07 de juny, 2011

Deregulation caused the construction bubble in Spain and may cause its eventual social security default

According to elites, in PIGS countries "governments catered too much to the masses"- i.e. promised too much  without collecting enough money from voters.  Discussing about the stupidity of this statement is like trying to convince a XI Century peasant that the earth is not flat. 

The problem of  the construction bubble in Spain is very simple and it has to do with deregulation. It all started with a 1985 law known as "Boyer Law" ( Real Decreto-ley 2/1985, de 30 de abril) . This law:
  1. Lowered taxes for  real state investments, regardless of the use and the investor.
  2. Supressed a law that prevented uncontrolled increase in property rentals.
This was completed by another law, of 2003 (the Rato law, Ley 10/2003, de 20 de mayo) that made virtually any land on Spain developable.

Banks along with developers contributed as well to this bubble  appraising all properties and then lending money to all kind of buyers -and developers too- because this was a tremendous source of income for both banks and developers. So people was forced to buy expensive homes because the only available homes were very expensive.

I suspect the same applies for Ireland. Just remember that Ireland was  always praised by the right wing as a model for deregulation (called some times flexibility). It had lower taxes in Europe for corporations and -.most likely- low taxes for developers.

The main problem is that most voters are uneducated. The laws  mentioned above were approved by governments of "different" parties. How come people elected these governments? On the other hand, educated people would never enrole in a mortgage involving more than half of their salaries.

The bottom line is that market requires regulation to protect people's interests. You can't just leave everything in hands of speculators and then blame people for buying the home they live in.

And the same is true for everything else in our society. There should be only one way of doing business: the way that can't ruin a country and its social security. And don't tell me, like The Economist often does , that this way doesn't exist.