Tuesday, July 31, 2007
Hence, there has been no shortage of articles about the transformation of home mortgages into collateralized debt obligations, the impact of loan defaults upon the value of these instruments, the destruction of hedge funds that used incomprehensible amounts of leverage (otherwise known as loans to you and me) to purchase them and the chaos that is now erupting in the bond and equity markets as a result.
If you want to read all about it, go to thehousingbubbleblog.com or Calculated Risk. As for the people who purchased homes with all of these strange new mortgage products such as adjustible rate loans, interest only loans, and, my personal favorite, stated income loans (yes, as incredible as it sounds, your guess is correct, banks loaned money to people based solely upon what people said they earned), they are frequently maligned as either greedy or stupid. In other words, they got what they deserved.
At best, they are just another nameless, faceless population of people run through the system to be fleeced by sharp financial operators, while serving as a cautionary example to the rest of us. A classic instance of the creative destruction that perpetually transforms and preserves our capitalist society. But such a superficial analysis barely scratches the surface of some serious questions about the extent to which the lower middle class and middle class workforce of this country can afford to pay for its basic needs of survival.
We all know that health care is increasingly unaffordable to many Americans, and that the coverage that they receive, if they can afford it, is often mediocre. Sicko merely gave cinematic expression to the lived experiences of millions. We are now discovering, as a consequence of the housing bubble, that housing, as measured by home ownership, is also increasingly unaffordable to many people as well. This is true revelation of the proliferation of exotic credit instruments for home purchases in recent years.
People in places like Sacramento, where I live, could no longer afford to purchase homes as they had done for generations, with a payment of 20% of the purchase price and a 30 year fixed mortgage for the remaining 80% of the price of the home. Cities and regions like Sacramento, Las Vegas, Phoenix, the Inland Empire of Southern California and much of Florida, places where people had fled the cost of living on the coasts were now becoming more and more expensive, as speculators and foreign investors juiced demand to new extremes.
So, it became necessary to devise new financial instruments to enable people who actually wanted to live in the homes to purchase them. Lenders looked to the credit card industry as the model, using low introductory interest rates to close deals, letting the buyers sink or swim when these rates expired, replaced by much higher ones, requiring much higher monthly payments. For the lending industry and Wall Street, it was a great party while it lasted, as the loans were securitized and purchased by hedge funds, with lucrative fees pocketed by all.
Of course, they now have their own problems, as you can read on all over the web, but what about the people who are losing their homes? What is going to happen to them? The answer, as well all know, is that it is going to be brutal. Many of them are going to be pushed into the rental market for the rest of their lives, and many are going to have to leave the locations where they currently reside because even the cost of rent is going to be too much for them. So, we are looking at the prospect of two migrations, one from houses to rentals, and the other from expensive parts of the country to less expensive ones. Furthermore, quite a number of communities built for home owners will rapidly become rental ones. Some may even resemble ghost towns, as it becomes impossible to fill all of the homes with residents.
Left academics would say that the socioeconomic life of the US will subtlely display more and more features of sub proletarization, as more and more people in the lower middle class and even the middle class find themselves forced to migrate internally within the country (an economically generated group of internally displaced people?) and live under conditions of financial insecurity. Analogizing them to global migrants is a stretch, demeaning their struggle for survival, and, yet, many Americans face a future of insecurity in all aspects of their lives.
It is easy to blame them as being greedy, stupid and gullible, and no doubt many were, but the fact is, they wanted something that they have been induced to believe that they should be able to achieve as Americans, and they were afraid, during the peak of the speculative mania, that, if they didn't buy a house, that they would never be able to do so. Financial institutions ruthlessly exploited this combination of fear, greed and lack of knowledge to destroy their financial futures, just as mutual funds and brokerage houses did during the stock market bubble of the turn of the century.
At the heart of it all remains the reality that the standard of living for many Americans has declined since the last 1960s. It has been artificially preserved, temporarily, by the creation and marketing of exotic forms of credit, such as the infamous home equity loan, that enabled them to live in a manner consistent with societal expectations. For example, the Sacramento Bee recently reported that the length of the average car loan is now almost 6 years, and that car sales have fallen in the last two years because of, yes, the bursting of the housing bubble, and the lack of any trade in value for vehicles purchased with loans over such a long period of time.
In other words, consumption at all levels has been subsidized by access to readily available credit. This is the portentious social change encapulated within the seemingly bland term that is now ubiquitous, the credit crunch. Going forward, money must be lent according to the remorseless calculations of risk that were suspended during the stock market and housing bubbles. As a society, we will be forced out of the universe of liberalized access to credit into an alternative one with pay as your go features, and it will be an agonizing exodus for many.
Socially, it is impossible to know how people will respond to it, just as it is equally difficult to predict how people will respond to the Iraq catastrophe, the flip side of the bubble coin. It is likely, however, that whatever transpires will be turbulent. It is not beyond the realm of possibility that we are experiencing the end of neoliberal economics, a transformation of the American economy that will rival the industrialization of the 19th Century and the deindustrialization of the late 20th Century in terms of importance.