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

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.

Regulation, Discretion, Democracy

Congress refuses to spend anymore but never fear, the Fed is contemplating a new round of quantitative easing and Obama is extending an (admittedly weak) administrative program to reduce housing debt. In a broad sense, what we are seeing is a familiar feature of crises – real or manufactured: the expansion of discretionary, especially executive, power. After all, who controls the deeply undemocratic Fed? A Fed able to undertake an entirely independent economic policy from actual apparatus of government. And while Obama has been reluctant to use executive power to put the squeeze on banks, improve financial regulation, and prosecute fraud, he too seems able to do a bit of an end-run around the slower, conflict-ridden legislative politics.

But more is at stake here than just a question of the relations between branches of government, or of the relations between elected officials and barely accountable bodies like the Fed. A second issue is the relationship between the daily practice of governing and democratic representation. Call this the representation game and the first one the discretionary power game. The first game tends to boil down to trying to limit and reduce the kinds of unchecked or arbitrary power exercised in the name of managing a crisis. That is an important project in a democracy, but it’s not the only one.

After all, modern states are currently saddled with an enormous administrative apparatus that cover a wide range of issues. The size and complexity of the modern economy, and the speed with which events take place unavoidably lead to the creation of administrative bodies like the SEC, FDIC, Treasury, and so on. To be sure, the specific bodies created, their formal authority, their composition, their mandate, are all a question of politics, not necessity. But it remains the case that governing in any particular area requires some kind of body that engages in the day-to-day activities of ruling, and this is almost never an activity of elected representatives themselves.

Again, representatives could be a lot better about congressional or parliamentary oversight, and about carefully crafting mandates rather than producing vaguely defined agencies with expansive regulatory powers. But to a degree, discretion will be built into the administrative apparatus. It cannot be eliminated.

This changes the democratic game, and shows us why movements like Occupy are important. The mainstream view is that the central democratic task is to elect representatives who will serve the public interest, or at least be responsive to the majority. And that democratic power is exercised by holding these representatives accountable for their actions. The anti-mainstream view, sometimes found in the Occupy movement, is that real democracy rejects representation and majority rule; instead, it is about direct participation and consensus. This debate misses a vital dimension of democratic self-government that goes directly to the management of the economy, and to questions of whose interests are served by the actual exercise of state power.

The missed dimension is how the actual governing apparatus – the regulatory bodies, the administrative agencies, the courts, the consultative groups, and other myriad authorities – uses its power, especially its discretionary power. Will it prosecute systemic fraud, use every measure it can to force banks to modify underwater mortgages, police banking practices, issue advisory and mandatory rules spreading risk fairly? Or will it try to force attorneys-general into weak settlements with banks and shovel fraud under the rug? As we have written before, the nature of a settlement on mortgage fraud is very important not just as a matter of immediate justice, but also of managing risk and future regulation. To a degree these regulatory outcomes depend on calculations about what will eventually happen at the ballot box – and thus on the familiar question of formal accountability. But even those electoral calculations depend on the current ability to mount pressure on the government. Those forms of pressure feed into predictions about what will happen electorally. And that latter power is a matter of social mobilization.

Moreover, the day-to-day contest over governing is also a matter of knowledge and ideas – specifically the knowledge and ideas that are in play, among the chattering classes, out in the public, and within the halls of power. Here again, social protest is part of transforming the kinds of ideas and the pieces of knowledge to which the state must respond. We have already seen the ability of the Occupiers to change national and international conversations. The power that movements like Occupy wield is always more nebulous because it has no formal, legal backing – it is not like a vote. But it is no less important for attempting to influence the ineliminably discretionary power exercised by administrative agencies. Constant social pressure and attention is probably the main way of securing a (more) democratic form of representation by these bodies, who are otherwise so easily influenced by powerful, wealthy interests.

To be sure, there are limits to this democratization of administration. At least from a democratic standpoint, it would be better if the Fed, or whatever lender of last resort there is, were more directly under public control. And there are agencies that it would be better to get rid of or slim down. Indeed, the dizzying array of agencies, and the simultaneous contraction of fiscal stimulus at the local, state and now federal level, alongside the expansion of (deeply regressive) monetary stimulus makes it difficult even to get clear on lines of responsibility and causal effects. But the apparatus of day-to-day self-government, especially when it comes to economic policy, will necessarily be administrative as well as legislative. Oversight, regulation, even just administration of the rule of law, are all exercised mainly by non-elected officials. Shaping the exercise of that power – so easily captured by those better able, and better financed, to operate in the halls of power – is one of the singular tasks of a social movement. Unresponsive representatives are not the only political agents that need whipping into line in a modern republic.