Celebrate Revolution - The Chaos That Creates America

Happy Independence Day. We live in a country that began with a revolution. A country that lost 620,000 lives standing up for principles of freedom and equality. A country that has the vision to create such apparently illogical economic tools like credit cards, credit scores, home equity lines of credit and subprime mortgages to help people live a better life and own homes.

As a country we are not alone in innovation, but we are ahead of most of our economic peers in extending financial tools and their benefits to as large a swath of the population as possible. All of these consumer tools have at times been roundly criticised for empowering people that have not allegedly earned the right to dream large.

I am a new American. I choose to live here. I was born in New Zealand where like Japan, “the nail that stands out is hammered down.” In New Zealand it’s called "the tall poppy syndrome." In nature, a poppy field is a network of plants. If one poppy shows extraordinary growth, the network conspires to starve it of nutrients.

America applauds innovation and even failure, provided lessons are learned and you try again. This has lead to the exploration of innovative economic experiments like subprime mortgages. These inventions expand markets and contribute to growth. The strength of the American economy is almost solely due to leverage (credit) and the social policy behind increased access to consumer loans and mortgages, thus homeownership. Try borrowing money in most other countries.

Sure, the subprime market has seen massive abuses by over optimistic promoters of mortgage backed securities, greedy loan brokers and sellers and crooked appraisers who all knowingly gamed the system or the truly unqualified, who lied to receive mortgages.

The hard to ignore reality is that the US has a homeownership rate of 68% of people eligible to own homes. This is now the highest rate in the First World. At some time in the past, Australia, UK and New Zealand all had better homeownership rates, but these have fallen behind as affordability has slipped and financial innovation has not kept pace with the dream of homeownership at a reasonable price.

When the smoke clears and Wall St realizes that "their subprime sky may have fallen," the underlying asset and the number of diligent homeowners making mortgage payments have just grown. Only 13% of mortgages classed as sub-prime mortgages are anywhere near default and this represents a miniscule fraction of the $14 trillion of residential real estate assets.

Happy 4^th in the Land of the Free (hold Homeownership)

God Bless and a safe 4^th.

Andrew Waite