, the, 133, 134 NDP (National Development Plan), the, 171, 195, 196, 200, 202, 219 Nearly Zero Energy Building regulations, 226, 227, 228 negative equity, 183 neoliberalism, 48, 53–5, 138, 145, 146, xvi NESC (National Economic and Social Council), the, 67, 73, 88–9, 130, 218, 220; and The Developmental Welfare State (report), 79, 108, 145, 149, 166; Housing in Ireland (2004 report), 70–2, 84, 109, 148, 149, 161, 169, 180, 181–2, 217; review on housing policy, 56–7, 58, 75, 78, 96; Urban Development Land (report), 221 Nevin Economic Research Institute, the, 161, 174 NHS (National Health Service), the, 247 Ninth Progress Report of the All-Party Oireachtas Committee on the Constitution (report), 221 no confidence motion in Eoghan Murphy, 132–3 non-market component in public housing provision, 180–1 non-nationals and access to housing, 236 non-subsidised public housing, 160–1, 163, 179 non-subsidised rental tenants, 91, 186 Noonan, Michael, 92, 112, 141 Norris, Michelle, 34–5, 40, 44, 48, 51, 63, 75–6, 107, 233 not-for-profit and social housing, 60, 72, 119, 141, 159, 161, 175–6 Nunan, Sheila, 133–4, 244 nZEB (Near Zero Energy Building) obligations, 227, 228, 230 Ó Cualann Co-Housing Alliance, 162 Ó Riain, Seán, 81 O’Brien, Darragh, 133 O’Connell, Cathal, 18, 137 O’Connell, Hugh, 131 O’Connor, Fr Ferghal, 42 O’Connor, Orla, 134 off-balance sheet delivery mechanisms, 175–6 Oireachtas Committee on Housing and Homelessness, the, 102, 118, 123, 124, 126, 129, 130, 156, 211–13, 233 Oireachtas Disability Group, the, 234 O’Riordan, Michael, 42 O’Sullivan, Eoin, 123–4 O’Sullivan, Jan, 83 Outlook (TV programme), 42 over-expenditure on the rent supplement, 64, 74 over-reliance on the private market, 12 overcrowded accommodation, 24, 33, 190, 236 owner occupiers (see homeownership) Parnell, Charles Stuart, 15, 16 Part 8 planning permissions, 96, 174 Passive House Standard, the, 230 Pathfinder Projects, 104 Peabody Trust, the, 19 pensioner homelessness, 121, 245 people with disabilities and access to housing, 233–4, 238 Pettifor, Ann, 139–40 pilot Participative Budgeting programme and community funding, 207 Plan for Social Housing, A (1991 White Paper), 58–62, 63, 80, 81, 85, 137, 141, 164, 203, 241 Planning and Development Act (2000), the, 71, 217, 222; and Part V acquisitions, 166, 176, 195, 222, 223 Planning and Development (Amendment) Act (2018), the, 216 planning corruption, 215–16, 220 planning process, the, 35, 57, 216–17, 219; and procurement rules, 96, 104, 173–4 planning reforms for the private sector, 104–5 political ties to building contractors, 29, 45, 215 post-war coalition government, the, 32–5 prejudices, 30 Priory Hall and building defects, 209 private housing: and affordability, 197–8; and home ownership levels, 38, 40, 44–5, 55; and subsidies, 26, 104 private loan finance and grants, 28, 52–3, 55 private property right restrictions, 188, 222, 244 private purchase sector proposal, 202 private rental sector, the, 127–8, 145, 169–70, 180, 228; and increasing reliance on for social housing, 88, 91, 95, 109, 137, 138, 166; and Rebuilding Ireland, 105, 108, 109; and reform of, 182–3, 185–94; and security of tenure, 76–7, 90, 137–8, 187; size and regulation of, 56, 62, 64, 82, 86; and subsidies, 63, 65, 74, 78–9, 88, 89, 108, 137, 138, 145, 177, 186, 235 private sector, the, 12, 34, 89, 104, 121, 138, 144, 162, 180, 201; and the property crash, 82; and social and affordable housing provision, 73, 105, 106, 176–7, 241; and supply of new homes, 1, 35, 39, 104, 195, 196–200; transfer to via tenant purchase, 36–7, 38, 40, 41, 44, 51, 61, 84, 143, 179 procurement rules for housing delivery, 104, 173–4, 208; and the Housing Procurement Agency, 96 production of new homes since the financial crash, 195–6 professional certification of building standards, 210, 212–13 Programme for Government Commitment for the Joint Oireachtas Committee on Housing, the, 155 Programme for National Recovery, the, 57–8 project loan finance and Dublin City Council, 172 Property, Family and the Irish Welfare State (book), 44 property boom and the Celtic Tiger, the, 65–7, 69, 71, 75–6, 81–2, 139, 195 property speculation, 38, 67, 75, xiv protests on the housing crisis, 131–2, 133–6, 243–5 public consultation process, the, 220 Public Health Committee of Dublin Corporation, the, 18 public housing (see social housing) Public Participation Networks, the, 206 public private partnerships, 90, 131, 141, 177 public rent register, the, 128 public service recruitment embargo, the, 205 Public Utility Societies, 24, 28 publicly owned land, 224 Punch, Michael, 66 Purchase of Land (Ireland) Act (1885), 17 Putting People First reforms, 205–6 pyrite, 208, 210 quantitative easing, 146–7 Quarryvale and planning corruption, 215–16 Raise the Roof, 133, 135, 157, 243–4 Rapid Build Programme, the, 114 RAS (Rental Accommodation Scheme), the, 75, 78, 87, 89, 96, 121, 167, 173; as a long-term social housing support, 74, 79, 137; as proportion of social housing delivery, 88, 90, 91, 103–4, 110, 118; and rental subsidy transfer to the Local Authority, 79, 80, 82, 83 re-categorised families removed from the homeless list, 122–5 Reagan, Ronald, 48 Rebuilding Ireland (Action Plan for Housing and Homelessness), 101–10, 115, 133, 136, 138, 141, 184–5, 196, 226–7, 240–1; and delivery of homes for the homeless, 102–3, 114 Rebuilding Roland Home Loan Scheme for first-time buyers, the, 201 reclassification of AHBs (Approved Housing Bodies) into the Government sector, 119, 166, 175–6 RedC opinion polls, 241 redress scheme for structural problems, 130, 210–11, 215–16 referendum proposal on the right to housing in the Constitution, 156, 158, 159 Regan, Maeve, 154–5 regulation of the private rental sector, 62 regulation of the short-term letting sector, 128–9 renewable energy sources, 228, 230 rent arrears, 28–9 rent prices, 9; increases in, 1, 91, 92, 113, 114; linkage to the Consumer Price Index, 92, 96–7, 135, 187; and a price freeze, 187–9, 194; and the RTB index, 91, 112, 114, 188, 189 rent regulation proposals, 92 Rent Subsidy Scheme, 63, 137, 177–8 rent supplements, 64, 74, 83, 91, 92, 97, 103, 137, 189 (see also RAS (Rental Accommodation Scheme), the) Rent Switch programme proposal, 97 rental inspections Bill motion, 128 Rental Subsidy Scheme, the, 60, 80 rental tenancies, 78–9, 88, 96, 97, 107–8, 137–8, 166, 170, 173, 182, 185, 190, 235 (see also HAP (Housing Assistance Payment); RAS (Rental Accommodation Scheme)) renting a second home, 183 Repair and Lease scheme, the, 106, 119 Report of the Commission on Itinerancy (1963), 41 report of the Dáil Housing and Homeless Committee, 95–7, 98, 108, 109 Report of the Joint Oireachtas Committee on Building Land (report), 221 repossessions, 97 Residential Property Tax, 68, 141 Residential Tenancies Act (2004), 77, 97, 113, 127, 183, 207, 238 Residential Tenancies (Amendment) Bill, 92–3 residents’ groups, 204 residual public housing provision during the era of bank liberalisation, 56, 137 Rethinking the Economics of Land and Housing (book), 220–1 retrofitting grants and programmes, 229, 230, 231 Returning Vacant Properties to Productive Use programme, the, 103 review of Rebuilding Ireland, 117 rezoning of agricultural land, 39 Ribbonmen, the, 15 rights and obligations of landlords and tenants, 183–4 Roche, Dick, 81 Royal Commission of Inquiry into Working Class Housing, the, 18, 19 RPZs (Rent Pressure Zones), 113, 114, 127, 185 RTB (Residential Tenancies Board), the, 86, 105, 182, 184, 192, 207; and impact on landlords, 77, 183, 193; and inspection reports, 190, 191; as mediator and adjudicator on legislation, 128, 183, 193; and the RTB index, 91, 112, 114, 188, 189 RTE Investigates (TV documentary), 127–8, 184 rural housing prioritisation over urban, 23, 24, 28 rural labourers, 17, 28 Ryan-Collins, Josh, 54–5, 67–8, 146, 147 Safe as Houses, A Report on Building Control, Building Standards and Consumer Protection (report), 211–15 safety inspections and Completion Certificates, 213 SEAI (Sustainable Energy Authority of Ireland), the, 228, 229 second homes as a property investment, 182 Section 10 of the 1988 Housing Act, 61 Section 23 tax reliefs, 62, 182 Section 34 and Notices to Quit, 187 securitisation, 147 security of tenure, 16, 17, 76, 90, 135, 167, 187, 191 Shared Ownership affordable housing scheme, 79 shared ownership schemes, 61, 79 short-term investment (vulture) funds, 194 short-term letting sector, the, 128–9 short-term license agreements, 187 short-term private sector tenancies, 137–8 Simon Community, the, 41, 124 single Housing Benefit system, a, 178 Sinn Féin, 94, 127, 128, 132, 177, 200 Sirr, Lorcan, 196 Skehan, Conor, 106, 196 skills shortages and apprenticeships, 201–2 ‘skinning down,’ 31 slum clearance, 38, 40 Small Dwellings Acquisitions Scheme, the, 24, 28, 33, 52 social and economic infrastructure for housing estates, 35, 37–8, 39, 215–16; and community building, 202–6 social housing, 23, 145, 148–9, 177, 200, 239; and allocation and eligibility, 131, 179; and association with poverty, 51, 164, 165; calculating existing need, 167–9, 171; and delivery targets, 71, 72, 73, 78, 79, 83, 88, 91, 96, 102, 103, 107–10, 114–15, 116, 117–18, 121, 145; and provision of, 148, 159–65, 168, 171, 174; and emergency accommodation, 98–9; funding of, 171–2, 177, 178–9; and increasing reliance on the private rental sector, 88, 91, 95, 109, 137, 138, 166; and investment by the Free State, 23, 24–5; and maintenance and management, 203, 205, 206, 207; and needs assessments, 58, 59; and non-subsidised housing, 160–1, 163; and production of, 24, 28, 29, 30, 32, 33, 34, 36, 38, 40, 44, 47, 49, 60, 83, 95; by the Local Authorities, 62, 73; and proposal for a programme for public housing, 181–2, 200; for rent, 1, 64–5, 179, 208, xv–xvi; and State funding, 87–90, 98 Social Housing, Disadvantage and Neighbourhood Liveability (policy review), 203 Social Housing, The Way Ahead (policy review), 63–4, 203 Social Housing Current Expenditure Programme (SHCEP), the, 103 Social Housing in Ireland (book), 164 Social Housing Investment Programme, the, 103, 138, 178 Social Housing Reform Agenda, the, 80 Social Housing Strategy 2020 (report), 88–90, 93, 108–9, 141, 241 Social Inclusion Community Activation Programme, the, 206 social partnership, 57, 70 social segregation, 59 social to private housing ratios, 34, 38, 40, 65, 88 socially mixed housing communities, 57 Society of Chartered Surveyors of Ireland, 198–9, 200, 223 socio-economic marginalisation of housing estates, 57–8 Special Branch, the, 42 speculative land investment, 225–6 Stamp Duty, 141 standardisation of banking regulation, 67–8 State agency for public housing delivery proposal, 174–5 State and housing, the, 3, 42–6, 53, 58–62, 63–4, 73, 77–8, 80–1, 138, 141–4, 240–1, 248; funding of social housing, 87–90, 98; interventionist role of, 145–6; and public housing provision, 159–60, 165–7, 231–2; since the 2008 financial crash, 81–2, 195–7, 200, 201–2 (see also Fianna Fáil; Fine Gael) State intervention and the common good, 222–3 Strategic Development Zones, 217 Strategic Housing Development legislation, 219 Strategic Investment Fund, the, 201 Strategic Policy Committees in Local government, 205 stress endured in unsuitable accommodation, 5–11 student accommodation, 105, 126–7, 180 Student Accommodation Strategy, 126–7 Studies (periodical), 20, 21 subsidies, 27, 31, 44, 46, 60, 63, 143, 179; of private home ownership, 12, 26, 40, 41, 48, 52–3; and the private rental sector, 63, 65, 74, 78–9, 108, 137, 138, 145, 177, 186, 235; and transfers to the Local Authority through RAS, 79, 80, 82, 83 suburbanisation and the 1963 Local Government (Planning and Development) Act, 37 Summary of Housing Need (report), 167–8 Sunday Business Post, The (newspaper), 131 supplementary grant for lower-income home buyers, 33 supplementary welfare allowance scheme, the, 64 Supreme Court and State intervention for the common good, 222–3 Surrender Grant, the, 49–50, 61 Sutton Housing Trust, the, 19 Sweetman, Michael, 42 Take Back the City, 132 Task Force on the Travelling People (report), 232 tax code, the, 68 tax credits, 194 tax proposal for vacant homes, 117 tax relief for renters, 189 Technical Guidance Document L, 228 tenancies and long-term planning, 137–8 tenancy and emergency accommodation arrangements, 124–5 tenancy protections, 77, 187, 207; and security of tenure, 16, 17, 76, 90, 135, 167, 187, 191 (see also RTB (Residential Tenancies Board), the) tenant farming system, the, 14–16, 17–18 tenant purchase from Local Authorities, 36–7, 40, 41, 44, 51, 61, 84, 143, 179 Tenant Right League, the, 15 tenements of Dublin, the, 20, 23, 25, 36 tenure neutrality, 80, 81, 86, 148–9, 163, 180 Thatcher, Margaret, 48, 54, 250 Threshold, 50, 76–7, 128, 184 town centre plan for Lucan and Clondalkin, 215–16 town planning debates, 25 trade unionism and Unionist politics, 22 training and accreditation for landlords, 192 Traveller community, the, 41, 61, 144, 232, 233, 238 Treaty for Stability, Coordination and Governance, the, 98 trilateral social partnership agreements, 57, 70 Troika, the, 82 Tusla, 103 UFHDs (Unfinished Housing Developments), 82, 195, 196 under-provision of public non-market housing, the, 12 unitary rental markets, 180–1 Universal Declaration of Human Rights, the, 154 urban densification, 219, 220 urban housing conditions in the nineteenth century, 18, 19–20 urban housing provision, 21, 32 vacant homes, 105–6, 117, 119, 120–1, 132, 185, 195 Vacant Homes Strategy (report), 119–20 vacant site tax, the, 225, 226 Varadkar, Leo, 115, 117, 130, 131, 136 voids (long-term vacant Council properties), 120–1 waiting lists for council accommodation, 6, 7, 35–6, 40, 73–4, 80, 83, 111, 121, 167, 233 Wallace, Mick, 225 Wallich-Clifford, Anton, 41 water ingress, 209 Way Home, A Strategy to End Adult Homelessness (report), 87, 235 Whitaker, Thomas, 35 White Paper (1948), 33, 35 White Paper (1964), 36 Whiteboys, the, 15 Why Can’t You Afford a Home (book), 55 women and homelessness, 134 Woulfe, Séamus, 128


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Theoretically, it could cost a tremendous amount of money, on the order of $2 trillion. This is much larger than the entire TARP fund allocation. Based on the amount of negative equity in the U.S. housing market as of 2010, the estimated cost would be around $751 billion.6 This is comprised of 11.1 million residential properties or 23.1% of the entire residential property market. The majority of these home owners have negative equity of greater than 25% (about $600 billion). Another problem with this solution is that if there are further house price declines, it would still not solve the problem entirely. Also, there may be many responsible home owners who have negative equity but would not leave their house anyway. That is, they would continue to pay the mortgage. Thus, by bailing these people out, the government would be giving up money unnecessarily.

This would reduce the burden for home owners, but the implied depreciation in the value a single house would be $230,103 (dropping from $600,000 to $369,897). This represents a decline of about 38%. Someone has to pay the cost, because it will be a direct loss to the banks. Thus, the government would have to absorb these losses. If the government considered everyone with these problems and others with negative equity in their home, the costs might be enormous. As of December 2010, the total negative equity of home owners in the United States has been estimated at $751 billion.11 The cost of bringing everyone to zero equity is large. But it is not only the cost that is perturbing. There are two further issues that are perturbing. First, many of these home owners will not default on their loans. Thus, recognizing this loss would be simply a transfer of wealth from the government to these households, which might be unnecessary.

By the end of 2010, the fund was down to –$7 billion, and at one point during the year, it was as far down as –$21 billion. Just a few years prior, in the second quarter of 2008, it was positive at $53 billion. The latest number for the 1st quarter of 2011 has the fund at –$1 billion. Thus, the fund is recovering as the number of bank failures have slowed down. How could the FDIC have survived with a negative balance to bail out banks? When other firms have a negative equity balance, don’t they go into bankruptcy? Isn’t that why LTCM was close to bankruptcy? Isn’t that why Lehman Brothers went into banktuptcy? Rudiger Dornbusch used to say “What’s true for the Gods isn’t true for the Cows.” By this Dornbusch meant that some institutions get special privileges, or you might say they are “too big to fail” or “too connected to the government to fail.” In fact, this is partly true.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

Suppose Bank B owns a CDO (let’s call it c) that B bought for $100. Of this, $40 was B’s own money and the remaining $60 was leverage (i.e. a sum that B somehow borrowed in order to purchase c). B’s problem is that, after 2008, it cannot sell c for more than $5. Given that its vaults are full of such CDOs, if it sells each below $60, it will have to file for bankruptcy, as the sale will not even yield enough to pay its debt of $60 per CDO (i.e. a case of negative equity). Thus, B does nothing, holds on to c and faces a slow death by a thousand cuts, as investors, deterred by B’s inability to rid itself of the toxic CDOs, dump B’s shares, the value of which on the stock exchange falls and falls and falls. Every penny the state throws at it to keep it alive, B hoards in desperation. Thus, the great bail-out sums given to the banks never find their way to businesses, which need loans to buy machinery, or to customers who want to finance the purchase of a new home.

Mr Bernanke’s stated purpose is that the Fed’s purchases of MBS will increase their price, setting off the following chain reaction: • increased MBS prices will push down the interest rates people demand from them before purchasing MBS paper (since they will now sport more attractive price-growth potential); • the lower interest rates associated with MBS paper will translate into lower interest rates for new mortgages; • the lower interest rates on mortgages will boost the demand for new homes; • the extra demand for housing will push up house prices; • the increasing house prices will reduce the number of American families whose home is worth less than the mortgage that they have on it, turning them into mortgage slaves. If all this transpires, the next hope is that a reduction in the incidence of mortgage bondage in American society (‘negative equity’ in the parlance of financiers) will cause more families to spend more readily, many to sell up and move to an area where they can find work more easily, others to slow down the rate at which they pay down existing debt (and spend some more) and, importantly, shift investors from MBS paper purchases to corporate bonds (i.e. more lending directly to corporations). This is, dear reader, Mr Bernanke’s heroic theory of how his QE3 will deliver the nation from recession.

., New Frontier social programmes, 83, 84 Keynes, John Maynard: Bretton Woods conference, 59, 60, 62, 109; General Theory, 37; ICU proposal, 60, 66, 90, 109, 254, 255; influence on New Dealers, 81; on investment decisions, 48; on liquidity, 160–1; trade imbalances, 62–6 Keynsianism, 157 Kim Il Sung, 77 Kissinger, Henry, 94, 98, 106 Kohl, Helmut, 201 Korea, 91, 191, 192 Korean War, 77, 86 labour: as a commodity, 28; costs, 104–5, 104, 105, 106, 137; hired, 31, 45, 46, 53, 64; scarcity of, 34–5; value of, 50–2 labour markets, 12, 202 Labour Party (British), 69 labourers, 32 land: as a commodity, 28; enclosure, 64 Landesbanken, 203 Latin America: effect of China on, 215, 218; European banks’ exposure to, 203; financial crisis, 190 see also specific countries lead, prices, 96 Lebensraum, 67 Left-Right divide, 167 Lehman Brothers, 150, 152–3 leverage, 121–2 leveraging, 37 Liberal Democratic Party (Japan), 187 liberation movements, 79, 107 LIBOR (London Interbank Offered Rate), 148 liquidity traps, 157, 190 Lloyds TSB, 153, 156 loans: and CDOs, 7–8, 129–31; defaults on, 37 London School of Economics, 4, 66 Long-Term Capital Management (LTCM) hedge fund collapse, 13 LTCM (Long-Term Capital Management) hedge fund collapse, 2, 13 Luxembourg, support for Dexia, 154 Maastricht Treaty, 199–200, 202 MacArthur, Douglas, 70–1, 76, 77 machines, and humans, 50–2 Malaysia, 91, 191 Mao, Chairman, 76, 86, 91 Maresca, John, 106–7 Marjolin, Robert, 73 Marshall, George, 72 Marshall Plan, 71–4 Marx, Karl: and capitalism, 17–18, 19, 34; Das Kapital, 49; on history, 178 Marxism, 181, 182 Matrix, The (film), 50–2 MBIA, 149, 150 McCarthy, Senator Joseph, 73 mercantilism, in Germany, 251 merchant class, 27–8 Merkel, Angela, 158, 206 Merrill Lynch, 149, 153, 157 Merton, Robert, 13 Mexico: effect of China on, 214; peso crisis, 190 Middle East, oil, 69 MIE (military-industrial establishment), 82–3 migration, Crash of 2008, 3 military-industrial complex mechanism, 65, 81, 182 Ministry for International Trade and Industry (Japan), 78 Ministry of Finance (Japan), 187 Minotaur legend, 24–5, 25 Minsky, Hyman, 37 money markets, 45–6, 53, 153 moneylenders, 31, 32 mortgage backed securities (MBS) 232, 233, 234 NAFTA (North American Free Trade Agreement), 214 National Bureau of Economic Research (US), 157 National Economic Council (US), 3 national income see GDP National Security Council (US), 94 National Security Study Memorandum 200 (US), 106 nationalization: Anglo Irish Bank, 158; Bradford and Bingley, 154; Fortis, 153; Geithner–Summers Plan, 179; General Motors, 160; Icelandic banks, 154, 155; Northern Rock, 151 NATO (North Atlantic Treaty Organization), 76, 253 negative engineering, 110 negative equity 234 neoliberalism, 139, 142; and greed, 10 New Century Financial, 147 New Deal: beginnings, 45; Bretton Woods conference, 57–9; China, 76; Global Plan, 67–71, 68; Japan, 77; President Kennedy, 84; support for the Deutschmark, 74; transfer union, 65 New Dealers: corporate power, 81; criticism of European colonizers, 79 ‘new economy’, 5–6 New York stock exchange, 40, 158 Nietzsche, Friedrich, 19 Nixon, Richard, 94, 95–6 Nobel Prize for Economics, 13 North American Free Trade Agreement (NAFTA), 214 North Atlantic Treaty Organization (NATO), 76 North Korea see Korea Northern Rock, 148, 151 Obama administration, 164, 178 Obama, Barack, 158, 159, 169, 180, 230, 231 OECD (Organisation for Economic Co-operation and Development), 73 OEEC (Organisation for European Economic Co-operation), 73, 74 oil: global consumption, 160; imports, 102–3; prices, 96, 97–9 OPEC (Organization of the Petroleum Exporting Countries), 96, 97 paradox of success, 249 parallax challenge, 20–1 Paulson, Henry, 152, 154, 170 Paulson Plan, 154, 173 Penn Bank, 40 Pentagon, the, 73 Plaza Accord (1985), 188, 192, 213 Pompidou, Georges, 94, 95–6 pound sterling, devaluing, 93 poverty: capitalism as a supposed cure for, 41–2; in China, 162; reduction in the US, 84; reports on global, 125 predatory governance, 181 prey–predator dynamic, 33–5 prices, flexible, 40–1 private money, 147, 177; Geithner–Summers Plan, 178; toxic, 132–3, 136, 179 privatization, of surpluses, 29 probability, estimating, 13–14 production: cars, 70, 103, 116, 157–8; coal, 73, 75; costs, 96, 104; cuts in, 41; in Japan, 185–6; processes, 30, 31, 64; steel, 70, 75 production–distribution cycle, 54 property see real estate prophecy paradox, 46, 47, 53 psychology, mass, 14 public debt crisis, 205 quantitative easing, 164, 231–6 railway bubbles, 40 Rational Expectations Hypothesis (REH), 15–16 RBS (Royal Bank of Scotland), 6, 151, 156; takeover of ABN-Amro, 119–20 Reagan, Ronald, 10, 99, 133–5, 182–3 Real Business Cycle Theory (RBCT), 15, 16–17 real estate, bubbles, 8–9, 188, 190, 192–3 reason, deferring to expectation, 47 recession predictions, 152 recessions, US, 40, 157 recycling mechanisms, 200 regulation, of banking system, 10, 122 relabelling, 14 religion, organized, 27 renminbi (RMB), 213, 214, 217, 218, 253 rentiers, 165, 187, 188 representative agents, 140 Reserve Bank of Australia, 148 reserve currency status, 101–2 risk: capitalists and, 31; riskless, 5, 6–9, 14 Roach, Stephen, 145 Robbins, Lionel, 66 Roosevelt, Franklin D., 165; attitude towards Britain, 69; and bank regulation, 10; New Deal, 45, 58–9 Roosevelt, Theodore (‘Teddy’), 180 Royal Bank of Scotland (RBS), 6, 151, 156; takeover of ABN-Amro, 119–20 Rudd, Kevin, 212 Russia, financial crisis, 190 Saudi Arabia, oil prices, 98 Scandinavia, Gold Standard, 44 Scholes, Myron, 13 Schopenhauer, Arthur, 19 Schuman, Robert, 75 Schumpter, Joseph, 34 Second World War, 45, 55–6; aftermath, 87–8; effect on the US, 57–8 seeds, commodification of, 163 shares, in privatized companies, 137, 138 silver, prices, 96 simulated markets, 170 simulated prices, 170 Singapore, 91 single currencies, ICU, 60–1 slave trade, 28 SMEs (small and medium-sized enterprises), 186 social welfare, 12 solidarity (asabiyyah), 33–4 South East Asia, 91; financial crisis, 190, 191–5, 213; industrialization, 86, 87 South Korea see Korea sovereign debt crisis, 205 Soviet Union: Africa, 79; disintegration, 201; Marshall Plan, 72–3; Marxism, 181, 182; relations with the US, 71 SPV (Special Purpose Vehicle), 174 see also EFSF stagflation, 97 stagnation, 37 Stalin, Joseph, 72–3 steel production, in Germany, 70 Strauss-Kahn, Dominique, 60, 254, 255 Summers, Larry, 230 strikes, 40 sub-prime mortgages, 2, 5, 6, 130–1, 147, 149, 151, 166 success, paradox of, 33–5, 53 Suez Canal trauma, 69 Suharto, President of Indonesia, 97 Summers, Larry, 3, 132, 170, 173, 180 see also Geithner–Summers Plan supply and demand, 11 surpluses: under capitalism, 31–2; currency unions, 61; under feudalism, 30; generation in the EU, 196; manufacturing, 30; origin of, 26–7; privatization of, 29; recycling mechanisms, 64–5, 109–10 Sweden, Crash of 2008, 155 Sweezy, Paul, 73 Switzerland: Crash of 2008, 155; UBS, 148–9, 151 systemic failure, Crash of 2008, 17–19 Taiwan, 191, 192 Tea Party (US), 162, 230, 231, 281 technology, and globalization, 28 Thailand, 91 Thatcher, Margaret, 117–18, 136–7 Third World: Crash of 2008, 162; debt crisis, 108, 219; interest rate rises, 108; mineral wealth, 106; production of goods for Walmart, 125 tiger economies, 87 see also South East Asia Tillman Act (1907), 180 time, and economic models, 139–40 Time Warner, 117 tin, prices, 96 toxic theory, 13–17, 115, 133–9, 139–42 trade: balance of, 61, 62, 64–5; deficits (US), 111, 243; global, 27, 90; surpluses, 158 trades unions, 124, 137, 202 transfer unions, New Deal, 65 Treasury Bills (US), 7 Treaty of Rome, 237 Treaty of Versailles, 237 Treaty of Westphalia, 237 trickle-down, 115, 135 trickle-up, 135 Truman Doctrine, 71, 71–2, 77 Truman, Harry, 73 tsunami, effects of, 194 UBS, 148–9, 151 Ukraine, and the Crash of 2008, 156 UN Security Council, 253 unemployment: Britain, 160; Global Plan, 96–7; rate of, 14; US, 152, 158, 164 United States see US Unocal, 106 US economy, twin deficits, 22–3, 25 US government, and South East Asia, 192 US Mortgage Bankers Association, 161 US Supreme Court, 180 US Treasury, 153–4, 156, 157, 159; aftermath of the Crash of 2008, 160; Geithner–Summers Plan, 171–2, 173; bonds, 227 US Treasury Bills, 109 US (United States): aftermath of the Crash of 2008, 161–2; assets owned by foreign state institutions, 216; attitude towards oil price rises, 97–8; China, 213–14; corporate bond purchases, 228; as a creditor nation, 57; domestic policies during the Global Plan, 82–5; economy at present, 184; economy praised, 113–14; effects of the Crash of 2008, 2, 183; foreign-owned assets, 225; Greek Civil War, 71; labour costs, 105; Plaza Accord, 188; profit rates, 106; proposed invasion of Afghanistan, 106–7; role in the ECSC, 75; South East Asia, 192 value, costing, 50–1 VAT, reduced, 156 Venezuela, oil prices, 97 Vietnamese War, 86, 91–2 vital spaces, 192, 195, 196 Volcker, Paul: 2009 address to Wall Street, 122; demand for dollars, 102; and gold convertibility, 94; interest rate rises, 99; replaced by Greenspan, 10; warning of the Crash of 2008, 144–5; on the world economy, 22, 100–1, 139 Volcker Rule, 180–1 Wachowski, Larry and Andy, 50 wage share, 34–5 wages: British workers, 137; Japanese workers, 185; productivity, 104; prophecy paradox, 48; US workers, 124, 161 Wal-Mart: The High Cost of Low Price (documentary, Greenwald), 125–6 Wall Street: Anglo-Celtic model, 12; Crash of 2008, 11–12, 152; current importance, 251; Geithner–Summers Plan, 178; global profits, 23; misplaced confidence in, 41; private money, 136; profiting from sub-prime mortgages, 131; takeovers and mergers, 115–17, 115, 118–19; toxic theory, 15 Wallace, Harry, 72–3 Walmart, 115, 123–7, 126; current importance, 251 War of the Currents, 39 Washington Mutual, 153 weapons of mass destruction, 27 West Germany: labour costs, 105; Plaza Accord, 188 Westinghouse, George, 39 White, Harry Dexter, 59, 70, 109 Wikileaks, 212 wool, as a global commodity, 28 working class: in Britain, 136; development of, 28 working conditions, at Walmart, 124–5 World Bank, 253; origins, 59; recession prediction, 149; and South East Asia, 192 World Trade Organization, 78, 215 written word, 27 yen, value against dollar, 96, 188, 193–4 Yom Kippur War, 96 zombie banks, 190–1


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial innovation, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, savings glut, short selling, sovereign wealth fund, special drawing rights, The Great Moderation, too big to fail

The preferred option of many housing activists was a “principal reduction” program that would reduce the amount that underwater home owners owed. But the government couldn’t just force banks to forgive mortgage debt, and providing sufficient incentives for them to do so voluntarily would have been an incredibly inefficient use of tax dollars. One 2014 study in the Brookings Papers on Economic Activity found that if the government had spent an additional $700 billion to wipe out every dollar of negative equity in the U.S. real estate market, it would have had very little impact on the broader economy, increasing personal consumption by less than 0.2 percent and costing an estimated $1.5 million for each job it saved. By contrast, TARP’s support for the auto industry would cost about $14,000 per job saved. The Obama administration did push the Federal Housing Finance Agency to pursue some targeted principal reduction for Fannie and Freddie loans, but the independent agency resisted.

Congress was never enthusiastic about a dramatically more powerful housing strategy, and Tim and most of those in the Obama administration also believed that additional dollars spent on unemployment benefits, infrastructure projects, payroll tax cuts, and aid to states would have more economic bang for the buck—while raising fewer dilemmas about fairness—than a new wave of programs aimed narrowly at home owners. Solving the economic crisis was a necessary condition for solving the housing crisis, while the reverse was not necessarily true. In the end, a long and steady economic recovery might be the most successful housing program. Home prices stabilized after the Great Recession ended, gradually eliminating trillions of dollars of negative equity, lifting millions of underwater home owners above water. The better economy made almost everything better. U.S. annual auto sales had plunged to 10 million in 2009, but they were back up to pre-crisis levels of 17 million by 2015. The credit crunch ended for most consumers and businesses, although banks remained skittish about lending for longer than we would have liked, especially to potential home buyers.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

Ordinary Icelanders tended to take out mortgage loans that were indexed against inflation or in another currency entirely. It was a disaster in the crisis as the value of debts shot up while the króna dived and inflation surged. Property prices typically fell too. The end result was that a 90 per cent loan-to-value loan ended up at 140 or 150 per cent, leaving homeowners stranded in massive negative equity. Some argued for an across-the-board debt write-down of 20 per cent, but that was too unfocused for the new government. Instead, Iceland targeted householder debt relief to write off everything above 110 per cent of the value of the property. The IMF called it the most effective debt-relief programme since US president Roosevelt’s plan in 1933 kept 800,000 Americans in their homes at an eventual profit to his government.

She’d had to give up her local job and find higher-paid employment further afield. The result? Four hours’ commuting per day. ‘I don’t want to have my home repossessed or for Northern Rock to say I haven’t been making my payments,’ she told me. ‘I will do whatever I have to do, even if it means I have to get out and get a second job. I will definitely make these payments.’ At that point, however, she was in negative equity – not surprising, given that she had been lent over 100 per cent of the value of her home. And her new mortgage was eating up two-thirds of her new take-home pay. ‘They lent me too much. It was a time when everything was wonderful. There was a great big property boom, the prices went through the roof. You were encouraged to go out and buy.’ Now she had boxed up her children’s teddy bears after a charging order arrived in the post.

Insurance companies, bond investors, even charities like the Bill Gates Foundation poured money into Adam Applegarth’s Newcastle bank, which in turn focused this money like a laser beam on British property. The Rock was offering returns above Libor (the inter-bank lending rate), at a time when the interest rate on US credit cards was below Libor. Amazingly, in November 2006, on behalf of the mortgage-seekers of Britain, the Northern Rock roadshow reached Africa. Scarce African liquidity, which could have funded local infrastructure, was instead diverted into Northern Rock to fund instant negative-equity mortgages at the very top of the UK housing bubble. For half a century the ‘efficient markets hypothesis’ conquered all in financial thinking. Of the many refutations of the hypothesis since the crisis, this African investment in Northern Rock stands out as one of the most egregious examples. Northern Rock did not itself slice up all the risk into CDOs. The Rock’s methods were relatively simple.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

The second and fourth factors, in particular, can be motivated by covariance with bad times, while the first and third factors are related to bonds’ standalone risks. In my opinion, long-run variation in the BRP has been primarily driven by a level-dependent inflation premium. This is the only premium that can move yields by several percentage points; the yield impact of other factors amounts at most to 1%. Over the past decade, given stable inflation expectations and near-zero inflation premia, real factors have mattered more: negative equity beta (the safe haven role), supply–demand factors, and perhaps cyclical factors. The countercyclical pattern in the predictable component of bond returns has dominated the academic literature but it might reflect systematic forecast errors as much as it does a time-varying BRP. Figure 9.7. Comparing various bond risk premium measures (smoothed) Sources: Bloomberg, Federal Reserve Board, Blue Chip Economic Indicators, own calculations.

Indeed, expected long-term inflation and bond market volatility have high predictive correlations over the 5-year horizon (0.31 and 0.64, respectively), consistent with the idea that high expected inflation and related uncertainty make the ex ante BRP high. Over short horizons the correlations are low. Safe haven influences. These influences should be observed best at short horizons, perhaps even shorter than one quarter if they are related to brief flight-to-quality episodes and wealth-dependent risk aversion. Negative-equity returns and high equity market volatility are bullish news for bonds both contemporaneously and predictively (with—0.15 and +0.11 predictive correlations to bonds for equity returns and volatility, respectively, over a one-quarter horizon). The negative coefficient on equity returns may also reflect an underreaction effect for growth news and not just risk aversion news. However, the absolute values of the correlations are not high, so the evidence on stock–bond correlation is weak.

Interestingly, Erb–Harvey (2006) document a strong cross-sectional relation between average roll returns and sensitivities to unexpected inflation. That is, commodity sectors that have been the best inflation hedges—notably energy—have also produced the highest roll returns (and, over many time periods, the highest realized returns). Perhaps because of its inflation-hedging ability, energy (with negative equity and bond betas) also has been a better diversifier against equities and bonds than other commodity sectors. This confluence of desirable characteristics seems too good to be true. I suspect that a fortuitously benign sample is part of the story—the increasing scarcity of oil and the growing demand from China and other emerging markets have boosted oil prices, resulting in persistent upside surprises.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

As early as March 2007, about one in three subprime mortgages in the 48235 ZIP code were more than sixty days in arrears, effectively on the verge of foreclosure. The effect was to burst the real estate bubble, causing house prices to start falling for the first time since the early 1990s. As soon as this began to happen, those who had taken out 100 per cent mortgages found their debts worth more than their homes. The further house prices fell, the more homeowners found themselves with negative equity, a term familiar in Britain since the early 1990s. In this respect, West Outer Drive was a harbinger of a wider crisis of the American real estate market, the ramifications of which would rock the financial system of the Western world to its foundations. On a sultry Friday afternoon, shortly after arriving in Memphis from Detroit, I watched more than fifty homes being sold off on the steps of the Memphis courthouse.

What I was witnessing was just the beginning of a flood of foreclosures. In March 2007 the Center for Responsible Lending predicted that the number of foreclosures could reach 2.4 million.61 This may turn out to have been an underestimate. At the time of writing (May 2008), around 1.8 million mortgages are in default, but an estimated 9 million American households, or the occupants of one in every ten single-family homes, have already fallen into negative equity. About 11 per cent of subprime ARMs are already in foreclosure. According to Crédit Suisse, the total number of foreclosures on all types of mortgages could end up being 6.5 million over the next five years. That could put 8.4 per cent of all American homeowners, or 12.7 per cent of those with mortgages, out of their homes.62 Since the subprime mortgage market began to turn sour in the early summer of 2007, shockwaves have been spreading through all the world’s credit markets, wiping out some hedge funds and costing hundreds of billions of dollars to banks and other financial companies.

securitization see securitization subprime see subprime lending and US economic triumph 3 Motown 250 Mullins, David 322 mutations (in economies) 349 mutual associations 247. see also building societies; Savings & Loan Nairobi 280 Nanking, Treaty of 291 Naples 86 Napoleon Bonaparte 3 Napoleonic Wars 80-86 National Bank Act 57 national debts 80 National Health Service see Britain (welfare state) nationalization see banks National Provincial Bank 56 Nationwide house price index 261 natural and market selection 350-51 natural resources see resources Nazis 80 Neal, Larry 343n. Nearing, Scott 231 negative equity 270-71 neo-imperialism 309-14 Netherlands, The: financial and commercial success 3 Holland (province) 74 pension fund 222 property price bubble 233 see also United Provinces network externalities 135 New Deal 246-8 New Orleans 96 . see also Katrina New York 101. New York Stock Exchange 300 Nicaragua 296 Nicholas II, tsar 107n. Nigeria 26 9/11 attack 6 NINJA (No Income No Job or Assets) 269 Nixon, Richard 58 Northern Rock 7 North Korea 18 Norway 292 property prices 233 and subprime loans 8 nuclear attacks 223 Nukak-Makoe people 17-18 number systems 31-3 OECD see Organization for Economic Cooperation and Development off-balance-sheet entities 5 Office of Federal Housing Enterprise Oversight 261 offshore markets 308 oil 26 O’Neill, Jim 283-4 Open Market Operations 161 opium 289-92 options/option contracts 149 . see also call options; put options options pricing see Black-Scholes model Organization for Economic Cooperation and Development 233 Oriental influences 3 Orleans, Duke of (Regent) 139 OTC contracts see derivatives Ottoman Empire 303 collapse 303 Jews in 36 and Venice 36 see also Turkey outsiders 161 Overend Gurney bank 55 Overstone, Baron 55 ‘over-the-counter’ contracts see derivatives overtrading 121 Pacific Investment Management Company see PIMCO Pacific islands 135 Padua 70 Palmer, J.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Geithner continued to prod, but stopped short of taking remedial action.7 Even as Citi was adding CDOs, the housing market was weakening. In certain cities—Boston and San Diego in the fall of ’05, San Francisco in May of ’06—housing prices had peaked. With prices starting to fall, homeowners had less equity. Nationwide, one-third of borrowers who had gotten adjustable mortgages in 2005 entered the next year with zero or negative equity in their homes—an alarming figure, for if home prices were to cool further, many more homeowners would find themselves underwater.8 On a national basis, prices kept rising, but the increase from April to June of ’06, less than 1 percent, was the smallest of any quarter during the boom. Also, inventories of newly built homes were rising and prices of newly built homes were actually falling—a dark omen for the overall market.9 Clouds were also gathering on the financial horizon.

Buyers were halting payments within months of closing loans (or never paying at all). Zandi correctly suspected that many had lied about intending to move in and, with the market turning, abandoned their speculations. 26 Nationwide, in the third quarter, real estate prices fell—the first such drop in thirteen years. Knowing full well that if the trend continued, millions of homeowners faced the prospect of negative equity, a CDO analyst at Standard & Poor’s—which, of course, had been affixing triple-A ratings to mortgage securities—blithely e-mailed his colleagues, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”27 Yet even as banks reported sharply higher totals of past-due loans and restructured loans, they were pouring capital into risky assets—real estate and, in no small measure, highly leveraged corporate loans.28 Lehman, pushing its commercial property franchise, lent more than $2 billion to a land developer in California.

See also specific funds Goldman Sachs and Lehman Brothers and Morgan Stanley and regulation of servicing for Wall Street, war with Herlihy, Edward Hogan, John home equity loans home foreclosure(s) Dodd’s position on number of Bush administration and, Obama administration and repercussions of suspension of at IndyMac homeowners government help for shift in mentality of home(s) building foreclosure. See home foreclosure(s) as investment assets median value of negative equity in ownership rate, U.S. Hoover, Herbert Housing and Economic Recovery Act of 2008 Housing and Urban Development (HUD) housing market affordable bubble. See also mortgage bubble flipping properties government role in as risk free game weakening of housing prices correlations in fall of gains in rate of increase subprime mortgages and HUD. See Housing and Urban Development (HUD) Iceland Immelt, Jeffrey IndyMac Bank inflation insurance.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Figure 2.1.2 Investor flow 2004 2005 2006 2007 ឣ 66 REAL ESTATE AND FORESTRY ______________________________________________ The third cause is existing debt. This factor will rumble on for some time to come. According to De Montfort University some 50 per cent of the current £202 billion could be in negative equity which as much as £22 billion could be due for refinancing in 2009. Most of this will have to be restructured on less attractive terms: higher margin costs and lower LTVs. Furthermore, many of these investors will be in negative equity due to falling values. This has already led to banks taking control of assets and an increase in sales volumes. So what next and where do the opportunities lie for HNW investors? In a rapidly changing market it seems unwise to try and predict too much. It is fair to say that many experts agree that the market has further to fall.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Exhibit 3.5 The manufacturing cycle: Several mini cycles in the last growth ... Exhibit 3.6 Equity returns across the cycle (average S&P 500 1-month price r... Chapter 4 Exhibit 4.1 Equity vs. bond performance is closely linked to the business cy... Exhibit 4.3 Correlation between equities and bonds has been less negative in... Exhibit 4.5 Sharp bond yield moves have coincided with negative equity retur... Exhibit 4.6 Equity/bond correlation can turn positive with higher yields (12... Exhibit 4.7 Equities have remained attractively valued over recent years des... Chapter 5 Exhibit 5.1 Industries and sectors can be divided in four groups according t... Exhibit 5.2 Beta of forward EPS growth to World GDP growth Exhibit 5.4 Global Cyclicals versus defensive across industrial cycles Exhibit 5.5 Lower bond yields tend to result in cyclical companies underperf...

The Level of Yields: Lower is Better In most of the past 15 years, equities have been negatively correlated with bond prices; falling bond prices (rising bond yields) have coincided with strong equity performance. This has been especially helpful for balanced and multi-asset investors, for whom not only have returns over time been strong for both equities and bonds but also the negative correlation has enabled reduced overall risk and volatility in balanced portfolios. Exhibit 4.5 Sharp bond yield moves have coincided with negative equity returns (average SXXE returns depending on absolute moves in US 10-year Treasury yields [weekly changes]) SOURCE: Goldman Sachs Global Investment Research. For most equity markets, the correlation of equities with bond yields is loosely dependent on the level of yields. If yields are very low – as they have been in recent years – then equities will tend to be negatively correlated with bond prices.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

In currency carry trades such as the Eastern European Swiss franc–funded carry trade, mentioned in the previous chapter, in which households in Hungary and Poland bought houses 33 34 THE RISE OF CARRY financed with Swiss franc mortgages, there clearly was significant equity committed. Sadly, as it turned out, those Hungarian and Polish families had, in many cases unknowingly, put at risk capital greater than the savings they had committed, being left with negative equity in their homes as the Swiss franc appreciated sharply against the Hungarian forint and Polish zloty. Currency carry trades are only one type of carry trade. Carry trades can take many forms in the financial world. The most obvious example is perhaps writing insurance. The insurance company, or writer of an insurance policy, takes a premium, or income, for accepting the risk of having to pay out if the event that is being insured against occurs.

A bank or other lender ought to be wary of entering into such a transaction with a mortgage borrower. The bank will have to fund the loan by borrowing the foreign currency in the interbank market or other funding markets. There might be a risk of losing access to foreign currency funding. If the low interest rate foreign currency does appreciate sharply in the foreign exchange markets, then the property buyer may be unable to service the mortgage and may fall into negative equity. What would happen if this latter eventuality did come to pass? Ordinarily, if the bank had made many such mortgage loans, its solvency might be threatened. It may find it difficult to roll over its foreign currency funding. Banks or institutions in the home country of the foreign currency, which would be the natural providers of the funding, may well be reluctant to extend credit if they fear a widespread insolvency problem.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

bank run, Blythe Masters, Bonfire of the Vanities, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

The bank had instituted several rounds of credit changes that tightened underwriting standards in 2007 and 2008, but it was too late. At the end of 2008, JPMorgan Chase estimated that about $25.6 billion of its home equity portfolio was extended to households where borrowing exceeded household value, the so-called state of “negative equity.” The percentage of the portfolio where households were sitting on negative equity nearly doubled during the year, from 15 percent in January to 27 percent at the end of the year. Much of that negative equity came from California, Florida, Arizona, and Michigan. Along with its competitors, JPMorgan Chase got smashed by the housing collapse. Citigroup had written down about $101.8 billion in assets from the beginning of the crisis through May 2009, Bank of America about $56.6 billion, and JPMorgan Chase $41.1 billion.


pages: 310 words: 85,995

The Future of Capitalism: Facing the New Anxieties by Paul Collier

"Robert Solow", accounting loophole / creative accounting, Airbnb, assortative mating, bank run, Berlin Wall, Bernie Sanders, bitcoin, Bob Geldof, bonus culture, business cycle, call centre, central bank independence, centre right, Commodity Super-Cycle, computerized trading, corporate governance, creative destruction, cuban missile crisis, David Brooks, delayed gratification, deskilling, Donald Trump, eurozone crisis, financial deregulation, full employment, George Akerlof, Goldman Sachs: Vampire Squid, greed is good, income inequality, industrial cluster, information asymmetry, intangible asset, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge economy, late capitalism, loss aversion, Mark Zuckerberg, minimum wage unemployment, moral hazard, negative equity, New Urbanism, Northern Rock, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, race to the bottom, rent control, rent-seeking, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, too big to fail, trade liberalization, urban planning, web of trust, zero-sum game

The ideologues of the right believe that, as long as governments do not interfere, market forces will address the problem. Unfortunately, this is merely an ideological belief. For actual knowledge, we need experts. The market responds to the collapse of a cluster, but not by replacing it with a new one. Instead, the initial response is a sharp drop in the price of residential and commercial property. Home owners become trapped by negative equity, and struggle to move to the booming cities where homes are much more expensive. The fall in the price of commercial property indeed attracts some activities, but they are the stuff that forms the underbelly of the national economy: warehouses that serve the local region; low-productivity manufacturers that can only survive if their premises are very cheap; call centres that rely upon cheap premises and low-waged, casual labour.

It makes sense to increase supply, and the most credible way of doing so is to break the planning log-jam. Local governments are best placed to plan new building programmes, while execution can be in partnership with commercial developers. Local authorities could plan build-to-buy, instead of build-to-rent. But an increase in the supply of housing needs to be gradual: a quantum increase would risk crashing house prices, plunging many young home owners into negative equity. Correspondingly, it makes sense to curb household growth by restoring restrictions on immigration. The credit frenzy unleashed by financial deregulation did not usher in nirvana – it ended in the regulatory disgrace of a bank run. The sight of depositors besieging the branches of Northern Rock was the first such spectacle in Britain for 150 years. As with a house building programme, change will need to be gradual, but its direction is unambiguous: we need to return to ceilings on the ratios of mortgages to income and of mortgages to deposits.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

This means that when interest rates go up, 1. life is harder for businesses, because money is more expensive, and 2. people will tend not to invest in companies, preferring to invest in risk-free bonds, and 3. the stock market will fall for that reason, so 4. confidence in general will fall. In addition, 5. people with mortgages will find it harder to make their repayments, and those who are coming off fixed-rate deals may suddenly see a dramatic increase in their monthly repayments. 6. That means mortgage defaults will rise, so 7. there will be downward pressure on house prices, and 8. some people will be in negative equity, which will stop them from spending money, 9. the currency will rise, because higher guaranteed rates of investment will attract money into buying the country’s debt, so 10. life will become harder for manufacturing businesses, because their exports will be more expensive. Also, 11. inflation will fall—remember, inflation means that money is worth less, whereas a rise in interest rates means that money is more expensive.

no-recourse loans Loans in which the person who has borrowed the money can stop paying the loan, forfeit the asset against which the loan was made, and walk away. The textbook example involves mortgages that go wrong: the borrower, realizing that the math has gone against him or her, decides to stop paying the mortgage and to give up the house. This is something that you would do only if the loan was for a large part of the value of the house—or even, in many cases, when the mortgage was actually for more than the house is worth. (That’s called negative equity: when the mortgage is for more than the property.) No-recourse loans have been denounced as a ridiculous cosseting of feckless borrowers, but one of the ironies of the Great Recession is that no-recourse loans helped the US economy in an unexpected way: by forcing banks to admit to bad property debts, they’ve helped bank balance sheets to stay honest and have helped avoid the Japanese and European curse of zombie banks.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Falling asset values dampen profitability, reducing investment and wages, and investors’ and households’ wealth, lending to lower spending. Unrestricted lending exacerbates these dynamics by prolonging the upswing and exacerbating the downturn. Falling profits may require firms to sell off even more assets, or lay off workers, to repay their debts. Those who have used debt to purchase assets during the upswing may find themselves in negative equity — with assets worth less than the total amount of debt they have outstanding. They will put off all but essential purchases in an effort to pay off their debts, reducing demand, but they may still end up going bankrupt. Historically, these observations have been applied mainly to business investment but the financialisation of the household meant that they could be applied to ordinary consumers too.

But by 2006, the “goldilocks” economy — as some termed the neither too hot nor too cold economic conditions that prevailed during the early Noughties — had begun to falter. US house prices peaked in 2006, and then started to fall. Similar trends prevailed in the UK.14 Banks had forayed into subprime markets and started to offer mortgages with low or no deposits based on the assumption that house prices would continue rising forever. As a result, when they started to fall, many homeowners fell into negative equity — meaning that they owed more in mortgage debt than their house was worth. In such a situation, consumers had a choice: keep a mortgage worth more than their homes or sell. Those who could opted to sell, some at any price, sending prices tumbling even further. Falling house prices cascaded through the financial system. The financial securities that banks had been selling rapidly lost their value when the quality of the underlying mortgages was called into question.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

There are still many foreclosures in the pipeline—some 5.9 million properties are 30 or more days delinquent or in foreclosure; see Mortgage Monitor Report, Lender Processing Services (March 2012), available at http://www.lpsvcs.com/LPSCorporateInformation/NewsRoom/Pages/20120321.aspx (accessed March 28, 2012). Additionally, 11.1 million, or 22.8 percent, of all residential properties with a mortgage in the United States were underwater (had negative equity at the end of the fourth quarter of 2011); see “Negative Equity Report,” Corelogic (Q4, 2011), available at http://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdf (accessed March 28, 2012). 2. The exact amount varies from year to year. For data on income inequality, I rely heavily on the work of Emmanuel Saez and Thomas Piketty. The important initial work is T. Piketty and E. Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics 118, no. 1 (2003): 1–39.

Kahn, “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy,” Labour Economics 12, no. 2 (April 2010): 303–16. 49. A point explained in Domenico Delli Gatti, Mauro Gallegati, Bruce C. Green-wald, Alberto Russo, and Joseph E. Stiglitz, “Sectoral Imbalances and Long Run Crises,” proceedings of the Beijing 2012 World Congress of the International Economic Association. 50. One in four mortgage owners, some 14 million Americans, are underwater, for a net negative equity total of $700 billion. M. Zandi, “To Shore Up the Recovery, Help Housing,” Special Report, Moody’s Analytics, May 25, 2011. 51. Those receiving mortgages between 2004 and 2008 were particularly hard hit; of those receiving loans in this period, 2.7 million households have already been foreclosed upon, and another 3.6 million are at serious risk. D. Gruenstein Bocian, W. Li, and C. Reid, “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures,” Center for Responsible Lending, November 2011, available at http://www.responsiblelending.org/mortgage-lending/research-analysis/Lost-Ground-2011.pdf. 52.


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The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

The money view, emphasized very much by those in the monetarists’ camp, focuses primarily on the liabilities side of banks’ balance sheets. In contrast, the credit view, pushed primarily by Yale economics profesor James Tobin, stresses the importance of restoring bank lending and so is more concerned with the asset side of banks’ balance sheets. Not all forms of credit, however, are equally desirable. “Healthy” credit should, so the argument goes, be expanded, while credit from zombie banks (undercapitalized banks with negative equity) or vampire banks (insolvent banks that offer high interest rates on deposits to attract new funding) is to be curtailed. To understand better this distinction between “healthy” and “unhealthy” credit, we need to look more closely into the behavior of zombie and vampire banks. Zombie banks, undercapitalized and artificially kept alive, gamble for resurrection. Rather than granting new loans to profitable projects, they opt for risky loans that turn out well if the economy recovers soon but can cause large losses otherwise.

Purchases, on the contrary, are inherently risky, as the government issuing the bonds may default on its debt. This would create losses for the central bank. Of course, in the case of the ECB, which is indirectly owned by all euro-area governments, the risk taken on by the ECB is in fact carried by all the others. And, as the ECB occasionally pointed out, central banks can create money and as a result can operate with negative equity. They are thus protected from insolvency. Those two differences explain the absolute and irreducible German hostility to the purchase of government bonds by the ECB. Germany considers any direct support by the central bank to a government as a violation of the prohibition of monetary financing. The 1924 Reichsbank Law, in the aftermath of the disastrous Great Inflation, and the 1953 law establishing the Bank Deutscher Länder, the predecessor of the Bundesbank, both contained ceilings (but not an absolute prohibition) for the purchase of government debt by the central bank.

For a formal analysis, see Brunnermeier et al. 2016, “The Sovereign-Bank Diabolic Loop and ESBies,” American Economic Review Papers and Proceedings, 106(5), pp. 508–512. 15. Rather, German euros would offer a redenomination opportunity, as a new Deutschmark would appreciate. 16. The run-up in TARGET2 liabilities prior to an exit might be so large, such that the central bank’s liabilities exceed their assets. This is okay to an extent because central banks can operate with some negative equity. 17. See Sebastian Edwards, “Currency Changes and Contracts: Lessons for Greece,” Vox, August 16, 2015. Last accessed January 4, 2016, from http://www.voxeu.org/article/currency-changes-and-contracts-lessons-greece. 18. Peter Spiegel, “Inside Europe’s Plan Z,” Financial Times, May 14, 2014. Last accessed January 4, 2016, from http://www.ft.com/intl/cms/s/0/0ac1306e-d508-11e3-9187-00144feabdc0.html#axzz3Lvk7ym2N. 19.


pages: 251 words: 88,754

The politics of London: governing an ungovernable city by Tony Travers

active transport: walking or cycling, congestion charging, first-past-the-post, full employment, job satisfaction, negative equity, Neil Kinnock, new economy, urban sprawl

From then on, there was a good working relationship. After 1990, the situation changed again. The impact of the deep property recession altered attitudes. Social housing began to be seen as a problem. This was driven by two specific local factors. First, there were large numbers of owner-occupied households in negative equity in Beckton, which was blamed to some degree on the presence of social housing nearby. Secondly, with an increase in homelessness, many owners with negative equity leased their properties to homeless families via the council’s PSL (private sector leasing) scheme. Homeless families from several boroughs were then placed in this accommodation. This led to some social tension and conflict in Beckton. In Tower Hamlets, the relationship with the LDDC was conditioned in part by the way the borough was administered and also by its political control.


pages: 323 words: 95,939

Present Shock: When Everything Happens Now by Douglas Rushkoff

algorithmic trading, Andrew Keen, bank run, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, business cycle, cashless society, citizen journalism, clockwork universe, cognitive dissonance, Credit Default Swap, crowdsourcing, Danny Hillis, disintermediation, Donald Trump, double helix, East Village, Elliott wave, European colonialism, Extropian, facts on the ground, Flash crash, game design, global pandemic, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, lateral thinking, Law of Accelerating Returns, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, Milgram experiment, mutually assured destruction, negative equity, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, passive investing, pattern recognition, peak oil, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, the medium is the message, The Wisdom of Crowds, theory of mind, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K, zero-sum game

Luckily for me I didn’t buy the apartment (or, rather, I didn’t buy the mortgage for that apartment). But the hundreds of thousands of Americans who did accept similar bargains ended up in big trouble. Instead of increasing, the value of the homes sunk below the amount that was owed on them. As of this writing, 31 percent of all residential properties with mortgages are under water, or what industry analysts call negative equity.26 Owing more on a thirty-year mortgage than one’s house is currently worth is just another way of saying present shock. A few traders did see the writing on the wall and understood that the housing market had become too dependent on these temporally compressed lending instruments. Famously, even though they were selling packaged loans to investors and pension funds, Goldman Sachs determined that the financing craze was unsustainable and began betting against the mortgages through even more derivative derivatives called credit default swaps.

(New York: Random House, 2009), 120. 23. Liz Moyer, “Fund Uses Behavioral Finance to Find Value Plays,” CBS MarketWatch, June 28, 2011, www.marketwatch.com. 24. Uttara Choudhury, “Behavioral Economics has Never Been Hotter,” Braingainmag.com. 25. Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit (New York: Basic Books, 2000). 26. “Corelogic Reports Negative Equity Increase in Q4 2011,” BizJournals, March 1, 2012, http://assets.bizjournals.com/orlando/pdf/CoreLogic%20underwater%20mortgage%20list.pdf. Also: “Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth,” Zillow Real Estate Research, May 24, 2012, www.zillow.com/blog/research/2012/05/24/despite-home-value-gains-underwater-homeowners-owe-1-2-trillion-more-than-homes-worth. 27.


Lectures on Urban Economics by Jan K. Brueckner

affirmative action, Andrei Shleifer, congestion charging, Edward Glaeser, invisible hand, market clearing, mortgage tax deduction, negative equity, New Economic Geography, profit maximization, race to the bottom, rent control, rent-seeking, Ronald Coase, The Nature of the Firm, transaction costs, urban sprawl

If the consumer instead defaults on the mortgage, failing to pay back the balance M and letting the lender seize the house, he is left with nothing. If V* – M < 0, so that the sale price V* is less than the mortgage amount (and equity is negative), the homeowner ends up “in the hole” when paying off the mortgage, having to contribute out-of-pocket funds to do so. He would thus be better off defaulting, in which case he would come out even. This negative-equity default rule is modified slightly when the consumer incurs “default costs,” denoted by C, which capture the cost of an impaired credit rating, the costs associated with moving out of the house, and the psychic costs (guilt) that defaulting on a mortgage might bring. In this case, default will occur only when V* – M < –C, or when equity is more negative than – C. This rule again minimizes out-of-pocket costs when leaving the house.

Eid, Jean, Henry G. Overman, Diego Puga, and Matthew A. Turner. 2008. Fat city: Questioning the Relationship between Urban Sprawl and Obesity. Journal of Urban Economics 63: 385–404. Fischel, William A. 1985. The Economics of Zoning Laws: A Property Rights Approach to American Land Use Controls. Johns Hopkins University Press. Foote, Christopher L., Kristopher Gerardi, and Paul S. Willen. 2008. Negative Equity and Foreclosure: Theory and Evidence. Journal of Urban Economics 64: 234–245. 276 References Freeman, Scott, Jeffrey Grogger, and Jon Sonstelie. 1996. The Spatial Concentration of Crime. Journal of Urban Economics 40: 216–231. Fujita, Masahisa. 1989. Urban Economic Theory. Cambridge University Press. Fujita, Masahisa, and H. Ogawa. 1982. Multiple Equilibria and Structural Transition of Non-Monocentric Urban Configurations.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Equity is simply the difference between assets and liabilities, and represents what would be left over for the shareholders (owners) of the bank if all the assets were sold and the proceeds used to settle the bank’s liabilities (i.e. pay off the creditors). Equity is calculated by subtracting liabilities from assets. A positive net equity indicates that a bank’s assets are worth more than its liabilities. On the other hand a negative equity shows that its liabilities are worth more than its assets - in other words, that the bank is insolvent. fig. 2.2 - Assets and liabilities Presenting balance sheets diagrammatically On official annual accounts, assets are typically presented first, followed by liabilities underneath, with equity coming last, as shown below: However, it can help to present the balance sheet diagrammatically with assets on one side, and liabilities and equity on the opposite side.

Their underinvestment in other assets may be compounded if/when the bubble in the UK housing market bursts – they may find their savings (in the form of property) insufficient to cover their outgoings. An increase in the future poverty of pensioners is the likely result. In addition, the bursting of the housing bubble will leave many with properties that are worth less than the mortgage that they took out to buy them (i.e. negative equity). Consequently, house price bubbles fuelled by banks have the effect of misleading people about their long-term interests and diverting savings away from pensions provision, with people slow to revise their beliefs appropriately when the bubbles collapses. Finally, excess returns in the financial sector resulting from the design of the monetary system bids resources away from other, productive enterprises.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Part II THE GLOBAL CRISIS Chapter 6 “THE WORST FINANCIAL CRISIS IN GLOBAL HISTORY” America’s real estate prices peaked in the summer of 2006 and began, slowly at first, to ease. In Ireland the turning point came in March 2007. By the summer construction sites began to close in Spain. October 2007 saw the first dip in UK house prices. Tens of millions of home owners now felt the force of asset valuation go into reverse gear.1 As house prices fell, equity dwindled, and the hardest hit slid into negative equity. Families scrambled to slash spending and pay down credit card and other short-term debt. The result was a smothering recession in consumer demand. Whatever else happened, a large part of the North Atlantic economy was headed into a downturn. On the face of it, this was precisely the sort of contingency that financial engineering was supposed to deal with. Through securitization, risks were supposed to have been spread so that even severe losses would be absorbed across the broad base of the economy.

In Spain net wealth per person fell by at least 10 percent between 2007 and 2009. Within five years personal wealth would plunge by 28 percent, or 1.4 trillion euros, more than a year’s worth of output.35 In the UK, as the stock market and house prices slumped, household wealth losses in 2008–2009 were estimated by the IMF at $1.5 trillion—50 percent of GDP in a matter of twelve months. Ten percent of home owners found themselves mired in negative equity.36 In Ireland, house prices, having quadrupled between 1994 and 2007, halved between 2008 and 2012, taking household wealth with them.37 These were severe shocks, but for sheer scale the US crisis trumped them all. An early IMF estimate in the summer of 2009 put US household wealth losses at $11 trillion.38 By 2012 the US Treasury would raise that to $19.2 trillion.39 Independent estimates put the figure closer to $21–22 trillion—$7 trillion from real estate, $11 trillion in the stock market and $3.4–4 trillion in retirement savings.40 From their peak in 2006, by 2009 US house prices had fallen by a third.

At the worst point in the crisis, 10 percent of home loans across the United States would be seriously in arrears and 4.5 percent of all mortgages crashed into foreclosure. More than 9 million families would lose their homes. Millions more suffered years of anxiety as they struggled to make payments on homes that were no longer worth the mortgages secured on them. At the worst point in the crisis more than a quarter of US homes had negative equity.41 And the pain was compounded by the distribution of losses between wealthier and poorer households. Between 2007 and 2010 the mean wealth of American households fell from $563,000 to $463,000. But those figures are elevated by the huge fortunes of the very wealthy. If we look instead at the median household—the household that sits at the 50 percent mark in the wealth distribution—it saw its net worth halved from $107,000 to $57,800.42 And as bad as these figures are, the experience of America’s minority populations was worse.


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Shaky Ground: The Strange Saga of the U.S. Mortgage Giants by Bethany McLean

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, collateralized debt obligation, crony capitalism, housing crisis, mortgage debt, negative equity, obamacare, race to the bottom

There were bitter battles over these programs. The biggest one was over principal reduction, or whether the administration should enable the write-down of mortgages that were larger than the value of the homes. By the fourth quarter of 2009, according to research firm CoreLogic, 24 percent of borrowers, or 11.3 million mortgages, owed more than their homes were worth, for a total of around $700 billion in negative equity. The numbers would get worse before they got better. Many borrowers will walk away from their mortgage in such circumstances; the default hurts the borrower, the lender, and everyone else in the neighborhood when the now-empty house gets trashed. So why not have a program that forgave the amount of the loan that was greater than the value of the house? The fight over principal forgiveness became one of the ugliest parts of the post-crisis landscape.


pages: 160 words: 46,449

The Extreme Centre: A Warning by Tariq Ali

Affordable Care Act / Obamacare, Berlin Wall, bonus culture, BRICs, British Empire, centre right, deindustrialization, Edward Snowden, Fall of the Berlin Wall, financial deregulation, first-past-the-post, full employment, labour market flexibility, land reform, light touch regulation, means of production, Mikhail Gorbachev, Monroe Doctrine, mortgage debt, negative equity, Neil Kinnock, North Sea oil, obamacare, offshore financial centre, popular capitalism, reserve currency, Ronald Reagan, South China Sea, The Chicago School, The Wealth of Nations by Adam Smith, trade route, trickle-down economics, Washington Consensus, Westphalian system, Wolfgang Streeck

Individual greed was beginning to turn to anger as people realized that they had been cheated (many had believed that Blair needed to make concessions in order to win and that once victory had been achieved it would be back to traditional social democracy). Nothing was being done to alleviate their suffering. New Labour enthusiasts do not like to be reminded that between 1990 and 1996, a million people lost their homes through repossession by the mortgage companies, while 390,000 homes, once publicly owned, were seized by those companies. Come 2009 almost one million properties were estimated to be in ‘negative equity’: the homeowners had paid too much for them in the first instance and could not get their money back. Thatcher had resolved to make Britain a nation of small businesses. This was the much vaunted ‘popular capitalism’. Yet by 1997, the year of Labour’s victory, personal bankruptcies had ‘stabilized’ at 22,000 a year; 30,000 companies had become insolvent between 1990 and 1997. The ‘flexible labour market’ so beloved by Thatcher, Blair, and the transnationals had, in reality, made unemployment a mainstream experience.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

addicted to oil, affirmative action, Amazon Mechanical Turk, anti-globalists, banks create money, big-box store, Bretton Woods, car-free, Charles Lindbergh, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, Kickstarter, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, negative equity, new economy, New Urbanism, Norbert Wiener, peak oil, peer-to-peer, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional, zero-sum game

Of course, freezing a mortgage rate may help an individual stay in his house, but it won’t help the pension fund or municipal project depending on that interest to stay solvent. Selling their homes now won’t even help. Thirty-nine percent of Americans who bought homes in 2006 owe more on their mortgages than the homes are worth. By contrast, of those who purchased their homes in 2003, only 3 percent now have “negative equity.” The government’s cure for what is being called a “liquidity crisis” is to add liquidity to the system. Through lower interest rates or direct bailouts, the Fed gives more money to the lending institutions, recreating the problem that got us here in the first place: a supply-side glut of money. This may calm Wall Street (long enough for institutional investors to sell their assets, anyway) but it has no positive effect on Main Street, where homes are still going into foreclosure at record numbers.

Gans, The Levittowners: Ways of Life and Politics in a New Suburban Community (New York: Columbia University Press, 1982). 66 “This particular problem” Daniel Gross and Jon Meacham, “The Oracle Reveals All: A Candid Conversation with Greenspan,” Newsweek, Web Exclusive, September 24, 2007, http://www.newsweek.com/id/41390 (accessed September 25, 2007). 66 Banks found willing customers Julia Werdigier, “Debt-Gorged British Start to Worry That Party Is Ending,” The New York Times, March 22, 2008, Business section. 67 As of this writing, 6 percent Peter Gumbel, “The $915B Bomb in Consumers’ Wallets,” Fortune, October 30, 2007. 68 But credit-rating agencies Mark Pittman, “Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss,” Bloomberg.com, posted on March 11, 2008, http://wwwbloomberg.com/apps/news?pid=20601109&sid=aRLWzHsF16lY&refer=home (accessed March 20, 2008). 68 Goldman Sachs and other Ben Stein, “Tattered Standard of Duty on Wall Street,” The New York Times, December 23, 2007, Business section. 69 Thirty-nine percent of Americans “30% of Recent U.S. Homebuyers Have Negative Equity: Report,” CBC News, posted on February 12, 2008, www.cbc.ca/money/story/2008/ 02/12/homeequity.html (accessed February 14, 2008). 70 Mr. Greenspan and the federal government Edmund L. Andrews, “Fed and Regulators Shrugged as the Subprime Crisis Spread,” The New York Times, December 18, 2007, front page. 71 While Goldman Sachs was underwriting The Daily Reckoning website has the best narrative accounts of Goldman Sachs’s short-selling strategy during the subprime-mortgage meltdown: Adrian Ash, “Goldman Sachs Escaped Subprime Collapse by Selling Subprime Bonds Short,” Daily Reckoning, October 19, 2007, http://www.dailyreckoning.com.au/goldman-sachs-2/2007/10/19. 71 For help predicting the extent Gregory Zuckerman covered the Paulson-Greenspan relationship for The Wall Street Journal.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

If it did not, she would be no worse off than if she sank the money into her house, since this would only benefit her creditor: it does not matter to her, after all, whether her creditor loses $120,000 or $70,000. Her loss is still limited to the initial $30,000 she invested. So Kate would chose ‘gambling for resurrection’. It is what one would expect anybody with negative equity to do. This is also relevant to banks. These are businesses with next to no equity in good times whose shareholders enjoy the benefits of limited liability: in other words, loans to banks (or any other company) are non-recourse. If the bank were to fall into negative equity – extremely likely to happen, in fact, given how leveraged they are – the downside would no longer matter to shareholders, since the losses fall on creditors or the government. So it would make sense to gamble on ‘resurrection’ or ‘go for broke’. They can do this quite easily by taking on riskier loans and adopting riskier trading strategies.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

The second is that regulators may be in a position where they hope that the insolvency is transitory. In other words, when the assets of the bank are studied, it may be that there is negative equity in the company but regulators believe there is a good chance of asset reflation that returns the institution to solvency in the near future. Simon Johnson, former chief economist at the IMF, makes the point that the experience of many banks in the crisis was, in fact, an issue of solvency but that many hoped that asset prices would rise again to reverse the issue.47 As such, regulators will be forced to think through the question of solvency based on liquidation value as well as potentially transitory insolvency for banks that have slightly negative equity but have a chance of becoming positive in an improved fiscal environment. One of the most promising ways of providing more stability to the banking system was the Volcker Rule, named after Paul Volcker, a previous chairman of the Federal Reserve.


pages: 229 words: 61,482

The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life You Want by Diane Mulcahy

Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, basic income, Clayton Christensen, cognitive bias, collective bargaining, creative destruction, David Brooks, deliberate practice, diversification, diversified portfolio, fear of failure, financial independence, future of work, gig economy, helicopter parent, Home mortgage interest deduction, housing crisis, job satisfaction, Kickstarter, loss aversion, low skilled workers, Lyft, mass immigration, mental accounting, minimum wage unemployment, mortgage tax deduction, negative equity, passive income, Paul Graham, remote working, risk tolerance, Robert Shiller, Robert Shiller, Silicon Valley, Snapchat, TaskRabbit, Uber and Lyft, uber lyft, universal basic income, wage slave, Y Combinator, Zipcar

Truth: Maybe, maybe not, depending on general economic conditions, your specific real estate market, the type of house you buy, the condition it’s in, how well you maintain it, and where in the real estate cycle you buy and sell it. MYTH #2: Owning “builds equity.” Truth: Relies on Myth #1. Ownership only builds equity if you buy a house that maintains or increases its value. You can make mortgage payments for a decade, but one sharp fall in the real estate market could put you in a position of negative equity, where the home is worth less than the remaining amount you owe on it. You also only build equity if you hold the house for many years. The early years of mortgages are dominated by interest payments, not principal payments, so you build equity very slowly for more than a decade. If you buy a house through an interest-only loan, you don’t build any equity at all by paying your mortgage. MYTH #3: I can deduct mortgage interest payments on my taxes.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business cycle, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, industrial cluster, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost airline, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, MITM: man-in-the-middle, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

Bush, remarks on home ownership, Atlanta, GA, June 17, 2002, http://​georgewbush-​whitehouse.​archives.​gov. 2 “I didn’t think I made enough money” Eliseo Guardado, interview, October 3, 2010. 3 “The banks are playing to brokers” Kathryn Keller, interview, August 9, 2010. 4 Even so, she got stung Bre Heller, interview, August 4, 2010. 5 “I am a victim” Bre Heller, email to Florida Attorney General’s Office, October 22, 2008. 6 Bre Heller figured her loan Heller, interview, August 4, 2010. 7 Was deep “under water” CoreLogic reported that 11.2 million homes, 24 percent of residential properties with mortgages, were in negative equity on March 31, 2010; CoreLogic, “Real Estate News and Trends: New Core-Logic Data Shows Decline in Negative Equity,” media alert, May 10, 2010, www.​corelogic.​com/​about-​us/​researchtrends/​asset_​upload_​file155_​1435.​pdf. 8 “Considering that I lost $250,000” Heller, interview, August 4, 2010. 9 The irony in that episode Robin Updike, “ ‘Friend of the Family’—Washington Mutual New TV Ads Focus on ‘The Little Guy,’ ” Seattle Times, September 3, 1991. 10 Killinger was warned in advance Lee Lannoye, interviews, August 27, 2010, and September 27, 2010.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

For the depressed economy has led to depressed interest rates, including mortgage rates: conventional mortgages taken out at the height of the mortgage boom often had rates above 6 percent, but those rates are now below 4 percent. Ordinarily, homeowners would take advantage of this fall in rates to refinance, reducing their interest payments and freeing up funds that could be spent on other things, boosting the economy. But the legacy of the bubble is a large number of homeowners with very little equity in their homes, or in quite a few cases negative equity—their mortgages are larger than the market value of their houses. And in general lenders won’t approve a refinancing unless the borrower has sufficient home equity or is able to put up an additional down payment. The solution would seem to be obvious: find a way to waive or at least soften these rules. And the Obama administration has in fact had a program, the Home Affordable Refinance Program, with that goal.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Albert Einstein, asset allocation, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

When he came back in to see the lender after the meltdown, he was already underwater and was referred to the company’s loan modification department. There are thousands of examples like this across the country, and after years of using their houses as personal ATMs, many Americans, like this gentleman, have seen their bedrock crack and crumble. In fact, many now see that their remaining retirement nest eggs are about equal to or even less than the amount of negative equity they have in their homes. There is one place where real estate is still hot. There is a booming market for the sale of burial plots by individuals, many of which have been in families for years, as record numbers of people are selling their final resting spots back to the cemetery and other buyers, often for a fraction of what they paid for them.25 What a difference a meltdown makes. I have been struck by the complete reversal in many investors’ perspectives.


pages: 317 words: 71,776

Inequality and the 1% by Danny Dorling

Affordable Care Act / Obamacare, banking crisis, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Boris Johnson, Branko Milanovic, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, collective bargaining, conceptual framework, corporate governance, credit crunch, David Attenborough, David Graeber, delayed gratification, Dominic Cummings, double helix, Downton Abbey, en.wikipedia.org, Etonian, family office, financial deregulation, full employment, Gini coefficient, high net worth, housing crisis, income inequality, land value tax, longitudinal study, low skilled workers, lump of labour, mega-rich, Monkeys Reject Unequal Pay, Mont Pelerin Society, mortgage debt, negative equity, Neil Kinnock, Occupy movement, offshore financial centre, plutocrats, Plutocrats, precariat, quantitative easing, race to the bottom, Robert Shiller, Robert Shiller, TaskRabbit, The Spirit Level, The Wealth of Nations by Adam Smith, trickle-down economics, unpaid internship, very high income, We are the 99%, wealth creators, working poor

In the homes of multi-millionaire properties, an area the size of the average doormat is now estimated to be worth £3,500. Verso/Leo Hollis The polarising property market of London Few who have not bought their own homes have any significant wealth, except what they might be saving for a deposit on a home. Even some who are buying their own homes find that they have no wealth. By summer 2013, it was estimated that ‘nearly 800,000 of those with a mortgage [were] in negative equity’.54 That number will grow rapidly if more people borrow huge amounts to buy homes in the near future, and if house prices fall when interest rates rise. Growing wealth inequality leads to an increasingly less efficient use of our existing housing stock, and rapidly increases housing prices as a result, because less efficient use reduces supply.55 This forces up rents, forcing even those on a living wage into effective poverty.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

The sum sought and eventually settled upon—over $20 billion—bears no resemblance to any demonstrable harm, but was intended to provide a source of funds to “keep people in their homes.” This raises a politically impossible-to-ask question: is it really good for financially distressed households to be kept in homes they can’t afford? The first requirement for a real estate market to recover is that it “clear”—that is, find a bottom at which qualified purchasers will emerge to pick up bargains. This means that the millions of “homeowners” who have zero or negative equity in the homes (so of course do not in any real sense own them) need to revert to being renters sooner or later. The politics of preventing this are irresistible and self-defeating in equal measure. We can confidently expect decades of litigation against the banking industry, some merited and some meritless, but none of it will make it easier to get a loan or buy a house. Broken Markets Dodd-Frank There is no scope in this book to examine in any detail Dodd-Frank, as the 848-page Wall Street Reform and Consumer Protection Act is known.


pages: 296 words: 76,284

The End of the Suburbs: Where the American Dream Is Moving by Leigh Gallagher

Airbnb, big-box store, Burning Man, call centre, car-free, Celebration, Florida, clean water, collaborative consumption, Columbine, commoditize, crack epidemic, East Village, edge city, Edward Glaeser, extreme commuting, helicopter parent, Home mortgage interest deduction, housing crisis, Jane Jacobs, Kickstarter, low skilled workers, Mark Zuckerberg, McMansion, Menlo Park, mortgage tax deduction, negative equity, New Urbanism, peak oil, Peter Calthorpe, Ponzi scheme, Richard Florida, Robert Shiller, Robert Shiller, Sand Hill Road, Seaside, Florida, Silicon Valley, Steve Jobs, Stewart Brand, the built environment, The Death and Life of Great American Cities, Tony Hsieh, transit-oriented development, upwardly mobile, urban planning, urban sprawl, Victor Gruen, walkable city, white flight, white picket fence, young professional, Zipcar

For more, see www.winstonchurchill.org. single-family housing starts . . . and new home sales each hit new lows: U.S. Census Bureau, new residential construction and sales monthly and annual data. prices that dropped 34 percent nationwide: S&P/Case-Shiller U.S. National Home Price Index, April 30, 2006, to January 31, 2012. here in February 2012: CoreLogic, number of residential properties in negative equity, first quarter, 2012. 312 million people: US Census Bureau, 2011, U.S. population estimate. builders erected: U.S. Census Bureau, new residential construction statistics. record amounts of farmland: American Farmland Trust, www.farmland.org. statistics and articles about the pain: Christopher Leinberger, “The Death of the Fringe Suburb,” New York Times, November 25, 2011; “Struggling in the Suburbs,” New York Times editorial page, July 7, 2012; Steve Yoder, “Housing Crisis Could End Suburbia as We Know It,” Fiscal Times, July 5, 2012.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

The only “plan” for achieving this growth appears to be for the government to provide the banks with almost-interest-free credit so that they can lend while exploiting huge margins. This policy has nothing to do with growing the economy; it is a “financial rake-off.” Meanwhile, the Fed faces an interest rate quandary: if it keeps rates low, the financial sector will be forced to gamble to achieve the growth in asset values it needs; if rates rise, real estate values will fall and the banks and pension funds will be forced even further into negative equity. If Hudson is right, we ought to be witnessing the end of two myths. The first is about free markets. We cannot continue to believe that they are free when they support rent seeking rather than real GDP, reward banks for pushing junk mortgages, and use credit rating agencies to make predatory finance look like sound wealth creation. Free markets need to be protected from fraud and rent seeking.

Gox, 366, 367, 369 multitude, and money, 77, 268; and finance, 248; in Hardt and Negri, 238, 239, 246, 247–49, 351; versus society, 293; in Spinoza, 77 Mundell, Robert, 253 Munn, Nancy, 215 mutualism, 353, 354, 357, 360, 363, 372, 382 mutuality, 101 myth, 16–17, 47 Nakamoto, Satoshi, 364, 381, 382 Namecoin, 370n40 Nantes, 165 narrow banking, 133 nationalism, 240 nation-state, 8 natural money, 361 nature, 155, 185, 188, 189, 232, 311, 328; in Bashō, 331; in Bataille, 196; in Baudrillard, 196; in Benjamin, 331; versus civilization, 283; in Fromm, 334–35, 337; in Goethe, 331; immortality of, 141; irrationality of, 77n; in Marx, 58; in Nietzsche, 141, 154; in Polanyi, 280, 311; in Proudhon, 354; and sacrifice, 168; state of, 223; in Tennyson, 331 negative equity, 132 Negri, Antonio, 13, 77, 237–51, 293; on bare life, 249–50; on biopower, 239–40; on the commons, 249, 380; Commonwealth, 237, 245, 250; on desire, 241; Empire, 237, 250; on empire, 238–41, 260, 263; on finance, 249–50; on globalization, 237–38; on imperialism, 237–38; on money, 241–42, 244, 245–46, 250–1; on money and community, 250; Multitude, 237; on the multitude, 238, 239, 246, 247–49, 351; on reterritorialization, 241; on the society of control, 239–40; on sovereignty, 238, 239, 244, 245, 247; Time for Revolution, 266; on time, 251 neochartalism, 103, 106–11, 1, 12n, 254, 359.


pages: 287 words: 80,050

The Wisdom of Frugality: Why Less Is More - More or Less by Emrys Westacott

Airbnb, back-to-the-land, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, carbon footprint, clean water, Community Supported Agriculture, corporate raider, Daniel Kahneman / Amos Tversky, dark matter, Diane Coyle, discovery of DNA, Downton Abbey, dumpster diving, financial independence, full employment, greed is good, happiness index / gross national happiness, haute cuisine, hedonic treadmill, income inequality, invisible hand, Isaac Newton, loss aversion, McMansion, means of production, move fast and break things, move fast and break things, negative equity, New Urbanism, paradox of thrift, Ralph Waldo Emerson, Thales and the olive presses, Thales of Miletus, the market place, The Spirit Level, Thorstein Veblen, Upton Sinclair, Veblen good, Zipcar

In the longer term, though, the wider economic benefits of this sort of extravagance may fade; for once people are hemorrhaging a good chunk of their monthly income servicing credit card debt, they have less disposable income, and money that they might otherwise spend on goods and services is siphoned into the coffers of the credit card companies. Imprudence can even damage an economy, as was demonstrated in the recession that began in 2008. A major factor in the complex of causes leading to this recession was the amount of debt being carried by American households, including mortgages that could no longer be refinanced and which left people carrying negative equity once the housing bubble burst. These particular chickens coming home to roost do not, however, disprove the economic benefits of affordable (as opposed to imprudent) extravagance. Common sense and moral philosophy may distinguish between reasonable consumer spending on the one hand and foolish, wasteful, and sickeningly self-indulgent outlays on the other, but economists interested in the effects of these on employment, per capita income, or gross domestic product do not.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial thriller, floating exchange rates, full employment, gig economy, inflation targeting, Just-in-time delivery, light touch regulation, liquidity trap, Martin Wolf, moral hazard, negative equity, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

The veteran of the Star Chamber added, ‘It sounds easy. The difficulty was that I had to concentrate almost daily on reducing the pressure on the public finances … Life was one long public spending round with my colleagues getting ever more distressed.’ Clarke recalled feeling quite embattled (a situation his personality is not averse to) with colleagues wanting to reintroduce tax relief for housing. The background was the period of negative equity and the collapse of housing prices in the denouement of the Lawson boom. ‘Most of my colleagues wanted to pump up mortgage interest relief but I was determined to get rid of the subsidies that had contributed to the boom.’ In those early days, before the economy had returned to ‘sustainable growth’, he felt he was concentrating on the inflation target (inherited from Lamont) and his fiscal rules, whereas colleagues, opposition and press were demanding instant results.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, American ideology, bank run, banking crisis, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve, zero-sum game

In addition, most of the mortgages had provisions that the borrower’s payment would increase to at least the interest cost ($1,000) if the amount of the loan relative to the value of the house rose above a certain percentage, such as 95 percent. Of course, in a falling house-price environment, this provision magnified the problems. In southern California, for example, as house prices started to fall, the pick-a-payment mortgage borrowers were faced with significant percentage increases in their mortgage payments at the same time that their home values were collapsing. In addition, most of these borrowers had negative equity in their houses, that is, they owed more on the mortgage than the house was worth. They were already overleveraged relative to their income, so they had a double problem. Default rates for these borrowers (who typically were not subprime borrowers) have turned out to be extremely high. One of the reasons is the economic double leverage just described. The other reason, which may be more significant, is the psychology of the borrowers.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve

But all else being equal, higher-risk investments should get proportionally smaller allocations. An equal allocation fund will tend to be more volatile as higher-risk holdings exert a disproportionate impact. In contrast, a risk-based allocation approach will mitigate portfolio volatility by holding proportionally smaller allocations in higher-risk investments. 8. Target a majority of positive months during negative equity months. If a fund of funds portfolio is intended to be used as a diversifier to traditional investments rather than just as a stand-alone investment, it should seek to be net profitable in the majority of bear market months. To enhance the likelihood of achieving this goal, seek managers who have been net profitable across the down market months that occurred during their track records. Correlation Matrix In comparing a portfolio of investments, it is highly useful to view correlations between the investments as a group rather than one pair at a time.


I, Partridge: We Need to Talk About Alan by Steve Coogan

call centre, Celtic Tiger, citation needed, cuban missile crisis, late fees, means of production, negative equity, University of East Anglia, young professional

Don’t get me wrong, I knew that there’d be the odd snide comment from people who think that a two-and-a-half-hour radio show five days a week is – I’m laughing as I write this – somehow a step down from presenting a half-hour TV talk show once a week (12.5 hours of weekly output, versus 0.5 hours). But there are idiots in all walks of life. No, I wasn’t worried about being welcomed back into the fold. Employees at a London station like LBC or Radio London or London FM might have been a bit sniffy about it, but people in Norwich are warmer-of-heart than their bitter London counterparts with their negative-equity and their stab wounds. No, I wasn’t worried about being welcomed back into the fold.142 I was fully prepared to be the big man and chat to each employee individually to ensure there were no hard feelings, so I made sure I sidled up to each member of the team – in the kitchenette, outside the lavs, jogging after them in the car park. I was making the effort and it paid off. At the end of each of these conversations, I said: ‘Right, point blank.


pages: 325 words: 89,374

Municipal Dreams: The Rise and Fall of Council Housing by John Boughton

British Empire, deindustrialization, full employment, garden city movement, ghettoisation, housing crisis, Jane Jacobs, laissez-faire capitalism, manufacturing employment, negative equity, Neil Kinnock, neoliberal agenda, new economy, New Urbanism, profit motive, rent control, Right to Buy, rising living standards, starchitect, The Death and Life of Great American Cities, the market place, upwardly mobile, urban decay, urban planning, urban renewal, young professional

In Derby, briefly held by the Conservatives after 1968, homes were sold to tenants on the Mackworth Estate and across the city. Another Conservative council, Nottingham, sold off 1,635 council homes in the mid-1970s, controversially not only to sitting tenants but to anyone – including in practice to some with minimal local connection – on the waiting list.2 In general, with house prices falling and problems of negative equity emerging, take-up was slow and only a little over 250,000 council homes had been sold across the country in the years up to 1979.3 The 1980 Act gave all council tenants who had rented for three years or more the right to buy their homes. It gave the Environment Secretary powers to intervene against any council held to be resisting the letter or the spirit of the new programme. (A 1982 Court of Appeal judgement against Labour-controlled Norwich City Council, which was held to have impeded sales while pleading more important housing priorities, showed this was no idle threat.)


pages: 279 words: 87,875

Underwater: How Our American Dream of Homeownership Became a Nightmare by Ryan Dezember

activist fund / activist shareholder / activist investor, Airbnb, business cycle, call centre, Cesare Marchetti: Marchetti’s constant, cloud computing, collateralized debt obligation, coronavirus, corporate raider, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, Home mortgage interest deduction, housing crisis, interest rate swap, margin call, McMansion, mortgage debt, mortgage tax deduction, negative equity, rent control, rolodex, sharing economy, sovereign wealth fund, transaction costs

THIS IS THE ONE Ryan Dezember, “My 10-Year Odyssey Through America’s Housing Crisis,” Wall Street Journal, January 26, 2018. The collapse of the U.S. housing market wiped out Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report,” New York: PublicAffairs, 2011, xv. At its depths, more than twelve million Americans CoreLogic, “New CoreLogic Data Shows Second Consecutive Quarterly Decline in Negative Equity,” news release, August 26, 2010. Some estimates put the number north of fifteen million Zillow, “Underwater Homeowners Sink Deeper, Even as Home Values Rise,” news release, March 20, 2015. People my age and a few years older were hit John Burns and Chris Porter, Big Shifts Ahead (Charleston, SC: Advantage, 2016), 56. Today these firms Invitation Homes, “Investor & Analyst Day Slide Deck,” October 4, 2019.


pages: 311 words: 94,732

The Rapture of the Nerds by Cory Doctorow, Charles Stross

3D printing, Ayatollah Khomeini, butterfly effect, cognitive dissonance, combinatorial explosion, complexity theory, Credit Default Swap, dematerialisation, Drosophila, epigenetics, Extropian, gravity well, greed is good, haute couture, hive mind, margin call, negative equity, phenotype, plutocrats, Plutocrats, rent-seeking, Richard Feynman, telepresence, Turing machine, Turing test, union organizing

The djinni holds up a finger the size of a chipolata. It cocks its head this way and that, causing its topknot to flop from side to side, its expression blank. Huw remembers this gesture from “her” djinni, the meatspace cousin of this one, back in Tripoli—it’s hourglassing, timing out while it thinks. “Collection protocol,” he says. “639,219 is trying to foreclose on you. She argues that your debts are so huge, they put my whole sim into negative equity, which means that unless I turn you over, she owns my sim too. It looks like she’s bought into a financial engineering clade and laid a whole whack of side-bets on your repayment schedule, hedging the crap out of herself so she’ll come out ahead no matter what happens. Wonder where she found the sucker who’d take the other side of that contract?” He was muttering to himself now, all the while zipping around the tiny volume inside the lamp, chalking magic sigils over the doorways and scattering herbs and yarrow stalks in complex patterns.


pages: 308 words: 99,298

Brexit, No Exit: Why in the End Britain Won't Leave Europe by Denis MacShane

3D printing, banking crisis, battle of ideas, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, centre right, Corn Laws, deindustrialization, Doha Development Round, Donald Trump, Etonian, European colonialism, first-past-the-post, fixed income, Gini coefficient, greed is good, illegal immigration, James Dyson, labour mobility, liberal capitalism, low cost airline, low cost carrier, Martin Wolf, mass immigration, Mont Pelerin Society, negative equity, Neil Kinnock, new economy, non-tariff barriers, offshore financial centre, open borders, open economy, price stability, purchasing power parity, quantitative easing, reshoring, road to serfdom, secular stagnation, Silicon Valley, Thales and the olive presses, trade liberalization, transaction costs, women in the workforce

Figures dug up from the Office of National Statistics by John Healey MP reveal that the regional share of UK output has fallen in every part of the country since 2010, other than in London and the South-East, where it has risen. According to Healey, the Gini coefficient measure of regional inequality has risen in every year since then. The South Yorkshire MP points out that ‘house prices are 93 per cent higher in London compared to the low-point after the global financial crash, but in other parts of the country they haven’t recovered at all, leaving thousands of households in negative equity’. A report by the Joseph Rowntree Foundation asserts that it was working-class, less-qualified, ‘left behind’ communities in England and Wales who were mostly likely to back leaving the EU. As we have seen, this does not explain the London or Scotland votes, and mono-causal explanations for the 37 per cent of the electorate who believed the enticements of the Leave campaign should be treated with caution.


pages: 463 words: 105,197

Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, Plutocrats, pre–internet, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Rory Sutherland, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, trickle-down economics, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, women in the workforce, Zipcar

A similar calculation yields that such a family would pay roughly $14,000 in COST and thus would still benefit by $6,000 a year because of the $20,000 social dividend. The rich would be hardest hit. The average wealth of the top 1% of households is $14 million. Each household in this group would pay a COST of about $280,000 annually. For families in weak financial situations, such as those with negative equity in their homes or who are burdened with credit card or student debt, a COST would actually be a subsidy. Because the liability would be worth more than the asset, the individual would receive a net tax refund on her private assets, even before the social dividend. Effectively, a third of their net debt would be immediately forgiven. Consider a family that owns a house worth $300,000 and with a mortgage of $420,000.


Corbyn by Richard Seymour

anti-communist, banking crisis, battle of ideas, Bernie Sanders, Boris Johnson, British Empire, call centre, capital controls, centre right, collective bargaining, credit crunch, Donald Trump, eurozone crisis, first-past-the-post, full employment, gender pay gap, housing crisis, income inequality, knowledge economy, land value tax, liberal world order, mass immigration, means of production, moral panic, Naomi Klein, negative equity, Neil Kinnock, new economy, non-tariff barriers, Northern Rock, Occupy movement, offshore financial centre, pension reform, Philip Mirowski, precariat, quantitative easing, race to the bottom, rent control, Snapchat, stakhanovite, Washington Consensus, wealth creators, Winter of Discontent, Wolfgang Streeck, working-age population, éminence grise

, Telegraph, 19 April 2017. 43Graeme Demianyk, ‘Jeremy Corbyn was NOT “dancing a jig” before Remembrance Sunday service’, Huffington Post, 13 November 2016. 44Jon Craig, ‘Labour leader Jeremy Corbyn denies supporting or meeting IRA’, Sky News, 26 May 2017 45Andrew Gilligan, ‘Revealed: Jeremy Corbyn and John McDonnell’s close IRA links’, Telegraph, 10 October 2015; Claire Newell, Hayley Dixon, Luke Heighton, and Harry Yorke, ‘Exclusive: MI5 opened file on Jeremy Corbyn amid concerns over his IRA links’, Telegraph, 19 May 2017; Laura Hughes and Edward Malnick, ‘Revealed: Jeremy Corbyn’s three decades of blocking terror legislation’, Telegraph, 26 May 2017; Richard Dearlove, ‘Corbyn would not be allowed into security services, so he’s not fit for No 10’, Telegraph, 8 June 2017. 46Sean O’Callaghan, ‘Jeremy Corbyn might not have planted a bomb but he made it easier for those who did, says former IRA man’, Sun, 22 May 2017; Tom Newton Dunn, ‘Jeremy Corbyn boosted morale of IRA killers with his support and prolonged the violence leading to more deaths, IRA killer reveals’, Sun, 22 May 2017; Sean O’Callaghan, ‘Finucane should not have been killed – but he was in the IRA’, Telegraph, 18 April 2013; Cory Collusion Inquiry Report: Patrick Finucane, House of Commons, April 2004. 47David Trayner, ‘Claims Jeremy Corbyn funded “IRA bomber” turn out to be 30 years old – and inaccurate’, Independent, 20 September 2015. 48‘Jeremy Corbyn quizzed over IRA comments’, ITV News, 21 May 2017; Jessica Elgot, ‘Johnson accuses Corbyn of siding with UK’s enemies in fight on terror’, Guardian, 6 June 2017; Robert Booth, Martin Belam, and Maeve McClenaghan, ‘Tory attack ad misrepresents Corbyn views on IRA, says Labour’, Guardian, 2 June 2017. 49Kate Devlin, ‘Labour MPs urge Smith to attack Corbyn over IRA’, Evening Times, 18 August 2016; Kate McCann, ‘Labour’s Stoke candidate branded Jeremy Corbyn “IRA supporting friend of Hamas” and criticised Brexit’, Telegraph, 27 January 2017. 50James Forsythe, ‘Jeremy Corbyn always blames Britain first’, Spectator, 28 May 2017; Simon Heffer, ‘Jeremy Corbyn has long hated Britain’, Telegraph, 28 May 2017; editorial, ‘Jeremy Corbyn’s intervention on terror is tasteless and wrong’, Telegraph, 26 May 2017; Steve Hawkes, ‘RED FLAG: outrage as it’s revealed Jeremy Corbyn will claim Britain’s war on terror is to blame for Manchester terror attack’, Sun, 25 May 2017; editorial, ‘An important speech from Jeremy Corbyn – but made at the wrong time’, Independent, 26 May 2017; Matthew Smith, ‘Jeremy Corbyn is on the right side of public opinion on foreign policy: except for the Falklands’, YouGov, 30 May 2017. 51Tom Batchelor, ‘British voters overwhelmingly back Labour’s manifesto policies, poll finds’, Independent, 11 May 2017. 52Will Dahlgren, ‘Voters choose greater equality over greater wealth’, YouGov, 30 April 2014; Will Dahlgren, ‘Nationalise energy and rail companies, say public’, YouGov, 4 November 2013; Patrick Butler, ‘UK survey finds huge support for ending austerity’, Guardian, 28 June 2017. 53Editorial, ‘The Guardian view on the Labour election manifesto: widening the bounds of the thinkable’, Guardian, 16 May 2017; editorial, ‘The Observer’s view on the Labour manifesto’, Observer, 14 May 2017; Andrew Grice, ‘Labour’s manifesto will be popular, but this election is about trust, not policies’, Independent, 16 May 2017; Nick Robinson, ‘No one should be surprised …’, Twitter.com, 20 May 2017; Jeremy Culley, ‘REVEALED: Labour plans to “TREBLE Council Tax plunging people into negative equity”’, Daily Star, 30 May 2017; Gordon Rayner, ‘Tax on homes “to treble under Labour plans for Land Value Tax”’, Telegraph, 29 May 2017; Jon Stone, ‘Labour looks to replace Council Tax with a Land Value Tax’, Independent, 16 May 2017. 54Macer Hall, ‘May’s plan for a Fairer Britain’, Daily Express, 18 May 2017; editorial, ‘DAILY MAIL COMMENT: as Mrs May unveils her manifesto, at last, we have a PM who is not afraid to be honest’, Daily Mail, 19 May 2017; editorial, ‘THE SUN SAYS: never in our history has a UK election thrown up such a clear-cut and obvious choice for Sun readers’, Sun, 19 May 2017; editorial, ‘The Guardian view on Theresa May’s manifesto: a new Toryism’, Guardian, 18 May 2017. 55Dawn Foster, ‘Theresa May’s manifesto shows that she is more right wing than Cameron ever dared to be’, Independent, 18 May 2017. 56Robert Booth, ‘Conservatives launch online offensive against Corbyn’, Guardian, 15 May 2017. 57Nicholas Cecil, ‘How Jeremy Corbyn beat Theresa May in the social media election war’, Evening Standard, 14 June 2017. 58Jim Waterson and Tom Phillips, ‘People on Facebook only want to share pro-Corbyn, anti-Tory news stories’, Buzzfeed, 7 May 2017; Ben Kentish, ‘Tories “spent more than £1m” on negative Facebook adverts attacking Jeremy Corbyn’, Independent, 11 June 2017; Giles Turner and Jeremy Kahn, ‘U.K.


pages: 387 words: 105,250

The Caryatids by Bruce Sterling

carbon footprint, clean water, failed state, impulse control, negative equity, new economy, nuclear winter, semantic web, sexual politics, social software, starchitect, stem cell, supervolcano, urban renewal, Whole Earth Review

When the last generators failed and the last light winked out there was nothing human on the island, nothing but the cries of birds. John Montgomery Montalban clearly knew this dreadful subject very well, since he had made this careful pilgrimage to see the island’s worst ruins firsthand. The California real-estate mogul calmly assessed the drowned wreckage through his tinted spex. He told her it was “negative equity.” Montalban, her strange brother-in-law, was a Dispensation policy wonk. He was cram-full of crisp, net-gathered, due-diligence knowledge. He was tall and elegant and persuasively talkative, with wavy black hair, suntanned olive skin, and sharp, polished teeth: big Hollywood film-star teeth like elephant ivory. His floral tourist shirt, his outdoor sandals, his multipocketed tourist pants: they were rugged and yet scarily clean.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

But in the past, the selling generation has been smaller than the buying generation. This has allowed the elderly to realize their assets at a higher price than they bought them. But with more people in the retired category than in the peak earning age category, asset sales will drive prices down. That will be a great disappointment for the elderly, of course. But it will also be a problem for those of working age who have mortgages; more of them will end up in negative equity. Demand for housing as an investment (second homes, buy-to-let) will surely decline. Over the long term, one would expect the value of houses to rise in line with GDP. During the boom years, they rose considerably faster. So house prices will face a double whammy from the older generation’s asset sales. The natural rate of house price rises will slow, as GDP growth slows. And the average value of houses should, at least, fall back to its historic relationship with GDP, as the elderly fund their retirements.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work

This is more due to the liquidity injections from the Federal Reserve, which has increased the size of its balance sheet by $800 billion relative to only a few months ago. This has nothing to do with the TARP and is an unsustainable situation. Some people have suggested that the larger banks will use the TARP equity injections to buy weaker banks. Doesn’t this solve the problem? Larger banks’ buying weaker banks just defers and worsens the problem. If the weaker bank is insolvent and has negative equity (likely), then the acquisition will just infect the balance sheet of the stronger bank (making it potentially insolvent). We will then be left with a more structurally important bank being at risk—a bank that is possibly considered too big to fail. Also, as the balance sheets are merged, asset values will become further muddled and opaque, which will only increase market uncertainty. Bottom line: this is akin to placing a burning match under a flammable carpet and pretending that it is not there.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The so-called shadow unemployment rate: “John Williams’ Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting,” shadowstats.com, last updated September 2, 2016, www.shadowstats.com/alter nate_data/unemployment-charts. Proof: a third of all cars: Wolf Richter, “What Will Sink the US Auto Boom?,” wolfstreet.com, May 24, 2016, wolfstreet.com/2016/05/24/this-sinks-auto-boom-negative-equity-loan-to-value-ratio-used/. In five thousand years: Matt O’Brien, “It’s the Best Time in 5,000 Years to Get Loan,” Dallas Morning News, September 28, 2015. The percentage of U.S. adults: Justin McCarthy, “Just Over Half of Americans Own Stocks, Matching Record Low,” Gallup, April 20, 2016 www.gallup.com/poll/190883/half-americans-own-stocks-matching-record-low.aspx. Inflows into U.S. stock mutual funds: Deener, “Many Shun the Bull.”


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients. These special funds often borrowed heavily in the money markets and, being based offshore, avoided the capital requirements and regulatory oversight of other financial institutions. Between 2001 and 2005 there was a lending boom in America like no other. The collapse in house prices in 2007 triggered massive defaults in the US mortgage market. Homeowners with negative equity walked away from their properties. It meant that the originators of mortgages, or those that had bought mortgage-backed securities, found themselves with assets worth less than their liabilities. The banks were in trouble. It is true that this financial crisis, though, differed from the Great Depression in several important ways, thus the lessons from the 1930s may not have carried over exactly, but it is still useful to compare the two.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Bankers created funds, such as special purpose vehicles (SPVs) and structured investment vehicles (SIVs), to hoover up these financially engineered securities offering better returns than safe assets like government debt, and sell the SPVs and SIVs to clients. These special funds often borrowed heavily in the money markets and, being based offshore, avoided the capital requirements and regulatory oversight of other financial institutions. Between 2001 and 2005 there was a lending boom in America like no other. The collapse in house prices in 2007 triggered massive defaults in the US mortgage market. Homeowners with negative equity walked away from their properties. It meant that the originators of mortgages, or those that had bought mortgage-backed securities, found themselves with assets worth less than their liabilities. The banks were in trouble. It is true that this financial crisis, though, differed from the Great Depression in several important ways, thus the lessons from the 1930s may not have carried over exactly, but it is still useful to compare the two.


pages: 385 words: 118,314

Cities Are Good for You: The Genius of the Metropolis by Leo Hollis

Airbnb, banking crisis, Berlin Wall, Boris Johnson, Broken windows theory, Buckminster Fuller, call centre, car-free, carbon footprint, cellular automata, clean water, cloud computing, complexity theory, congestion charging, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, Deng Xiaoping, digital map, East Village, Edward Glaeser, Enrique Peñalosa, Firefox, Frank Gehry, Geoffrey West, Santa Fe Institute, Gini coefficient, Google Earth, Guggenheim Bilbao, haute couture, Hernando de Soto, housing crisis, illegal immigration, income inequality, informal economy, Internet of things, invisible hand, Jane Jacobs, Kickstarter, knowledge economy, knowledge worker, Long Term Capital Management, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, Masdar, mass immigration, megacity, negative equity, new economy, New Urbanism, Occupy movement, openstreetmap, packet switching, Panopticon Jeremy Bentham, place-making, Ray Oldenburg, Richard Florida, sharing economy, Silicon Valley, Skype, smart cities, smart grid, spice trade, Steve Jobs, technoutopianism, the built environment, The Chicago School, The Death and Life of Great American Cities, The Great Good Place, the High Line, The Spirit Level, The Wisdom of Crowds, Thomas Malthus, trade route, traveling salesman, urban planning, urban renewal, urban sprawl, walkable city, white flight, Y2K, Yom Kippur War

In 1997 only 4 per cent of loan applications came from ‘unskilled/manual’ workers; by 2004 this had risen to 12 per cent. At the height of the boom some houses in Dublin were worth 100 times the owner’s salary. But then, in 2007, the market began to slow and there were rumours of problems on the horizon; yet estate agents, economists and politicians continued to tell people to buy. The crash eventually came in 2009 and by the end of 2010 over 31 per cent of all properties were estimated to be in negative equity. Today there are large areas of Dublin that remain half-finished building sites, while other neighbourhoods and new developments stand empty. The idea of a home in the suburbs (despite the unserviceable mortgage), of the security of living in a gated community, has long been at the heart of the contemporary dream, and, as events have shown – the empty neighbourhoods of Detroit, the death of Trayvon Martin, the increasing levels of inequality within the city – this dream has turned for many into a nightmare.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

Another fundamental danger is the tendency of the system to overexpand: for credit to become too readily available, as the Bank for International Settlements has recently recognized.41 The system is stable when the growth in debt is matched by the growth in the value of assets whose purchase is financed by that debt. As soon as people begin to have doubts about the assets' value, however, the cracks appear. That is what happened when US property prices collapsed after the crash of 2008. Home owners may find themselves in negative equity and even have their property repossessed, although not before lenders have extracted rent in interest and loan repayments. But banks can always choose to provide other services than loans. When uncertainty about the future is high, they can even decide to hoard cash rather than invest it - often a sound decision, as high interest rates are associated with a high risk of not obtaining enough for the investment.


pages: 387 words: 119,244

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

asset-backed security, bank run, Basel III, beat the dealer, Big bang: deregulation of the City of London, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial innovation, G4S, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk

He did not yet suspect it, but Goodwin was getting ready to remove Fish as head of Citizens, although yet again he would stop short of sacking him. There was another possible explanation for those ‘headwinds’ and the recent poor performance of Citizens, of course. Fish’s division was in the old-fashioned mortgage and personal lending business in the world’s largest economy and if there were to be a serious problem in America, with falling house prices, negative equity and consumers facing problems paying, it might show up first as a flicker in the results of institutions such as Citizens. Goodwin – an ‘optimist’ as Cameron used to observe to his team – told Cameron and other colleagues that it was fine: ‘US house prices are not going to fall by 30 per cent. They just aren’t.’ Goodwin was not for slowing down and as 2007 began he was ruminating on the possibility of even more growth.


How I Escaped My Certain Fate by Stewart Lee

carbon footprint, Etonian, illegal immigration, negative equity, quantitative easing

I thought about the prophecy that Malcy had just made, And wondered what exactly he’d been doing while away. If he really had the power that he seemed to think he did, Then having him as my opening act might not be ideal. If Malcy had stumbled upon some comic formulae That unleashed the energies he had described Then if I had to follow him I would surely die, And with it being Bangor I needed to do the time Agreed, or with the petrol and the rooms I’d be in negative equity. I went into the hotel bar to get a drink and steady my nerves, And then I remembered I wasn’t well enough. But as I sat there smoking I realised there were two options. Either Malcolm was a superbeing, or he’d just flipped and lost it. Tragically it seemed to me the second was most likely. I resolved to get through the gig tonight, Then have a think in the cold hard light Of day as to whether my childhood hero really was going to pay his way.


pages: 430 words: 140,405

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

asset-backed security, bank run, business cycle, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk

The pain to so many people I know in the United States and abroad was horrific. People I knew well were selling their houses, changing their children’s schools, selling boats and SUVs. Even Joe Gregory had to sell his helicopter and his beachfront palace, and Dick Fuld’s wife was selling art. Staff members who had bought real estate at the top of the market were in desperate trouble in the negative equity trap. And the reputations of Dick and Joe took a merciless hammering, because everyone now knew the CEO should have accepted the $23-a-share offer from the Koreans, the one Hank Paulson had recommended all those months ago. And if not that, surely Fuld should have grabbed the $18-a-share offer later in the year. By now there were stories out in every financial publication that none of the Korean offers had even been taken before the board.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

Between August 2007 and October 2008, according to Realty Trac, 936,439 homes were foreclosed on. An undetermined but significant number of mortgage holders left their homes willingly. Rather than continuing to make payments on loans that were now bigger than the properties’ values, they chose to hand over the keys. By the spring of 2008, according to Mark Zandi, of the Moody’s website Economy.com, about 8.5 million homeowners, or about one in seven mortgage holders, had “negative equity” in their homes, giving them an economic incentive to pack their bags and leave. Every time a homeowner did this, another property was left vacant, and the stock of unsold homes expanded, putting more pressure on sellers to reduce their prices. “The housing market was trapped in a self-reinforcing negative cycle,” Zandi noted. “This had occurred, briefly, in California and New England in the early 1990s but never in so many parts of the country.


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

The effect of this rise was that from 1997 to 2006 overall inflation-adjusted equity in US real property—that is, the equity people owned in their homes and so in general their main source of wealth—more than doubled to $13 trillion. But by the end of 2011 this had fallen some 58 per cent to $5.6 trillion, a level not seen since 1983. More than $7.4 trillion of value had been wiped out, thrusting millions of home-owners into negative equity. The housing market was, it appears, both a cause and a leading indicator of the catastrophe; there was a marked fall in new housing starts and housing expenditure in 2006–8, before the crash, even while equity and other financial asset markets continued to rise. THE ECONOMIC CONSEQUENCES OF FORGETTING SMITH This brief and inevitably schematic account of a highly complex set of events illustrates all of our key themes.


pages: 613 words: 151,140

No Such Thing as Society by Andy McSmith

anti-communist, Ayatollah Khomeini, Berlin Wall, Big bang: deregulation of the City of London, Bob Geldof, Boris Johnson, British Empire, Brixton riot, call centre, cuban missile crisis, Etonian, F. W. de Klerk, Farzad Bazoft, feminist movement, fixed income, Francis Fukuyama: the end of history, friendly fire, full employment, glass ceiling, God and Mammon, greed is good, illegal immigration, index card, John Bercow, Kickstarter, liberal capitalism, light touch regulation, Live Aid, loadsamoney, long peace, means of production, Mikhail Gorbachev, mortgage debt, mutually assured destruction, negative equity, Neil Kinnock, Nelson Mandela, North Sea oil, Northern Rock, old-boy network, popular capitalism, Right to Buy, Ronald Reagan, Rubik’s Cube, Sloane Ranger, South Sea Bubble, spread of share-ownership, strikebreaker, The Chicago School, union organizing, upwardly mobile, urban decay, Winter of Discontent, young professional

However, the Lawson boom, which made the government so popular and confident, and left the opposition floundering, proved to be unsustainable. After the fun came the long hangover. House prices, which went up and up until the 1 August deadline was reached, suddenly tumbled because everyone who had thought about buying their first home had now done so. Suddenly, young couples were introduced to a new and unpalatable phenomenon called ‘negative equity’, something that no one had ever experienced in the old days when building societies had refused to lend to anyone who had not saved up a substantial deposit on their first home. During 1988, many couples had borrowed 100 per cent of the cost of their first home, and as prices fell they owed more than their property was worth. To make it worse, all that spending money sloshing around in the economy had set off inflation.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

accounting loophole / creative accounting, Albert Einstein, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, Boris Johnson, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, Kickstarter, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, plutocrats, Plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

But if too many others do this in the hope of realising their capital gains, it may swamp the market and send prices plummeting. The bubble can survive only as long as the number of houses actually up for sale remains smaller than the number of house hunters. But demand-side changes could burst the bubble too: it takes only a small disturbance, such as some house buyers losing their jobs, for the rising market to collapse. Some lose their homes, others end up finding themselves in ‘negative equity’ – with a house worth less than their debts but still having to repay them. Markets for assets, especially where credit plays a major role, are inherently unstable and prone to boom and bust cycles.108 How neoliberalism uses housing to support rentier interests Since neoliberalism took hold in Britain in the 1980s, governments have acted in ways that have produced massive house-price inflation and increases in unearned income for rentiers.


Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, technology bubble, transaction costs, yield curve

In a smaller market, or with an undiversified portfolio, or if the world Figure 14-5: Projected percentiles for the distribution of the equity risk premium Annualized twenty-year risk premium relative to bills (%) 25 20 Top decile Above median Below median Bottom decile 16.3 12.3 15 10.6 9.6 8.9 -3.4 -2.6 -1.9 10 23.3 19.7 14.7 17.1 12.5 14.4 11.2 10.4 12.9 11.8 5 0 -5 -10 -4.9 -6.9 -8.1 -4.0 -3.2 -10.8 -15 -20 -5.1 Standard deviation = 16% -8.8 -6.7 -5.4 -4.5 -13.4 Standard deviation = 20% Standard deviation = 24% -25 10 20 30 40 50 10 20 30 40 50 Time horizon in years 10 20 30 40 50 204 Triumph of the Optimists: 101 Years of Global Investment Returns becomes a riskier place, a standard deviation of 24 percent might be realistic, and even over fifty years there would be a 17 percent probability of underperforming. Arnott and Bernstein (2001) and others analyze the equity premium relative to bonds. The bond maturity premium is around 1 percent above bills (see chapter 6). Hence our 3.0 percent equity premium relative to bills is broadly consistent with the Arnott and Bernstein estimate of 2.4 percent relative to bonds. The probability of a negative equity premium is larger than Figure 14-5 indicates, if premia are defined relative to bonds. Moreover, fat tails in the distribution of returns would further increase the chances of adverse performance. To sum up, the likely rewards from equity market investing are worth having over the long haul. Yet downside risk is always present. The chance of underperforming government securities shrinks with a longer horizon, but because of the power of compound interest rates, the very worst that could happen to an equity investor worsens as the investment horizon is lengthened.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

When house prices ran up sharply between 2001 and 2007, homeowners extracted a staggering $8 trillion of equity from their homes, all a tax-free stream of cash, which is now quite material relative to the overall value of residential real estate ($20 trillion). $8 trillion is a lot, more than half a year’s GDP, and it distorted signals to businesses, which expanded and repurchased shares. Individuals saw the rising fortunes and bullishly invested in the stock market. Sadly this withdrawal closes the gap between financing and the now reduced value of properties. As of 2008 it left some one-third of all homes with negative equity. A report issued by Harvard University’s Joint Center for Housing Studies in July 2008 documented that even if interest rates fell by 1 percent, the median home price in 18 major metro areas would need to fall another 25 percent to return affordability to 2003 levels.15 Interestingly, the problem is not as acute for flyover country, because if rates fell that much nationwide, only a 2 percent adjustment in price would be necessary.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

New York: Portfolio Trade. Mehran, Hamid, and Anjan Thakor. 2010. “Bank Capital and Value in the Cross Section.” Review of Financial Studies 24 (4): 1019–1067. Mehrling, Perry. 2010. The New Lombard Street. Princeton, NJ: Princeton University Press. Meltzer, Allan. 2012. Why Capitalism? New York: Oxford University Press. Melzer, Brian T. 2012. “Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity.” Working paper. Northwestern University, Chicago. Merkley, Jeff, and Carl Levin. 2011. “The Dodd-Frank Act Restrictions on Proprietary Trading and Conflicts of Interest: New Tools to Address Evolving Threats.” Harvard Law and Policy Review 48: 515–553. Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics 4 (1): 141–183. Merton, Robert K. 1957. “The Self-Fulfilling Prophecy.”


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

More risky than prime but less risky than subprime, Alt A (Alternative A) mortgages were for borrowers who did not meet normal criteria. As lenders decreased standards, there were increases in SIVA (stated income verified assets) loans, where borrowers stated their income without proof, such as income or tax receipts, and NIVA (no income verified assets), loans where no proof of employment was required. Traditional mortgages provide 70–80 percent of appraised value. More aggressive LVRs, including negative equity loans, where the lender lent more than the value of the house, became available. In the UK one lender offered loans for 125 percent of the value of the property. In the United States undisclosed piggyback loans and silent second mortgages meant that by 2005 the median down payment for first-time home buyers was only 2 percent, with more than 40 percent of buyers not making any down payment at all.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

"Robert Solow", airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, global pandemic, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

.* Likewise, it’s leverage when you borrow money to take out a mortgage—or when you borrow money to bet on a mortgage-backed security. Lehman Brothers, in 2007, had a leverage ratio of about 33 to 1,73 meaning that it had about $1 in capital for every $33 in financial positions that it held. This meant that if there was just a 3 to 4 percent decline in the value of its portfolio, Lehman Brothers would have negative equity and would potentially face bankruptcy.74 Lehman was not alone in being highly levered: the leverage ratio for other major U.S. banks was about 30 and had been increasing steadily in the run-up to the financial crisis.75 Although historical data on leverage ratios for U.S. banks is spotty, an analysis by the Bank of England on United Kingdom banks suggests that the overall degree of leverage in the system was either near its historical highs in 2007 or was perhaps altogether unprecedented.76 What particularly distinguished Lehman Brothers, however, was its voracious appetite for mortgage-backed securities.


pages: 1,057 words: 239,915

The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931 by Adam Tooze

anti-communist, bank run, banking crisis, British Empire, centre right, collective bargaining, Corn Laws, credit crunch, failed state, fear of failure, first-past-the-post, floating exchange rates, German hyperinflation, imperial preference, labour mobility, liberal world order, mass immigration, Mikhail Gorbachev, Monroe Doctrine, mutually assured destruction, negative equity, price stability, reserve currency, Right to Buy, the payments system, trade route, transatlantic slave trade, union organizing, zero-sum game

In April 1920 the Bank of England followed the Federal Reserve in hiking interest rates and the budget brought in large tax increases on higher incomes and a spending cut of 30 per cent, leaving a 12 per cent surplus for debt repayment.16 Prices plunged, interest rates increased, but nominal wages remained stubbornly high. Producers faced a ruinous surge in real costs, whilst debtors were plunged into negative equity. Bankruptcies followed en masse. By the autumn of 1920 the British economy was in free fall. Repeatedly, the Bank of England pleaded with the Federal Reserve to loosen its grip on the US economy. But the Fed refused. With specie surging back into America, instead of easing the pressure the Fed ‘sterilized’ the gold inflow, refusing to allow American credit to expand, resorting to accounting tricks to disguise the ample gold cover.


pages: 1,013 words: 302,015

A Classless Society: Britain in the 1990s by Alwyn W. Turner

Berlin Wall, Bob Geldof, Boris Johnson, British Empire, call centre, centre right, deindustrialization, demand response, Desert Island Discs, endogenous growth, Etonian, eurozone crisis, facts on the ground, Fall of the Berlin Wall, falling living standards, first-past-the-post, Francis Fukuyama: the end of history, friendly fire, full employment, global village, greed is good, inflation targeting, lateral thinking, means of production, millennium bug, minimum wage unemployment, moral panic, negative equity, Neil Kinnock, Nelson Mandela, offshore financial centre, old-boy network, period drama, Ronald Reagan, sexual politics, Stephen Hawking, upwardly mobile, Winter of Discontent, women in the workforce

This time it was not just manufacturing that took the brunt of the slump, but commercial construction and the financial services industry, as the boom of the late 1980s juddered to a halt. Some forty million square feet of office space were said to be lying unoccupied in London, and even estate agents – those great symbols of the Thatcherite high noon – were suffering. The huge rises in house prices in affluent parts of the South went into reverse, provoking a wave of repossessions by mortgage companies and leaving many mired in a hitherto unknown state called negative equity, whereby the amount they owed exceeded their homes’ market valuations. ‘The politics of the property-owning democracy had come temporarily unstuck,’ admitted Michael Heseltine in later years, and for many who had bought into the dream, the comedown was especially bitter. Disillusion was everywhere apparent, as Major, a longstanding fan of Chelsea Football Club, discovered in late 1991 when he met Vinnie Jones, the club’s hard-man midfielder who also happened to be a Tory supporter.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

When we convert accrual taxes to cash taxes, income is adjusted, and the difference becomes part of retained earnings, making it an equity equivalent.11 Exhibit 18.9 presents a reorganized balance sheet that includes the deferred-tax items for the current year from Exhibit 18.8. Equity equivalents, which are located in the equity section, include any accounts used to convert operating taxes to cash operating taxes, in this case, the accelerated depreciation DTL ($3,800 million) net of the warranty reserves DTA ($300 million). Since warranty reserves result in an operating DTA, they are treated as a negative equity equivalent (i.e., a reduction to retained earnings). With the exception of tax loss carryforwards and nondeductible intangibles, classify nonoperating 11 If mistakenly included as part of invested capital, operating DTAs and DTLs could be double-counted in free cash flow: once in NOPLAT via cash taxes and again when taking the change in invested capital. As discussed in Chapter 9, equity equivalents are not part of invested capital. 408 TAXES EXHIBIT 18.9 Reorganized Balance Sheet: Treatment of Deferred Taxes $ million Total funds invested: uses Operating assets Operating liabilities Invested capital without intangibles Total funds invested: sources 12,000 (3,000) 9,000 Short-term debt Long-term debt Unfunded pensions Debt and debt equivalents 300 1,800 2,200 4,300 3,500 Acquired intangibles 8,000 Less: Gross-up of intangibles (DTLs) (2,050) Operating DTLs, net operating DTAs1 Acquired intangibles, adjusted 5,950 Nonoperating DTLs, net nonoperating DTAs2 Owners' equity Equity and equity equivalents 950 6,800 11,250 Total funds invested 15,550 Invested capital with intangibles 14,950 Tax loss carry-forwards (DTAs) Total funds invested 600 15,550 1 Operating DTLs, net operating DTAs include accelerated depreciation and warranty reserves. 2 Nonoperating DTLs, net nonoperating DTAs include pension and postretirement benefits.


Great Britain by David Else, Fionn Davenport

active transport: walking or cycling, Albert Einstein, Beeching cuts, Boris Johnson, British Empire, call centre, car-free, carbon footprint, clean water, colonial rule, Columbine, congestion charging, credit crunch, David Attenborough, Etonian, food miles, glass ceiling, global village, haute cuisine, illegal immigration, Isaac Newton, James Watt: steam engine, Kickstarter, land reform, Livingstone, I presume, Mahatma Gandhi, mass immigration, mega-rich, negative equity, new economy, North Sea oil, Northern Rock, offshore financial centre, period drama, place-making, Skype, Sloane Ranger, South of Market, San Francisco, Stephen Hawking, the market place, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, Winter of Discontent

But at the time of going to press, Britain was under a cloud in more ways than one, with recession looming on the horizon. The global credit crunch that began in late 2007 has seen interest rates rise, mortgages dry up and house prices tumble – possibly by as much as 30% by 2010. Those who bought into the get-rich-quick, property-owning dream in the last few years are feeling the clammy grip of negative equity, and tens of thousands of homes are being repossessed. * * * FAST FACTS Population: 59 million Area: 88,500 sq miles (230,000 sq km) Inflation: 5.2% (October 2008) Unemployment: 5.7% (August 2008) Head of State: Queen Elizabeth II Per capita GNP: approximately £23,500 (US$41,000) Average annual rainfall in southeast England: 550mm Average annual rainfall in northwest Highlands: 3000mm Male life expectancy (posh part of Glasgow): 82 Male life expectancy (poor part of Glasgow): 54 * * * The economic crisis has seen a backlash against the investment bankers, chief executives and hedge fund managers whose actions are seen by many as the cause of the credit crunch – ordinary people suffer while the ‘fat cats’ walk away with millions in their pockets.