From: glevy@PRATT.EDU
Date: Sun Oct 16 2005 - 07:14:25 EDT
From mrzine-monthly review/In solidarity, Jerry
_______________________________________________________________________
Personal Debts and US Capitalism
by Rick Wolff
There is no precedent in US -- or any other -- history for the
level of personal debt now carried by the American people.
Consider the
raw numbers. In 1974, Federal Reserve data show that US mortgage plus
other consumer debt totaled $627 billion. By 1994, the total debt had
risen to $4,206 billion, and by 2004, it reached $9,709 billion. For the
second quarter of 2005, the Fed announced that the nation's debt service
ratio (debt payments as a percentage of after-tax income) was 13.6%, the
highest since the Fed began recording this statistic in 1980. Past
borrowing now costs Americans so much in debt service that more borrowing
is required to maintain, let alone expand consumption.
These facts raise two questions: what caused this mountain of
debt to arise and what are its consequences? Answering these
questions is an urgent matter since, as has been known for
centuries, the risks of high debt include economic collapse.
Since the real wages of most workers stagnated or fell since
1975, they responded partly by borrowing to maintain or raise
their living standards. Over the last twenty five years, ever
more enterprises (stock brokers, insurance companies, lending
branches of industrial corporations, etc.) are seeking high
profits by offering easier loans (credit cards, basic
mortgages, home equity lines, mortgage refinancing, tax-refund
advances, etc.). After the stock market bubble burst in 2000,
the Federal Reserve tried to contain the damage by drastic,
sustained cuts in interest rates. Already debt-addicted, US
households responded to cheap, available credit by borrowing
much more.
Historically low interest rates and intense competition among
lenders drew millions of Americans into borrowing to buy a
first home. Not only the native-born exchanged rental
apartments for "the American dream." Millions of immigrants
borrowed to partake of that dream too. Millions of other
Americans borrowed for costly home expansions and renovations.
The resulting boom in residential construction and its
dependent industries partly offset the depressive economic
effects of the stock market bubble burst in 2000. A stock
market bubble gave way to a housing bubble. As housing prices
were bid up, homeowners' "equity" in houses rose, and that
allowed them to borrow still more with their higher "home
equity" as collateral.
In all debt-based economic upswings, the crucial issue is: How
long will lenders keep feeding rising debt demands? Nowadays,
banks lending to US homeowners usually resell that debt to
investors in the form of "mortgage-backed securities."
Because the US government is believed to guarantee those
securities, more or less, investors around the world have been
buying them. The two biggest buyers recently have been banks
in Japan and the People's Republic of China. They are
therefore -- and note the irony -- among the biggest ultimate
recipients of the monthly mortgage payments made by American
homeowners. The US housing bubble postpones bursting only so
long as Americans keep borrowing and the major housing
lenders, including the Japanese and Chinese banks, keep the
cycle of
rising home prices and rising home indebtedness rolling.
Nothing guarantees that the lending and borrowing binges will
continue. Americans' rising debt levels may frighten them into
slowing or ending their borrowing. Countless other
possibilities from political
shifts to military reverses to cultural changes -- including the tougher
bankruptcy laws that will take effect on Monday, October 17 -- could
likewise reduce Americans' abilities or willingness to borrow. Similarly,
all sorts of considerations may dissuade lenders, foreign or domestic,
from continuing to provide credit. If and when either the borrowing or the
lending slows, the housing bubble will likely burst. As home buying slows,
housing prices will stop rising. Inventories of new homes will become
difficult to sell, resulting in lower home prices. Housing construction
will stop, raising unemployment in that industry and all others dependent
on it. Rising unemployment will likely further depress home prices since
the unemployed cannot maintain mortgage payments, and so on.
The economic optimism required to keep the Bush regime afloat
regularly issues from economists and politicians. They offer
reasons why American homeowners will keep borrowing and why
lenders will keep
providing the credit. Because rising home prices have made American
homeowners richer, they are willing to keep borrowing. Likewise, lenders
are willing to provide more credit to richer borrowers. Yet these
"reasons" explain nothing; they merely describe the bubble itself.
Identical predictions in 1999 promised that rising stock prices enriched
stock owners who could
then afford more stock purchases at higher prices and so on. Yet, the
stock market bubble burst. Why should the same not happen to housing
prices?
Some optimists try another line of reasoning. Japan and China
will keep lending to US homeowners because, if they do not, a
collapse in the US housing market will hurt them. Japan and
China depend heavily on sales of their goods to Americans. An
economic downturn here will cut demand for their goods and so
spread to them. Thus, they have no choice
but to support the US economy by endless lending to Americans.
This argument's flaw emerges from a brief look at capitalism's
history. Every previous capitalist depression, including the
devastating one in 1929, was thought to be impossible because
everyone wanted to avoid it since everyone foresaw how a
depression would hurt everyone. Today again, US homeowners,
businesses and the government want to avoid a burst housing
bubble. The Japanese and Chinese banks and government as well
as all the other lenders into the US housing boom want the
same. The history of capitalism teaches us that what everyone
wants provides no guarantee that it will happen. Everyone may
want to keep the boom afloat, but
because everyone is also hyper-vigilant to get out of a market that seems
to be on the way down, once a downturn starts, it can quickly become a
collapse.
It has happened many times. Once again, capitalism brings us
to a precipice. Surely the human race can devise a better system. And if
not now, when?
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Rick Wolff is Professor of Economics at University of
Massachusetts at Amherst. He is the author of many books and
articles, including (with Stephen Resnick) Class Theory and
History: Capitalism and Communism in the U.S.S.R. (Routledge,
2002).
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