Comparing Greece’s debt problem with the McMansions of the 2007-2008 subprime crisis

One writer links the issues with McMansions in the last decade with the debt issue in Greece:

Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.

As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime’s go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp “low-risk” on the mortgage because it was quickly sold to credulous investors…

The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.

Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece’s loan application. Though anyone with the slightest knowledge of Greece’s economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece’s northern neighbors, and then sell them as low-risk sovereign debt investments.

In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers.

Two quick thoughts:

1. Most analogies made about McMansions are not likely to reflect well on such homes. Here, McMansions are part of huge financial problems. Later in the piece we have more negative ideas about McMansions:

Meanwhile, the poorly constructed McMansion is falling apart…So the hapless subprime borrower with the crumbling McMansion and Greece both have the same choice: decades of zombie servitude to pay for the crumbling structure, or default and move on with their lives.

Not exactly attractive options. Yet, the assumption here is that all or most McMansions fall apart within ten years or so. Is this truly the case with McMansions – do they have more repair issues than other homes? Perhaps Consumer Reports could sort this out for us since they like collecting such data.

2. I don’t recall seeing strong evidence that the subprime crisis was primarily driven by people purchasing McMansions. Rather, mortgages were granted that were too risky. But, how many of these loans were actually made for McMansions as opposed to other kinds of housing? The whole housing market was doing crazy things, not just in the McMansion sector.


Quick Review: Boomerang

Michael Lewis’s latest book, Boomerang, gives the current economic crisis some international context. In an entertaining and somewhat breezy manner, Lewis investigates why countries as disparate as Iceland, Greece, Germany, and the United States all fell into the economic mess. Here are a few thoughts about his take:

1. My overwhelming thought about Lewis’s explanations is that he wants to delve into different cultural approaches to the world of finance. Lewis’s argument goes like this: even though these countries have very different histories and cultural mindsets, somehow they all got involved with bad debt in the 2000s. This same topic could spark a fascinating economic sociology or cultural sociology manuscript.

2. Unfortunately, Lewis either doesn’t have much time to spend with each country (he admits the book began as he was working on understanding the US system, which became The Big Short or he doesn’t want to delve deeply into his thin arguments. For example, in Germany he tries to tie their fondness for following rules (which means Germans were the last people to be being disastrous American CDOs) to their fondness for scatalogical humor (which Lewis bases on one anthropological study). While there is a lot of potential here for showing how different cultures can be tied together by a global finance market, Lewis needs a lot more evidence to construct a convincing argument.

3. I found the last chapter to be both exhilarating and depressing. Lewis comes back to the United States in the final chapter and describes how this could all play out. Here is what Lewis suggests: while the centralized governments of Europe struggle, the problem in the US is pushed down the road because the federal government can push off more and more obligations on state and local governments. If this plays out as Lewis suggests (though there is debate over whether it will be as bad as Meredith Whitney suggested), local governments will continue to feel the pain of the economic crisis for years to come and the results may not be pretty.

Summary: I think Lewis is on to something here but I would like to see the topic covered with more depth and include more research.

A bad week for sociologists in prominent government positions?

Two stories from this week suggest it might not have been the best week for sociologists who are in prominent government jobs.

First, in Greece, George Papandreou resigned as Prime Minister. From earlier this week:

“Today I want to send a message of optismism to all Greeks. Our road, our path, will be more stabilised. Our country will be in a better situation. We will be stronger,” Mr Papandreou said in the televised address.

Philippos Petsalnikos, current speaker of the Athens parliament, has been widely tipped to replace Mr Papandreou as prime minister. Although Mr Papandreou did not name a successor, he added:

“I want to wish every success to the new PM and the new government. I will support this effort with all my strength.”…

Pressure has mounted on Greece’s two main political parties this afternoon to wrap up three days of critical power-sharing talks and name a new prime minister to take over at the helm of an interim government.

Papandreou has a sociology background.

Second, here is a fairly critical review of Ireland’s president-elect:

Michael Higgins, the President-Elect of Ireland, has lived a very comfortable life sucking on the government teat. He began his adult life as a sociologist in academia. He then moved into politics, and for decades enjoyed lucrative pay as a member of the political elite (well above $100,000 annually in recent years).

Now he’ll pull in more than $300,000 per year for a largely ceremonial job as Ireland’s President. As the old saying goes, nice work if you can get it. This guy’s definitely part of the top 1 percent.

He’s also an economic illiterate or a cynical hack who apparently thinks noble poverty is a good idea for the other 99 percent.

Here is a quick overview of Higgin’s academic background from Wikipedia:

Higgins holds a graduate degree in sociology. In his academic career, he was a Statutory Lecturer in the Department of Political Science and Sociology at University College Galway and was a Visiting Professor at Southern Illinois University. He resigned his academic posts to concentrate fully on his political career.

Perhaps Anthony Giddens can ride in and save the idea for prominent sociologists in higher levels of government?

Job for sociology majors: Greek prime minister

Greece is in a difficult economic crisis these days. Trying to navigate the country through the mess is sociologist and Prime Minister George Papandreou:

The Papandreous have dominated Greek politics for more than half a century. But last week, Prime Minister George Papandreou, whose father and grandfather had both been premiers before him, nearly walked away from it all…

Papandreou, a multilingual sociologist who was born in St. Paul, Minn. and educated in the United States and Great Britain, was initially seen by many as adept at handling the Europeans. A former foreign minister, he was well liked by his European peers and had an easy rapport with them. But he had a harder task with Greeks, who have never quite viewed him as one of their own.

Papandreou is a health-conscious cyclist in a nation that loves its cafes, cigarettes and greasy-spoon tavernas. He drives a Prius and loves to talk about green energy. His father, Andreas, was a fiery populist who was known for his electrifying speeches. But Papandreou is a genial, if uninspiring, speaker who does not seem to enjoy the aggressive dialogue found in Greek politics, said Stamatis, the novelist…

Papandreou is viewed as a sincere politician, even if Greeks cannot identify with him, said Christoforos Vernardakis, president of the polling firm VPRC and a political science professor at the Aristotle University of Thessaloniki.

I would guess that his political heritage, the third in his family to serve as Greece’s prime minister, helped him more in getting this job than a sociology background. As a sociologist, how would Papandreou analyze or view his own privileged background and how this impacts his relationship with the citizens of Greece?

Still, I wonder how Papandreou would say sociology has helped him direct Greece and interact with foreign leaders  in this high-powered position.

From foreclosed homes to islands for sale

From this Guardian UK article discussing Greece’s efforts to lease or sell island property to help fill its national coffers, I clicked through to this website: Private Islands Online. Even with a weak economy, why not pick up a 12.5 acre island in the Florida Keys for $17 million? Or how about a 3 acre island in the St. Joseph River in Michigan, just an hour or so from Chicago?

And for those who are a little worried about their budgets, don’t worry: there are some beautiful islands for rent.