Abstract
How did US housing markets articulate both with global financial flows and US domestic politics? During the long 1990s, the US economy benefited from a system of global financial arbitrage in which the US economy as a whole borrowed short term, at low interest rates, from the rest of the world, while lending back long term at higher returns. A temporarily self-sustaining housing market boom in the US based on declining nominal interest rates emerged from these flows. This boom favored employment and gross domestic product (GDP) growth in the US at the expense of some but not all advanced economies. The more that housing market financial structures in an economy approximated those in the US (wide-spread homeownership, high levels of mortgage debt to GDP, low transaction costs for mortgage refinance, and mortgage loan securitization), the better that economy performed in GDP and employment terms during the 1990s. While falling interest rates could have benefited all economies, US style housing markets proved better at translating disinflation into new aggregate demand. This situation consolidates voter preferences around a continued low inflation environment, continuation of US financial arbitrage, and maintenance of high housing prices.
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Notes
See Schwartz (2009) for an analysis. Brad Setser (2006) argues that exactly the opposite is true, that the US lends short term to the world and then borrows back long term. But this is not plausible given the rate of return data. His case rests on high levels of US short term lending to international financial centers in London and the Caribbean. But surely these financial centers are dominated by US banks which then re-lend long term.
A MBS bundles discrete mortgages into one or more bonds that can be sold in the open market.
Privatization split the Federal National Mortgage Agency into an unsubsidized, private firm, FNMA, and a publicly owned, subsidized agency, the Government National Mortgage Agency (GNMA, or Ginnie Mae), whose remit was public housing.
The reverse might also be true: inflation may percolate through housing markets in differentially detrimental ways. Our point here is not that at all places and at all times US-style housing market institutions produce superior employment outcomes. Our analysis only shows that this was true during the 1990s. Lane Kenworthy's (2002) findings are relevant to this point, because he finds that the relative job creation ability of coordinated and liberal market economies inverted around 1990/1992. This suggests that rising nominal interest rates adversely affected countries with US style housing markets in the first period.
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Schwartz, H. Housing, Global Finance, and American Hegemony: Building Conservative Politics One Brick at a Time. Comp Eur Polit 6, 262–284 (2008). https://doi.org/10.1057/cep.2008.11
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DOI: https://doi.org/10.1057/cep.2008.11