The great stakeholder society

There was much talk over the past decade about creating a “stakeholder society,” one in which property owners would ameliorate some of the social woes afflicting the country through the exercise of their own enlightened self-interest. The stakeholder society – or, at least, the rhetoric around the concept – received deep support from both political parties. For Republicans, who tended to construe “property” in a more elastic fashion, this meant creating the economic conditions whereby property could be more easily owned and more fruitfully deployed, where “property” could be anything really…a house, a yacht, a publicly traded security. This meant lower taxes on a variety of income and assets and also meant lower regulatory barriers to entry and operation for all manner of businesses. For Democrats, it meant shrinking the population of the dispossessed, putting working class and poor people into homes that they own.

Both sides had disagreements with the other on its version of stakeholding, but most folks were willing to compromise to get what they wanted. These political compromises – seemingly rare examples of bipartisanism in an otherwise deeply partisan era – unleashed the destructive forces that have all but destroyed the American banking industry and ushered in an age of economic uncertainty. The freewheeling regulatory climate favored by Republicans left large swathes of the economy with insufficient oversight, most notably mortgage origination, lending standards, and the marketplace for trading derivative securities. But Democrats didn’t much care, because this toxic combination of bureaucratic neglect brought forth an era where, literally, absolutely anyone could buy a home, despite their ability to service the debt incurred over time.

The explanation of events above is fairly standard and, with perhaps minor revisions to suit some tastes, probably wouldn’t raise hackles in any political quarter.

The destructiveness of the Republican side of the argument has been eminently manifest, or so it’s thought, in the continuing slide into insolvency of the nation’s banks. But evidence is now pouring forth detailing how the Democratic version of the stakeholder society is faring no better. Over at CalculatedRisk.com, there is a great pair of charts, based on new US Census data, showing that the housing gains of the past eight years have been wiped out in a couple of quarters. We are basically back at 2000 levels of homeownership, or to risk putting too fine a point on it, we have bankrupted the banking industry for absolutely nothing of permanent value to society.

Even more interesting to me is what the homeownership chart tells us about the years 1994 to 2000. The chart shows a spike in homeownership during this time, much larger than the one in the 21st century when lending standards were greatly relaxed. This shouldn’t have been the case, but I think it spells out for us the diminishing returns associated with easy credit. When you consider that we have brought the nation to the brink of a Great Depression-like event, you’d like to think the return was worth the risk. But from 2000 to the height of the housing bubble, homeownership rates expanded only from 67.5% to a little over 69%. Future generations will surely shake their heads in disbelief over such incredibly stupid and self-destructive risk-taking for what amounts to minute, transitory gains.

Exacerbating our problem now is all those homes that were built to house our stakeholders. The second chart at CalculatedRisk demonstrates that vacancy rates are far, far higher today than at any time since 1956 (and I suspect longer). In short, we have a huge glut of unoccupied homes – CR reckons about 900,000 – that will exert a severe drag on the housing market for some time.