Re: [OPE-L] [Jurriaan re] Rick Wolff, Personal debts and US Capitalism

From: glevy@PRATT.EDU
Date: Mon Oct 17 2005 - 21:01:28 EDT

---------------------------- Original Message -------------------------
Subject: Re: [OPE-L] Rick Wolff, Personal debts and US Capitalism
From:    "Jurriaan Bendien" <>
Date:    Mon, October 17, 2005 7:33 pm

At the risk of overposting again, I am sure Rick Wolff article is
wellmeaning, but why should we be afraid of a housing boom? Is credit the
big bad wolf? What is the real point of telling this story? Is it another
leftist doomsayer prophesying "the end is nigh"? How does this inspire
anybody to do anything? Is it a new type of "crisis theory"? Personally,
although I am not a professional economist, I think it is rather
meaningless to talk just about "rising debt levels and debt servicing
ratios", unless you put side by side:

- the structure of debts incurred by type of debt and type of
- the distribution of disposable income as against the cost of living,
- the structure of assets by type, value and location.
- the real propensity to borrow by type of borrower.

If we go beyond scare stories, and do some empirical research, a different
picture will emerge. And a matter of fact, the housing boom has affected
most OECD countries, it is not unique to the USA, but is geographically
unevenly distributed also within states, as David Harvey can tell you. You
can probably validly say that:

- the housing stock is overvalued, fueled by easy credit and relatively low
interest rates;
-  a greater proportion of disposable income is spent on pay off mortgages
and so on (affecting the "value of labour-power"); to really see what is
going on, you have to relate income distribution to the cost of living;
- effectively, an increasing proportion of total capital nowadays is
*rentier capital* rather than productive, employment generating capital
(though this is hidden in official gross product figures, which exclude
much property income - in the form of rents and interest - from the
concept of value-added).

This last-mentioned effect is I think, in part, a consequence of the
longterm problem of overcapitalisation and excess capacity generated in
the sphere of production; capital hives off into other areas, seeking a
better short-term return. The neoliberal argument was that if you freed
up the markets in a low interest-rate environment, you would get strong
cumulative growth in output and employment, but in present-day corporate
monopoly capitalism, instead what you get is, that workers invest in
housing and capitalists speculate in financial and physical property.
Manufacturing declines, while intermediation services increase. The
resulting gap between the actual and the potential physical output that
could satisfy human needs is mainly due to the fact that, in free-up
markets, the strong defeat the weak, so that income inequality increases
enormously. People who have little income cannot buy nor borrow much. The
only real defence the working class has there, short of powerful
political action, is in its own coupling activities.

But let us suppose that suddenly e.g. 1 million people default on their
mortgages. Okay, that is terrible for those people, but it is
macroeconomically not anything like Hurricane Katrina (which could take
0.5% to 1% off annual US GDP) because the asset is still there, and,
assuming the home owners are not completely pauperised (presumably they
still own some of the capital tied up in the housing), they will just
rent, rather than be owners. Even if housing is overvalued by 30%, a
slump in housing prices is not very different from a stock crash. The
banks would not lend so easily, unless they thought it was a relatively
safe bet to do so, and politicians support it, because it promotes social

According to a 1998 OECD estimate, a 20% average fall in share prices
would reduce private consumption spending by about 1.2% and would cut
OECD-GDP by 0.6%. The Dutch Central Bank for its part estimated that a
20% drop in average house prices would cause a 1.4% drop in total private
consumption spending over two years. (The 1987 stock crash for example
had, in aggregate, actually rather little effect on total private

I think the way to see it is, that housing booms and busts are going to
be a permanent characteristic of the housing market; no different really
from stockmarket speculation. In themselves, they do in no way lead to a
breakdown of the system however; that would require a whole *combination*
of adverse economic conditions.

I think the problem of these gloomy leftist tales is, that they feed
directly into official propaganda about people (who, exactly?) "living
beyond their means" and so on, which becomes an excuse for new cutbacks in
social spending. Probably it is true, that Americans on average save
relatively little, but a lot depends on how you do the figures - they do
save, in the sense that they pay into insurance schemes of various types,
and pay off mortgages, and once you include that, the savings rate is

Here in Holland, the GDP growth rate is practically zero, but that is due
primarily to lack of consumer spending; people have money, but do not spend
it on consumables. In that sense, saving is the problem, not credit-driven
overspending. In New Zealand, Finance Minister Michael Cullen (Labour
Party) went on record as saying that "My sense is that there are definite
gains to be made, both economic and social, in increasing the savings
level of New Zealanders and in encouraging diversification in assets away
from the residential property market." The problem is that the banks, who
receive mortgage payments from workers, do not invest that capital in
job-creating production that could pay off debts, so why not blame the
workers, if capitalism isn't functioning as it should?

Yes, of course you can make a good critique of the "housing question", but
I think not in the way Wolff has done it. To give you a simple example,
here in Holland there's a permanent housing shortage, and the government
wants to solve that by marketisation and privatisation - the real scandal
being, that they want to reduce rent controls, although house *owners* get
tax rebates on their mortgages (i.e. more than 10 billion euro a year;
reportedly about half of total housing is owner-occupied, but only about
2% of Dutch house owners are beneficiaries). As a tenant, that kind of
policy makes me wild, where is the justice in that.

Credit is a very flexible instrument, precisely because, as Wolff implies,
you can not just sell loans to borrowers, but also trade in debt claims (as
"debt securities" of various types), renegotiate repayment schedules, and
hedge your bets. And therefore, a series of debt defaults by themselves are
unlikely to lead to any sudden and total economic collapse in rich
countries, at worst a slow hemorraghing downwards due to a more and more
unequal income distribution.

The real debate concerns the moral ambiguity inherent in credit itself -
after all, if people borrow money that they cannot pay back, haven't they
go themselves to blame, as a sort of Original Sin of being too greedy? At
the root of that ambiguity, is the problem that we live in a world which
extends credit mainly on the basis of what you have, not what you are, in
which case, people pretend to be all sorts of things, to have more. In
context, the modern "American Dream" is just based on superior marketing.
Behind that flashy marketing, is a slowly decaying social system.


Oh yes, I'm the great pretender
Pretending I'm doing well
My need is such, I pretend too much
I'm lonely, but no one can tell
Oh yes, I'm the great pretender
Adrift in a world of my own
I play the game, but to my real shame
You've left me, to dream all alone

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