Maria N Ivanova. Capital & Class. Volume 35, Issue 3. October 2011.
Ever since the 1930s, housing has represented an area of paramount social and economic importance in the USA. Home-ownership was central to the particular model of capitalism forged in the postwar period on the prewar Fordist foundation that acquired hegemonic status through the New Deal (see Florida and Feldman, 1988). An essential component of the new social order became the strategy of coping with profitability crises through the progressive commodification of necessities of life, with housing being the generalized and overarching case. But the commodification of housing not only softened the immediate pains of accumulation by maintaining the vitality of construction, real estate, production of consumer durables, and a host of banking, financial, and legal services; the spatial reorganization of built environment and the fostering of corresponding work-life strategies have also been instrumental in the shaping of a particular form of society and in supporting its reproduction.
The 2007-? housing crash represented the first serious challenge to the hegemonic homeownership project that emerged in the course of the transition from ‘Americanism’—the ‘economic-corporate’ stage characterized by disjunction between economic and social reality—into ‘Fordism’—a large-scale attempt at creating a planned economy, a corresponding planned society, and a ‘new man’ (Gramsci, 1971). Postwar US hegemony was consolidated as a broad-based class alliance of the owners of capital, the managerial and professional cadres—’the organization men’ (Whyte, 1956)—and the unionized workers in the Fordist industries, grafted onto the appeal of an asset-owning democracy, wherein the suburban, mass-produced, single-family house emerged as the main asset within reach of the aspiring middle class.
This paper examines the historical evolution of housing in the context of the wider transformation of US capitalism, with a particular emphasis on the significance and impact of homeownership as an ideology and social practice on the reproduction of hegemony in the USA. It further highlights the role of the US state in the fostering of the material and social foundations of homeownership. In addition to providing a proper legislative framework, institutional support, and an array of mortgage guarantees, the state has been heavily involved in the purposeful crafting and propagating of the allure of homeownership, hailed as the key ingredient of the American dream. The housing policies of the US state thus epitomize dialectical materialism in its purest form—they have been serving capital while keeping labour dreaming by selling ideas and commodities at the same time.
Further, the paper challenges widely held views that identify public policy errors and government regulatory failures as primary causes of the ongoing housing collapse. Its purpose is to show how the subprime solution that triggered the housing crisis organically evolved out of the growth imperative to keep harnessing the economic and social benefits of homeownership. Far from being a sole enterprise of the state, narrowly defined as the administrative and bureaucratic apparatus of the government, this project arose as a concerted effort of the American ‘integral state’—a joint endeavour of government and business, of ‘state and market’, of political and civil society. The failure of the subprime solution signals the failure of the profit-seeking system of privatized housing provision to overcome the limits of production based on capital.
Origins of American Hegemony: Americanism, Fordism and Scientific Management
Hegemony as a form of class dominance
Hegemony is a form of class dominance, grounded in highly specific national and historical contexts: no two hegemonies are alike. The idiosyncrasy of the American case derives from the peculiar way in which capital, methodically and organically, has penetrated in time and space every aspect of human existence—social and individual, public and private—and moulded with it, thereby transforming it to serve its reproduction. This section draws from the work of Antonio Gramsci to examine the foundations of Fordism—the hegemonic project that created an American version of planned economy and society. It further employs the Gramscian concept of hegemony to explain the entrenchment and subsequent resilience of Fordist capitalism.
Gramsci’s insights are valuable for the present analysis in a way that is fundamentally at odds with ‘idealistic’ interpretations of his writings, whose thrust is captured by Hughes’s (1977: 104) contention that,
In Gramsci’s hands the [Marxist] doctrine returned to its idealist beginnings. It was in the consciousness of intellectuals alone, he recognized, that the great social ideas had their origin. They did not spring spontaneously from material conditions and economic relationships. They had an irreducible autonomy of their own.
In a similar vein, some students of Gramsci have tended to become preoccupied with putative ‘constructivist’ aspects of his writings: ‘Gramsci’s approach has many affinities with the hermeneutic tradition in sociology, and particularly with constructivist sociology. He places great emphasis on the ability of groups to develop hegemony through a process of social construction’ (Kemeny, 1992: 94).
The view taken here is that such interpretations are problematic for at least two reasons. First, while ideas, culture, ideology and social construction play an important role in Gramsci’s theory, this role is instrumental and not autonomous: class and not culture is the defining feature of hegemony. As noted by Ghosh (2001: 11), ‘the cultural and “intellectual” dimension of hegemony [is] an epiphenomenon of class [… and] the intellectual [is] no more independent of the ultimate logic of class evolution than the politician.’ Second, idealistic and constructivist readings of Gramsci are often peculiarly ideological in nature—and thus, arguably, products of the same dialectic they strive to explain—in that they overemphasize the consensual and noncoercive character of hegemony, thereby making its author appear more ‘democratic’ and more palatable to the mainstream. Such interpretations obscure the fact that the so-called consent, far from being the spontaneous outcome of ‘free choice’, is actually manufactured through complex mechanisms, linkages and processes. Hence, every serious study of hegemony should by necessity include an inquiry into ‘how the ideological structure of a ruling class is actually organized: that is, the material organization meant to preserve, defend, and develop the theoretical or ideological “front”‘ (Gramsci, 1996: 52). Lack of awareness that consent is manufactured—since relatively few are privy to the inner workings of the hegemonic machinery or possess the intellectual capacity to uncover the truth—nurtures the belief that consent arises ‘freely’ and spontaneously (Buttigieg, 1995: 6).
Hegemony is a social order wherein the economic dominance of a class is reproduced as political and cultural leadership on a multitude of levels ranging from the public sphere to the most intimate domains of private life. In order to achieve hegemonic status, a social class must be able to articulate its own particular interest in universal categories that have an integrative effect on society at large; that is, hegemony is achieved and maintained through the construction of a broad-based class alliance. Hegemony is indeed founded on consent, but one of peculiar character: the dominant social class establishes itself as such not by outright repression but by the radical reorganization of work and life that enables it to acquire control over the total human environment, monopolizing it both spatially and intellectually. ‘There are no alternatives’ becomes a palpable fact of life. The crafting and propagating of universal ‘values’ and ‘ideas’, which assume the status of ‘popular religion’, constitutes merely the icing on the cake. For an organic hegemony can never be achieved solely by ideological manipulation; it is always grounded in social relations, in the economic structure of society: in the ‘civil society’. And Gramsci was quite particular in pointing out that American hegemony was ‘born in the factory’, that is, grounded on the structure and, at least in these early stages, relatively little superstructural work was needed to cement it—in the ‘rationalized’ society ‘the “structure” dominates the superstructures more immediately and […] the latter are also “rationalized” (simplified and reduced in number)’ (Gramsci, 1971: 285-6).
In light of the above, there is nothing ‘idealistic’ about Gramsci’s treatment of ideas—these are the mental structures and images through which the dominant hegemonic project is absorbed and reproduced by society: ‘values’ legitimate the production of value, ‘ideas’ sell commodities, and ‘”passions” are, precisely, economic facts’ (Gramsci, 1996: 186). Gramsci’s ideas are a social, material force in that they derive from material conditions. For while ideas exist in the mind, they do not spring from it, but originate out of spatio-temporal activity thus constituting a ‘real abstraction’ (Sohn-Rethel, 1978: 38). And Gramsci was adamantly opposed to any attempt at destroying the dialectical unity of the philosophy of praxis by splitting it into ‘philosophical materialism on the one hand, while on the other hand, modern idealist high culture has tried to incorporate that part of the philosophy of praxis which was needed in order for it to find a new elixir’ (Gramsci, 1971: 396). His concept of ‘dialectical historicism’ encapsulates the attempt at grasping the social reality in its totality and complexity as a union of material forces and ideas.
But in addition to not being an ‘idealist’ or a ‘democrat’ in the contemporary common sense—or in any sense at all if we follow Ghosh (2001)—Gramsci was not even a ‘liberal’, for he plainly rejected the fundamental liberal myth of the separation of political and civil society (or of ‘states and markets’ in mainstream parlance), a separation that he saw as ‘purely methodological and not organic; in concrete historical life, political society and civil society are a single entity’ (Gramsci, 1996: 182). The state is the organic fusion of political and civil society, with the former being an outgrowth of the latter, of the ‘integral State’. The multilayered, organic linkages between political and civil society not only enable a certain class to establish its hegemony over the rest of society, they also allow for the continuous reproduction of this hegemony by perpetuating the subalternity of other classes (Buttigieg, 1995: 3).
Forging hegemony through scientific management
The term ‘Americanism’ carries at least three different meanings in the Prison Notebooks. In the first usage, Americanism refers to the American way of life as a ‘philosophy which is not expressed in verbal formulations, but is affirmed in action’ (Gramsci, 1971: 307). Second, the notion relates to the American form of culture that, in Gramsci’s (1971: 318) view, far from being a new form of civilization, represented ‘an organic extension and an intensification of European civilization, which has simply acquired a new coating in the American climate’. Finally, and most importantly for the present analysis, Gramsci uses the term Americanism to refer to the pre-hegemonic, pre-Fordist period of American society:
the essence of ‘Americanism’ [is that] America has not yet emerged from the economic-corporate phase which Europe passed through in the Middle Ages—in other words, has not yet created a conception of the world or a group of great intellectuals to lead the people within the ambit of civil society. (Gramsci, 1971: 272)
A society in the ‘economic-corporate phase’ is one in which a social group dominates the others not on the basis of a general ‘agreement’ as to how this society should be organized, but by direct economic dominance which is not rationalized in universalist terms; this is a society in which no social group has (yet) managed to achieve hegemony. This is a society in crisis, and crises, as Gramsci (1971: 270) reminds us, arise out of the rift between ‘spiritual’ and ‘temporal’, that is, between political (or ethico-political in the sense of Benedetto Croce) and economic-corporate. This situation could be resolved only when the economically leading social group is ‘able to present itself as an integral “State”, possessing all the intellectual and moral forces it needed to organize a complete and perfect society’ (Gramsci, 1971: 271).
The crisis of Americanism in the second half of the 19th century originated in the economic structure of US society, as a range of capital-intensive industries—from steel to synthetic chemistry—were confronted, in a particularly forceful way, with capitalism’s enduring nemesis: the rising organic composition of capital and the resultant decline in the rate of profit. The problem announced itself as a rise in the overhead costs—the growing share of fixed costs in the total cost structure meant that any reduction in output would lead to a dramatic increase in unit costs. As a result, production volumes became increasingly difficult to reconcile with the textbook laws of supply and demand—lowering supply now led not to lower, but to higher prices—and encouraged a massive effort at obtaining control of market movements by the biggest industrial players. These tendencies underlay the birth of monopoly capitalism. In the case of the USA, still a debtor country, but already an emerging industrial giant with the world’s highest wage level, coping with the profitability crisis at that juncture necessitated ‘a substantial increase in the rate of exploitation of the labour employed in the industries at home’ (Sohn-Rethel, 1978: 146). Thus, it seemed that monopoly capitalism was confronted with the difficult dilemma between extracting more surplus value and keeping wages high in order to maintain demand. What was needed in this situation was a new ‘conception of the world’ put forward by the great organic intellectuals of monopoly capitalism, such as the industrialist Henry Ford, the department store owner Edward Filene, and, most importantly, the father of scientific management, Frederick Winslow Taylor.
Gramsci (1996: 185), very much like Lukács (1966), saw the development of society, including changes in the forces and instruments of production, as conditioned by changes in the social relations of production. In this context, focusing on the labour process, on the dramatic reengineering of work through ‘the schism made by Taylor between the mind and the body of the industrial workman [who] … handed over his mind to a new institution which has come into existence—the modern management in charge of the economy of time peculiar to monopoly capitalism’ (Sohn-Rethel, 1978: 157), would be the right point of departure for a study of Fordist hegemony. Scientific management and the whole movement for organization of production were an attempt to counter the tyranny of overhead costs by speeding up the turnover of capital, which, in turn, necessitated the establishment of total control over labour. The separation of head and hand became the precondition for breaking the monopoly of skills that dislodged the supremacy of the craftsmen over the work process. The concept of control introduced by Taylor was innovative in that it asserted as an ‘absolute necessity for adequate management the dictation to the worker of the precise manner in which work is to be performed’ (Braverman, 1974: 62). Thus, we arrive at the twin underpinnings of hegemonic consent: the labourer was mentally incapacitated and reduced to the condition of undifferentiated labour power, easily adaptable to perform a range of simple tasks, but he was also rewarded with a high wage, shorter work hours, and the participation in a profit-sharing plan. The re-engineering of work resonated with profound changes in the fabric of the wider social formation.
[T]he mechanical disintegration of the process of production into its components also destroys those bonds that had bound individuals to a community in the days when production was still ‘organic’. In this respect, too, mechanization makes of them isolated abstract atoms whose work no longer brings them together directly and organically; it becomes mediated to an increasing extent exclusively by the abstract laws of the mechanism which imprisons them. (Lukács, 1971: 90)
The purported goal of the fragmentation of the labour process was to increase efficiency. But the ultimate goal was to establish over the totality of social relations a mode of control resembling the one that Taylor pioneered at the level of the enterprise. The factory system became the model and the expression of social relations under the emerging Fordist hegemony as it was subsumed into the ‘”organisational” upheaval of the economic machine’. As Gramsci (1971: 292) remarked, ‘the corporative trend did not originate from the need for changes in the technical conditions of industry, or even from that of a new economic policy, but rather from the need for economic policing, a need which was aggravated by the 1929 crisis’.
Housing and Fordist Hegemony
Home-ownership as primer for mass consumption
The capitalist mode of production is characterized by a tendency to uneven development, generated by the contradiction between the capitalists’ drive toward limitless development of the forces of production and the need to ensure that production remains profitable, i.e. that surplus value is realized. Left to its own devices, the capitalist class tends to overinvest in the primary circuit of capital (production of wage and capital goods) and underinvest in the secondary circuit of capital (built environment for production and consumption), which creates a persistent tendency to overaccumulation in industry and manufacturing (Harvey, 1985). The latter manifests itself in different forms, which can appear individually or in various combinations: gluts of commodities on the market, falling profit rates, surpluses of capital that cannot be profitably reinvested, unemployment, and idle production capacity. Accumulation and class struggle are elements of the same dialectical unity. Crises of capital are bound to violently affect them both, while soothing the pains of accumulation is likely to mitigate class struggle and the other way around.
The idea that homeownership could be actively put to work as a powerful lever of worker’s control figured prominently in Engels’s pamphlet on ‘The housing question’:
How this solution of the housing question by means of chaining the worker to his own ‘home’ is arising spontaneously in the neighbourhood of big or rapidly rising American towns can be seen from the following passage of a letter by Eleanor Marx-Aveling, Indianapolis, November 28, 1886: ‘In, or rather near, Kansas City we saw some miserable little wooden shacks, containing about three rooms each, still in the wilds; the land cost 600 dollars and was just big enough to put the little house on it; the latter cost a further 600 dollars, that is, together about 4,800 marks, for a miserable little thing, an hour away from the town, in a muddy desert.’ In this way the workers must shoulder heavy mortgage debts in order to obtain even these dwellings, and now indeed become the slaves of their employers. They are tied to their houses, they cannot go away, and must put up with whatever working conditions are offered them. (Marx and Engels, 1975: p. 330 fn.)
Several decades later, in the 1920s, the potential of homeownership to become the cornerstone of a bourgeois consumer hegemony was rationalized in more capital-friendly terms by Edward Filene—one of the great organic intellectuals of monopoly capitalism. Filene was a department store owner from Boston who, similarly to Ford, pioneered progressive employment practices, such as high wages, a profit-sharing plan, a forty-hour week, and medical benefits. Filene (1925) recognized that old industrial capitalism, characterized by undisguised worker exploitation, a growing disparity between rich and poor and class conflict, had run its course; it had become not only inconsistent with, but outright disruptive to, monopoly capitalism, whose tremendous productivity and massive production volumes could only be maintained profitable by an ever increasing army of consumers. Filene took inspiration from Ford’s successful application of Taylorist methods that enabled the simultaneous increase of profits and wages, to advocate a ‘democratic’ version of consumer capitalism. He was convinced that the average worker had little interest in politics and could only be lured into subversive activities when subjected to extreme exploitation and economic hardship. By contrast, the consumer society would be a peaceful one because ‘[m]en who can take care of the whole material side of life by working, say six hours a day, simply won’t be interested in socialism or communism’ (Filene, 1925: 204). Filene redefined democracy as people’s freedom to consume and the marketplace as the proper terrain where this freedom could be exercised. He argued that workers could be integrated into consumer capitalism through more ‘economic freedom’, that is, higher wages, shorter work hours, access to mass education and consumer goods, including new housing. Filene’s appeal for ‘a Fordized America’ that would make ‘houses like Fords’ expressed his key insight of housing as primer for mass consumption that would lay the foundation of a thriving consumer democracy.
In 1925, when Filene’s book The Way Out: A Forecast of Coming Changes in American Business and Industry was published, and eleven years after Ford had introduced the ‘five-dollar day’, the idea that high wages had become a necessity for the system of mass production was anything but universally accepted by the overwhelming majority of traditionally-minded capitalists. This situation was not quick to change for, as Marx (1993 : 419) observed, while capitalists tend to see the total mass of workers as consumers and ‘possessors of exchange value (wages)’, this point of view is not usually applied to their own workers. Despite Filene’s efforts to convince the business community of the merits of a high-wage industrial democracy, by 1934, capitalists’ support for New Deal programmes had largely evaporated (McQuaid, 1976). Ultimately, it took not only the Great Depression, but a protracted period of struggle by ‘citizen consumers’ and labour unions ‘obsessed with expanding workers’ purchasing power’ (Cohen, 2003: 153), and, most importantly, a decades-long massive effort on the part of the state for the housing- and automobile-centered, workers-as-consumers paradigm to gain ground.
The role of the state was indeed crucial because, as the failure of Filene’s efforts demonstrates, capital reproduction is often jeopardized by the fact that the interests of individual capitalists can be myopic to the point of running counter to their common interest as a class. Rationalization of production and narrowly-defined enterprise efficiency do not automatically translate into macroeconomic harmony, and can produce quite inefficient collective outcomes. The process of concentration of capital weighs heavily upon the mythical invisible hand of the market which is thus rendered mute as a regulatory mechanism. Monopoly capitalism needed a more visible hand—a coordinator- in-chief—to serve as a protector of capital in general and to guide capitalist development writ large. This role was assumed by the state authority. The state can temporarily alleviate the tendency to overaccumulation in the primary circuit of capital by facilitating the switch of resources from industry and manufacturing into construction and real estate through a variety of public policies, such as the provision of long-term financing and the willingness to guarantee large-scale projects (Harvey, 1985).
How the state got involved
The vitality of the US economy over the 1920s was not in small part due to a real-estate bubble, which peaked in 1925, followed by a rapid downturn in construction. Over the next four years, residential construction in dollar terms dropped 46 percent, from $4.5 billion in 1925 to $2.45 billion in 1929. By 1931, the housing decline had reached epic proportions as total housing production had fallen 69 percent below the 1922-28 average (Keith, 1973: 17-9). Prior to the housing collapse, there was barely any government involvement in that or any other sector of the economy, and the belief that the private sector can adequately meet all housing needs was commonly shared. In the early 1930s, however, government intervention was rendered necessary by skyrocketing foreclosure rates and the acute need for affordable working class housing. The policies to tackle these issues were designed with one underlying purpose in mind: to boost employment. Construction was particularly hard-hit by the Depression and approximately one-third of the unemployed had previously held jobs in that sector.
To halt the massive wave of foreclosures, which reached 250,000 in 1932 and continued unabated at a thousand per day over the next year, on 13 June 1933, President Franklin D. Roosevelt signed into law the Home Owners Loan Corporation (HOLC), whose main purpose was to refinance mortgages in danger of default. Over the next two years, HOLC supplied mortgages and housing-related loans for one-tenth of all owner-occupied, non-farm residences in the USA. About 40 percent of eligible Americans sought and received HOLC assistance (Jackson, 1985). The most important innovation in mortgagefinancing introduced by HOLC was the long-term (up to twenty-year), self-amortizing mortgage with uniform payments spread over the life of the loan. This represented a significant relief for homeowners because in the preceding period the typical length of a mortgage had been between five and seven years, while the loan itself was not fully paid off at the final settlement. This meant that homeowners needed immediate refinancing which was, however, problematic if the mortgage had expired at a time when credit was scarce.
The second ‘innovation’ with wide-reaching consequences introduced by HOLC was the practice of ‘red-lining’. As part of the effort to develop uniform appraisal methods, HOLC devised a rating system which divided neighbourhoods into four categories—labeled with the letters A, B, C, and D and the corresponding colours blue, green, yellow, and red—based on the quality and age of the housing stock as well as the ethnic composition of the inhabitants. The D-status was typically granted to African-American neighbourhoods. Empirical evidence shows that HOLC’s rating exercises did not influence its own lending, which was relatively equally distributed across B, C, and D neighborhoods (Jackson, 1985: 202-3). Its appraisal system, however, had strong repercussions on the financing decisions of other government and private financial institutions in that it underlay arbitrary decisions not to lend in certain areas because of the general characteristics of the neighbourhood rather than of the specific property to be mortgaged (Harriss, 1951).
No institution embraced the practice of red-lining more ardently than the Federal Housing Authority (FHA), which was created in June 1934 to serve a multitude of purposes, such as encouraging the improvement in housing standards, facilitating home financing, and exerting an overall stabilizing influence over the mortgage market. FHA activities over the next 30 years completely transformed the mortgage market and housing provision in the USA. On the one hand, the FHA mortgage guarantees dramatically increased the affordability of home financing for a significant portion of the white middle and working classes. Home loans were fully amortized with repayment periods up to thirty years, which led to a significant reduction in monthly payments. Since FHA financing favoured new residential developments, typically located in the suburbs, buying a suburban single-family house became more affordable for eligible homeowners than renting a unit in urban multi-family dwelling. On the other hand, the eligibility for homeownership was determined in a highly problematic, racially- and spatially-biased way. FHA embraced wholeheartedly HOLC’s residential maps and appraisal methods, and refused to guarantee mortgages on properties located in neighbourhoods with ‘inharmonious’ racial composition, that is, not racially homogenous, and with aging housing stock, which was taken to imply an impending transition to lower-class occupancy and falling property values. These policies, complemented by corresponding banking regulation and practices, have been justly credited with aggravating racial segregation and hastening the decay of the inner cities by consistently depriving them of their middle-class residents (Jackson, 1985; Farley and Frey, 1994; Gordon, 2005; Kimble, 2007).
The decline in construction activity after 1925, and its virtual collapse after 1929, had created an acute shortage of affordable housing for people on modest incomes. After a series of false starts, the Public Works Authority, established in 1933, ended up building about 22,000 new units for low-income working class families over the next four years. But public housing really took off during Roosevelt’s second term with the passing of the 1937 Housing Act (also known as the Wagner-Steagall Act), which made the provision of low-cost housing a responsibility of the federal government. Consequently, by 1939, new housing starts recovered to the 1929 level, but only with the help of 56,000 publicly financed units. There was the further expansion of 16 per cent over the next year, including 73,000 publicly financed units (Keith, 1973: 39). The success of public housing, however, was short-lived, and its failure was the outcome of the epic battle between two socioeconomic paradigms, dubbed ‘commercial’ and ‘social’ Keynesianism by Baxandall and Ewen (2000). Commercial Keynesianism advocated government involvement through private mortgage guarantees along the lines of HOLC and FHA as well as subsidies to private builders. The supporters of social Keynesianism argued in favor of the government as direct builder and provider of affordable middle and working class public housing. Conservatives attacked public housing with particular zeal because they saw it as the first step towards socialism that would ultimately destroy the ‘free, democratic enterprise system’. They further feared that public housing might come to be perceived as a right similar to public education that everyone could demand (Davies, 1966).
The efforts of Joseph McCarthy, the red-baiting junior senator from Wisconsin, who presided over the public hearings of the US Senate Joint Committee Study and Investigation of Housing in 1947-1948, were instrumental in demolishing the prospects of public housing and others of the New Deal social guarantees. Overall, 1947 became a ‘watershed in the domestic war to redefine the meaning and scope of democracy’ (Baxandall and Ewen, 2000: 89). The demise of American social democracy was enshrined in the 1949 Housing Act, which dealt a serious blow to the hopes for a genuine housing reform (Marcuse, 2001: 726-7). In essence, the Act served to finance ‘the destruction of American cities, while sustaining a rebuilding machine that united politicians, bankers, and developers into a powerful coalition that took over the Democratic party’ (Wolfe, 1981: 88). The Act left public housing a responsibility of the federal government, but the choice of the location of new projects was granted to local communities. Residents of suburbia naturally wanted to avoid housing poor people out of concern for their ‘quality of life’ and property values. Moreover, as per the Act, the number of new units built could not exceed the number of slum units destroyed. This is how new public housing developments for the most part ended up replacing the slums in the inner cities. The fate of publicly-owned housing in the USA is most instructively revealed by the fact that by 1980, it constituted only 1 per cent of the housing market, compared to 46 per cent in England and Wales and 37 per cent in France (Jackson, 1985: 224).
The practice of government-blessed red-lining and the embrace of commercial Keynesianism were essential features of the housing policies initiated during the New Deal years. They became deeply ingrained components of US Fordism, which was characterized by a ‘dual’ housing system of privately financed, single-family suburban housing for corporate managers, professionals, and unionized primary sector white workers, and inner-city rental or public housing for African Americans, other minorities, female-headed households, and non-unionized peripheral workers (Florida and Feldman, 1988).
The ‘new man’ of suburbia
The ‘American phenomenon’, Gramsci (1971: 302) remarked, was ‘the biggest collective effort to date to create, with unprecedented speed, and with a consciousness of purpose unmatched in history, a new type of worker and of man’. The economic basis of the new man was comprised of ‘big factories, Taylorisation, rationalization, etc.’ (Gramsci, 1971: 242, fn. 42). The ethico-political basis of the new man became the standardized and rationalized consumerist existence grounded in the microcosm of the mass suburb. In this ‘new world of gestation’,
Collective and individual life must be organised with a view to the maximum yield of the productive apparatus. The development of economic forces on new bases and the progressive installation of the new structure will heal the contradictions which cannot fail to exist, and, when they have created a new ‘conformism’ from below, will permit new possibilities for self-discipline, i.e. for freedom, including that of the individual. (ibid)
The Fordist-Taylorist methods tremendously increased production and potentially sped up the turnover of capital. What was needed for this potentiality to be realized was a system of mass consumption that could proceed on par with mass production. American hegemony was born in the factory, but did not remain confined to it: it penetrated every corner and aspect of society. For one thing, the worker spent only about half of his or her waking time in the factory. Thus the rest of the worker’s time needed to be engaged in ways that rationally furthered the reproduction of capital. Mass consumption in the USA became organized through the radical spatial restructuring of work and life epitomized in suburbanization. Demand in the suburbs was structured around the consumption of two key commodities: the home and the automobile, symbolically representative of the dichotomy of work and life, which, in turn, spurred the demand for a host of other housing-related goods and services.
It was only through the invention of the mass suburb that a unique American identity was forged, as Americanism stripped off the vestiges of European heritage, abandoning old-world culture along with its architecture. The ‘American exceptionalism was built in part on the embourgeoisement of the working class’ (Beauregard, 2006: xi, 13) as access to housing opportunity in suburbia was extended to various social strata. The commercial egalitarianism of the mass market pattern could be rationalized not only from the standpoint of monopoly capitalism, but also from the perspective of the unfolding Cold War, which, as May’s (2000) detailed presentation of the 1959 ‘kitchen debate’ between US Vice President Richard Nixon and the Soviet Premier Nikita Khrushchev reveals, was fought over the ‘commodity gap’ as much as the ‘missile gap’. The ideological contest with the Soviet Union required an appearance of relative egalitarianism, of ‘economic freedom’ subsumed in the creation of the so-called ‘middle class’ that became an epitome of the purported classlessness of the suburbs. This ‘classlessness’, however, sometimes generated its own tensions, as it was not always easy to reconcile with existing reality:
Asked to describe the kind of people living in Eastgate, Park Foresters grope with difficulty. No one can bring himself to say ‘working-class people’; the phrases are more likely to be ‘people who work with their hands more than their heads’, ‘artisans’, or, at worst, ‘blue collar’. (Whyte, 1956: 308)
At the same time, the rhetoric of classlessness that diffused throughout American society served to disguise inexorable racial discrimination. In actuality, racial antagonism was successfully put to work to dampen class tensions and consciousness. Thus, access to suburbia remained restricted to the traditional, that is, white, male-headed, middle- and working-class households that enjoyed the economic advantages of homeownership in the form of tax deductions of mortgage interest, the opportunity to build equity, and to benefit from appreciation of property values. Such advantages further exacerbated existing inter- and intra-class differences while hindering the formation of class consciousness. Because the selective extension of homeownership fostered a socio-spatial fragmentation of the working class into the ‘housing classes’ of homeowners and tenants, whose essential interests were fundamentally different (Harvey, 1976).
The new man of the suburb was an interesting creature. Gramsci noted with fascination of sorts the interest Ford took in the private affairs of his workers, and his attempts to control how they lived their lives and spent their wages. For example, at one time Ford linked the participation in the profit-sharing plan to good moral behaviour, which was to be established by his own inspectors. These methods, although somewhat crude and naïve, were among the first attempts to bring workers’ way of life into complete conformity with the needs of capitalist production.
The new methods [e.g., Taylorization] demand a rigorous discipline of the sexual instincts […] and with it a strengthening of the ‘family’ in the wide sense […] and of the regulation and stability of sexual relations…[that is] the new industrialism wants monogamy. (Gramsci, 1971: 300, 304)
The postwar suburban home—the most tangible symbol of the American dream—and ‘the sexually charged, child-centered family’ (May, 2000: 153) became as fundamental for the reproduction of hegemony as the factory order itself. Hegemony, as argued above, is most effectively reproduced through ‘freedom’ and ‘consent’; that is, when the human subject self-internalizes the rules and restraints, s/he can be ‘freed’ from direct coercion. No other nation in the postwar period embraced marriage and parenthood with more enthusiasm, passion, and commitment. Consumerism and children were considered the essential rewards for this way of life, centered on the nuclear family, while ‘the gender roles associated with domestic consumerism—homemaker and breadwinner—were central to the identity of many men and women at that time’ (May, 2000: 172). The subject of production and consumption (‘the new man’) was thus bifurcated into man and wife: the male breadwinner earning the ‘family wage’ to be spent on household goods and the female career homemaker diligently purchasing them.
Gramsci (1971: 280) saw Fordism as ‘the ultimate stage in the process of progressive attempts by industry to overcome the law of the tendency of the rate of profit to fall’. The failure of these attempts manifested itself in the 1970s as a deep structural crisis engulfed the USA and the world economy. There were two main strategies through which capital sought to resolve the crisis: reorganization of the labour process along with the spatial and temporal restructuring of production and circulation. The 1980s witnessed the proliferation of various forms of ‘workplace flexibility’ which intensified work while strengthening control over workers. The entrenchment of subprime employment preceded and, in a way, conditioned the subprime solution to the housing problem as labour-market segmentation along with intra-firm ‘dualism’ deepened further, increasing the gap between the privileged ‘core’ workers, who enjoyed good pay along with standard employment rewards, and the ‘peripheral’ workers—casual employees without job security, benefits, and opportunities for promotion. The reorganization of the labour process was paralleled by the progressive outsourcing of the labour-intensive Fordist industries to peripheral countries. Over time, the share of manufacturing in the US GDP shrank from 20 per cent in 1980 to 11.5 per cent in 2008. The geographical separation of production (located in low-wage countries) and consumption (occurring in high-wage countries) seemed to work miracles for corporate profits. In the case of the USA, this configuration has been strongly aided by the ownership of the key international currency, which provided an apparently unlimited access to foreign funds for financing domestic consumption. Under the conditions of stagnant, or falling in real terms, incomes, domestic demand increasingly came to depend on access to credit, thereby adding a temporal aspect to the spatial restructuring of production and exchange. The latter, however, was not accompanied by a corresponding modification of the social norm of mass consumption, which remained centered around the key Fordist commodity—the home—albeit increasingly disguised as a financial asset.
The Subprime Solution in Context
The US subprime mortgage crisis was a part of a generalized housing crisis, which exposed the limitations of the profit-driven model of housing provision, whose foundations were established with the New Deal policies and solidified in the postwar years. These policies commodified housing and, in various degrees, all other necessities of life. No other ‘developed’ country has made such remarkable inroads in the progressive and inexorable commodification and privatization of the necessities of life. In fact, all four essential domains of the welfare state—education, health care, pensions, and housing—have been pried open for private profit-making by the state’s helping hand. However, even the most inventive forms of commodification, with or without financialization, are bound to encounter the limits of production based on capital, and housing, as the crisis showed, is no exception.
From commodification to financialization of the home
Housing is a commodity like no other. Like a typical commodity, a house leads a double existence as use value that provides shelter and exchange value that can be bought and sold, transformed into money. Unlike a typical commodity, it can also serve as an investment and an asset not only for the capitalist who produces it, but also for the homeowner who ‘consumes’ it. The New Deal housing policies fundamentally transformed the meaning of owning a home in the USA. Before the Depression, housing was largely bought for consumption purposes; it required a significant down payment and was typically acquired late in life (Gordon, 2005). Owing to New Deal housing policies, homeownership became the only mechanism for asset-building available to the majority of Americans and the most significant ‘investment’ that the average person ever makes. For the middle three wealth quintiles of the US population, in 2004, the principal residence constituted 66.1 per cent of the value of the total household assets, whereas corporate stocks and securities accounted for only 7.9 per cent (Wolff, 2007: Table 7). This ‘investment’, however, is not of a productive nature. Investment in construction, residential as well as commercial, similarly to investment in infrastructure, does not immediately produce value; it rather freezes exchangeable wealth in a way that ‘creates no direct equivalent and therefore devours it, for the moment, without replacement’ (Marx, 1993 : 121). Furthermore, the housing asset is typically highly leveraged. As long as the home is inhabited by the owner, it does not generate any significant income; the most it can do is to serve as an inflation hedge.
But home mortgages can be securitized to produce ownership titles that are traded like commodities, separately and independently of the underlying asset. This process of ‘creating liquidity out of spatial fixity’ (Gotham, 2009) was government-fostered. The so-called government-sponsored enterprises (GSEs)—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Corporation (Ginnie Mae)—played a key role in the standardization of mortgage underwriting, pioneering the development of securitized assets and the establishment of the secondary mortgage market. Notably, Ginnie Mae issued the first mortgage-backed securities (MBSs) in the late-1970s. The growth of securitization, from the 1980s on, enabled financial institutions to repackage illiquid assets, such as home mortgages, student loans, car loans, and credit card receivables, into standardized interest-bearing securities traded on globally integrated securities markets. Mortgage securitization, epitomized in MBSs and collateralized debt obligations, served to greatly expand the supply of credit available to finance housing construction and home purchases. Furthermore, massive foreign inflows into US government securities in the 2000s consistently depressed their yields and thus the long-term interest rates, including mortgage rates. On his part, Fed Chairman Alan Greenspan was firmly committed to keeping the short-term interests rates low, while opposing attempts at financial regulation. The resultant surge in liquidity, innovation, and speculation forced down any remaining lending standards, bidding up housing prices, and fueling a housing boom. A detailed investigation of these processes is beyond the scope of the present analysis, as the financial and macroeconomic dimensions of the US housing bubble have been examined at length elsewhere (see e.g. Gotham, 2006; Immergluck, 2009; Sassen, 2009; Schwartz, 2009; Lysandrou, forthcoming; Ivanova, forthcoming).
The Origins of the Subprime Mortgage Crisis
The origins of the subprime mortgage crisis should be sought at the confluence of two factors: the saturation of the housing market that became apparent by the 1970s, and the opportunity offered by the demands of the civil rights movement to dismantle discriminatory lending practices, thereby broadening the horizon of capital accumulation. In what follows, I argue that the subprime crisis resulted from the common interest and action of government and business to overcome the limits of private production of housing by expanding the size of the market. Since traditional constituencies had been largely housed by the 1970s, the remaining course of action was to extend the purported gift of homeownership to previously excluded segments of society, such as African Americans, other minorities, women, and the poor. I further concur with Marcuse’s (2009: 352) view that the private housing market itself produces such crises, ‘not because it is failing, but because it is working’.
According to the Decennial Surveys of the US Census Bureau, the US homeownership rate increased from 43.6 per cent in 1940 to 61.9 per cent in 1960. Over the next decade, however, there was only a meager 1 per cent increase to 62.9 per cent in 1970. By the mid-1970s, the homeownership rate was approaching 65 per cent, but afterwards there was a small decline to 64.4 per cent in 1980. Apparently, by that time, the potential of homeownership as a key driver of the US economy had been largely exhausted as the overwhelming majority of eligible homeowner candidates had been housed. Population growth was far from sufficient to keep the housing machine going at its previous pace; besides, it was strongly skewed toward minority groups where homeownership rates were lagging behind. Even after the first wave of subprime lending, in 1999, the homeownership rate for African Americans (46.7 per cent) was still 26.5 per cent lower than the rate for whites (73.2 per cent). The gap for Hispanics was 28.7 percent. In addition, in 1999, households with income below the median had a homeownership rate of 51.2 per cent, which was 27.4 per cent lower than the rate for households with above the median incomes, which stood at 78.6 per cent (HUD, 2000b: 2).
In the course of its maturation, capitalism grows more and more entangled in its own contradictions, which become increasingly difficult to resolve without the willing participation of subaltern groups. In other words, the proper functioning of the capitalist system, its potential to weather crises and move on, depends on its ability to integrate previously excluded groups by channeling their demands into productive (from the standpoint of capital) activities. This has been relatively easy to achieve in the case of the USA, where the hegemony of capital has been anything but seriously contested by the subaltern segments of the populace; rather, their grievances have largely resulted from the perception of an ‘unfair’ distribution of entitlements. As we saw above, homeownership policies and practice under Fordist capitalism were designed to strongly favour the so-called middle class of managerial personnel and the unionized portion of the working class that were granted the privilege to populate the suburbs. By contrast, non-unionized peripheral workers, minorities and female-headed households were typically relegated to occupy multifamily rental housing, often in underserved inner-city areas. These ‘subprime’ groups never articulated a consistent challenge to the legitimacy of the hegemonic homeownership project of privatized housing. Their grievances largely concerned the lack of access to the latter, which, under certain circumstances, could be and was granted.
The logic of capital reproduction necessitates the channeling of all concessions to subaltern groups into further opportunities for accumulation. Thus, under the pressure of the civil rights movement, the federal government passed a number of key pieces of legislation. The 1968 Fair Housing Act and the 1974 Equal Credit Opportunity Act extended the anti-discriminatory principles of civil rights law to housing and credit provision. The Home Mortgage Disclosure Act of 1975 required lending institutions to report annually on the distribution of the mortgages granted by census-tract. The Community Reinvestment Act (CRA) of 1977 was aimed at ending the practice of red-lining by requiring banks to meet the credit needs of their entire market areas which, however, was to be done within the context of safe and sound banking practices.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 GSE Act) established a new regulatory framework for Fannie Mae and Freddie Mac, placing them under the regulatory authority of the Department of Housing and Urban Development (HUD) and affirming their affordable-housing mission centered on the promotion of homeownership for low- and moderate-income households as well as bank lending in underserved areas. The initially stated affordable-housing goals were raised by HUD in March 2000 as follows:
- Low- and moderate-income goal. At least 50 percent of the dwelling units financed by each GSE’s mortgage purchases should be for families with incomes no greater than area median income (AMI)
- Special affordable goal. At least 20 percent of the dwelling units financed […] should be for very low-income families (those with incomes no greater than 60 percent of AMI) or low-income families (those with incomes no greater than 80 percent of AMI)…
- Undeserved areas goal. At least 31 percent of the dwelling units financed […] should be […] located in underserved areas… (HUD, 2001: 3).
It is important to note that the affordable housing turn of the US state went along with a neoliberal reform of public housing, initiated in the early 1970s, aimed at encouraging ‘self-sufficiency’, entrepreneurialism, and private homeownership, while minimizing public funding and oversight (Hackworth, 2007, Ch. 3). In this context, the expansion of lending for low- and moderate-income households was paralleled by massive cuts in subsidy for affordable rental housing. By diverting public resources to market-based forms of housing, the housing policies of the US state led to further intra-working-class polarization, deepening the separation of ‘the working poor from the workless poor, the homed from the homeless, the accepted from “others”‘, and of the deserving poor from the undeserving poor (Hackworth and Wyly, 2003: 149-50).
Cui Bono, Cui Culpa?
Considering the above policies, one might reasonably ask: cui bono? In whose particular interest was it that the state embraced ‘homeownership for the poor’ precisely in the way it did? Ever since the 19th century, homeownership has been one of the most commonly recommended cures for the economic problems of the working classes. Homeownership in the postwar period was considered the hallmark of a middle-class status. Its perception as the bedrock of the American dream has become so deeply embedded in the common-sense understanding that any serious debate or questioning of the superiority of homeownership over other forms of housing tenure has been conspicuously absent from public discourse at least since the 1950s. Neither conservatives nor liberals have challenged the role of the market as the key determinant of housing production and allocation. ‘Neither sees housing as a good that should be produced, allocated and used according to social principles, rather than as a commodity, for profit’ (Marcuse, 2001: 732). But the commodification of housing is in and of itself already a precondition for crisis as the supply of this first-order necessity of life is allowed to fluctuate as a function of private profit-seeking considerations.
Conservative analysts have been eager to blame the subprime debacle on government policies aimed at extending homeownership to low-income groups, such as the CRA and the affordable-housing mission of Fannie and Freddie. Such accounts can be challenged on a number of grounds. For one, the boost given by the CRA on subprime lending can be judged insignificant for reasons enumerated by Aalbers (2009). It is important to emphasize one of these reasons: the CRA only applies to bank lenders, while two-thirds of all mortgage lenders in the USA, including the major subprime lenders such as Ameriquest, New Century Financial Corporation, and Countrywide, until 2008, were nonbank lenders and not subject to the CRA.
Furthermore, encouraging fair and nondiscriminatory lending practices might not have taken a ‘subprime’ turn at all, were it not for the deregulation of the mortgage market that began in the 1980s under the guise of extending credit opportunities to previously excluded groups and neighbourhoods. A number of key pieces of legislation adopted then made subprime lending both possible and legal. The Depository Institutions Deregulation and Monetary Control Act of 1980 preempted state interest rate caps and enabled lenders to charge high rates and fees to borrowers. The Alternative Mortgage Transaction Parity Act of 1982 preempted state laws restricting the use of variable interest rates, balloon payments, and negative amortization. The Tax Reform Act (TRA) of 1986 prohibited the deduction of interest on consumer loans while allowing the deductibility of mortgage interest not only for a primary residence but for one additional home as well. The first two pieces of legislation made subprime lending much more profitable for lenders than prime loans, while the TRA boosted the demand for mortgages for both housing and consumption purposes. These three deregulatory milestones along with the Secondary MortgageMarket Enhancement Act of 1984 enabled the massive growth of securitization and the vertical disintegration of the lending industry epitomized in the transition from the traditional ‘originate-and-hold’ to ‘originate-and-distribute’ model of lending.
The primary source of capital for the first wave of subprime lending in the mid-to-late 1990s came not from Fannie and Freddie but from private-label residential MBSs, whose issuance grew from $35 billion in 1993 to $150 billion in 1998; 55 percent of subprime mortgages in 1998 were securitized (HUD, 2000c: 2). These were predominantly refinancing loans, structured similarly to the traditional thirty-year, fixed-rate mortgages, although with substantially higher fees, interest rates, and in many cases, prepayment penalties and balloon payments. They were heavily concentrated in predominantly black neighbourhoods.
Mortgage loans during the second wave of subprime lending in 2001-2006 became much more innovative, typically carrying adjustable interest rates or ‘exotic’ features, such as interest-only payments and negative amortization. Lending standards deteriorated even further as no-documentation loans and low-to-zero down-payment loans became commonplace. Such practices were partially a response to the affordability problems faced by borrowers in light of the spectacular rise in housing prices, which overshot both the historical trend and the so-called economic fundamentals. Since originators’ profits were determined solely by loan volumes and fees, lenders competed for customers by offering ever larger loans for ever larger houses with ever more exotic features (Immergluck, 2009).
In sum, by the early 1990s, the federal government had wholeheartedly committed to spreading homeownership to the lower-income classes. This commitment was reflected in the affordable-housing mission of the GSEs and the relaxation of underwriting standards for mortgages insured by the FHA (HUD, 2000b). The bulk of subprime lending, however, took place in the private, non-agency market, dominated by nonbank lenders. While the conforming markets peaked in 2003, non-agency markets continued to expand. In 2005-6, non-agency origination and issuance (including subprime, alt-A, and jumbo mortgages) significantly exceeded the volumes realized in the prime (agency) market. For example, in 2001, banks originated $1.433 trillion in conforming mortgage loans and issued $1.087 trillion in agency securities, while the non-agency sector originated $680 billion in mortgages and issued $240 billion of MBSs. By 2006, non-agency origination of $1.48 trillion was 45 per cent larger than agency origination, while non-agency issuance exceeded agency issuance by 14 per cent (Ashcraft and Schuerman, 2008: 2). In 1994, subprime mortgage originations totaled $35 billion and accounted for only 5 per cent of total new mortgages originated in that year. By 2005, it had soared to $625 billion or 20 per cent of total mortgage originations (McCoy and Renuart, 2008: 10). As mentioned above, non-bank mortgage lenders that were primarily responsible for the high-risk subprime boom were not subject to the regulations that applied to traditional banks and thrifts. However, those who tend to see the lack of regulation in this area as government failure miss one essential point: that this ‘failure’ might have been a deliberate policy. That it was part and parcel of the government-sponsored effort to expand the limits of the market and augment the opportunities for private profit-making in housing provision.
Analyzing the origins of predatory lending, Wyly et al. (2006) have noted the relevance of David Harvey’s (1974) theory of class-monopoly rent. Importantly, in this context, class-monopoly rent is exacted not necessarily on the basis of monopoly control over land, or even ownership, but by virtue of having a common stake in the preservation of a particular class configuration, characterized by systematic inequalities in access to land, financial resources, and political power. Thus, the class-monopoly rent previously collected by the slumlord/developer/speculator has now diffused over ‘a new cast of local characters’: mortgage brokers incentivized by yield-spread premiums and the like to entice borrowers into taking financially-debilitating loans; loan officers imposing exorbitant points and fees; fraudulent home improvement contractors; attorneys, real estate agents, and appraisers ‘who play supporting roles in deceiving consumers and consummating transactions’ (Wyly et al., 2006: 109).
The relevance of the class-monopoly rent framework extends beyond the particular case of predatory lending, and can be meaningfully applied to the more general case of financialization of workers’ incomes, including expenditure on housing, education, health care and pensions. The financialization of the US economy, since the early 1980s on, has been a multidimensional process in the course of which traditional investment and commercial banking have been radically transformed. On the one hand, the reorientation of large corporations toward market finance and away from bank loans has encouraged the commercial banks’ turn toward direct financial expropriation of workers’ incomes as a key source of profit. On the other hand, commercial banks became increasingly involved in investment-banking activities, such as the underwriting and trading of securities, a process that received an official blessing with the 1999 repeal of the Glass-Steagall Act (Lapavitsas, 2009).
The transformation of banking and finance went along with profound changes in the structure of the US economy and society, including the reorientation towards the services- based economy. Labour market segmentation, characteristic of the American economy in general, has been particularly pronounced in the service sector where a stratum of privileged professional and managerial cadres has coexisted with a huge underclass of low-skilled, low-paid, marginal and disposable workers. The core areas of the financialized economy are centred around finance, investment, and real estate (FIRE). The managerial and professional avant-garde of the FIRE economy constitutes a new rentier class. What sets apart the FIRE class from the traditional rentiers is the former’s ability to derive class-monopoly rent not necessarily on the basis of ownership of loanable capital, but because of its position relative to the financial system. This modern form of class-monopoly rent has much in common with traditional usury in that the former is derived not from enterprise profit but from labour income (Lapavitsas, 2009).
Under these conditions, the bloated US housing sector has had to support not only construction and housing-related production, but also the gigantic parasitic structure of the FIRE economy, feverishly feeding on the homeownership project, and, ultimately, on the ‘homeowners’ themselves, mortgaged to the hilt. Thus, the subprime turn of the US state was conditioned by the growth imperative of the financialized economy, that is, by the ‘needs’ of the growing parasitic FIRE class to harness the economic benefits of homeownership. Correspondingly, government housing policies were designed in tandem with a broad coalition of interested parties, eager to reap the benefits of the subprime road to the homeownership society:
Making homeownership more attainable has always been a goal but the National Partnership for The National Partners in Homeownership—a coalition of 66 national groups representing the housing industry, lenders, non-profit groups and all sectors of government—gave the goal renewed emphasis and vitality. In late 1994, the Partnership and Administration set as a national goal raising the homeownership rate to 67.5 percent by the end of the year 2000. This goal was met during the third quarter of 2000. The Department, as part of its Annual Performance plan under the Government Performance and Results Act, has set a new goal of 70 percent by the end of 2006. (HUD, 2000a: 1)
The latter goal was almost achieved, albeit for a short while. Reinvigorated by the bubble, the homeownership rate peaked at 69.2 per cent in the fourth quarter of 2004, only to retreat to 66.5 per cent at the end of 2010.
Conclusion: Housing and Hegemony Unraveling?
The subprime crisis marked the beginning of a generalized housing crisis whose end is not in sight. The US government and the Federal Reserve have employed a variety of conventional and unconventional means—from the trillion-dollar purchase of MBSs to the sponsoring of mortgage modifications—to halt the collapse of asset values and housing prices. These measures have failed to resuscitate the housing sector. According to the S & P Case-Shiller 20-City Composite Index, seasonally adjusted home prices in February 2011 were about 31 per cent below the peak reached in April 2006. New home sales in 2010 fell to 321,000, a drop of 14.4 per cent from 2009, and the lowest number since records began 47 years ago (New York Times, 2011). For the purposes of comparison, new home sales averaged 1.156 million per year in 2003-2006, while 600,000 new home sales per year is considered a ‘healthy rate’ for the US economy.
As of the third quarter of 2010, there were 10.78 million mortgages underwater, that is, with outstanding loan amount exceeding the market value of the home. In January 2010, 4.17 million mortgagesqualified as seriously delinquent; 1,643 million (40 per cent) of these were prime mortgages (HUD, 2011). Thus, the housing crisis no longer qualifies as subprime as it has spread to various income classes. Over 2.8 million and 2.9 million foreclosures were initiated, respectively, in 2009 and 2010. New foreclosure filings are expected to peak in 2011.
Persistently high unemployment and the deepening degradation of work, manifested, among other things, in the ongoing transformation of full-time employment with benefits into casual part-time work, are likely to further undermine the housing market along with any serious prospects for genuine economic recovery. The notion of a ‘middle- class squeeze’ referring to the largely stagnant incomes of the bottom 80 per cent of the population, the growing disparities in the distribution of income and wealth, and the disappearance of traditional ‘good jobs’ has been sorely lamented by Keynesian economists and liberally-minded intellectuals (e.g. Krugman, 2002; Schmitt, 2008; Weller, 2008). It is important to underscore the significance of this phenomenon within the larger context of transformation of US capitalism. The ongoing housing collapse has demonstrated the obsolescence of the postwar homeownership project and the type of capitalism that thrived on it. ‘[C]apitalism’, Harvey (1985: 247) remarked, ‘builds a physical landscape appropriate to its own condition at a particular moment in time, only to have to destroy it, usually in the course of a crisis, at a subsequent point in time’. Suburbanization has run its course along with homeownership as the consumption pattern meant to support it. The ‘middle class’ was an ideological and practical device that adorned the image of suburbia and powered an economy painfully dependent on compulsive and mindless consumerism, which was the hegemonic reward for mindless but relatively well-paying work. But US capitalism no longer needs a middle class of this kind for a number of reasons.
For one, the amount of ‘good jobs’ is steadily dwindling and there can be no spontaneous reversal of this process. Paradoxically at first glance, outsourcing and the cost-cutting race to the bottom, while serving the interests of big business, may be actually hurting ‘capital in general’, that is, the reproduction of the existing order. The American state, which by definition should be able to mediate conflicts between these two worlds, has become so entangled with individual ‘big’ capitals that its ability to articulate and guarantee a modicum of ‘common interest’ seemed seriously impaired. While for now the middle class is surrendering quietly, the chronic lack of good jobs is a potential source of social tensions as a large stratum of young people, who have incurred debilitating financial burdens to purchase college educations, awake to a reality in which their overpriced degrees no longer guarantee a decent middle-class existence. For a significant portion of these debt-crippled middle-class aspirants, homeownership is likely to remain a dream, and a very distant one at that.
A second reason for the obsolescence of the middle class of the past lies in its inability to further serve its underlying purpose, which was to consume out of proportion to its income. Income growth has slowed down significantly over the last three decades (Ivanova, 2011, Table 1). The real incomes for the majority were stagnant or falling during the bubble years. The real median household income in 2008 was $49,800, down from $52,400 in 2000. Even at its periodic peak in 2007, the median household income was still 1.2 per cent below the 2000 level (Joint Center for Housing Studies, 2010: 5). Notwithstanding the combination of stagnant incomes and rising inequality over the last three decades, the growth in personal consumption expenditure continued unabated and particularly accelerated in the 2000s, exceeding 70 per cent of GDP in 2002 for the first time in postwar history. The high consumption of the neoliberal era, similarly to the housing bubble, was enabled by credit expansion and financial innovation. But debt-driven growth cannot escape the limits of production based on capital. For the magnitude of effective consumption capacity is ultimately limited by the amount of labour income—present and future. Access to credit does not alter this underlying fact; it can only change the temporal allocation of income by allowing the use of future income to consume in the present. Personal debt gives the creditor a legal claim over the worker’s future income. However, if debt rises faster than labour income, ‘credit saturation’—a condition wherein anticipated future income that could be diverted to debt servicing has been exhausted—will inevitably ensue (Gramm, 1978). Credit saturation of remarkable magnitude has been a characteristic feature of the Great Recession—the collapse of the household sector’s net borrowing that started in the third quarter of 2008 reached negative $232.6 billion in 2009 and negative $262.7 billion in 2010. The so-called ‘unwillingness of the banks to lend’, which has served as a popular explanation for the contraction of credit, is actually driven by justified concerns about the solvency of the prospective borrowers.
In light of these dire realities, concerned pundits are now in search of modified subprime solutions to the housing question as the once coveted thirty-year mortgage has become a ‘thirty-year prison’ under the prevalent conditions of subprime employment or the outright lack of work. Purportedly, what is needed are ‘more flexible mortgages that take today’s employment landscape, with its frequent job-hopping and episodic unemployment, into account’ (Stone, 2010). Accidentally, one is left wondering how and whether this psychology and thinking differ from those that informed the original ‘subprime solution’.
The shakeout of housing, the crumbling homeownership project, the middle-class squeeze, and the supersession of the relative pauperization of the working classes by an absolute pauperization in the context of a permanently jobless economy are the harbingers of hegemony unraveling. It appears that American society is slipping back into the ‘economic-corporate phase’ in which the disjunction between economic and social reality is far too brutal to be concealed by ‘values’, ‘ideas’, and ‘dreams’.