The bursting of the behemoth housing bubble in the United States has focused a great deal of media attention on the effects of this bubble on the wider American and European economies. Much of the reporting has heretofore focused on the scandalous insolvency of both the financial institutions in America and the de facto insolvency of what will likely be the majority of average American homeowners. While there is very good reason for the mainstream media to focus on the effects of this debacle on the American and European Markets, (since the bubble originated in the U.S., and it literally laying waste to the very financial foundations that underlie the American economy), it is important to recognize that the deleterious effects of the housing bubble extend far beyond the balance sheet of Lehman Brothers and the housing market generally. This article will focus on the tragic effects of Alan Greenspan’s housing bubble on illegal immigration.
The Creation of the Housing Bubble
Before turning to an analysis of the effects of the housing bubble on illegal immigration, it is important, indeed critical, to identify the cause of this disaster. For, without any understanding of what causes bubbles in the first place, we will have no way to determine who is at fault, if indeed anyone is at fault, or how to avoid them in the future, if indeed they can be avoided. So, what caused a spectacularly large number of people to get caught up in a frenzy of speculative home building and buying?
The answer is to be found by examining the reasons why people engage in speculative home building and buying in the first place (although, all of what follows applies equally to commercial and other kinds of property as well). Quite obviously, people build and buy homes in order to live in them, and as a means to preserve or increase their wealth if they expect that their homes will increase in value over time. It is relatively uncommon, however, for people to have the large sums of money that are required to build and buy homes outright; which means that in order to build homes or buy homes most people must borrow money in order to pay for them.
On the other side of the exchange, the people and institutions who lend money to these prospective home builders and buyers seek to loan out their funds at the highest rate of interest that they can possibly find. Just as in the markets for all other goods and services, the convergence of the many people seeking to borrow money at the lowest possible interest rate and the many lenders seeking the highest rate of return for the use of their money leads to a market rate of interest.
Additionally, the rate of interest is the critical factor in determining which projects will actually be undertaken and which homes will be bought, because prospective home builders and buyers have a benchmark by which to judge the prospective profitability of their projects. If builders anticipate that their projects will earn a return that is sufficiently greater than the rate of interest they must pay to finance them, the project will be viewed as profitable. Similarly, if home buyers anticipate that their homes will appreciate in value at a sufficiently faster rate than the rate of interest they must pay in order to buy them, the home will appear to be a wise investment.
What dramatically changes this interplay between lenders and creditors is the supply of money that is available to be loaned out to home builders and buyers. If the supply of loanable funds increases, this will drive down the rate of interest and drive up the price of homes, and vice versa. Just as with every other good and service, if the supply of loanable funds increases, other things held equal, the price of borrowing (i.e., interest rate) will decrease. The increased supply of loanable funds will also lead to the bidding up of home prices and building materials over time, as the new money gets loaned out and used to build homes and buy homes.
What created the current and catastrophic housing bubble was precisely such an increase in loanable funds by the Federal Reserve System. Under the guidance of Alan Greenspan, the Fed chose to massively increase the money supply between 2001 and 2006 in the naïve hope of shocking the economy out of the recession. Take a look at the chart for M1 for this period:
As we have lately been discovering, a massive amount of this newly created money made its way into speculative residential and commercial real estate mortgages (and, as we shall also shortly see, auto financing and other credit-based industries), which are now threatening the very existence of American financial institutions. This drove down the rate of interest, bid up the price of homes, and is subsequently causing one of the worst (if not the worst) housing recessions in U.S. history.
The Effect of Greenspan’s Bubble on Illegal Immigration
A. The Cost of Illegal Immigration
One of the most profound effects of the housing bubble was a dramatic reduction in the costs associated with illegal immigration to the United States in order to find employment. In order to see why this is the case, recall from above that one of the effects of an increase in the money supply is that it bids up the price of the goods where the newly created money gets spent. As Greenspan’s newly created money began to inflate the real estate sector, more and more Americans were misled by this new money into believing that it was profitable to move into the construction-related industries (ourselves included). There appeared to be a bottomless cornucopia of free money to be had if one simply bought a new home, built a home, or renovated an old home, and this demand for construction and renovation services had the predictable effect of bidding up the wages of people employed in these trades to astronomical heights. For Mexicans living across the border, these high wages for basically unskilled and semi-skilled labor had the similarly predictable effect of decreasing the costs associated with sneaking into America in order to find one these lucrative jobs.
Legal and illegal immigration to a foreign country in order to find employment is essentially an entrepreneurial venture. The immigrant takes risks in leaving his native country in the hope that his risks and his assets (in this case, commonly labor) will yield a return that is greater than the costs and risks he must bear in the process of immigrating, (such as leaving one’s family behind, or getting caught at the border). If the costs of immigration are lowered, or the potential benefits to be gained from illegal immigration are raised, then illegal immigration will, ceteris paribus, increase. Thus, Greenspan’s giant housing bubble, which resulted in a massive increase in construction-related wages, made illegal immigration a much more attractive option to Mexican citizens than it otherwise would have been in the absence of the bubble.
(If you think our reasoning is unsound here, ask yourself if you would be willing to leave your family and move to French-speaking Canada by yourself in order to make 15% more money than you currently earn now. Now ask yourself whether you’d be willing to move to French-speaking Canada in order to make 60% more money than you currently earn. Makes you think, doesn’t it?)
Put in starker terms, Alan Greenspan’s decision to pump hundreds of billions of dollars into the American economy following 9/11 and the recession of 2000—2001, and which was subsequently fuel for a massive housing bubble in the United States, also increased illegal immigration from Mexico and other Central American countries above what it otherwise would have been without Greenspan’s reckless monetary intervention.
B. Encouraging Illegal Immigrants to Stay in the U.S. and Bring their Families to the U.S.
Another consequence of Greenspan’s housing bubble was that illegal immigrants were unintentionally encouraged to stay in the United States, and even bring their families northward in many cases. As was just seen, one of the inexorable effects of a housing bubble is that wages in construction related industries and trades get inflated along with everything else associated with housing. In addition to spurring illegal immigration, these artificially high wages also increased the opportunity costs of leaving one’s job here in the United States to go back to Mexico temporarily or permanently.
Quite obviously, the higher the wage one is earning, the higher is the cost associated with leaving that job. This is precisely why employers often offer higher salaries to their best employees if they think their employees might be considering switching employers. By offering a higher salary, the employer hopes to make the opportunity costs of passing up the higher salary outweigh the possible benefits associated with switching employers. Alan Greenspan’s housing bubble had precisely this effect on many illegal immigrants who had found employment in the housing sector in the United States. Since they were earning much higher wages, (sometimes extremely high wages if they happened to pick up a highly desirable skill such as tiling or finish carpentry), the costs of giving up those jobs — even temporarily — to head back down to Mexico dramatically increased. Understandably, many were persuaded to stay in the U.S. and keep their high-paying jobs, thanks to Greenspan’s bubble.
At the same time, however, since illegal immigrants in the United States still faced the unenviable costs associated with being away from their families while they were working across the border, the higher wages they were earning thanks to Mr. Greenspan often made it economically viable for them to pay the steep costs associated with moving their families across the border.
To pay an experienced Mexican or gringo guide, (or "coyote," as they are known in Spanish), to smuggle an illegal immigrant safely across America’s border can cost upward of $3,000 per person (and sometimes more). Prior to Greenspan’s housing bubble, this was an extremely steep cost to be paid by an illegal Mexican worker residing in the United States — especially if he had a large family. If he had a wife and three children, which is a small family by Mexican standards, he could potentially be looking at $12,000 in "travel expenses." In addition to these expenses, once his family arrived in the U.S., he would instantly find himself burdened with four more mouths to feed on his wage. Prior to Greenspan’s housing bubble, many illegal immigrants did not think the costs of moving their families across the border were outweighed by the benefits. Instead, they simply made regular remittance payments to their families in Mexico, which enabled their families to live very comfortably, and made regular trips back to Mexico to visit with their families
All this changed with the emergence of Greenspan’s housing bubble and the attendant high wages for construction workers that were caused by the bubble. Illegal immigrants could now afford to pay the high costs to bring their families over the border to live with them, and many took advantage of this situation by reuniting with their families on American soil.
Thus, one of the many unintended consequences of Alan Greenspan’s reckless increase of the money supply between 2001 and 2006 was to encourage illegal immigrants to permanently stay in the United States, and bring their families over for company.
C. Other Effects of Illegal Immigration on Property Values in the U.S.
The increase in illegal immigration spurred by Greenspan’s tidal wave of new money had other very interesting yet similarly deleterious effects on the real estate market here in the United States. As millions of immigrants flowed northward into the United States looking for well-paid work in the construction related industries, they also had to find places to live. Since many chose to rent properties, at least at first, this increased the price to be paid for rental properties in many areas of the United States. This increased demand for rental properties added still more fuel for the already raging housing market, since people could buy low-end properties and rest assured that there would be growing demand to rent them.
Many illegal immigrants were not content, however, simply renting properties. Many were working in construction related trades in the U.S., and they knew firsthand that there was plentiful money to be made simply by buying a house and flipping it for a profit. Hence, many illegal immigrants managed to find lenders in an attempt to get a piece of the action. This, too, added fuel to Greenspan’s already flaming housing market.
This article is not meant to be a rant against illegal immigration. On the contrary, we merely hope to have shown that Alan Greenspan’s myopic inflationary policy between 2001 and 2006 had far-reaching economic consequences, one of which is that Greenspan encouraged illegal immigration from south of the border for half a decade. Many of the deleterious consequences of the housing bubble will now have to be borne by the millions of illegal immigrants in this country who staked their lives and scanty fortunes on coming to the United States to eek out a living for themselves and their families. They were entrepreneurs risking much in the hope of satisfying consumers in this country for a profit, and they were horribly misled by Alan Greenspan’s housing bubble. Many will have to pay a steep price for being thus misled.
Unemployment in housing-related industries is high and rapidly rising, and many of the illegal immigrants who currently work in construction-related capacities have no other skills and meager knowledge of English. Remittances to Mexico have seriously declined of late, and this is a very good indication that illegal immigrants in the United States are faring rather badly in the very early stages of this very serious recession. There will be extreme suffering for many, many illegal immigrants and their families over the next few years.
It is not enough to blame these poor and often uneducated people alone for having simply tried to make a decent living for themselves, their wives, and their children. After all, we were the people who paid them the high wages that brought many of them here in order to put new tile in our bathrooms and plant trees in the yards of houses we couldn’t afford. Instead, the blame for this tragedy must be placed at the feet of Mr. Alan Greenspan and the Federal Reserve System itself for having the mind-boggling stupidity to believe that the United States could be made better off by increasing the money supply. We all will have to pay a terrible price for their mistakes, including illegal immigrants, and we will continue to do so until we learn that money must be backed by gold.