Tag Archives: credit crunch

The Real Culture War II: Utopia, Austerity and the F***** C****

18 Dec

Yesterday we argued for carrying the culture war into the heart of the American political economy. We made the very broad claim that a defining feature of our economic culture is the acceptance of limits. This might seem like a strange thing to say. Surely the last decade was marked not by limits but by a failure to acknowledge them. Individuals, businesses and eventually governments borrowed well beyond their means. That, so the story goes, was what created the credit crunch and the stagnant new normal. It is certainly the narrative behind the growing deal, in which Republicans appear to be ‘conceding’ on some tax hikes while Democrats accept 5-10% cuts to Social Security.

But that narrative exactly misreads the role of credit and consumption. The expansion of credit was largely an attempt to overcome the limits of capitalism within capitalism. As is now common knowledge, the expansion of consumer credit presupposed stagnant wages:

Real Household Debt Wealth Income

And, as the graph shows, it began with sagging profit rates of the late 1970s – perhaps most famously marked by Volcker’s revanchist announcement that “the standard of living of the average American must decline.”

Slide1

(graph from Robert Brenner, see also Henwood.) What the expansion of consumer credit permitted, in other words, was the appearance that capitalism could accommodate the expansion of desires, the demand for ‘more,’ even while suppressing labor costs and increasing the expropriation of the expropriated.

The expansion of credit over the past thirty years was in a sense a massive bridge loan to cover the transition to a leaner set of arrangements, in which more jobs would be low-paying, part-time and insecure, labor would be less able to defend attacks on the standard of living, ‘job-creating’ capital would take home a larger share of the pie and then basically sit on it, and politicians could pretend serious economic issues could simply be managed by technocrats.

The major problem with the credit crunch was not the attempt to surpass existing limits to consumption, but with the implicit practical belief that credit could in any way rise above and compensate for the class defeats of the past twenty years. Just as Obama has frequently tried to rise above politics in the name of some abstract non-partisan unity, so too did the borrowing public hope it could rise above the real disparities in society, without having to face them directly.

To put it another way, the ‘fiscal cliff’ is not just a false emergency engineered by Republicans and Democrats, it is the culmination of decades of attempting to paper over the limits, not merely injustices, of the American economy. It is not just that both parties have joined the austerity bandwagon, they in the process are attempting to neutralize the only utopian moment of the past few decades: the satisfaction of desires that the current society cannot satisfy. The expansion of debt would have been unlikely to succeed had that desire not been there to sublimate.

Of course, critics may say that many of these desires took a form not at all challenging to a consumer society. That criticism has some teeth, and we will take it up in tomorrow’s post. However, moving too quickly towards anti-consumerism not only misses the utopian moment, but also blurs quickly into the bland and conservative narrative of arguing we should do more with less. The starting point for an economic culture war must be to reject the austerity party and its culture of low expectations. Any reconstruction of meaningful alternatives must begin by rejecting that piece of our economic culture. After all, the so-called ‘solution’ of a grand bargain is really just a an attempt to throw back on society the political class’s own lack of imagination and inability to deal with the problems it has inherited.

(to be continued)

The Housing Problem: More than a matter of fraud and finance

26 Jan

Amidst the waves and waves of fraud, it is possible that the root of the housing problem – inequality – has remained buried. To be fair, the fraud was monumental. Enough lawsuits have been filed, legislative reports published, investigative media reports run, for us to know that all kinds of illegal schemes, high and low, were an integral part of the housing bubble and financial crisis. At the top there was the way that funds, banks, and other financial outfits, like Goldman Sachs and General Electric Co., bundled and sold mortgage backed securities. There was also fraud at the bottom, in the forging of income statements, robosigning, and other dishonest and illegal methods for generating mortgages. Fraud that continued even after these mortgages were issued, as mortgage servicers did all that they could to prevent loan modifications, jack up fees, and keep borrowers underwater so that they could collect while the system tanked. The bottom-feeding was linked to the high-tech fraud at the top, insofar as the demand for MBS, CDOs, CDO-squareds, was so immense that the only way for mortgage issuers to generate large enough quantities in such a short time was by throwing due diligence to the wind. Then there is the systematic corruption in the fact that, at least at the top, banks made money both by turning shit into gold, and then by waiting for that gold to turn back into shit.

In the midst of all of this fraud, we have to remember that cheap and easy credit was supposed to solve or at least address the housing problem itself. It was supposed to make access to housing possible for borrowers who otherwise had trouble getting loans. That was one of the justifications for many of the changes in regulations that fraudsters took advantage of. Moreover, so long as cheap credit served its welfare-function of increasing consumption, especially of houses, there was less incentive to look into just how this was all made possible (there were, of course, many other factors contributing to indifference towards systematic fraud, not to mention the perfectly legal ways in which systematic risk was spread around the financial system.) What we can say, first off, is that the tradeoff – of increased homeownership for financial innovation in housing finance – was not worth it. The tradeoff was not even close to worth it. As the graph below shows, there was very marginal increase in home ownership. Even if we arbitrarily choose the year of the lowest rate of ownership (1993), even though it is not the beginning of the housing bubble, and compare it with the peak (2004), we get a 7% rise in homeownership, which can hardly all be attributed to financial innovation itself – and by the time the bubble burst most of the gain was wiped out.

And of course this way of financing access to housing came at the price of an immense credit crunch, doubling of unemployment, years of stagnation or recession, collapse of home values, long-run declining access to homes, declining household formation and, as we noted last week, a massive redistribution of wealth upwards.

But it would be a mistake just to blame those in the financial system who benefited, legally and illegally, from this permissive climate. After all, when it comes to housing, they alone did not create the poverty, and in particular the inability to afford housing, that lies at the root of the housing problem itself. Behind all the fraud is the cold hard fact that many are too poor to be able to securely hold or own a house without fraud. That is the root housing problem.

Looking to innovative credit mechanisms and market ‘incentives’ to make housing available to the poor is one of those neoliberal, post-Cold War ‘solutions’ that ultimately created a bigger problem. It registered, among other things, the fact that there is so little class power at the bottom that direct claims to the social product, in the form of low-income housing, public housing, rent controls and other forms of public provision are supplanted by mechanisms that make claims to housing contingent on becoming subject to the discipline of deeply inegalitarian financial and credit markets. But the inability of poor and middle income workers to control enough social product to meet a basic need like housing is a function not just of the economic power of financiers, but of ownership more widely. It is not just finance capital that keeps workers separate from the means of production. In this sense, the housing problem is wider than and predates the fraud and the legal forms of exploitation that it eventually gave rise to.

The Unholy Alliance of Monetary Expansion and Fiscal Austerity: More for those who have, less for those who don’t

16 Jan

Anyone observing the course of macro-economic policy in industrial countries over the past few years cannot help but notice an over-riding pattern: monetary expansion, fiscal austerity. This is an unholly alliance, in which the most regressive form of stimulus tacitly underwrites a fiscal contraction that punishes the least well off for the financial crisis and subsequent economic stagnation. (Skip the next two paragraphs if you already know the basic facts.)

Consider first some well-known facts. In the United States, the Federal Reserve has pushed interest rates about as low as they will go, and says it will keep them at the lower bound until 2013. It has also engaged in two rounds of quantitative easing, first buying in 2008-2009 over $1 trillion worth of MBS (Mortgage Backed Securities) and agency securities, then in 2010 it bought $600 billion worth of Treasury bonds, as well as the less significant Operation Twist. These measures have, in a narrow sense, been somewhat successful, with the Fed making profits on its original asset purchases, recently returning $77 billion to the Fed. The easing of the 2008-2009 credit constraints has acted as a kind of stimulus to the US economy by increasing the money supply, though strong doubts persist as to any further marginal improvements the Fed can make (e.g. Here and here). Meanwhile, while the Fed has pumped like crazy, state spending has come under serious attack. To be sure, there was the initial roughly $800 billion stimulus in late 2008, but this was almost entirely offset by contractions at the state and local level. The contractionary trend continued in 2011 such that government employment was “down by 280,000 over the year. Job losses in 2011 occurred in local government; state government, excluding education; and the U.S. Postal Service.” And then there is the whole super-committee, trillions of dollars in savings issue waiting in the wings.

We find a similar story in Europe. There have been in some cases multiple rounds of austerity in Greece, Portugal, Spain, Italy, Ireland, United Kingdom, France, Germany, and so on, despite record level Eurozone unemployment and economic economic stagnation, verging on recession. Meanwhile, despite initial recalcitrance, the ECB not only has pushed interest rates low, it has begun quietly expanding its balance sheet, offering nearly $500 billion in cheap 3-year loans, and after the recent success of Italian and Spanish bond auctions, has suggested it will loan more money in February. Fiscal austerity, monetary expansion.

Now one perfectly reasonable response to this relationship between central banks expanding the money supply and central governments contracting demand is to say “thank God for the Fed/ECB! At least there is one sane institution left intervening in the economy.” And as a response to those banging the drums of austerity, who believe in ‘expansionary austerity’, or to those who think the Fed is the root of all evil, this is a perfectly reasonable response. Austerity makes things worse, and displaces the costs of the crisis onto the worst off; the Fed, though it is not a progressive institution, is not the root of all evil. However, there is more going on here than that.

For one, in the European case, the tradeoff has been explicit. Draghi held out for as long as he could, on the grounds that Europe had to get its fiscal house in order before the ECB would become more adventurous. Moreover, as Henry Farrell has pointed out, while the raison d’etre of central banks to be insulated from political pressure, what this really means is that they are insulated from the kinds of political pressure felt by elected representatives, i.e. democratic political pressure. They are not from political pressure tout court. Instead, they are influenced by those like them, who speak their language of expertise and money. This makes it much easier for them to propose ‘solutions’ that hurt the majority – who do not so easily understand financial matters, nor tend to produce expert knowledge about it. Which is why it is easy for them to be so nonchalant about fiscal austerity, and why one hears very little about how regressive stimulus through loose monetary policy is relative to fiscal policy.

Just a refresher on that last point because it is relevant. Those best able to take advantage of low interest rates are those with positive net worth, not to mention financial savvy, which is for the most part the wealthy. And it does so without forcing them to invest in any particular way (one of the reasons why it can be of limited use as stimulus – borrowers can just park their money in T-bills, Swiss francs, or some other safe asset, rather than invest in job-creating enterprises). Additionally, it indirectly helps the wealthies by boosting the stock market, and thus those who gain most from increases in stock values (regardless of the underlying employment situation.) Moreover, as Doug Henwood has pointed out, monetary stimulus does the least to disrupt the existing class structure. It increases the ability of private borrowers to spend without actually altering the ability of average workers to earn or increasing their bargaining power with employers. Fiscal policy, on the other hand, especially something like jobs programs, puts a floor under wages, increases demand for labor, and thus changes labor-capital relations. On top of which, it challenges employers’ claims that they should possess exclusive control over investment.

The unholy alliance between monetary expansion and fiscal austerity is more intricate yet. A further response to those who want to present central banks right now as the only sane actors is that their expansionary activity deadens the impact of the insanity. That is to say, even when central bankers argue there should be more fiscal expansion, as Bernanke is reputed to want, their expansionary monetary policy conceals the full damage of the fiscal policy. It gives even greater room for fiscal irrationality. In all, the unholy alliance amounts in practice to a kind of policy combination that serves to redistribute upwards: fewer social services and public benefits for majority, alongside a monetary policy that directly or indirectly benefits the wealthy. And this combination does little to address the underlying sources of the crisis and continued lack of employment/stagnating wages.

Finally, and this is the most difficult part of the unholy alliance to tease out, there is a deep-seated, tacit ideological dimension here. The willingness of central banks to engage in massive pump-priming seems to us to be conditional in certain ways on a certain balance of class forces. The balance is one in which working class demands are weak, expressed not just in more passive unions with lower membership, but in the wider ideological defeat of the idea that public power could be used to meet the basic needs of all and even to socialize investment. Central bankers, once called in to lower the American standard of living by raising interest rates, have been freely keeping interest rates low now that weak labor bargaining power practically eliminates fears about inflation (a reality to which German bankers have yet fully to adjust.) It is harder to imagine an expansionary monetary policy, at least of the magnitude that we have seen, in the midst of a more robust fiscal response by the state to protect the bargaining power and living standards of workers, not to mention in the midst of significant labor militancy. Insofar as the absence of strong political support for expansionary fiscal policy registers the wider political weakness of the Left, the unholy alliance speaks to the ideological hegemony of conservative economic views (despite the hand-wringing of certain Austrians and ‘end-the-Fed’ Randians.) While the credit crunch was supposed to have discredited economic orthodoxy, in fact it seems to have created the conditions for its consolidation. The result: easier money for those who have, less for those who don’t.

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