Jim

So you can’t afford to buy your own home

In Biz, Politics, Unfettered stupidity on November 18, 2008 at 12:55 am

Turns out, it’s not that great of an investment, after all.

Suppose you had put $100,000 into the U.S. property market back in the first quarter of 1987. According to the Case-Shiller national home-price index, you would have nearly tripled your money by the first quarter of 2007, to $299,000. On the other hand, if you had put the same money into the S&P 500, and had continued to re-invest the dividend income in that index, you would have ended up with $772,000 to play with—more than double what you would have made on bricks and mortar.

The linked article’s really about the collapse of the whole system of finance. Every once in a rare while, I say something smart. The other day, I had one of those moments: “Money is entirely too important to leave in the hands of bankers.”

Some more tidbits from the linked article, if you don’t feel like plowing through the whole thing:

• The financial history of the past 800 years is a litany of debt defaults, banking crises, currency crises, and inflationary spikes. Moreover, financial crises seldom happen without inflicting pain on the wider economy.

• In 1980, bank indebtedness was equivalent to 21 percent of U.S. gross domestic product. In 2007 the figure was 116 percent.

• The motto “In God we trust” was added to the dollar bill in 1957. Since then its purchasing power, relative to the consumer price index, has declined by a staggering 87 percent.

• (Upon signing S&L deregulation) President Reagan declared, “All in all, I think we hit the jackpot.” … When the ensuing bubble burst, nearly 300 S&Ls collapsed, while another 747 were closed or reorganized …. The final cost of the crisis was $153 billion (around 3 percent of the 1989 G.D.P.), of which taxpayers had to pay $124 billion.

• One might assume that, after the catastrophic failure of L.T.C.M., quantitative hedge funds would have vanished from the financial scene, and derivatives such as options would be sold a good deal more circumspectly. Yet the very reverse happened. Far from declining, in the past 10 years hedge funds of every type have exploded in number and in the volume of assets they manage ….

• But what about the rest of us, the rank-and-file members of the deluded crowd? Well, we shall now have to question some of our most deeply rooted assumptions—not only about the benefits of paper money but also about the rationale of the property-owning democracy itself.

Thanks to Kristin Lenz of the Washington Post for posting the link on Facebook.

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