ENTRY
[ESC]DOC TAYROC'S [UNSOLICTED] ECONOMICS HOT THOUGHT
Marx and the Death of the Author XVII: Capitalism in Crisis III: Home Ownership is a Comforting Lie
Editor's note: Due to an extremely busy couple of weeks, this is late, and I'm sorry, but I should be back to a normalish schedule now. If you'd like to see what kind of stuff I do 'irl', might I recommend a perusal of my Cyberspace page? (Admittedly, a work in progress). Of course, when you're done, you should have a look at the whole 'pages' thing. I'm fielding suggestions for what my webring token should be, since alas, I have all the imagination one would typically associate with an economist/statistician.
I am adding an extra section to this series, this section, because I realised that the 2007/08 financial crisis informs how I examine the AI bubble, and so might help us before we get to the 'thrilling' conclusion next week.
I don't mean to brag, but I have entered into the capitalist hell contract that is home ownership in the neo-liberal era. I say capitalist hell contract because:
a) I don't own my house, the mortgage company does. They just let me live here as long as I pay my mortgage, which is in no way like rent, we swear.
b) I spent the morning waiting on the helpful British Gas man to come around and fix a circuit in my kitchen that had previously left me without any of my kitchen appliances for the better part of a week. He was helpful and extremely nice, not only to me but also my cat. However, once he left I still found myself doing a mental inventory of everything else in the house on the edge of breaking.
Of course, the downsides of modern home ownership aside, there must be reasons to still engage in this soul crushing practice, right? Well, yes, of course. There are a few, some more guaranteed than others. For a start, when you 'buy' your house, even on mortgage, you can do whatever you want to it. We renovated our bathroom, redid the upstairs flooring, and painted several of the rooms. Granted, I'm colour blind and so there were, as far as I can attest, diminishing returns on the extensive colour selection process my wife went through, but it's the spirit that counts.
From the perspective of capital, of course, the argument is that now my wife and I are on the 'property ladder'. This is where things become rather tulip crisis rather fast again. You see, the idea is that as we own our house, especially as it's in London, the equity we hold in the property will probably increase, and so if and when we sell the property, assuming we've consistently paid our mortgage fares, then we will probably get back more than we paid for the house.
Of course, if you've been in the house buying process you already know, you never actually personally see any of this money. The potential profit from owning your house will likely go towards whatever you pay for the new house. If you're upgrading because you're seeking more space, then you will likely need to take an additional mortgage to cover the costs of the new house, which will exceed the price of the previous house, especially if its value also increased over the course of its current owner's occupancy. The actual money itself will therefore primarily transfer between multiple mortgage providers, with little to no time spent with the property owners. What do the mortgage providers do with the money? We will get back to that in a second.
Let's first spend a little time with all the heavy lifting the probablies are doing up there. When you first set out to do the home buying or selling process, you might go to your banker first. They will give you a valuation based on 'Net Present Value' (NPV), which is calculated thusly:
NPV = \frac{R_t}{(1+i)^t}Where t is the time of the cash flow, i is the discount rate, and R is the cash flow. The NPV is all great and good for determining the current theoretical value of your property assuming the discount factor remains constant, and the relationship of time to the discount factors remains consistant, as well as assuming the value of cash at the time of transaction maintains its relationship with the perceived value.
Much like Schroedinger’s cat, the NPV is a theoretical value with no meaningful value, as in the process you might also enlist the aid of a parasite. I mean, estate agent, who will come over and give your house a valuation based on their own internalised criteria, for which there is no consistent open standard. They will likely choose whatever number they give you based on perceived value of any improvements you've made to the property, your property's location, and the perceived quality of the neighbourhood. Consistent with capitalist logic, this will mean assigning a numerical value to things that are difficult, even impossible to quantify. This number may approximate the NPV, but will more likely than not be unequal to NPV, rendering all previous NPV calculations irrelevant. Idle speculation on the part of the bank. You may start to make plans based on the number given you by this estate agent, however, your agent as well as the agent of the party buying or selling the home, as well as any and all solicitors involved will continue to debate the actual price that will be paid, leaving the actual value of the house 'up in the air' until money and contracts finally change hands. This final value may bear little to no resemblance to any of the values previously given, and all the speculation ceases to have meaning. The final threshold of any speculation is finally crossed, and all the probability in the world ceases to have meaning, as the actual observed data is finally produced. At this point, the seller may end up with exactly the amount they paid previously, or at a loss. In the even of a loss, neither the banks involved nor the agents suffer any loss, only the seller.
Now imagine, if you can, that as the capitalist class seeks to extract more profit from the surplus value of labour, and so in the process wages go stagnant. Instead of inhibiting the increasing profits at the cost of fair wages for labour, you instead crush unions but also make credit easier to obtain for the masses, so they can continue to consume, and you can now also extract even more profit from the interest that will be paid on this debt. Of course, there needs to be collateral, and so you use the previous promise of private property, an enshrined part of your system, as said collateral, even for people who can't afford said collateral in the first place, thanks in no small part to the aforementioned knee capping of the bargaining power of labour.
This is where we come to the 1980s, and we find the stagnating wages being met not with proper regulation against excessive executive pay, or protections for labour against shareholders, but instead the expansion, by way of Alan Greenspan, of cheap credit based on home equity. The assumption being that since there is a finite amount of land, the value of land will always go up. Of course, for this to work, a great number of people who previously would be unable to reliably afford land must be given a loan to purchase land, in the process driving up demand, and therefore increasing the value of the obviously finite land. To further remove risks to the banks giving these sub-prime mortgages, you allow mortgage brokers and commercial banks to become investment banks, and you allow them to take a bunch of 'bad' mortgages, which will likely default, and package them with a bunch of 'good' mortgages, which will likely pay off with profit. This package, called a 'securitised mortgage' can then be sold to other banks as though it were a commodity, with the promise that enough of the 'good' mortgages, and even a certain number of the 'bad' mature into a net positive asset. Profit, profit, profit. Again, for the good mortgages, things will probably always go up, right?
Of course, I'm writing from this side of the financial collapse, and so we all know that this didn't work out. Enough 'bad' mortgages defaulted that the value of securitised mortgages as a whole came into doubt. This seed of doubt was enough to burst the bubble that had been growing since the 1980s. Bubbles may take a while to burst, but they do always burst. The securitised mortgages were showing that they were not the reliable return on investment that had they had previously been assumed to be, and as the 'marketplace corrected', that is admit that millions of dollars of imaginary 'future money' didn't exist, millions became homeless as the banks sought to recoup lost funds by recapitalising on the physical assets they held. That is, the houses held by flawed or even just border-line flawed mortgages. As deluded, rosy profit forecasts fell, millions were let go from their jobs to assure share holders that even though nothing material had changed, there were 'proactive steps' being taken to stave off disaster.
Of the crises covered thus far in this mini series, this one hits closest to home. I remember watching this unfold on the television, hearing about it on radio, and reading about it online. The crisis began in late 2007, but realistically the initial event wasn't complete until 2010. I entered undergrad in 2009. One of the first undergraduate economics modules I took was on the history of economic crises, with an obvious and timely focus on the one unravelling around us in near-enough to real time, with us reading several 'hot off the press' essays and/or books by the 'top' economists of the era advising world leaders on how to navigate their respective countries through this perfect storm of an economic crisis. For Britain and America, the crisis came at a time when the wars in Afghanistan and Iraq were clearly going poorly, and so the growing fiscal costs of these conflicts was being drawn into greater public scrutiny as millions globally faced homelessness. The 2007/08 Financial Crisis, as it became known, was just another reminder of how very dead the optimism of the 1990s, which had been dying since the dawn of the 'war on terror', was.
Regardless, there was still optimism in the air, the British general elections had ousted the Labour Government, which had suffered under the remarkable incompetence of Tony Blair, and although Blair was long gone, the stain of his politics continued to permeate the party. Strawberries and cream loving David Cameron brought the Conservative Party to a slight victory, ultimately forming a coalition with backbone lacking Nick Clegg's Liberal Democrats. Under Blair, Labour had become the party of 'Margaret Thatcher, but Red'. Under Cameron, the Tories had become the party of 'Margaret Thatcher, but socially correct on the surface'. That social corrected-ness, mixed with a TED Talk, (oh how I loathe TED talks) and the public punishing Labour for becoming Tory-lite lead to Tory regular with a sprinkle of whatever the hell was left of the Liberal Democrats. In the states, Bill Clinton had made the Democrats into 'Ronald Reagan, but blue', whilst George Bush had made the Republicans into 'Ronald Reagan, but somehow more deranged and right wing'. As we now know, the Americans would not punish him for the clear derangement and descent into fascism, but rather for being at the wheel whilst Reagan's financial policies did what they were always going to do, and bankrupt the majority for the benefit of the minority. As such, the Americans elected 'Ronald Reagan but socially progressive' Barack Obama.
I bring this up because reflecting on the time, I am now drawn to the conclusion that we were never going to fix it because at the time we refused to learn the lessons. Neo-liberalism died an extremely predictable death in 2007/08 but because Britain and America still insisted on doing post-Cold War victory laps, instead of moving us onto the next thing, we've been stuck in the festering rotting corpse of neo-liberal economic dogma ever since, practically condemning us to the current fascist hell-scape as far back as 2010. So what happened?
For this little series I've skipped the 1929 stock market crash, largely because I'm saving that for a series I've got planed on John Maynard Keynes. It also doesn't help that what killed the economy in 1929 isn't exactly the same as the Dutch Tulip Crisis or the 2007/08 crisis, but it's close enough that it'd be like rhyming a word with itself, the trademark of a truly lazy poet/songwriter. For lack of better phrase, the causes of 1929 are intellectually boring to me because it's the 'classic crash' that we've compared every other crash to for the last century, and so all the meat's been picked off those bones. Granted, something similar can be said about 2007/08, which is why I'm not going to linger that much longer on the lead up. To me, what's more interesting is the reactions to these crises, because in many ways they couldn't be more different, and there's a couple reasons the 'golden age of capitalism' followed the Great Depression, but doesn't seem like it's in the cards for us.
So let's start with the response to 1929. One of the most obvious traits in common between 1929 and 2007 is that it was immediately obvious to most lay people that the banks were to blame. In both instances, several large blanks were even forced to close, and others ran into insolvency. Millions, even billions of [insert local currency unit] that were previously promised to have existed were discovered to have never existed, and so people made a mad dash to insure that their accounts were filled with real currency and not that fake, speculative currency. In both cases, as businesses discovered they weren't nearly as asset rich as they'd previously assumed took it out on the labour rather than the share holders, and so in both instances unemployment radically increased. In both cases, large swaths of the population had borrowed against future value of now worthless assets, and thus lost assets that had been purchased on that credit. Sometimes the assets were as 'innocent' as a sofa, other times they were as utterly necessary for modern life and employment as a car, a house, a computer. In both cases, the people who had made the decisions that were hurting the majority were shielded from meaningful consequence, as their sizeable incomes meant they hadn't needed to invest or borrow the majority of their savings to live an adequate (or more often above adequate) lifestyle. In both instances, there had been a massive boom in the economy based on a technological advance that made people think things were always going to get better.
There is, however, one difference. In 1914, over a decade before the fateful crash, an angry young man put bits of the insides of an ageing Franz Ferdinand on display for the good people of Sarajevo. In a more sane society, this would lead to a lot of people questioning why we were still letting a family as inbred and demonstrably crazy as the Hapsburgs rule a sizeable chunk of Europe in a period with electric lights, motor cars, and indoor plumbing, thus bringing about the transition away from monarchy. We do not live in a sane society, and so instead we spent four years wiping out an entire generation of teenagers and young adults across Europe, America, Africa, and Asia. One of the monarchs who had a vested interest in improving his image in Europe was Tsar Nicholas II, who had the admirable goal of wanting to oust an Hapsburg, but the less honourable goal of single handed ruling Russia. On account of the magic blood, you see. The problem is this magic blood didn't seem to have magic'd a single brain into his head or an ounce of competency because the Tsarist Russian Army was somehow worse than even the Austro-Hungarian one. Which took some doing. The military incompetence of Nicky II compounded on his decades of general civilian government incompetence, and the peoples of the Russian Empire had finally had enough. Thus, in 1917 Russian Imperial Citizens became the first, and perhaps only, victors of the First World War outside of British and American arms manufacturers when they realised they could just stop having a Tsar after all.
Of course a period of civil war followed as no one quite agreed what ought to replace said Tsar, and of course Britain and America seeing someone else's civil war also just had to invade and generally sow additional discord. We can't help ourselves. Moths to a flame. So anyway, more people dead, and at the end of it all in 1922, the Russian Empire ceased to exist, and in its place came the territorially suspiciously similar Union of Soviet Socialist Republics (USSR). The focus of today's entry is not the internal politics of the USSR, or debating the merits or demerits of Lenin, Stalin, Trotsky, the Bolsheviks, the Mensheviks, etc., etc. The reason to bring up the Soviets here is less about what they actually were or weren't and more about how Britain and America perceived them. The USSR was the first European country to openly question the longevity and success of the bourgeois revolutions that had been occurring across Europe since the 17th century. Naturally, this scared the hell out of the bourgeois in the US and the UK. As a depressing number of people would learn the hard way over the course of the rest of the 20th century, there is little more dangerous than a scared capitalist.
Except for in the 1930s, the rarest of rare windows where the bourgeois was on the back foot. The First World War had been a disaster for them, as they had been part of the nation-state building that led to the extreme nationalism that precipitated the particular humanitarian crisis that was 1914-1918. The First World War had resulted in the cultivation of a class consciousness not only in the obvious places, such as the Russian Empire/USSR and the obviously collapsing German, Austro-Hungarian, and Ottoman empires, but also in the 'victorious' British, French, and American empires. Of course, in some places this wouldn't result in a lurch to the left, as had happened in the USSR, but rather a lurch to the right, as happened in Turkey, Germany, and Austria, as 'good will to those who look and sound like you' has, unfortunately, always been an easier sell than 'good will to all mankind'. Of course, the pusher of nationalism in place of dynastic imperialism would be none other than US president and noted racist and fan of 'Birth of a Nation', Woodrow Wilson, who held a similar view that 'proper Americans' looked and sounded a lot like him, at the expense of the numerous Black, Hispanic, and Asian persons living in the US at the time. Nonetheless, as we can even see hinted at in works like The Great Gatsby by F. Scott Fitzgerald, the bourgeois did not feel all that secure in the 1920s and 30s, and so as the failure of the 'return to normalcy' policies of the 1920s became evident, and the world began to gravitate to one of two options, fascism or communism for solutions, a rare moment of sanity came to the American and British bourgeois classes.
Resultantly, the 1930s and 40s saw the British and American empires pivot to Keynesian capitalism to 'save capitalism from itself', and head off some of the clear advances the Soviets were making. You read that correctly, in the depths of the 1930s depression, before either the British or American governments could pull together the political capital to use Keynesian 'socialism-lite' to pull themselves out of the depression a not-insignificant number of British, French, and American persons moved to the USSR, one of the only major powers not seeing an economic downturn, only further putting pressure on the bourgeois liberal democracies to put on a good show for those remaining. Again, I'll leave this vague and open ended here because I'm planning a series on Keynes next, but regardless both the British and American governments began building many of the social programmes and regulations (many 'common sense', if I were to say there's a good version of capitalism, which is a mighty big if) that would lead to the so-called 'golden age of capitalism'.
Those of you who are, like me, old enough to remember the 2007/08 financial crisis may have noticed no similar steps were taken in the aftermath of that financial crisis. Few new regulations on the banks, but a rather generous bailout given to the largest banks and other firms most hurt by the financial crisis. Little to no programmes made available to the individuals affected. Promises of improvements to employment were made, and in the US an attempt to make health insurance mandatory, but still private and tied to employment, was rolled out. The Occupy Wallstreet protests were widely ignored, and no systematic reforms were introduced. Part of this, it has been suggested, is because neo-liberal capitalism was not under the existential threat that capitalism had found itself under in the 1930s. As there was no viable alternative, in the eyes of many at least, there was no need to fix capitalism.
Of course, 2007 was also the year that Apple unveiled the first iPhone and Google the first Android. The 2007/08 financial crisis had all but wiped out memories of the 2001 'Dot Com' bubble bursting in the memories of many in the public. Not to mention that whilst in 2001 the digital world was caught in the 'Wintel' monopoly of Microsoft Windows based systems running on Intel's x86 processor architecture, by 2007 Apple's 'triumphant return' had brought the Wintel monopoly to a temporary pause, and given people fresh ideas of what computing could be outside of the increasingly stale Windows XP dominated environment. The iPhone and Android had ushered in a new age of technological optimism, one that in many ways expanded past the one of the 1990s. The internet was no longer an activity that you had to go to, it was now with you 24/7/365. Millions who had previously relied on slow and unreliable dial-up internet now had ready access to 'always on' broadband internet for the first time. The 'there's an app for that' campaign from Apple had cemented in people's mind a new digital form of consumption. Before the iPhone there was a marked, physical space between the home and the marketplace. Now, the digital marketplace was universally omnipresent. Resultantly, the fiscal value of online advertising sky rocketed.
Any failure of the wider economy to recover from the 2007/08 financial crash could now be neatly and conveniently covered up by the astronomical values that 'big tech' was achieving. Further, there was now a tidy bundle of statistics that could be used to cover up the glaring economic stagnation: GDP and unemployment. The average consumer was none the wiser that neither statistic covered the economic health of individuals, and as long as capital transfers, even of what Marx would call 'fictitious capital', or speculative capital, could continue to occur between the bourgeois classes, well, GDP go up. And the increasingly online nature of the economy after 2007 added a layer of abstraction that allowed for speculators to add even more 'fictitious capital', completely alienated from actual surplus value derived from actual labour, to further concentrate capital in the bourgeois class, and away from the proletariat, who found themselves increasingly unprotected from the regulations and social programmes that had emerged in the latter half of the 1930s and 40s, especially as the rise of the 'gig' and 'platform' economies sought to further alienate the labourer from the surplus value they generated by obfuscating what the products actually were, and distancing labour further from ownership in the 'share economy'.
In short, we solved the problems from the last bubble by building a whole new bubble. Thusly, not solving a single problem, but merely kicking the can down the road. Bush, Brown, Obama, and Cameron were not the right men at the right time. Their policies were the worst ideas at the worst possible time, and continued paving the road to the hellscape in which we presently live. And that's not even touching their foreign policies.
Next week I'm talking about the bubble(s) currently bursting.
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