To inform, confuse, and enlighten; in economic matters as well as philosophical ones. Jørund Aarsnes and Stephan Jensen write on economics and the human condition.
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“Betting Against Home Owners” is Betting For Affordable Housing – A case for Goldman Sachs doing “God’s work”

In the still ongoing political smear campaign against Goldman Sachs conducted by the Senate Subcommittee on Investigations, the latter has been particularly enraged by Goldman Sachs’ supposed “bet against home owners”. That is, because Goldman Sachs was net short exposure to mortgage-related securities, policy-makers have been arguing that the bank was contributing to pushing prices down, and in an evil way benefiting from the ruin of hard-working regular Americans.

Now, first of all, I am unsure about whether Goldman’s supposed “big short” really had a significant impact on housing prices. Arguably, the collapse of the U.S. housing market in 2007-2008 was a necessary consequence of unsustainably rapid price increases brought about by horribly easy credit in the years before, and would have been just as painful for regular hard-working Americans regardless of whether Goldman had a net short position or not. One could perhaps even argue that the crash would have been worse if Goldman had not been as hedged as they were.

Above: Charles Ponzi, the model banker, according to the Senate Subcommittee on Investigations

Nevertheless, it is interesting for the sake of argument to assume that Goldman’s supposed “big short” did in fact push down the price of property, which seems to be an important assumption in the politicians’ criticism of the bank’s conduct (unless, of course, one thinks it is morally despicable in and of itself to do well when others are doing poorly, regardless of any cause-and-effect relationships). Now, if one is to follow the argument that contributing to lower housing prices is a bad thing per se to its logical conclusion, one ends up at a pretty strange place. Firstly, while falling property prices tend to be bad for those who own property – or more specifically – for those that own property and want to sell it or borrow against it, it is a very good thing for those people that want to buy or rent property. Recent university graduates working hard in entry-level positions while caring for young children, for example. Or low-income families who struggle to pay their rent in a tough economy. If my memory serves me right, many of the same politicians who are now reprimanding Goldman for supposedly contributing to lower property prices were, not many years ago, supposedly very concerned about affordable housing - which is exactly what falling property prices brings about.

The counter-argument, of course, is that as long as property prices keep rising, the recent university graduates and low-income families can borrow money and invest in their home (this is, of course, exactly what the various complex derivatives investment banks are being so criticized for helping create were meant to facilitate). Again, let us see where such an argument brings us if taken to its logical conclusion. If property prices are rising indefinitely, at a brisk rate, even NINJA (no-income-no-job-or-assets) lenders can borrow lots of money and buy a nice, big, expensive, house, and pay both the principal and the interest by refinancing the loan as the value of the house increases. Translation: affordable housing for everyone. This, of course, is exactly how sub-prime mortgage lending worked in the years before the financial crisis, and one might think that it somehow contributed to it. Let’s assume it didn’t for now, and the collapse was caused by evil Goldman Sachs “betting against home-owners”. A happy scenario that is, where, in 20 or 30 years time, recent university grads and low-income families buy houses valued at hundreds of millions of dollars, leveraging their downpayments (if they pay them at all) thousands of times, producing imaginary profits for a financial industry vastly, vastly, larger than it ever was before the crisis. Sounds sustainable? About as sustainable as a good old Ponzi-scheme.

If only Goldman and the other investment banks had shorted the housing market a little more, a little harder, and a little earlier, perhaps this whole mess could have been avoided. “God’s work”, indeed.


1 Lord Tata { 05.09.10 at 21:33 }

Stephan, I could not be more delighted to see you’ve renounced your Marxist ways.

2 Lord Tata { 05.09.10 at 21:35 }

This has too many words though, you should cut 2/3 of them.

3 Stephan Andreas Jensen { 05.09.10 at 21:49 }

I have never taken up, nor renounced Marxist ways. I try to be politically eclectic, though. I don’t think one can be very trustworthy if one isn’t. Again, I refer you to Evolution-Revolution’s Pledge to Our Readers.

4 Lord Tata { 05.09.10 at 22:24 }

Jolly good. I’m all for political eclecticness (sp?) so long as it involves unwavering support for God, Queen, country, and last but not least the Tory Party.

5 Lord Tata { 05.09.10 at 22:35 }

Did you hear we won the last election with 36% of the vote? Now that’s what I call democracy!

6 Are Riksaasen { 05.12.10 at 15:38 }

Without Goldman-Sachs betting against their customers, they would have quickly run out of product to sell.

7 The Future of Capitalism (and economics) | Evolution-Revolution { 05.28.10 at 01:32 }

[...] argument that “speculation” is to blame for the financial crisis quite unconvincing (speculation can actually be stabilizing), I am pretty sure there have been some more fundamental structural dynamics at work. I will write [...]

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