Housing Busts

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• 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

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MELTDOWN

• WHAT ARE
• 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?
  

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The dialectic of housing capitalist commodity
sustainable shelter
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• THE
• THREE DIMENSIONS
• OF HOUSING

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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
  

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HOUSING IS

• Our shelter from nature, our protection from
  natures elements
  
• A major factor in our ecological and carbon
  footprint through size of house, siting,
  density, materials, etc.
  

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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 non-dominant groups
  
• Was the trigger for both an accumulation boom and
  the present financial crisis

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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
  

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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
  couldnt find work
  
• Homeownership at the beginning of 1930s was 40.
  Required 50 downpayment with 5 year terms
  

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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

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FANNIE MAE (and thenFREDDIE 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

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• 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)

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• WHO NEEDS SUSTAINABLE?
• WEVE GOT SUBURBIA..
• After WWII, US had
• 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 werent used
  effectively, the nation would retreat back into
  depression.

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• Elements of Suburbiaor 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
• 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

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Levittown
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• 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

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• 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 Mae

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• 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

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• 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
  

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Financial Crisis I

• Deregulation of S Ls.
• 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
• SLs go too far, make risky deals
• Many fail are bailed out.
• Properties foreclosed go into Resolution Trust
  Corporation

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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

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• END THE CENTURY WITH A BANG
• 1999 Congress passes Financial Services
  Modernization Act which repeals Glass-Steagall
  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).

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• 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).

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• 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.

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Bucket shop
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• 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!!

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• INTRODUCING.
• THE PLAYERS
• Brokers
• Bankers (mortgage lenders)
• Securitizers
• Investors
• Borrowers

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• 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

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• THE BANKERS..
• Includes mortgage companies (brokers may or may
  not work for them)
  
• Didnt 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 werent holding the loans.
• WERE NOT LENDING THEIR OWN MONEY

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• THE SECURITIZERS
• Operated as the go-betweens for banks and
  investors
  
• Took the bundles to Wall Street as
  mortgage-backed securities
  
• Got the bundles rated by bond companies
• Were paid fees for bundling and selling packages
• WERE NOT LENDING THEIR OWN MONEY

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• 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

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• THE VILLAIN.
• SUBPRIME
• LOANS

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• ANATOMY OF SUBPRIME LOAN
• Adjustable-rate interest with low introductory
  rate that balloons later
  
• No money down (NINA No Income, No Assets)
  Liars 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

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• SONS OF SUBPRIME
• Collateral Debt Obligations (CDOs)
• MBS which have been separated out and re-packaged
  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.

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• 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.

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• 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
  

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• And then.
• The first ARM interest rate increases on subprime
  loans started kicking in (2005) and people
  couldnt pay the increase
  
• Someone lost their job and couldnt pay a
  mortgage that was too high
  
• The drip became a flood and created a negative
  feedback loop

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• 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.

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• The ecology of housing
• SHELTER
• PSYCHOLOGICAL SPACE
• COMMODITY

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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)
  

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WHATS 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

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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.
  
• Dont give up. Its going to be a rough and
  exciting ride
  

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• 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_at_apt-la.net