9-19-07, 9:35 am
Editor's Note: Art Perlo chairs the economics commission of the Communist Party USA.
PA: Could you briefly describe some of the basic causes of the current housing bubble crisis? AP: There are two basic, interrelated causes: sub-prime mortgages and the unprecedented bubble in housing prices. The sub-prime mortgages are what are getting all the headlines now, although, while people were being victimized by them, you didn’t read much about them. This was a great invention by the financial community, which allowed people to buy houses at prices they couldn’t afford. They did this by setting low introductory monthly payments, and then after a period of time, usually about 2 years, the payments would increase. So somebody might buy a house where the initial monthly payments were $1,200 dollars a month, which they could barely afford, and then after 2 years, the payments would reset overnight to $2,000 a month. There are also all kinds of hidden fees and other problems with these mortgages.
You might ask how a lender could possibly make money by selling mortgages to people who couldn’t afford to pay them back. The answer is that the lender would sell off these mortgages to a bigger lender, and the bigger lender would package them into what they called “mortgage-backed securities,” and sell them to investors and pension funds – anybody who was looking to make what they thought was a secure investment. At every step along the way, from the original mortgage broker and the realtor, to the next higher level bank, to the investment houses, corporate executives raked in millions of dollars in salaries, fees and bonuses. So you might say that they didn’t really care if the whole bubble popped eventually, because they were getting rich, and they were unloading the risk onto someone else.
The other cause of the crisis, which is closely connected, was the bubble in housing prices. People not only got stuck with home mortgages they couldn’t afford, but they were for amounts far more than what the house was realistically worth. Generally, for the past 100 years housing prices nationally have pretty much kept up with inflation. In the last 10 years, house prices have risen 70% faster than inflation, which has created $8 trillion in surplus wealth on paper. What that means is that people paid far more for houses than they were worth. So eventually, over the last year, this hit a wall. All these sub-prime mortgages were resetting and people could not afford to pay them. And as houses were being foreclosed, housing prices had risen so high that people could not afford them. The builders and developers, who had been cashing in on the high housing prices, built like there was no tomorrow, until the number of unsold houses increased from 2 million in 2001 to over 4 million unsold houses today. There got to be so many unsold houses on the market that they just couldn’t keep the prices up. Suddenly people were stuck owing huge amounts of mortgages on their houses. They might owe $300,000 on a house and if they tried to sell it – if they were able to sell it at all – they could only get maybe $200,000 or $150,000 for it. So now they owe more on the house than the house is worth.
PA: You’re saying that the basic elements of this crisis have been going on for at least a decade?
AP: Some of it has been going on for a decade, including various forms of sub-prime and predatory loans and the beginning of the house price inflation, but it really took off after 2001, when there was a huge explosion in the sub-prime lending market and when the inflation in housing prices really took off. So it’s mainly a phenomenon of the last 6 years. It was partly fueled by [the fact that], after the high-tech stock market burst in 2000, investors from around the world, who had money they wanted to make profits from, were looking for someplace else to invest their money, and Wall Street came along and said, “Have we got the deal for you! You can invest in mortgage-backed securities and get rich safely.”
PA: Who are the people that have been most negatively affected by the crisis?
AP: The people who directly are affected, first of all, are at least 2 million families who have lost or will lose their homes, and there could easily be 3 or 4 million before this is over. Then there are the millions more who are working 2 or 3 jobs and sacrificing their healthcare, their kids’ education, even their food, in an effort to hold on to their homes. There are also at least 100,000 workers who have lost jobs in construction, building supplies, and real estate and mortgage finance, and the job cuts are only beginning to roll in. There will probably be millions of jobs lost. Some state and local governments are already facing budget shortfalls because of lower than expected tax revenues. There is also a broader economic downside, but that’s a brief summary of those most directly affected.
Tthis isn’t only a crisis for homeowners but also for tenants. A lot of the houses that were bought were 2 or 3-family rental units in smaller city neighborhoods. When those units are foreclosed, or even when the owner runs into difficulty making payments, the tenants are going to be affected, first of all with bad service, but eventually when the property is foreclosed on, the tenants are likely to be evicted and lose their home as well. In addition to which, with people no longer easily able to buy houses, and with people being thrown out of their houses, it is creating more competition for rental units, and rents are likely to go up as a result. So it affects renters. We have the problem that because there are too many unsold houses, because they built too much housing, there is now going to be a shortage of housing, particularly for renters.
People at every income level have been affected, in some states more than others. California, Nevada, Florida, Ohio, Michigan, and Indiana are amongst the hardest-hit states. Proportionally, African American and Latino families are the hardest hit. There has been a surge in home ownership among African Americans and Latinos, and they got stuck two ways. First, they paid inflated prices for their homes, and secondly they got saddled with sub-prime mortgages at terrible terms. Studies show that even among families with comparable incomes and credit histories, African Americans and Latinos have been charged higher rates for their mortgages. It looks to me like the overwhelming majority of African American home buyers in recent years have been sold mortgages with above-normal fees and payment terms.
PA: How would you evaluate the timing of Bush's response to the crisis and its content?
AP: My impression, although I have not studied his proposal closely, is that he proposes to make 100,000 or 200,000 homeowners eligible to apply for federally-backed mortgages. This means he is offering to possibly provide some relief to only 1/10 of the homeowners who are affected by this crisis. And the bulk of relief will go to bailing out the lenders who made the bad loans in the first place. The investors will get the full value of the mortgage repaid to them, even though on the market the mortgage is not worth nearly the full amount. In return, Bush is sticking the government with the risk, because the mortgage is going to be bought out by a government-backed agency, so that if the homeowner still can’t pay, taxpayers will have to pick up the tab. It’s a typical Bush program that will “trickle down” and help a few people a little bit to help a bunch of high rollers, that is, the investors who hold the mortgages. But mainly I suspect it’s a matter of PR and showing how concerned he is.
PA: Why didn’t he jump into this sooner? If this could be seen coming along, what was holding him back?
AP: Well, not to let Bush off the hook, but he was hardly the only one who was a little bit late. There have been a few economists who for several years have been warning of this impending crisis, but the majority of professional economists, and certainly the economic reporters in the news media, have been cheerleaders for the housing bubble and have been implying that it would go on forever. Now, of course, it’s irresponsible for either the president, his economic advisers, and his chairman of the Federal Reserve Board, to act as cheerleaders for something which any rational economist could see was headed for disaster. So he certainly shouldn’t be let off the hook, and I imagine he jumped in when he did because suddenly the crisis in foreclosures and the consequent economic slowdown were front-page news and he couldn’t avoid it any longer.
PA: What are some immediate solutions to help people avoid losing their homes and to face the impending economic crisis?
AP: I’d like to talk about this on two levels, both in terms of national policy and on the local level. Nationally, I think we have to recognize that there are millions of homes that were overpriced and that homeowners owe far more than the homes are worth, far more than they can pay back. Literally trillions of dollars in wealth, wealth that has now proved to be imaginary, will have to be written off. This needs to take place in a planned, organized way, and at the expense of the lenders and financial institutions, not the homeowners. That means that mortgages should be marked down to a realistic value the homeowner can afford to pay. For example, if a family has an income of $50,000 a year, they can realistically afford a mortgage of about $180,000, with monthly payments of $1,100. If a mortgage company lent them $350,000 to buy an overpriced home, they are now trying to pay over $2,200 a month. They can’t afford it. It’s not sustainable. The mortgage banker should never have made the loan, so the banker should be the one to live with the consequences. That loan should now be marked down, so that the family owes $180,000 in affordable monthly payments. That’s my solution. There are other useful solutions that don’t go as far but are in the same direction, particularly those proposed by Paul Krugman in the New York Times a couple of weeks ago and Dean Baker of the Center for Economic Policy Research.
In any case, what do we need to do while we are waiting for Congress to pass this legislation? I think it is important to organize at the local, community level. This is already being done in some communities around the country, both by community organizations and local governments. The first step is to reach out and find those families who are in danger of losing their homes. There should be public hearings. It needs to be acknowledged that this is a community problem, that these are not just individual disasters that each family has to meet in isolation. It is possible to negotiate with lenders to improve payment terms, but this is most effective if it is done as early as possible and with the backing of an organized group. It should be made clear to the lenders that if they try to foreclose on a property, they will face as many delays and legal obstacles as the community can impose on them. That gives them the incentive to work out a deal where they get something from the homeowner instead of nothing. There is no single formula that is going to work in every community and for everyone, but if people organize and fight back, more homes will be saved, more communities will be saved, and there will be more pressure for a national solution to help families, not the banks.
In terms of the larger economic picture, the housing crisis appears to be turning into a trigger for a more general financial crisis and probably a recession, with attendant job losses and government budget crises. It could well be deeper and more stubborn than the 2001 recession. It is hard to sum up a program to deal with this in a few words, but we really need, at all levels, state, local and national, to have elected officials who will fight for the people, to have an Administration and a Congress with completely different priorities from the Bush administration.
In 2001, when there was a recession, this administration – the Bush administration and the Republican Congress – had the meanest, stingiest, most punitive response in memory. They grudgingly extended unemployment insurance for 3 months, but after a short time they refused to renew even that. There were calls for measures to extend health insurance to people who lost their jobs and to broaden eligibility for Medicaid. The administration stubbornly resisted. The administration resisted efforts to raise the minimum wage. Its only response was more tax cuts for the rich and a huge military buildup for the war in Iraq. This is their approach, and we sorely need a Congress and a president whose approach is going to be that the victims of an economic crisis did not bring it on themselves. At a minimum, we need a decent safety net, with unemployment insurance that covers more than 1/3 of the unemployed, which is about the percentage that are covered now, and which provides enough for families to get by. We need a program so that people who lose their jobs don’t lose their health benefits, but we really need comprehensive national healthcare for everyone.
PA: How do you relate this picture of crisis you present to the system of capitalism itself? How do you envision a socialist society would provide alternatives?
AP: The housing crisis and the general economic situation in the country is almost a classic case of what Marx described as a crisis of overproduction. Marx said, “The ultimate reason for all real crises remains the poverty and restricted consumption of the masses, as opposed to the drive of capitalist production to develop productive forces as though only the absolute consuming power of society constituted their limit.” This means that, in their drive for profits, capitalists expand production almost without limits. That’s with their right hand. But with their left hand and also in their drive for profits, they do everything they can to keep down the wages and the consuming power of the worker. So they produce more and more, but workers can’t buy what they produce. An economic crisis has been held off since 2001 by filling in the gap with debt. Working families have gotten deeper and deeper in debt, and now that the housing crisis has hit, people can no longer borrow any more money against the value of their homes. Not only do we have overproduction in housing – I talked about the 4 million unsold houses that people are unable to afford – but in the economy as a whole an estimated $400 to $900 billion dollars a year of purchasing power stands to be lost by consumers, just on the basis that they can no longer borrow against their homes. And so there is a real danger of the economy slipping into a steep and possibly prolonged recession, because people can’t afford to buy what they need, even though the economy is perfectly capable of producing what they need. Of course, in the limited area of housing, we are going to see more and more people who can’t afford a place to live, who are either homeless or doubled-up with friends and relatives, tripled up, whatever, and at the same time we are going to have 4 million houses sitting empty around the country, many of which will be boarded up and eventually destroyed because there are too many houses. That’s the fundamental contradiction in capitalism.
If I may wax a little philosophical, something directly related to all this, particularly to the housing bubble, is what I call the belief in the Harry Potter School of Finance. There is a pervasive myth that the “Wizards of Wall Street” create wealth through the magic of the market. Thus you have housing developers and speculators thinking they can just mint money indefinitely. The head of the Association of Realtors actually published a book in 2005 explaining how the housing boom was going to go on for ever. These Wall Street wizards repackaged and sold THEIR bonds, which they called mortgage-backed securities, and these bonds were supposed to make everyone rich. But, in a reality-based world, you don’t have to understand the intricacies of Wall Street securities to know that wealth comes from work, not from speculation. This huge wealth that goes into these speculative activities takes away from meeting the real needs of the people. In fact, this represents millions of workers who, instead of doing jobs that could benefit everyone, from rebuilding the infrastructure to teaching school, to providing healthcare, to building affordable housing, end up instead employed as mortgage brokers and energy traders, working for firms like Enron and on Wall Street.
But so much for philosophy. Let me try to answer your question about socialism. I don’t have a roadmap for how socialism should work. But socialism is a rational system where the economy is owned and run by working people for their own benefit. The goal is to meet the needs of the people, not first to make profits. How does that apply to housing? If we look at the housing question broadly, it is not only a question of how many houses are built and what hey cost, it’s also a question of where they are built and under what conditions. It ties in with all the environmental issues. For instance, in my state of Connecticut, there has been no population increase in the past 20 years, but there has been a huge decrease in open space and forested lands because of urban sprawl. Houses are built not in the places where they are most socially useful, but where the most profit is expected to be made from them. The result is that cities, inner suburbs, and some rural towns are allowed to run down and decay, while housing is built all over the countryside, and the housing that is built is often energy inefficient and has a built-in dependency on automobile traffic to do anything. People who buy houses scattered all over the suburbs have no choice but to get in their car even if they need a quart of milk, much less to go to work. A socialist society would look at housing holistically. One, it could avoid bubbles. It would be able to look at the demographics and say, over the next 20 years we are going to need this many new units, and we are going to need to refurbish this many apartments. So you’d build housing at a steady rate and employ a steady number of workers, and you would not have huge booms and busts, which disrupt the lives of millions of people. On the other side, you would you say, okay this is where the population is. This is where economic development is planned. This is how we can integrate the need for more housing with environmental concerns and with energy efficiency. Therefore, we’re going to build houses by redeveloping existing areas near transportation hubs or in new areas along planned transportation lines, so that people don’t have to rely on cars, people can move around and get to work, so that we preserve open space near urban areas.
Socialism, as a system, does not always create the right answers, but it creates the possibilities for the right answers, because the people, acting through their elective bodies and their mass organizations, can plan and determine what they need. In capitalism, regardless of what the people want, the foundation of capitalist freedom is that the developer, the banker, the person with money, having the right to build almost wherever, whenever, and whatever he or she pleases, whether it is socially useful or not.
| | |
