FROM LEVITTOWN TO
MELTDOWN
A MORALITY POWER POINT ON THE ROLE
OF HOUSING IN OUR LIVES, THE HISTORY
OF U.S. HOUSING, THE FINANCIAL CRISIS
OF CAPITALISM…. AND THE POSSIBLE
POLITICS OF SUSTAINABILITY
Jan Breidenbach
MAP Colloquium Presentation
Prescott College
November 9, 2008
MELTDOWN
WHAT ARE:
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•
•
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MORTGAGE-BACKED SECURITIES
COLLATERAL MORTGAGE OBLIGATIONS (COLLATERAL DEBT OBLIGATIONS)
CREDIT DEFAULT SWAPS
HEDGE FUNDS
AND WHAT ARE THEY DOING IN MY HOUSE?
WHAT ROLE DO THEY PLAY IN THE LARGER POLITICAL ECONOMY?
WHAT DO THEY HAVE TO DO WITH A POLITICS OF SUSTAINABILITY?
The dialectic of housing:
capitalist commodity & sustainable
shelter
THE
THREE DIMENSIONS
OF HOUSING
HOUSING IS…
• The physical space where we become who we
are, where our psychological lives take place
• Often the site of our greatest loves, happiness,
hatreds and losses
• The determinant of other opportunities or
barriers in our lives
HOUSING IS…
• Our shelter from nature, our protection
from nature’s elements
• A major factor in our ecological and
carbon footprint – through size of house,
siting, density, materials, etc.
HOUSING IS…
• A commodity that is bought and sold in a
capitalist market place that requires winners
and losers
• Is a market that has failed yet is not
questioned by either dominant or nondominant groups
• Was the trigger for both an accumulation
boom and the present financial crisis
A LITTLE HISTORY TO
SET THE SCENE
• History of privilege for property owners
– John Adams
“Is it not true...that men in general, in every society,
who are wholly destitute of property, are… too
dependent on other men to have a will of their own?
….very few men who have no property, have any
Judgment of their own.”
• Homeowner privilege is embedded in our
national ideology
From the revolutionary war to the
Great Depression
• Owning property was necessary to vote until late
19th century (for men)
• Homesteading was policy to keep returning Civil
War soldiers from creating problems when they
couldn’t find work
• Homeownership at the beginning of 1930s was
40%. Required 50% downpayment with 5 year
terms
BIG DEPRESSION – BIG CHANGES
• Home Owners Loan Corporation (HOLC)
• Federal Housing Administration (FHA)
• Fannie Mae
Got housing construction up and running but
created: “… the illusion of ownership
through the reality of debt”
FANNIE MAE (and then
FREDDIE MAC)
• Set up to expand pool of money available for
home loans
• Bought loans from selected lenders (who lend
according to FM criteria)
• Pooed the loans into Mortgage-Backed
Securities (earlier on were bonds, more
recently were the riskier products)
• Uses income to buy more loans from banks
Results…..
• Housing markets were stabilized
• Housing construction started to rebound at end of
Depression
• Homeownership would become possible for large
numbers of Americans
• Was part of Keynesian approach that used
government spending to jump-start economic
activity and growth (US prepared for and entered
WWII which effectively ended Depression)
WHO NEEDS SUSTAINABLE?
WE’VE GOT SUBURBIA…..
• After WWII, US had:
•
•
•
•
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Land
Intact productive capacity
A finance system for private homeownership
Lots of young people looking for jobs and housing
Also:
• The knowledge that if all these weren’t used
effectively, the nation would retreat back into
depression.
Elements of Suburbia……or a “little
box” of unsustainability
• New, single-family, detached homes built outside
of the city (Levittown)
• Highways to connect them with one another and
cities (National Highway Defense)
• Tax policies to support system:
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•
•
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Mortgage interest deduction now used
Depreciation for new construction but not rehab
Low gas taxes and destruction of trolley cars
US paid for new sewer construction only
Levittown
All held together by:
• The Cold War
• Provided ideological basis for military
production that continued after WWII
• “American Way of Life” ideology
contributed to consumption/increased
production
• Changes
• Loss of cities to suburbs
• Black migration into cities – slums
WINDS OF CHANGE….
1960s:
• Vietnam War (paid for on credit card through deficit
spending)
• Civil Rights Movement and creation of Great Society
• By 1968, Fannie Mae is privatized to take funding off the
federal budget.
• Homeownership expands to 60%
1970s:
• Long growth based on post-war production and cold war
ideology ends
• Stagflation (inflation and high interest rates .. 10% - 14%)
• OPEC Oil Embargo
• Freddie Mac is formed to create “competition” for Fannie
Birth of Neoliberalism… 1978 - 1980
• Paul Volker appointed to Federal Reserve
• Within months changes economic policy from fiscal approach to
monetary control to “fight inflation” no matter what the cost to
employment or government programs (Followed by Greenspan in
1987 who continued same policies)
• Margaret Thatcher is elected Prime Minister in Great
Britain
• Claimed mandate to curb power of trade unions; coins TINA “There is
No Alternative” to global corporate power
• Ronald Reagan is elected President in United States
• Within months breaks large PATCO union, proposes deregulation of
industry, agriculture, resource extraction; “liberates” the powers of
finance
• Also known as “Washington Consensus”
The Big Shift: 1980-1990:
• De-industrialization occurs as production goes overseas
and capital accumulation moves to financial sector.
• Income gap starts to widen even as productivity
increases
• Households maintain standard of living through massive
entry of women into workplace
• Homeownership rate goes flat – stays flat, see beginnings
of larger scale homelessness (bag ladies)
• Ideology of neoliberalism cemented with fall of Soviet
Union – Seen as evidence of TINA
Financial Crisis I
• Deregulation of S & L’s.
– No longer limited to home mortgages, begin wider,
riskier investments, including overseas.
– Banks no longer required to only lend in mortgages
the equivalent of their deposits
– “Disintermediation”
• S&L’s go too far, make risky deals
• Many fail – are bailed out.
• Properties foreclosed go into Resolution Trust
Corporation
TOIL & TROUBLE, BOIL & BUBBLE….
1990 - 2000
• Income gap widens
• Homeownership rate remains flat at 64%
• Homes increase in size (1990 average: 1500
sq.ft., 2000 average: 2100 sq. ft.)
– Levittown exchanged for McMansion
• Dot-com boom & bust
• Asian financial crisis
END THE CENTURY WITH A BANG…
1999: Congress passes Financial Services
Modernization Act which repeals GlassSteagall Act of 1933
2000: Congress passes the Commodities Futures
Modernization Act (added to the spending bill
in 12/00, the last bill before Bush takes office)
and repeals earlier laws outlawing Bucket
Shops (betting).
Financial Services Modernization
Act (repeals Glass-Steagall) 1999
Glass Steagall (was really two acts)
• Established FDIC (insure deposits)
• Separated banks according to type (Commercial banks
vs. investment banks)
• Intended to bring transparency and accountability to
financial sector to prevent a run on the banks like
occurred in 1932-1933
• First merger after repeal is Travelers Insurance and
CitiBank (became CitiGroup).
COMMODITIES FUTURES
MODERNIZATION ACT 2000
• Repeals 1922 legislation that outlawed “Bucket
Shops” (off-site betting establishments that took
bets on prices of commodities – “commodities
bookies”)
• Specifically prevented states from passing any
legislation limiting this type of betting
• Passed as part of last spending bill under Clinton, last
bill to be signed before Bush inaugurated.
Bucket shop
1990s had offered capital accumulation a
recession, dot-com bubble and bust.
now
A perfect match for the new millennium
• Capital looking for safe accumulation home
• Pension funds, local governments, 401(k)
managers – a “Giant Pool of Money”
• Homeownership rates stagnant since 1960
• Widening income gap in 1980s – 1990s made
ownership harder to achieve
• Perfect Match – invest in homeownership!!
INTRODUCING….
THE PLAYERS
•Brokers
•Bankers (mortgage lenders)
•Securitizers
•Investors
•Borrowers
THE BROKERS…
• Unlicensed, not regulated
• Represented the lenders, not the buyers
(different than 30 years ago)
• No investment of their own (sold the loan
usually within days)
• Incentive to sell high because fees based on
size of loan
• DID NOT LEND THEIR OWN MONEY
THE BANKERS…..
• Includes mortgage companies (brokers may or
may not work for them)
• Didn’t hold the loan, pooled it with others and
sold them through to Wall Street
• Important note: Remember deregulation of the
1980s: banks (not mortgage companies) could
only lend as much as they held in deposits. After
deregulation, could lend larger amounts because
they weren’t holding the loans.
• WERE NOT LENDING THEIR OWN MONEY
THE SECURITIZERS
• Operated as the go-betweens for banks and
investors
• Took the bundles to Wall Street as “mortgagebacked securities”
• Got the bundles rated by bond companies
• Were paid fees for bundling and selling
packages
• WERE NOT LENDING THEIR OWN MONEY
THE INVESTORS…..
• Bought the “security” – provided the money
• Got the money from places like pension funds,
local governments, etc.
• That’s all – not so complicated
But wait….
THE BORROWERS….
• Expanding the “ownership” society engendered
new products that allowed formerly unqualified
borrowers to become qualified
• Since everyone was unregulated, incentive to
create new products was driven by loan system,
not borrowers needs
• Borrowers pushed by ideology, desire & need
for wealth accumulation, hedge against social
insecurity
THE VILLAIN….
SUBPRIME
LOANS
ANATOMY OF SUBPRIME LOAN
• Adjustable-rate interest with low introductory rate
that balloons later
• No money down (NINA – No Income, No Assets) –
“Liar’s Loans”
• Serial re-finance loans
• Home equity loans
• Complicated documents, several inches thick
• Everyone involved: brokers, real estate agents,
appraisers, lenders
• Assumption was value would ALWAYS increase
SONS OF SUBPRIME…
• Collateral Debt Obligations (CDOs)
• MBS which have been separated out and repackaged into “tranches” (slices).
• Although the subprime loans are in their own
tranche, the way they are sold, the position of the
investors (who gets paid first), lax oversight – and
the assumption of a default rate based on prime
loan history – allow the subprime CDOs to be
rated high (AAA) for sale to investors.
• Credit Default Swaps
• A type of “insurance” but completely unregulated
• Buyer of swap purchases the “right” to be paid if
the underlying mortgage loans default
• One investor buys swap “insurance”
• Seller re-sells the swap without knowledge of the
first investor.
• By 2006-2007, credit swaps were for all sorts of
loans (credit cards, auto loans, etc)
• Modern version of the “bucket shops” outlawed
in 1922 and re-introduced in 2000.
• Hedge Funds
– Investment vehicle
– Unregulated
– Buy whatever they want – usually risky, “exotic”
securities.
– Became big in the late 1990s
– Got big enough that banks got into the act
– Known for high returns, but this causes them to
take greater risk, increasing exposure to systemic
failure
And then….
• The first ARM interest rate increases on
subprime loans started kicking in (2005) and
people couldn’t pay the increase
• Someone lost their job and couldn’t pay a
mortgage that was too high
• The drip became a flood and created a
negative feedback loop
MARCH – OCTOBER 2008
• Starting with Bear Stearns in March, through the
receivership of Fannie & Freddie in July through the
bankruptcy of Lehman Brothers in September.
• Late September:
• US government proposes $700 billion “bailout”.
• Starts as purchase of “toxic” MBS
• Moves into purchase of stock
• Will likely end up with re-working mortgage loans.
The ecology of housing:
SHELTER
PSYCHOLOGICAL SPACE
COMMODITY
THE FINANCIAL CRISIS STEMS FROM A
POLITICAL ECONOMY THAT
• Allows markets to dominate society instead of
society dominating markets
• Is dependent on growth and accumulation in these
markets
• Commodifies all things including nature, labor and
social goods (in this case--shelter)
• Creates belief systems that support this economy
as natural (“markets are the most efficient way of
allocating goods and services”)
WHAT’S ON TAP…
• Stimulus package
• Tax code
• Health care
• Stop hemorrhage of foreclosures/revamp
financial system
• Deficit spending and national debt
• And…..overarching reality of climate
change
OUR TEACHABLE MOMENT
– Replace the dominance of the “free” market with
the dominance of planned cooperation
– Craft a new language, new frames and ideologies
that both contest the existing order and outline
another one
– Build new ‘pre-figurative’ models that help us
see how a new social order can actually work.
– Don’t give up. It’s going to be a rough and
exciting ride
Contact:
Jan Breidenbach is Adjunct Associate Professor in the School of Policy,
Planning and Development at the University of Southern California. She
can be reached at jbreidenbach@apt-la.net