Town Refurbishment, German Style: How To Revive A Failing Economy.
I was visiting Pegau with my former partner, Brian. Pegau itself is a little town near Leipzig, not far from delightful – if equally dilapidated Naumburg. Nevertheless, there was something truly remarkable about Pegau, which had been in the DDR and Communist governments were only interested in production not investment. In this way, the communists strangled their own economy – and the result is infrastructure that was in an appalling state of repair. Their towns were little different.
Yet the roofs of this little town were bright and new. What’s more, there was new zinc guttering too. Yet underneath was a house that was all but ruinous. A term that doesn’t do these buildings justice: some were so dilapidated and for so long that the windows had rotted from their casements. Nobody had the money or the will to do anything, nor were they allowed to do it by the communists who had some remarkably daft ideas. Sometime, we’ll visit the East German trams to discover how astonishingly daft these ideas imposed by the Soviets were.
I was puzzled as to what was going on.It was later and whilst still looking for houses with Brian, that the term Stadtsanierung popped up. I looked into this and it transpired that with some of these renovated properties there was a substantial debt to pay on them. This was the more puzzling still!What was going on here?
Believe me, it took a while to firstly work out what was going on, what had gone wrong and then to reverse-engineer all this to establish the principle.
Because the Germans had been dashed clever. Well, that’s what Germans are good at, isn’t it. But this was truly fiendish! Yet it was the kind of thing no American government could ever dream of, because it involved giving money away. With terms and conditions, but the appearance was free money. Saxons they may be, but Germans do not share the same guilt complexes that the Anglo-Saxons do!
The German government made an agreement with houseowners whereby their building would be restored. You can imagine that this money would then flow back into the economy fairly quickly: renovating buildings means buying stuff in the local shops and builders’ merchants. Not forgetting the builders themselves.
The increase in sales tax alone would have been enough to pay the interest on the money the German government had borrowed.Everybody wins!
The crunch would come when after a certain time, it came to the owner of the building having to pay their fair share. The rule was simple: you paid the government the going rate for your home.All of it!But then, if you owned a neat little house that had a decent roof and was in good condition, there’d be little difficulty in arranging a mortgage for it. You can see that the Germans really did work with their banks. Only if you know anything about banking, selling mortgages is not where the money’s made! Leveraging funds and playing the stockmarket like a casino is where the big money is. The Americans learned this the hard way with the crash of 2007; the Germans just don’t let their banks make that kind of profit – in Germany at least.
In any case, the house prices were going up, so the German homeowner wouldn’t be so upset by all this because their house would soon have doubled in value. What’s more, many houses in their street would be equally pretty.Positive Spirals. You can see that the German government set up an effective tool to both establish a sensible number of decent houses and at the same time, revive an emaciated economy. Not only that, everybody won. The homeowner got a decent place to live in, the government got their money – and the speculators jumped in too! No doubt this was hoped for, but buying a dilapidated property for almost nothing and then paying back the government doesn’t seem that bright an idea, does it.
Until you start thinking, that is. When you realize that in waiting a year, the house would have accrued another 15% in value! In the mean time one was able to make a profit by renting the place. When you start to think about this, it doesn’t sound so daft, does it? Germans are good thinkers, it’s why their engineering’s so good.You see: the speculators were actually working to fuel the economy and the German government at the same time! Unlike in the US and UK where they only line their own pockets and inflate the stockmarkets. Because this wasn’t the stock market they were playing about with, where the values are entirely notional.
The Germans had salted their economy with a small amount of money and in the space of ten years had a better economy, better housing and as importantly, made lots of money too. This was bricks and mortar – and with a growing economy, houses to buy and rent were becoming sought after. Solid objects have a value that is tangible and far harder to undermine than the imaginary value of a share on the stockmarket. Americans reading this, please take note.Negative Spirals Courtesy Of The US Government.
Nevertheless, the Americans managed to undermine the notional values of their stockmarket with consummate skill. Their style of economy whilst certainly more dynamic than the communists was its mirror. For the Americans changed their banking regulations to allow the banks to lend to people who neither had the capital, the value in their home nor the money to pay the mortgage. Yet happy salesmen pounded the streets and sold mortgages to any Tom, Dick or Harry.A brilliantly simple idea, and the banks made a stack!Only as with all simplistic ideas, it had a flaw. For simplistic ideas rarely consider the consequences, where clever – but elegantly simple – ideas have.The problem was this: the Americans gave away loans (and this is important: a loan is not free money!) The Americans gave them to anybody and everybody, irrespective of their home or what they might do with it.
The final point was the wooden stake hammered through the heart of the US economy: the loans given out did nothing to improve the state of the houses nor did it improve the local economy.
There came a point where the American banks couldn’t handle the numbers of repossessions on their hands. That is to say, the owners couldn’t pay their monthly interest, and so handed back the keys. The problem was that the house they lived in was worth nothing at all. The banks were left with their own debts and nothing of value to place against them.There was only one thing they could do!
The only thing they could responsibly do was to tell everyone else that the wonderful investments they’d purchased were worth nothing at all. That they were rated AAA by the ratings agencies only proves that the ratings agencies lack the ability to discern when they’re being had. That the US economy is one of the few AAA rated on this planet is more because of the ratings agencies’ shortcomings than any genuine economic muscle.Thus it was that we had the crash of 2007. [Update, 2016: Deutsche Bank is being fined $14bn for doing this – when it could only do this kind of thing because US banking regulations allowed it to].
The Americans’ Fool’s Gold.
The Americans made the mistake of not investing the money they gave out.
Well, that was fool’s gold, wasn’t it?
What the Americans had done in their supremely American way was to do precisely what their hated communist enemies had done three decades and more before them: they had not thought of investment as the key strategy to improving an economy.Communist and capitalist alike, they were only interested in the bottom line. They were only interested in the economic statistics.The German government had looked at the statistics and asked in that more Steinerian of approaches: where do these numbers come from?
Taking The Right Risk.
Because investment always involves a risk, and handling risk is a matter of using one’s intelligence to assess that risk as much as it is to use one’s courage in implementing it.Neither communist nor capitalist will take such risks. The communists are now dead from self-strangulation, the Americans now need an oxygen supply from a tracheotomy that lies below their ever-tightening noose.
That is to say they are inflating the lungs of their economy with printed illusory money rather than pumping up the economy with genuinely valuable houses and the economic activity that created them.This doesn’t mean that the Germans are entirely correct, but the truth is this: it is the nature of the Anglo-Saxon that dovetails with the German so neatly.
The Anglo-Saxon imagination is just what a culture like Germany needs.