This story,about a new way to buy a house, appeared on page 8 of the LA Times on December 15th. Check it out. http://www.latimes.com/business/realestate/la-fi-lew-20131215,0,7858562.story#axzz2nh3BQaDN
This story reports on a new method of financing home purchases. It enables a buyer who can’t come up with the full down payment, to sell shares in the home to investors. The home buyer uses his own money plus investors’ contributions to secure the mortgage.
The primary owner may reside indefinitely in the home, but when it’s sold, the investors receive a percentage of the capital gain (or partake in the loss). Investors can trade their shares, just as we can sell our Microsoft stock, at any time. Will the primary owner hold have to hold meetings every year so that stockholders can vote on whether it’s OK to paint the house pink? Lots of possibilities.
This story is potentially important on many grounds. If the idea takes off and financial wizards add opaque features, the possibility for bubbles and crashes are as great as the securitization of sub prime loans. On the other hand, if reasonably regulated, this method can lead to more home ownership (which I suppose is good), or increase the efficiency of buying and selling homes, which is also good, if not transformative. (Back to this point a little later).
The Primarq story and model has other implications. For example: Why not allow kids or their parents to sell shares in student loans? When the student gets her first job, or opens a business, investors receive a percent of the income, with time limits. Investors could choose among prospective students on a website, and direct their capital to the kid just accepted into Yale’s Astrophysics program. Down the road some investors will cash in big when she wins a Nobel prize for discovering what preceded the Big Bang. The possibilities for the Primarq idea, like the universe, are endless.
The most important implication of this story is that it provides yet another example of how the financial sector dominates the US economy. Or, put another way, how the business of using money to make money has become the main end of capitalism, rather than just its hand-maiden or life blood (with which I would have no problem).
The dominance of the financial sector is made possible (or a lot easier) by technology, which allows voluminous and immensely complex transactions to occur with ease, at very little cost per unit. Primarq could probably not have made money with this idea twenty, or even ten, years ago. Technology, software, and the internet have dramatically lowered transaction costs.
It is my sense, that instead of trying to make money inventing new tangible, possibly transformative products (the wheel, the basic telephone, the automobile, the computer) and services which materially change our lives (medical treatments, taxi rides, education), way too many smart people are engaged in economic activities which use money to make more money. Any other impacts are incidental.
Entrepreneurs of companies like Primarq are not only hoping to make money from fees and advertising, but are playing lottery capitalism. If the web business gains traction, maybe Schwab or Ameritrade will buy it for $20 million….even it it hasn’t turned a profit yet.
The consequences of the Primarq model, even when you trace its impacts up (or down) the chain of economic activity, are not, at least in my (limited) vision, transformative. Not every new business venture can or needs to transform lives. But if so many of our best and brightest are using their creativity and hard earned MBAs to manipulate financial instruments, or get out front with the latest scheme with Ponzi overtones, or get noticed in the lottery economy so they can be bought out for millions, capitalism is being stood on its head; the tail is wagging the dog. Meanwhile Tesla — you can actually see, touch, and drive the cars — struggles to overcome jibes and obstacles from jealous or threatened interests because they (presumably) couldn’t be making it without selling emission credits. (Well, Boeing would never have made it without federal government contracts which effectively subsidized their R&D).
The Primarq story on page 8 reminded me of all that. Hey, want to buy shares in a new blog? As beta testers and founding followers, you will be the first to know about the IPO. I promise. Shhhh!