REUVEN
BRENNER Lottery can end homes
crisis By Reuven Brenner
Back in 2010, I suggested a radical
solution for the housing crisis. It wasn't radical
in the sense of it never having been done - and
even done prominently in the US - but only in the
sense that it was practiced a few centuries ago,
and then forgotten.
With the ongoing
housing crisis water torture and the recent events
unfolding in California, where a number of cities
have recently announced plans to seize loans on
"underwater" homes (those valued at less than the
mortgages), perhaps that radical solution should
be now given priority.
The solution is
perfectly legal, whereas the "eminent domain",
that is, the compulsory purchase the California
bankrupt cities
want to invoke, has
never been used for private loans (though used for
the acquisition of private lands for public use,
such as roads and airports). Its use would set a
dangerous precedent for the already embattled
financial markets, and shake one of US-sacred
cores to the core.
Shortly before Thomas
Jefferson died, he tried to pay debts that
amounted to US$80,000 by disposing of land he
owned through the use of a lottery, a
well-established method at the time.
He
explained the rationale for such financing: "An
article of property, insusceptible of division at
all, or not without great diminution of its worth,
is sometimes of so large value that no purchaser
can be found ... The lottery is here a salutary
instrument for disposing of it, where men run
small risks for a chance of obtaining a high
prize."
This should not come as a
surprise.
Using a lottery to solve a big
financial mess may seem surprising today, and
misguided puritans - who have no clue about
gambling and the "betting human nature" - may
object. But lotteries financed some of the
biggest, most prestigious projects that still
survive around the world.
Revenues from
them financed the reconstruction of Rome after
Nero burned it down; provided funds for military
infrastructure such as the Great Wall of China;
financed settlements in the New World, like the
Virginia Company; financed the British Museum, the
Westminster Bridge, many of England's wars.
Last but not least, Yale, Harvard
Princeton, and the University of Pennsylvania were
all initially financed by lotteries - though their
economics departments today are infested with
academics writing endless models and recommending
policies based upon them, all drawing on a view of
human nature which precludes all gambling,
considering buying lotteries "irrational" (since
such acts preclude finding internal solutions to
some cherished "general equilibrium models", where
there is no uncertainty, no financing of risk
taking, no governments, no wars - well, nothing
that identifies humans).
Yet, throughout
history there have only been four methods of
voluntary exchange: barter, gift, monetary
exchange and, indeed, gambling. Sometimes gambling
worked best: which may well be the case today as a
potential remedy for settling the housing problem
in the US. This prospect is better than either
using eminent domain or pursuing monetary policies
to boost housing and other asset prices.
Federal Reserve chairman Ben Bernanke, of
Princeton affiliation, rationalizes this policy by
stating that low interest rates would move people
out to "take more risks". This is a silly
statement: whereas some young people may indeed
take more risks and move out of savings deposits
paying 0.5% after tax, the retiring 65+ old Baby
Boomers, having lost their equity in homes, having
lost significant amounts in the markets and with
their pensions in doubt - know they cannot afford
taking any more significant risks. Their chances
of recouping if they lost the money are slim.
However, even this 65+ group could spare a
few bucks, giving up some bottle of beers and buy
lottery tickets instead. After all, this is their
sole chance of recouping some wealth at this age.
Not everyone can count on Bernanke's
well-cushioned pensions and eventual board
memberships and speaker's fees.
The
proposal would work as follows. First, establish a
National Lottery for foreclosed properties. The
financial institutions would put all foreclosed
properties into a pool and the government would
supervise the lottery. Next, tickets would be sold
at $100 or so. The proper price of the tickets
should be high enough to be serious so as not to
be treated as a game, but low enough so that
almost any family could spare the money, including
foreigners.
The National Lottery would
indeed induce people to seek "risky assets" in
exchange for uncommitted cash and savings - the
not fully thought through stated policy objective
of the Fed - but without the present wrongheaded
pursuit of severely punishing savers, in pension
funds in particular.
Homeowners risking
foreclosure and financial institutions owning
foreclosed property could each participate. The
homeowners would obtain both lender permission and
a reserve price set at or above the outstanding
mortgage debt. Homeowners would not have to sell
below that price. Owners could get more, but would
never end up below the reservation price. Banks,
however, could set the reservation price at less
than the mortgage, since they have been forfeiting
mortgage payments anyway, and owners risking
foreclosure could negotiate with their banks,
allowing for lowering the reservation price.
All houses would be listed online, with
the reservation price and an initial probability
of winning equal to 100 divided by the reservation
price. If the proposal made clear that this would
be a one-time lottery, then it would be highly
likely that the homeowners and financial
institutions would establish reasonable reserve
prices.
Only properties that met the
reserve price would be sold. The bidders for such
unsold property would forfeit the $100 lottery
price, but they would be able to deduct it from
their taxes.
The lottery ticket buyers
would choose which house they wanted. Houses that
got bids with aggregate values greater than the
reservation price would have their probabilities
decreased by dividing 100 by the aggregated sum of
the bets on this particular property. Houses whose
aggregate bids do not meet the reservation price
would not be sold and would revert to the present
owners.
People could change their choices
based on the fluctuating probabilities. This
process would go on for a stated period of time,
say two weeks or a month, and then ticket holders
would be committed to whatever house they last
selected. Any winner could either keep the house
or obviously dispose of it as they wish.
A
winner of the lottery drawing would then receive
title and ownership of the property from the
owner. The latter would get a net price equal to
$100 multiplied by the number of bidders on this
property, after deducting an established
percentage to the government for administration
fees. The newly won house would be tax free.
How many of the million or so properties
foreclosed since 2007 would be sold? It seems most
would.
Participants could own a house for
$100, foregoing the monthly beer, lottery and
McDonald and Coke budget of many citizens (sorry
Mr Buffet). If unable to maintain the prize, they
could re-sell promptly and pocket the winnings
obtained for the $100.
Or they could
choose to wait, as property taxes would be their
only annual obligation.
One million
families would become homeowners, free of mortgage
debt. Details about participation, including the
possibility of restrictions on foreigners, need
further discussion, though foreign participation
should be welcomed. After all, such participation
would signal that foreigners are betting on the
future of the US. Property is "immobile" capital
within the US, and an investment in such an asset
signals belief in the country's prosperity: it
can't be taken away from the US, right?
Financial institutions would benefit
because millions of mortgages would be paid off
and removed from their balance sheets. These
payoffs would cascade through hundreds of
thousands of CDOs, CLOs, SIVs and other types of
derivatives, which would serve to clarify value
and help to further unfreeze credit markets.
There are many who think the US needs some
"big, uplifting" national project. Building
bridges and roads? Why? Shouldn't the Internet be
used to allow more people to work from homes and
bring less congestion? (Though this requires
drastic simplification of the tax code)
And where should they be built? And if
they are not used by people whose income would be
generated by more businesses such infrastructure
would all turn out to be empty monuments.
Restoring the housing market to health
using a National Lottery might just be the
project. And if the US will then be labelled the
"betting nation" - so be it. As close reading of
the history of betting and gambling suggests,
there would be nothing wrong with that: it's
today's perception of this activity that is
entirely false.
The US would restore its
image of being an accountably risk taking nation,
respecting contractual agreements between private
parties. These would certainly better that than
going bankrupt and putting all contractual
agreements - a core of US's historical performance
- at risk.
Reuven Brenner holds
the Repap Chair at McGill University's Desautels
Faculty of Management, and serves on the Board and
Investment Committee of its Pension Fund. The
article draws on his World of Chance
(Cambridge, 2008, co-authored by Gabrielle
Brenner and Aaron Brown) and History - the
Human Gamble (Chicago, 1983).
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