Monday, February 11, 2008

Socioeconomic Crises

Whenever socioeconomic issues emerge and are discussed there tends to arise the common misconception that economic crises, such as increasing national dept, are entirely independent of social crises, such as an increase in infant mortality rates, and that “the economy” is some sort of transcendent entity unto itself.
In the final analysis, economic issues are social issues, and the economy, as Karl Marx revealed, is nothing more than the social relations of production, the asymmetrical relations of power – with bosses and workers and with, as Cornel West observes “those at the top who will be able to live lives of luxury and those whose labor will be both indispensable, necessary, but also exploited in order to produce that wealth” – and the disunity between the forces of production and the relations of production.
For instance, the ability to drill for oil and to use the oil drilled to produce fuel is socially in common, it is a collective effort, however, the final product and the capital there from earned is not shared, it’s usurped by a small, elite class, the bourgeois. Thus, to speak of “the economy” as some sort of singular, transcendent entity unto itself is erroneous.

Turning now to the interrelation of economic and social crises, the current sub-prime mortgage crisis provides and illuminating example.
The sub-prime mortgage crisis is a prime example of the crises provoked by capitalist socioeconomics long ago exposed and critiqued by, most famously, Karl Marx and socialists such as Rosa Luxemburg.
The sub-prime mortgage crisis is in essence the inevitable manifestation of the crisis of overproduction Marx wrote about, despite the adaptation of capital through credit, which Luxemburg wrote about. Luxemburg observed that “[w]hen the inner tendency of capitalist production to extend boundlessly strikes against the restricted dimensions of private property, credit appears as a means of surmounting these limits in a particular capitalist manner.”
The sub-prime mortgage boom, a boom the Economist called the “largest financial bubble in history,” was fueled by credit. People seeking to obtain new houses, borrowers who had low credit and/or low income, were directed towards sub-prime mortgages, the interest rates of which were usually two to five percentage points higher than on prime loans. The idea being that these mortgages provided a way for borrowers who might not otherwise qualify for loans to buy homes.
However, as Petrino DiLeo writes, “this sector has morphed into a classic predatory lending environment. Stories are emerging of mortgage brokers fudging applicants’ incomes on forms or ignoring it entirely--and rushing through approvals on loans that have little prospect of getting paid back.”
This “predatory lending environment” emerged because Wall Street banks, investment firms, mortgage companies and even the storefront mortgage broker operations were motivated to push this boom forward – “even if that meant making loans to borrowers who wouldn’t be able to afford the terms, or steering customers with better credit into more unstable mortgages that, at first glance appeared cheaper” – because of the prospects of profits in the millions; “whether borrowers missed payments, refinanced their loans or paid off the mortgage too early.”
Petrino DiLeo points out that the sub-prime loans “were enticing to a secondary market” also, “in which bankers packaged mortgage loans in large numbers and sold them to the biggest investors as giant bonds.”

While it lasted the sub-prime mortgage and housing boom was a great success, “the largest financial bubble in history,” yet no so great for the borrowers who had been huckstered into the shyster deals when their mortgage rates were adjusted and they were forced to foreclose and lose their homes. Unfortunately for many of those who exploited the situation and benefited from the boom, the crisis soon became there’s also.
As Rosa Luxemburg explains: “If it is true that crises appear as a result of the contradiction existing between the capacity of extension, the tendency of production to increase, and the restricted consumption capacity of the market, credit is precisely…the specific means that makes this contradiction break out as often as possible. To begin with, it increases disproportionately the capacity of the extension of production and thus constitutes an inner motive force that is constantly pushing production to exceed the limits of the market. But credit strikes from two sides. After having (as a factor of the process of production) provoked overproduction, credit (as a factor of exchange) destroys, during the crisis, the very productive forces it itself created. At the first symptom of the crisis, credit melts away. It abandons exchange where it would still be found indispensable, and appearing instead, ineffective and useless, there where some exchange still continues, it reduces to a minimum the consumption capacity of the market.”So, when the market began overproducing houses and the borrowers were unable to pay off the loans, the “largest financial bubble in history” exploded. As Joel Geier points out, proving Marx’s theory of capitalism’s crisis of overproduction and Luxemburg’s theory of the role credit plays in such crises, “the enormous profits from [the sub-prime mortgage boom] produced the typical capitalist cyclical outcome - an overproduction of houses, which could not be sold at the usual profit. A year ago construction activity and housing prices stagnated and then fell, coincidentally just as the resetting of mortgage rates began. People found that with falling home prices they could not refinance, and were now stuck with these higher, unaffordable rates. Within a few months, half a million families couldn’t make their mortgage payments and lost their homes…Beyond the human tragedy, this will add to the large inventory of unsold houses, further depressing prices. Many mortgages will be greater than the house is worth, which in turn will lead more people to walk away from homes with inflated prices, producing even more forecloses, and further price declines. And of course the banks are now refusing to make mortgages in declining or unstable markets, narrowing the pool of potential buyers [just as Luxemburg argued, “credit melts away”]. It is the mad logic of the capitalist market in crisis spiraling downward and producing the worst housing depression since the 1930s.”

As is illustrated by the specific example of the economic crisis of the sub-prime mortgage bust, economic crises are also necessarily social crises because they carry with them consequences for the society as a whole and, in fact, the world. The housing crisis has now rippled around the globe. The crisis is in fact provoking a possible recession. Joel Geier explains: “Now that housing prices are falling, increasing house debt as the vehicle to maintain living standards is over, and retail sales to working-class families are sliding.All of this is cutting into profits, the dynamic that drives the capitalist engine. In the last quarter, profits fell by 8 percent from a year ago, the first decline in the mass of profits since the last recession. With less profit, business spending for capital goods is being cut back. All the elements of a recession have been slowly unfolding for months. But this is more than an ordinary recession, it is also the opening of an international financial crisis unlike any in the post-Second World War period. The massive build-up of toxic debt is threatening the functioning of the international financial system. The banks have been forced in the last two months to write down $80 billion of bad mortgage debt. Conservative estimates are that they will have to take losses of $300–400 billion in the next year—if the economy doesn’t go into recession. Citibank, the largest American bank, had to take a $6 billion loss in November, and is expected to take between $10–15 billion more in the next three months, on its worst subprime mortgages alone. Like other banks it also has severe problems with its corporate debt book, and its off-balance-sheet subsidiaries, which it did not put up capital reserves for. The most important international bank may face a capital crisis because it does not have adequate reserves to cover all of its bad loans.”

In the final analysis, it is always the working class that pays the bills. All the recent talk about “fiscal responsibility” means cuts in social spending and a renewed propaganda campaign for privatization, which is most assuredly a social problem; it’s not just a social problem, it’s actual class warfare. Unemployment is rising, wages are stagnating and have been for several years, inflation in the price of food and fuel has also risen and this is all destructive of working-class living standards. Not to mention the millions likely to lose their homes due to the sub-prime disaster.
These are the results of the inevitable crisis of the capitalist system, a system founded upon avarice and exploitation, yet, unlike the formulations of many Marxist theoreticians, capitalism is not going to by its own internal contradictions dismantle itself. It is going to take dedicated, sustained and renewed activism from the left to ensure that rather than the capitalist system driving the majority of society into the ground, it is dismantled and replaced with a just socialist system. As Rosa Luxemburg aptly summarized it, we must decide between either “socialism or barbarism.”


melloncollie said...

This is very illuminating; I enjoy this blog more and more!!

Banks are up to $80 million dollars of bad morgtage debt?! That is insane!! I had no idea the current economic crisis was so severe.

Quote: ". . . the final product and the capital there from earned is not shared, it’s usurped by a small, elite class, the bourgeois. Thus, to speak of “the economy” as some sort of singular, transcendent entity unto itself is erroneous."

Great point!! I read this essay twice, JDHURF. Your prose is erudite; your content is excellent!!

melloncollie said...

Quote: "Stories are emerging of mortgage brokers fudging applicants’ incomes on forms or ignoring it entirely--and rushing through approvals on loans that have little prospect of getting paid back.”

Sorry I'm off-topic, but this paragraph about predatory mortgage brokers reminds me of how credit card companies are now offering special high-interest rate cards to people with BAD credit!! I couldn't believe it when I read about that. It seems to fit right in with the whole culture of credit vultures, such as the countless paycheck advance businesses that have popped up recently. In my opinion, these huckster businesses are a million times more offensive and destructive than strip clubs and adult stores, but I bet nobody ever tries to legislate keeping them away from churches, temples, and mosques like they do with the other places.

Your main thesis that economic crises are social crises are is obviously accurate and timely. There is something violent and heartless about our economic structure, and it would be nice if more people got their concerns and priorities straight.

JDHURF said...

melloncollie said:
Banks are up to $80 million dollars of bad morgtage debt?! That is insane!! I had no idea the current economic crisis was so severe.”

Oh yeah, it’s been pretty bad. It has rippled around the world, for the first time in, from what I hear, quite a while, there were rushes on banks in the UK: UK Bank rush

Banks are in pretty bad shape and the economic stimulus plan is more of a bank bailout than legitimate help for the working class: A bailout for the banks only

Too little for those who need it most

I completely agree with your pointing out that people wouldn’t hesitate to get into an alleged moral uproar about such trivialities as strip clubs and adult stores yet don’t seem to mind the immoral rampaging of credit vultures which literally destroys the lives of millions.

Thank you very much for stopping by and commenting.

Renegade Eye said...

This is a document about the world economy, that my group is allowing sympathizers and friends, to comment on. It's long, but not written to all be digested at once. It was written before recession was seriously talked about.

It is irresponsible to lower interest rates, when debt is so high.

JDHURF said...

I read the first two sections of your link Renegade Eye, looks like an interesting and enlightening read, I intend to read the rest of it in the coming week. Thanks for the link and thanks for commenting.

creditxp said...

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JDHURF said...

I am opposed to censorship based upon basic principle, but, I highly warn anyone with credit and mortgage problems enticed by the creditxp propaganda to thoroughly look into the company before doing business with them. With the credit crunch, borrowers in trouble and mortgages being refinanced, capitalist sharks smell blood and they want a piece of the kill. Beware of the sharks!

Anonymous said...

Who should I get in contact with about a states own laws about mortgage broker bonds and as such, how would I get a mortgage bonds form? I life in England and am considering moving to America, don’t know where yet however I was doing some general reading about housing and came across the term mortgage broker bonds and am a little confused, is it a mortgage or a loan to acquire a mortgage?
Also if I want to set up life insurance do I need insurance bonds? Or can I simply open a policy with a company? Im a little confuse by some of the jargon. I am not moving anytime soon but thought I should be aware of things I will need to understand.

jon said...

Can you tell me what Surety Bonds are? I have heard of Corporate Surety Bonds but I don’t understand what they are, can you help?