As more and more people fall behind on their rising mortgage payments, for-sale signs are proliferating in working-class neighborhoods of American cities. Home prices are falling, foreclosures rising. The housing bubble has reached its peak and is coming down.
The elderly go without food or essential medicine in order to meet their mortgage payments. Families with young children are forced into the street or crowd into small apartments with relatives or friends. Houses go empty, while the number of homeless people grows.
Speculative capital is taking another, deeper cut into society, cutting loose a broader section of our people from the American dream, and ushering them into the new proletariat.
This latest crisis of the new economy created by robotics and globalization is shaking the world financial system, presenting revolutionaries with the opportunity – indeed, the obligation – to give clarity to what’s happening and provide a vision of a society where everyone has a home by right.
The Housing Bubble
When something appears too good to be true, it usually is. As housing prices started their steady rise, houses became more than a home. They became a means to finance consumer spending through maximizing home equity loans. Homes became a debt trap tying up families’ life savings.
The mortgage companies fueled the demand and contributed to rising home prices by offering increasingly risky loans, creating the predatory “sub-prime” mortgage market. Knowing full well that most buyers would be unable to repay the loans, they offered mortgages with no down payment, 100 percent financing and often required no proof of income to people least able to afford them. With low introductory interest payments, large balloon payments, and adjustable rates, most buyers were in danger of losing their homes and their life’s savings if interest rates rose or home prices fell.
This house of cards is crashing down. As adjustable-rate mortgages ratchet up, monthly payments are rising for millions of homeowners, balloon payments are coming due, and home prices are falling. A growing number are defaulting and losing their homes. By April 2007, nearly one-fifth of homeowners with sub-prime mortgages made in 2005 and 2006 were two months or more behind in their payments.
But sub-prime foreclosures are only the most obvious aspect of the deflating housing bubble. Experts estimate that as many as 2.2 million families will face foreclosure within the next two years.
Declining home prices leave many holding mortgages greater than the value of the house they own. As homeowners attempt to cut their losses and sell, flooding the market, prices will drop even further. A spiral of increasing foreclosures and declining prices will surely result.
With the nation’s highest foreclosure rate, Ohio provides a good example of what to expect. Cleveland and its suburbs are spending millions of dollars to maintain empty houses abandoned by the lenders. Despite the thousands of homeless people in the region, Cleveland is floating a bond to tear down these empty houses.
An End to the American Dream
For many workers who had become part of “middle-class” America – or who aspired to – this marks an effective end to the American Dream.
Following WWII, the American Dream was built on imperialist bribery. Profits made possible as the world’s dominant capitalist power were used to pay the high wages and benefits needed to keep the working class loyal and supportive of capital’s anti-communist foreign policy. That ended when computer technology began replacing workers with robots. and a globalized economy began pitting worker against worker worldwide. Together those forces have created a downward spiral that is driving millions into the new proletariat.
With the good jobs and the benefits already gone, losing the house withdraws the last of the bribes. And it is not the “communist threat” that is taking away America’s prized possession; it is capitalism itself. Thus, for all its tragedy, the end of the American Dream frees the new proletariat to see its interests as a class more clearly.
Part of seeing clearly means they must stop relying on the Democratic Party. While Bush, not surprisingly, says that helping homeowners stave off foreclosure is “not an appropriate role for the federal government,” organizations tied to the Democratic Party are trying to focus the sub-prime struggle on demanding reforms from Congress. But Congress cannot resolve the housing crisis, and leading Democrats have made that clear.
That’s because resolving the housing crisis would require challenging private property globally – major investment banks, hedge funds, private-equity funds, even central banks. And the challenge would not simply be over who owns the house but over who owns the capital and, indeed, over who owns the state.
Speculative Capital
Providing clarity and vision demands that revolutionaries understand the rise of speculative capital and the new proletariat.
Speculative capital uses financial instruments to accumulate money. In their pure form, these financial instruments are “derivatives” created pretty much out of thin air – billion-dollar bets on the yields of central-bank bonds or the spread between currencies. This is not industrial capital – it is not employed in production (to profit from the surplus value created). Instead, speculation dominates capitalism at the beginning of the age of robotics, when computerization replaces labor and when accumulating money by speculation supersedes accumulating it by exploiting labor.
The importance of this development is being discussed at the top levels of capital. “Capitalism is mutating once again,” writes Martin Wolf, chief economic commentator for the Financial Times, capital’s international daily. Industrial capitalism “is disappearing into economic history,” he says. In its place, we have the triumph of the global speculator and the rise of “a host of complex new financial products [which] have been derived from traditional bonds, equities, commodities, and foreign exchange.”
By the end of 2006, Wolf reports, the best known of these derivatives were valued at $286 trillion, six times the global gross product. The rise of “the new capitalism,” as Wolf calls it, “is among the most significant events in our time,” he says. Made possible by the revolution in computing and communications, it represents “the triumph of the trader in assets over the long-term producer.” Under its sway, Wolf reports, there has already been “a sizable shift in income from labor to capital.”
That shift from labor to capital is not difficult to understand. Industrial or finance capital hires workers to produce commodities, which are then sold for a profit, with capital pocketing the surplus value created by labor. Out of this relationship, workers are allowed a living. But speculative capital is predatory, giving nothing in return for the wealth it accumulates and needing no workers to accumulate it. Accumulation under speculation occurs through what are effectively a variety of pyramid schemes – or bubbles – which must eventually deflate, leaving the folks at the bottom holding the bag.
In the financial pages, speculative capitalists are routinely referred to as making “bets.” Indeed, in July, hedge funds were reported as having made one-month returns of 40 percent from bets on how bad the sub-prime mortgage defaults would get. They warned banks not to make things easier on overextended homeowners, as that would skew the betting. They preferred foreclosures.
Housing Bubble and Speculative Capital
The dynamic of speculative capital is that it requires more and more money to satisfy its demands. It thrives on the increasing gap between the real values of assets and their inflated prices. After the dot.com bubble burst in 2000-01, speculative capital needed another inflated asset to siphon money from the working class to the wealthy. The rising prices of housing became the latest Ponzi scheme to benefit the rich at the expense of working class America.
By lowering interest rates to 1%, the U. S. Federal Reserve stimulated the money creation that was key to fueling the housing bubble that has kept speculative capital expanding.
Why would mortgage lenders and banks offer “sub-prime” loans they knew could not be repaid? Because each loan becomes an asset that the mortgage company or bank can then lend to another borrower. Each round of borrowing and lending increases the global money supply.
Such a system is not stable. Since it requires ever-increasing opportunities for investing ever-expanding amounts of liquidity, speculative capital is highly volatile – a pyramid scheme just waiting for its crash. The deflating of the housing bubble is spreading throughout the financial world, just as the sub-prime mortgages spread throughout the global economy.
The fear of a financial meltdown is heralded on the front page of the national and international press. Two major hedge funds tottered then failed entirely, distressed by losses in the sub-prime mortgage market. Rating agencies devalued billions of dollars in sub-prime bonds and began working on the next tier up, chancing a cascading selloff and collapse. The fallout is felt in Europe and Asia. Investment bank JPMorgan envisioned “scenarios in which the core of the global liquidity system suffers a serious assault.”
In early August, U.S. Federal Reserve Chairman Ben Bernarke issued an optimistic statement that the sub-prime crisis posed no global financial danger. Interpreting this to mean that no central bank assistance was forthcoming, stock markets went into a tailspin. The Fed and the world’s other major central banks reversed themselves and within a few days poured more than $325 billion of extra liquidity into the system; the Fed’s contribution to that total is said to be about $100 billion. The Fed followed this by lowering the discount rate, the interest rate for banks borrowing from the government.
The federal government refuses to give any assistance to homeowners who have lost everything. It won't give a dime or a care to people who are most in need, not one penny, but overnight this very same government through the U.S. Federal Reserve can print billions of dollars to pour into the banks to protect the interests of speculative capital. The financial system they are attempting to save is only for them, for the very wealthy. Every advance of speculative capital is at the expense of the working class, indeed, at the expense of all humanity.
‘Nothing Left to Lose’
Through the housing bubble (and other debt such as credit cards), speculative capital is picking whatever the working class still has in its pockets. With mortgages, it is taking the down payment (if there was one), the points paid at settlement, and the savings used to make frantic mortgage payments.
After losing their house and savings, while already living from paycheck to paycheck, millions of Americans who once thought of themselves as middle-class (or aspired to that status) will find themselves expelled into the new proletariat. Those burdened with lifelong house payments eating up their available capital will be in pretty much the same condition.
But if “freedom’s just another word for nothing left to lose,” the deflating housing bubble leaves the new proletariat free to divest itself of its myths, see the world as it is, and envision how it can be.
The alternative is fascism, a taste of which is being delivered in the anti-immigrant state laws and local ordinances being passed around the country, creating a reign of terror reinforced by the federal government’s sporadic U.S. Immigration and Customs Enforcement (ICE) raids. In the process, those who are threatened with (among other things) the loss of house and savings are being urged to attack immigrant workers as the source of all their problems—jobs, taxes, housing, health care, and education for their children.
So that’s the choice – not revolution or reform, but revolution or fascism, a united class or a divided one. With clarity and vision – but not without it – our class will see its way through to a new America. Revolutionaries are the midwives to that process.
September.2007.Vol17.Ed5
This article originated in Rally, Comrades!
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