A look behind the housing crisis

Close to a million families lost their homes last year. This year, it will likely be 2 million. There were 25,000 layoffs in the mortgage industry in the first three weeks of August. Building supply and furniture manufacturers have been cutting back. With home construction 25 percent below last year and falling, hundreds of thousands of building trades workers could lose their jobs. The R-word — recession — is back in the media after a brief appearance last summer. This time, all the happy talk from business leaders and administration flaks won’t make it go away.

The trigger for the economic crisis is the collapse of the housing bubble, which has been building for the last six years.

A short and simplified history of the housing bubble includes the following:

• Decent rental housing becomes harder to find, as funds are cut for public housing and for Section 8.

• A propaganda campaign by the real estate industry, echoed by the Bush administration, convinces ever more people that individual home ownership will bring them wealth and security.

• House prices soar as the demand increases. The media quotes real estate industry representatives who say that prices will never stop rising.

• Specialized mortgage companies offer loans to low-income families to buy overpriced houses. These families could never afford regular loans, so the companies offer subprime loans with a low “teaser rate,” which will balloon to above-normal payments after 18 months or two years.

• African American and Latino families are especially targeted for expensive, subprime loans. Half of their recent home mortgages are officially subprime, and it is likely that most of the rest have above-normal rates and fees.

• The mortgage companies know that when the rates go up, low-income families won’t be able to afford the payments. But meanwhile, the executives and brokers pocket fat fees and salaries.

• Big Wall Street banks buy the mortgages from the original lenders. They package them together as “mortgage-backed securities” and sell them to pension funds and other investors, pocketing healthy fees in the process. Rating agencies declare that these securities are safe investments.

• With house prices soaring, developers see big profits and rush to build more houses. By 2005, they are building houses faster than people are buying them.

• Regulatory agencies, including the Federal Reserve Board, turn a blind eye.

• By 2007, there are over 4 million unsold homes on the market, more than double the number in 2001. House prices begin to fall.

• Families that bought houses in 2004, 2005 and 2006 are now seeing their monthly payments soar after their low “teaser rate” ends. Every month, the mortgages of more than 200,000 families’ are reset to a higher rate. Sixteen percent of subprime homeowners are two or more months behind in their payments.

• With homeowners unable to keep up, mortgage lenders are in trouble. At least seven have gone out of business, and 13 more are in bankruptcy.

• Big investment houses, along with other investors, have discovered that their “mortgage-backed securities” might be worthless.

It’s not just a housing crisis

The housing market was not the only place where high rollers were gambling with other people’s money.

Wall Street executives took billions in fees and commissions for organizing corporate buyouts and mergers. The resulting companies are deep in debt, and will try to survive by cutting jobs and wages. Other corporations had easy access to low-cost loans. With heavy loads of debt, some are finding it hard to raise capital for day-to-day operations, and may be forced out of business.

The global economy depends on massive borrowing and lending on a daily basis. Suddenly, it is much harder to borrow money, and the financial crisis has spread to Europe and Asia.

But we are experiencing more than a financial crisis. Karl Marx described the fundamental problem: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”

Applying Marx analysis to the U.S. economy since the recession of 2001, there has been steadily increasing production. Houses been built at a record pace, along with an increase in the production of most goods and services. At the same time, real wages for most workers have stagnated or declined. Manufacturing employment has fallen even while production is increasing. So there is a big imbalance between the amount produced, which is increasing, and the ability of working people to purchase what they need, which hasn’t kept up.

Until recently, consumption has been maintained by several means. Part of the tax cuts went to middle-income workers. Big increases in the military budget provided jobs and paychecks for some workers. But these weren’t enough for consumers to keep up. So they turned to debt. Which brings us back to housing.

Debt bomb

As home prices increased, families were bombarded with ads like “put the equity in your home to work.” Homeowners took out second and third mortgages, using the cash to purchase cars or furniture, or to pay for taxes, college, medical bills or even groceries. As a result, Americans own a smaller portion of their homes (and banks own a larger portion) than at any time in history.

With house prices falling this year, and the collapse of the mortgage lending business, homeowners are unable to keep borrowing. But they still have to make payments on those loans. No wonder debt payments are soaking up a record 14.5 percent of personal disposable income.

For millions of working families, this means they will have no place to go to meet emergency expenses, or even to keep up with basic living costs. For the economy, it means that consumers will cut back even more on purchases. There is evidence this is already happening in weak retail sales. Dean Baker of the Center for Economic and Policy Research estimates that consumption will drop between $415 billion and $950 billion per year from the housing crunch and the related stock market decline.

When consumers reduce spending, businesses sell less, and they lay off workers. And laid-off workers cut back purchases even more.

The slowing economy is already affecting state tax receipts. It is likely that, in the next year, state and local governments will face severe budget shortfalls, as they did in the early part of this decade. Governments will raise taxes, and cut payrolls and services, which will further reduce consumption.

Capitalism’s ‘creative destruction’

When the people are unable to afford to buy what the economy produces, the result in a capitalist economy is a recession. In fact, capitalist economists view recessions as useful. In its Aug. 25 issue, the conservative, pro-capitalist magazine The Economist asks, “Does America need a recession?’’ and answers, “The economic and social costs of recession are painful: unemployment, lower wages and profits, bankruptcy.” But, they continue, some economists argue that the “creative destruction” of recessions allow inefficient firms to be weeded out, helping the economy in the long run. In other words, strong companies gobble up weaker competitors, shutting less profitable plants and throwing their workers and communities on the scrap heap.

The Federal Reserve Bank, along with central banks in Europe and Asia, are responding to the financial crisis by cutting interest rates and making loans available to troubled banks. But there are limits to what the Fed, and the administration can do. Government bodies can’t change the laws of capitalism. But it makes a difference whether the government is on the side of corporations or on the side of the people.

Following the 2001 recession, the Bush administration’s policy was tax cuts for the rich, and a cold shoulder for the unemployed, and for state and local governments. There is no reason to expect anything better now.

What can be done?

When economic conditions worsen, right-wing corporate interests are always ready to sow division and fear. It’s the immigrants’ fault. It’s China’s. Consumers aren’t spending enough. Consumers aren’t saving enough. It’s the government’s fault for wasting your tax dollars on health care for kids. The solution they offer: “Show some responsibility. Tighten your belt. And by the way, we need more tax breaks to give the super-rich an incentive to invest.”

In the Great Depression of the 1930s, the American people rejected those arguments. They rejected racism, and under the slogan “Black and white, unite and fight,” they organized unemployed councils that stopped evictions. They organized unions that raised wages and improved working conditions. They organized struggles against racist discrimination and for equal opportunity policies.

They marched, demonstrated and elected candidates at all levels to enact unemployment insurance and Social Security, regulate and control the utilities and the banks, and put millions to work building roads, bridges and schools. The combination of united, mass organization with political action won immediate gains for the people, and also laid the basis for 50 years of relative prosperity and stability.

It is possible to win government policies that keep people in their homes instead of evicting them; that provide a safety net for those displaced by capitalism’s “creative destruction”; that provide decent education and health care as a human right; that supports workers’ rights and takes effective action against racist discrimination; that makes the rich and the monopoly corporations pay for the mess they have made of the economy; and that regulates essential industries like finance and energy in the interests of the country.

The 2008 elections will be critical, from the state legislatures to Congress to the White House, in defeating the corporate agenda and reversing eight disastrous years of Bush. The politics of the economy — meaning what policies the government pursues or is forced to pursue — is a critical issue for working people of all races, nationalities, ages and sexual orientation, for both women and men. Ending the far-right Republican rule of the White House and strengthening progressive forces in Congress opens up the political landscape for struggle and winning far-reaching, pro-people policies.

A change of system

The capitalist system breeds crisis, and treats working people as disposable scrap. But working people can fight back and win important gains like health care, better opportunities for youth and better retirement security. The working-class organization and unity that are built in the process will make it possible to move toward real popular control over the economy. The time will come when the American people will say this capitalist system needs to be replaced with one that puts cooperation over cut-throat competition, a healthy society over chaos, poverty and insecurity.

Arthur Perlo is a regular contributor to the People’s Weekly World’s “People Before Profits” column. He can be reached at pbp @peoplebeforeprofits.net.