The Ascent of Money: A Financial History of the World

Chapter 5 discusses real property in the form of houses, tracing its history from the advantaged aristocracy to the democratic middle classes. Ferguson opens by using the board game Monopoly as an illustration of this phenomenon. It first became popular in the United States during the Great Depression, which might seem like an odd time for its success. But that is precisely the period when home ownership in America first took off en masse, thanks to Franklin Roosevelt’s New Deal policies.

“The Property-owning Aristocracy”

This section focus on the aristocratic origins of home ownership, which was even tied to the right to vote. Ferguson states that through the 1830s in Britain, the landowning elite were in great shape. Land was high in value, agricultural activity produced income, and raw materials like coal were needed for industrialization. After that time, grain prices fell due to factors such as lower transportation costs, which meant that agricultural income fell along with them.

As Ferguson explains, property itself only really has value (as collateral) to those who lend money, while the borrower’s only security against losing this property is income. As their income decreased, aristocrats became vulnerable. The example he gives is the 2nd Duke of Buckingham, who owned about 67,000 acres in three countries, including the magnificent Stowe House on his estate in England. He borrowed and spent extravagantly, all based on the value of his vast properties, until it caught up with him. To avoid total financial ruin, the duke’s son obtained legal control and sold Stowe House and its luxurious contents. According to Ferguson, this symbolized “a new, democratic age” (240). Britain passed a number of laws reforming the voting rules that extended the franchise to the poor and the unpropertied, reducing the aristocracy’s control over politics. Still, as of the late 1930s, not even a third of all housing in Britain was owned by its occupants. Greater strides in this area would first come in the United States.

“Home-owning Democracy”

In the United States, before the 1930s, a little over 40% of households were owned by the people who lived in the houses. Mortgages were not common except among farmers, and for those mortgages that existed, the repayment period was quite short (3-5 years) and the principal was not repaid along the way, so a large payment awaited at the end.

During the Depression, many people lost their homes, and the value of houses fell sharply. This affected people in the country and city alike, both owners and renters. Businesses like Ford Motor Company laid off workers, who had little choice but to either line up at soup kitchens or protest for the return of their jobs. Class divisions were widening. While other countries around the world, facing similar economic straits, turned to political extremes on both the left and right, the United States maintained democracy, in part, by turning its citizens into property owners.

Franklin Roosevelt’s administration introduced many new agencies as part of its New Deal to counter the effects of the Depression. Mortgage periods were extended and Savings and Loans Associations were set up as local institutions that accepted deposits and issued mortgages. But the greatest impact came from the new Federal Housing Administration. It insured mortgage lenders with the backing of the government in order to foster mortgages that were a large share of the full purchase price, amortized (so that principal was repaid along with interest over the full period, avoiding the large lump sum of previous mortgages), and had long repayment periods (20 years). Ferguson writes that “[t]his did more than merely revive the mortgage market; it reinvented it” (248). The effect was to increase home ownership to 60% by 1960.

Despite this success, however, not all Americans could participate in the system, as racism excluded African-Americans from the process. The government’s own maps showed predominantly African-American areas as uncreditworthy and thus not eligible for loans; these areas were outlined in red, so this exclusion came to be called “red-lining.” When they were able to secure loans, African-Americans paid higher interest rates than whites. Civil rights protests in the 1960s, along with violence in the form of riots, helped lead to reforms that outlawed the practice of red-lining.

In Britain, meanwhile, widespread home ownership came later, as the government subsidized public housing for workers. Still less than half of homes were owner-occupied in the early 1970s. It wasn’t until the 1980s that Conservative Prime Minister Margaret Thatcher pushed for greater numbers of people to own their homes by allowing mortgage payments to be deducted from income taxes and by selling off public housing at reduced prices.

“From S&L to Subprime”

This section examines the Savings and Loan (S&L) scandals of the 1980s in America. The 1970s were a period of high inflation, and because S&L mortgages were fixed at a lower rate due to regulations, the S&Ls were losing money on loans. At the same time, other institutions offered higher interest rates to depositors, who moved their money out of S&Ls to take advantage of this. As a response, the federal government relaxed regulations: S&Ls could now invest in anything and charge any rate of interest on savings accounts. All deposits were still insured by the government. Now, Ferguson writes, “the people running Savings and Loans had nothing to lose–a clear case of what economists call moral hazard” (255). He gives the example of Empire Savings and Loan in Dallas, Texas. Deposits were attracted by promising high interest rates. With this money, Empire purchased cheap land, which was then sold at excessively high prices to investors, who themselves borrowed the money from Empire. Since the government was underwriting it all, Empire had nothing to lose. When regulators finally caught on, Empire was closed and the government was out $300 million. In the end, the total cost to taxpayers was $124 billion (out of a total of $153 billion to settle the crisis).

While the S&L crisis was costly to some, it proved profitable to others. When high interest rates in the early 1980s led some to sell of their mortgages to raise cash, a New York bank named Salomon Brothers saw an opportunity. It bought these mortgages at low prices and combined them as collateral for new securities similar to bonds, a process called “securitization.” Because the mortgages still had the backing of the federal government, the securities that used them as collateral could be given a high rating, called “investment grade.” According to Ferguson, this “was an innovation that fundamentally transformed Wall Street[…] ushering in a new era in which anonymous transactions would count for more than personal relationships” (260). Its significance would become apparent twenty years later.

Finally, Ferguson ends by comparing the housing market to the stock market as an investment from 1987 to 2007. Stocks come out ahead. Three factors must be kept in mind with such a comparison: (1) houses wear out, leading to depreciation; (2) houses are far less liquid than stocks, meaning they are harder to sell and convert into cash; and (3) houses are also far less volatile than stocks. Houses do decline in value, however, which happened in Britain and Japan in the 1990s, and in the United States, starting in 2007. This last occasion had to do with “subprime” mortgages, or those made to people considered credit risks. Their terms were risky, too: many had variable interest rates and were interest-only (i.e., they were not amortized, like the mortgages of the 1920s before the New Deal reforms), among other things. Subprime mortgages took off in the early 2000s, largely due to a push by the George W. Bush administration to encourage home ownership for everyone, and involved a large share of minorities. Ferguson states, “Here, surely, was the zenith of the property-owning democracy” (266). It worked as long as three things continued: low interest rates, low unemployment, and increasing home prices. These conditions didn’t last, and the resulting defaults on mortgages led to a global economic crisis in 2007 because they had been securitized and bought up by investors all around the world. The total estimated losses exceeded one trillion dollars.

“As Safe as Housewives”

This section relates the work of economist Hernando de Soto of Peru. He estimates that shantytowns around the world, where millions of poor live, have a total value of $9.3 trillion. Yet because the occupants cannot obtain titles to their homes, this property represents a vast loss in unrealized income. Property is usually necessary to secure a loan (by serving as collateral), which in turn is necessary to open a business. Thus, de Soto equates home ownership with generating wealth. Securing a title is hard, in part, because bureaucratic hurdles in many countries makes it a tedious and lengthy process. A shantytown called Quilmes, outside the Argentine capital of Buenos Aires, put this theory to the test when a group of squatters took over the land and were granted ownership by the government. As a result of legal challenges to this, some of them obtained their dwellings merely by squatting, while others had to pay for leases that ended in ownership. The latter group thus had titles to their homes. However, less than 5% were able to get mortgages, calling into question de Soto’s theory.

Ferguson then describes the microfinance movement, the opposite of de Soto’s theory in that it does not involve using property as collateral for loans. The founder of the movement is Muhammad Yunnus, who began making small loans to women in Bangladesh. The key here is the borrowers’ gender, as the microfinance experiment “suggests that creditworthiness may in fact be a female trait” (279). Results show that women are a better credit risk than men, whether or not they have property to back their loans. Ferguson gives the example of a microfinance organization called Pro Mujer and one of its loan recipients, Betty Flores, who used her loan to enlarge her coffee stall at a street market in La Paz, Bolivia.