The Urban Roots of Financial Crises (Part 1)
Over the next few weeks NLP will present a range of material relating to the most recent edition of Socialist Register - The Crisis and the Left. We kick off with an exclusive presentation David Harvey's contribution to the volume, which we will serializing in four parts over consecutive weekends.
In an article in the New York Times on 5 February 2011, entitled `Housing Bubbles Are Few and Far Between', Robert Shiller, the economist who many consider the great housing expert given his role in the construction of the Case-Shiller index of housing prices in the United States, reassured everyone that the recent housing bubble was a `rare event, not to be repeated for many decades'. The `enormous housing bubble' of the early 2000s `isn't comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional'. The only reasonable parallels, he asserted, were the land bubbles that occurred in the United States way back in the late 1830s and the 1850s.1 This is, as I shall show, an astonishingly inaccurate reading of capitalist history. The fact that it passed so unremarked testifies to a serious blind spot in contemporary economic thinking. Unfortunately, it also turns out to be an equally blind spot in Marxist political economy.
Conventional economics routinely treats investment in the built environment along with urbanization as some sidebar to the more important affairs that go on in some fictional entity called `the national economy'. The sub-field of `urban economics' is, thus, the arena where inferior economists go while the big guns ply their macro-economic trading skills elsewhere. Even when the latter notice urban processes, they make it seem as if spatial reorganizations, regional development and the building of cities are merely some on-the-ground outcome of larger scale processes that remain unaffected by that which they produce. Thus, in the 2009 World Bank Development Report, which, for the first time ever, took economic geography seriously, the authors did so without a hint that anything could possibly go so catastrophically wrong in urban and regional development as to spark a crisis in the economy as a whole. Written wholly by economists (without consulting geographers, historians or urban sociologists) the aim was supposedly to explore the `influence of geography on economic opportunity' and to elevate `space and place from mere undercurrents in policy to a major focus'.
The authors were actually out to show how the application of the usual nostrums of neoliberal economics to urban affairs (like getting the state out of the business of any serious regulation of land and property markets and minimizing the interventions of urban, regional and spatial planning) was the best way to augment economic growth (i.e., capital accumulation). Though they did have the decency to `regret' that they did not have the time or space to explore in detail the social and environmental consequences of their proposals, they did plainly believe that cities that provide `fluid land and property markets and other supportive institutions such as protecting property rights, enforcing contracts, and financing housing will more likely flourish over time as the needs of the market change. Successful cities have relaxed zoning laws to allow higher-value users to bid for the valuable land and have adopted land use regulations to adapt to their changing roles over time'.2
But land is not a commodity in the ordinary sense. It is a fictitious form of capital that derives from expectations of future rents. Maximizing its yield has driven low- or even moderate-income households out of Manhattan and central London over the last few years, with catastrophic effects on class disparities and the well-being of underprivileged populations. This is what is putting such intense pressure on the high-value land of Dharavi in Mumbai (a so-called slum that the report correctly depicts as a productive human ecosystem). The World Bank report advocates, in short, the kind of free-market fundamentalism that has spawned both macro-economic disruptions such as the crisis of 2007-09 alongside urban social movements of opposition to gentrification, neighbourhood destruction and the eviction of low-income populations to make way for higher value land uses.
Since the mid-1980s, neoliberal urban policy (applied, for example, across the European Union) concluded that redistributing wealth to less advantaged neighbourhoods, cities and regions was futile and that resources should instead be channelled to dynamic `entrepreneurial' growth poles. A spatial version of `trickle down' would then in the proverbial long run (which never comes) take care of all those pesky regional, spatial and urban inequalities. Turning the city over to the developers and speculative financiers redounds to the benefit of all! If only the Chinese had liberated land uses in their cities to free market forces, the World Bank Report argued, their economy would have grown even faster than it did!
The World Bank plainly favours speculative capital and not people. The idea that a city can do well (in terms of capital accumulation) while its people (apart from a privileged class) and the environment do badly is never examined. Even worse, the report is deeply complicit with the policies that lay at the root of the crisis of 2007-09. This is particularly odd, given that the report was published six months after the Lehman bankruptcy and nearly two years after the US housing market turned sour and the foreclosure tsunami was clearly identifiable. We are told, for example, without a hint of critical commentary, that:
since the deregulation of financial systems in the second half of the 1980s, market-based housing financing has expanded rapidly. Residential mortgage markets are now equivalent to more than 40 percent of gross domestic product (GDP) in developed countries, but those in developing countries are much smaller, averaging less than 10 percent of GDP. The public role should be to stimulate well- regulated private involvement... Establishing the legal foundations for simple, enforceable, and prudent mortgage contracts is a good start. When a country's system is more developed and mature, the public sector can encourage a secondary mortgage market, develop financial innovations, and expand the securitization of mortgages. Occupant-owned housing, usually a household's largest single asset by far, is important in wealth creation, social security and politics. People who own their house or who have secure tenure have a larger stake in their community and thus are more likely to lobby for less crime, stronger governance, and better local environmental conditions.3
These statements are nothing short of astonishing given recent events. Roll-on the sub-prime mortgage business, fuelled by pablum myths about the benefits of homeownership for all and the filing away of toxic mortgages in highly rated CDOs to be sold to unsuspecting investors! Roll-on endless suburbanization that is both land and energy consuming way beyond what is reasonable for the sustained use of planet earth for human habitation! The authors might plausibly maintain that they had no remit to connect their thinking about urbanization with issues of global warming. Along with Alan Greenspan, they could also argue that they were blind-sided by the events of 2007-09, and that they could not be expected to have anticipated anything troubling about the rosy scenario they painted. By inserting the words `prudent' and `well-regulated' into the argument they had, as it were, `hedged' against potential criticism.
But since they cite innumerable `prudentially chosen' historical examples to bolster their neoliberal nostrums, how come they missed that the crisis of 1973 originated in a global property market crash that brought down several banks? Did they not notice that the end of the Japanese boom in 1990 corresponded to a collapse of land prices (still ongoing); that the Swedish banking system had to be nationalized in 1992 because of excesses in property markets; that one of the triggers for the collapse in East and Southeast Asia in 199798 was excessive urban development in Thailand; that the commercial property-led Savings and Loan Crisis of 198790 in the United States saw several hundred financial institutions go belly-up at the cost of some US$200 billion to the US taxpayers (a situation that so exercised William Isaacs, then Chairman of the Federal Deposit Insurance Corporation, that in 1987 he threatened the American Bankers Association with nationalization unless they mended their ways)?4
Where were the World Bank economists when all this was going on? There have been hundreds of financial crises since 1973 (compared to very few prior to that) and quite a few of them have been property or urban development led. And it was pretty clear to almost anyone who thought about it, including, it turns out, Robert Shiller, that something was going badly wrong in US housing markets after 2000 or so. But he saw it as exceptional rather than systemic.5 Shiller could well claim, of course, that all of the above examples were merely regional events. But then so, from the standpoint of the people of Brazil or China, was the crisis of 2007- 09. The geographical epicentre was the US Southwest and Florida (with some spillover in Georgia) along with a few other hot spots (the grumbling foreclosure crises that began as early as 2005 in poor areas in older cities like Baltimore and Cleveland were too local and `unimportant' because those affected were African-Americans and minorities). Internationally, Spain and Ireland were badly caught out, as was also, though to a lesser extent, Britain. But there were no serious problems in the property markets in France, Germany, the Netherlands, Poland or, at that time, throughout Asia.
A regional crisis centred in the United States went global, to be sure, in ways that did not happen in the cases of, say, Japan or Sweden in the early 1990s. But the Savings & Loan crisis centred on 1987 (the year of a serious stock crash that is still viewed as a totally separate incident) had global ramifications. The same was true of the much-neglected global property market crash of early 1973. Conventional wisdom has it that only the oil price-hike in the fall of 1973 mattered. But it turned out that the property crash preceded the oil price hike by six months or more and the recession was well under way by the fall. The boom can be measured by the fact that Real Estate Investment Trust Assets in the US grew from $2 billion in 1969 to $20 billion in 1973 and that commercial bank mortgage loans increased from $66.7 billion to $113.6 billion over the same period. The property market crash that then followed in the spring of 1973 spilled over (for obvious revenue reasons) into the fiscal crisis of local states (which would not have happened had the recession been only about oil prices). The subsequent New York City fiscal crisis of 1975 was hugely important because at that time it controlled one of the largest public budgets in the world (prompting pleas from the French President and the West German Chancellor to bail New York City out to avoid a global implosion in financial markets). New York then became the centre for the invention of neoliberal practices of gifting moral hazard to the banks and making the people pay up through the restructuring of municipal contracts and services. The impact of the most recent property market crash has also carried over into the virtual bankruptcy of states like California, creating huge stresses in state and municipal government finance and government employment almost everywhere in the US. The story of the New York City fiscal crisis of the 1970s eerily resembles that of the state of California, which today has the eighth largest public budget in the world.6
The National Bureau of Economic Research has recently unearthed yet another example of the role of property booms in sparking deep crises of capitalism. From a study of real estate data in the 1920s, Goetzmann and Newman `conclude that publically issued real estate securities affected real estate construction activity in the 1920s and the breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929-30'. With respect to housing, Florida, then as now, was an intense centre of speculative development with the nominal value of a building permit increasing by 8,000 per cent between 1919 and 1925. Nationally, the estimates of increases in housing values were around 400 per cent over roughly the same period. But this was a sideshow compared to commercial development which was almost entirely centred on New York and Chicago, where all manner of financial supports and securitization procedures were concocted to fuel a boom `matched only in the mid-2000s'. Even more telling is the graph Goetzmann and Newman compile on tall-building construction in New York City. The property booms that preceded the crash of 1929, 1973, 1987 and 2000, stand out like a pikestaff. The buildings we see around us in New York City, they poignantly note, represent `more than an architectural movement; they were largely the manifestation of a widespread financial phenomenon'. Noting that real estate securities in the 1920s were every bit as `toxic as they are now', they went on to conclude: `The New York skyline is a stark reminder of securitization's ability to connect capital from a speculative public to building ventures. An increased understanding of the early real estate securities market has the potential to provide a valuable input when modelling for worst-case scenarios in the future. Optimism in financial markets has the power to raise steel, but it does not make a building pay.'7
Property market booms and busts are, clearly, inextricably intertwined with speculative financial flows and these booms and busts have serious consequences for the macro-economy in general as well as all manner of externality effects upon resource depletion and environmental degradation. Furthermore, the greater the share of property markets in GDP, then the more significant the connection between financing and investment in the built environment becomes as a potential source of macro crises. In the case of developing countries such as Thailand, where housing mortgages, if the World Bank Report is right, are equivalent to only 10 per cent of GDP, a property crash could certainly contribute to but not totally power a macro- economic collapse (of the sort that occurred in 1997-98), whereas in the United States, where housing mortgage debt is equivalent to 40 per cent of GDP, then it most certainly could and did in fact generate the crisis of 2007-09.
1 Robert Shiller, `Housing Bubbles are Few and Far Between', New York Times, 5 February 2011.
2 World Development Report 2009: Reshaping Economic Geography, Washington DC: The World Bank, 2009. See my earlier critique in David Harvey, `Assessment: Reshaping Economic Geography: The World Development Report',Development and Change, 40(6), 1269-77, 2009.
3 World Bank Development Report, p. 206.
4 Graham Turner, The Credit Crunch: Housing Bubbles, Globalisation and the
Worldwide Economic Crisis, London: Pluto, 2008; David Harvey, The Condition of Postmodernity, Oxford: Basil Blackwell, pp. 145-6, 169.
5 David Harvey, The New Imperialism, Oxford: Oxford University Press, 2003, p. 113; Robert Shiller, Irrational Exuberance, Princeton: Princeton University Press, 2000.
6 John English and Emerson Gray, The Coming Real Estate Crash, New Rochelle, NY: Arlington House Publishers, 1979; William Tabb, The Long Default: New York City and the Urban Fiscal Crisis, New York: Monthly Review Press, 1982; David Harvey, A Brief History of Neoliberalism, Oxford: Oxford University Press, 2005; Ashok Bardhan and Richard Walker, `California, Pivot of the Great Recession', Working Paper Series, Institute for Research on Labor and Employment, University of California, Berkeley, 2010.
7 William Goetzmann and Frank Newman, `Securitization in the 1920's', Working Papers, National Bureau of Economic Research, 2010; Eugene White, `Lessons from the Great American Real Estate Boom and Bust of the 1920s', Working Papers, National Bureau of Economic Research, 2010.