Tuesday, July 12, 2011

The curse of leverage

As argued before, this blogger thinks tax deductions on mortgage interests that American homeowners enjoy are a mistake.  At the level of public policy, this subsidy is as reprehensible as any other subsidy; at the level of individuals, it exacerbates the moral hazard of buying stuff with someone else's money.

The good news is, the said blogger is finding new friends in high places.  Recently, a Federal Reserve President, N. Kocherlakota, went on record that tax incentives to mortgage interests should be trimmed. 

Read about it here.

Kocherlakota notes that:
"...leverage made the financial sector more sensitive to downward movements in the price of land."
Indeed so. What is true for the financial sector, so is it for housing. Compare the highly-leveraged American housing market with the barely-leveraged Chinese one. In 2009, there were fears that the Chinese market would crash too in the wake of the American one, but nothing of that sort happened. Leverage made all the different. Or the lack of it.

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