Subprime Lending and European Values

A couple of years ago the Jeremy Rifkin wrote a book called The European Dream: How Europe’s Vision of the Future is Quietly Eclipsing the American Dream. An essay in which he summarizes the main points is here.

Rifkin praises many European values — a more family-friendly balance of life and work, emphasis on environmental sustainability, foreign policy that focuses on non-violent conflict resolution — the usual suspects. The book is uneven (a fair-minded critique of Rifkin’s rosy view of Europe can be found here) but one of the parts of the book I found convincing is the beginning, in which Rifkin critiques contemporary American values. His point is that "traditional American values" of hard work, thrift, postponement of gratification, etc. have been weakened in the U.S. over the past few decades under an onslaught of consumerism and superficiality. Here, he’s in Christopher Lasch and Neil Postman territory, two American culture critics whom he repeatedly cites. (In the spirit of true Kulturkritik, both of these authors’ critiques don’t break down neatly along conventional political lines — Lasch especially can sound like a European conservative in his praise of family, tradition, and community).

Sure, Americans work harder than Europeans, but, Rifkin asks, how much of this hard work is triggered by low wages and high living expenses (i.e., the need to have 2 jobs to finance the basics of life)? How much by the fact that most Americans carry thousands of dollars in consumer debt that must be paid off month-by-month? Puritan thrift also can’t really explain the explosion in legal gambling the U.S. has seen in the past few decades: now 70% of Americans have played some form of legal gambling regularly, 47 states have legalized casino gambling in some form, and Americans "are now now spending more money on gambling than on all movies, videos, DVDs , music, and books combined." (28). Fifty-five percent of Americans under thirty believe they are going to become rich, but closer questioning reveals they have little idea precisely how. Rifkin argues that values of postponement of gratification, moderation in spending, and a distrust of get-rich-quick schemes have survived in Europe just as they have been weakened in the U.S.

The latest evidence that Rifkin may be on to something here is the subprime mortgage fiasco. "Subprime" lending is a euphemism for lending to people who have bad credit. Either they’ve defaulted on loans in the past, or they can’t give reliable information about their income. The idea behind loaning these people money to buy houses was that the value of the house they bought would continue to rise dramatically, which housing prices in the U.S. were doing until recently. In fact, some of these homeowners — usually ordinary lower-middle-class people — took out second mortgages on their homes, or even "leveraged" their properties to acquire additional ones. The loans were structured so that the payments would rise dramatically if interest rates increased, or if housing prices stopped increasing. Despite everyone crossing their fingers and hoping for the best, those things have now happened, and hundreds of thousands of these loans are going bad. The U.S. press is now awash in articles like this one, wondering whether the damage will be limited to a wave of foreclosures, or whether it could have wider effects on the economy.

I cannot imagine something similar happening in Europe. First, many Germans I know do not expect or want to own a home in their lifetime. The ones who do assume that they will have to put a large down-payment on a home, and save for at least a decade before having enough money to do so (the government helps a bit). Second, I have hard time imagining that European banks would deliver hundreds of thousands of Euros to people based solely on their own unverified statement of how much they make per year, or give loans with no downpayment whatsoever. (Two practices common in the U.S.). Third, I can hardly imagine any German taking out debt grossly out of proportion to their income, especially under circumstances in which monthly payments could rise dramatically based on unpredictable future events. Cultural memories of families driven to ruin by debt and inflation persist in Germany. It’s a country in which credit cards are still rare, and ones with revolving credit (where the total balance is not paid off monthly and gathers interest) rarer still.

I’m certainly not qualified to judge whether the sub-prime lending "debacle" will lead to a larger economic downturn in the U.S. But I think I’m on solid ground to say cultural attitudes and regulatory structures rule out something similar happening in Germany.

6 thoughts on “Subprime Lending and European Values

  1. Credit cards with revolving credit do certainly exist, are common, and are called ‘Dispokredit’. Everyone with a regular income usually gets one with a credit limit of three times monthly income.

  2. I would also agree that the picture on loans and lending in Germany isn’t as rosy as one would assume – there’s enough debt-trap lending practice about out there, even if it’s less on the usual suspects of credit cards etc. and more on the side of the Dispokredit, car loans, “Umschuldungs”-loans etc. But, as an observant American friend once pointed out to me: note the word “Schuld(en)”, that says something about the cultural mindset. But hey, don’t “debt” and “duty” have the same root as well?

  3. many Germans I know do not […] want to own a home in their lifetime

    Of course, lifelong indenture is a wet dream for Germans come true.

  4. “I cannot imagine something similar happening in Europe.”

    Look to the west, across the North Sea, toward Jollie Olde Englande. It’s called ‘Buy to Let’, and involves precisely the same practices. It’s also driven house prices to double their previous levels since 2000 across most of the UK. When I moved to Uxbridge in 2002 one could purchase a substantial middle-class semi-detached house for between £140 and £150 thousand. Now the range for the same property is £250 to £300 thousand.

    I have friends in Italy who tell me that something very similar has happened there, and we have also seen major price rises in Spain and France.

    Germany seems to be an island of housing sanity in a sea of speculation, and the US (taken as a whole) seems to be nearer the midpoint of the property insanity than the ‘leader’. Of course the US does have cities which rival London for the status of leading bubble, mostly on the East and West coasts. Of course as any good German ‘journalist’ knows the US IS the coasts, points south and in between being mere rumor….. 😉

  5. “Germany seems to be an island of housing sanity in a sea of speculation”

    If you look at the figures for the last ten years, in practically all European countries the housing market has gone up by at least 40 percent. In some cases (Spain, England) it has more or less doubled. The exception is Germany, where the rise was ca. 5 percent.

    I would say there are two main reasons for that: First, German individuals and families don’t “buy to sell” property (i.e. take a mortgage loan on conditions that mean the house will be paid off in only 30 years, but you sell the house after 5 years to make profit). There is no culture for that kind of risk-taking. Banks don’t really encourage people to do that, either. The second reason is that most German cities and municipalities allow the construction of new houses and residential areas (“Bauland”) more easily. If you want your own home, you buy land in the countryside and build a new house. As far as I know, this is much less possible in England, as the authorities there are much more reluctant to grant permits for new construction zones, hence there’s a higher demand for the existing houses.

    The complete lack of a “housing boom” in Germany is also one of the main reasons why GDP growth has been so sluggish here since 1995, compared with other European countries.

  6. A credit card society, which Germany ever more becoming, will give way to more and more stories like US one, happening here. As debt risk models become more advanced, combined with more consumer information being consolidated, there is no reason Germany will not experience a similar outpouring of credit in the coming years.

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