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How Pimco Is Holding American Homeowners Hostage

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As overlord of the fixed-income finance market, it generates billions annually in effort-free profits. Now it wants to make things worse.

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For one thing, in response to sharply higher mortgage rates and more restrictive housing credit terms, it's likely that home-ownership rates would drop from the current 66% rate to perhaps 50% or even below, thereby approximating rates in countries like Germany which don't seem to be suffering from inadequate shelter as a result.

In the process, the 4 million households with current negative equity of 50%, and probably the 9 million with 20% or higher negative equity, would likely default -- relieving them of a lifetime of debt slavery, even as they reverted to the status of credit-impaired renters. Indeed, under market-based housing finance, additional trillions of still-illusory housing asset values would be quickly purged from the economy as housing prices found an economic bottom. Letting housing prices clear the market would subtract millions more from the ranks of faux homeowners -- households whose incomes have been essentially garnished by the HIDC anyway.

Secondly, dismantling the HIDC would stem the current wasteful misallocation of societal resources, and perhaps just in the nick of time. America is a rapidly aging nation that's become hopelessly incapable of paying its bills in the world economy. As a result of importing roughly $8 trillion more in goods and services than we've exported over the last three decades, we've sent abroad a frightening share of the nation's value-added output and employment.

In July, for example, the BLS reported 68.3 million jobs in goods production and the core private business service sectors such as retail/wholesale transportation, information technology, the professions, FIRE and business support services. That figure represented virtually no job gain at all from the December 2009 bottom; a reduction of 8 million jobs (11%) from the December 2007 cycle peak; and an even larger contraction from the nearly 77 million high-value jobs reported in these categories way back in January 2000.

The HIDC subsidy system, then, has been doubly perverse. Whereas the nation lived way beyond its means by saving too little at home and borrowing too much abroad, even the meager savings we did generate were artificially channeled into the least-productive investments. Thanks to the pervasive HIDC subsidy system we now have big, new houses and small, aging factories.

Nor should the magnitude of this resource misallocation be gainsaid. In the post-war years prior to 1980, single-family construction, home improvement expenditure, and real estate broker commissions typically amounted to about 3.5% of GDP on a combined basis. By contrast, at the peak of the housing bubble in 2006, these activities added up to nearly 6% of GDP. This means that $300 billion of GDP was going into enlarging the stock of housing, increasing average square footage, adding marble countertops and churning the turnover rate.
No positions in stocks mentioned.

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