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.

Debt, Rights and Social Goods

We have been living in a society where debts, rather than rights, have been the major means for accessing basic social goods. There is now, to a degree, some resistance to this social model. Debt burdens have been a major theme of the Occupations; various state Attorneys-General have grown spines and started investigating foreclosure fraud; and Yves Smith posted a class-action filing by shareholders in Lender Processing Services, one of the worst. When coupled with the work of anti-foreclosure organizations, this amounts to a growing awareness of the problems with debt-financed access to basic social goods like housing and education. And it may lead to alternative ways of thinking about how we win access to these goods.

After all, while the previous decade has been represented as a debt-financed spending binge, when consumers lived well-beyond their means, this turns a complex story into a morality play. A major part of the credit binge was about how people get access to housing and education. Sub-prime mortgages (especially with the decline of affordable housing) were the only way for many to gain access to a home. Student loans were the only for many to gain access to higher education, and thus participate as equals in the radically unequal distribution of opportunity in theUnited States. Mike Konczal posted the following graph at Rortybomb showing the dramatic rise of student debt. In a decade, student loans have gone from a third the number of home loans to nearly equal.

If there is a reasonable expectation that debtors can meet their interest payments then in theory debt is not a particularly bad way to finance access to certain goods. It is on the individual borrower to make a judgement about reasonable debt burdens to take on.

There are, however, two problems with this. First, there might be very good social reasons to not want to yoke access to certain social goods to debt. Education is a prime example. Taking on debt means taking on a kind of discipline. One must make all future calculations about, say, educational and career choices, with the need to meet future interest payments in mind. In conscious and unconscious ways, this narrows horizons and produces a more instrumental relationship to education. We saw many of our college classmates make more conservative professional choices (corporate law, consulting, finance, medical specialist) than they might otherwise have made (public service, teaching, science, labor and public interest law) in order to ensure their ability to pay back loans.

Many have talked about how the growth of finance sucked the math and physics geniuses, who might have contributed something lasting to society, into hedge funds and investment banks. But the alteration of professional choices was much wider than that. The number crunchers at the top were, one suspects, simply lured by lucrative pay. The much more widespread, and difficult to measure, shift in career choices due to the discipline of debt burdens is probably the more important, and still ongoing, effect. If, on the other hand, access to higher education were on the other order of something like a right – a publicly financed good, provided at little or no cost, on the grounds of real equality of opportunity – then one can imagine a much different set of results. While conservatives like to talk about ‘freedom,’ this is a place where the Left ought to have the upper hand in connecting economic practices to real freedoms. Providing necessary social goods, especially education, as a right rather than through debt-financing not only reduces the disciplinary effects of the latter, it also is a way of publicly recognizing and democratically defending the real freedoms of all citizens. To be clear, this is not a moralistic criticism of debt as evil or irresponsible. It is that there might be very good reasons why society would not want to impose certain kinds of discipline on (most of) its citizens, not just because there is good reason to want them to have real equality of opportunity, but also because, simply from a social point of view, its members talents might be much more productively used in some other area than those that promise the most immediate monetary returns.

A second reason why providing social goods like housing and education through debt is a bad idea is that practice does not resemble theory. Again, the theory is that so long as each individual makes a reasonable calculation about ability to meet debt payments, there is nothing wrong with financing access to basic social goods through credit. Putting systematic fraud to one side (but remembering it is unlikely that credit can sink that far into housing and educational markets without it), there is a deep historical reason for thinking that practice was the opposite of theory. The rise of debt-financed household consumption generally was the product of stagnating wages. Consider, for instance, the rise in consumer debt-payments relative to savings.

And compare that with the fate of median real earnings during that same period:

Debt-financed consumption, was, in other words, a response to the declining ability of most households to afford consumption levels, not an increasing ability to or trust in future ability to finance debt-payments.

The entire social model, then, of offering homes, education, cars not to mention ‘non-necessities’ was built on a lie. The separation of consumption (financed by future promises to pay) from production (based on limiting present ability to earn) was a mirage. In a different kind of society, it is conceivable that one might separate a worker’s contribution in terms of effort from the amount of consuming he or she might do. But not in this one. The problem is, in this one, the underlying right to maintain a certain standard of living, or more minimally, to maintain access to certain basic social goods like housing and education, was just that: implicit. Every so often, of course, it was made somewhat public, for instance when Clinton or Bush would say something about providing housing to the poor and minorities who could not otherwise afford it (mainly by changing market incentives, and promoting sub-prime borrowing, as it turned out). But this promise was always implicit, and had to stay that way, because it was mediated through the credit system. It was never a public claim each individual had against society, in virtue of his or her needs and freedoms. Instead, access to these social goods was a matter of a complex series of private, individualized claims against other private persons and institutions like banks and employers. That is the difference between debt and right, and it is clear that the debt-based social model has failed.

To be clear, this is not some moralistic rejection of debt, or a claim that society needs to learn to live within its means. There are some situations where debt-financing is a perfectly good option – the calls for more austerity at present, for instance, is ideological claptrap. Moreover, any economy always has to take a bet on the future if it is going to innovate, and take the risk that innovations will fail. But there are certain kinds of goods that are better provided as a matter of right, both for the sake of the freedom of the persons who need those goods, and as a matter of fairness in how they are provided.