Part V: From the Personal to the Political Economic Crisis
Obama was always a political gambler. But never an economic one. He was suspicious – and rightly so – when many he personally knew “suddenly became fluent in the language of balloon payments, adjustable-rate mortgages, and the Case-Shiller Index.” (CSI 173) (The CSI was the leading U.S. measure of residential real estate prices that tracked the changes – up and down – of those prices.) The miniboom in house and condo prices should have meant that almost anyone owning property would and could make a profit, provided, of course, they got out of the market before prices fell. Obama did avoid the larger storm to come because he was off to Washington. The surprise is that it seemed that he did not make much on his condo.
Obama had been warned by a friend about the real estate bubble in the U.S. at the time and how inflated house prices were and how, with any weakening of the economy, many home buyers could not afford the debt they had assumed. A tremor had hit the Chicago real estate market. But a tsunami was on the way. Obama looked at the impending eruption from the perspective of a very conservative, innocent and cautious home buyer himself. And his summary of the crisis provided a clue, an analysis written with the benefit of hindsight and a quick course in real estate economics by his advisers.
“So long as housing prices kept going up everybody was happy: the family who could suddenly buy their dream house with no money down, the developers that couldn’t build houses fast enough to satisfy all these new customers, the banks that sold increasingly complex financial instruments at handsome profits, the hedge funds and investment banks that were placing bigger and bigger bets on these financial instruments with borrowed money; not to mention furniture retailers, carpet manufacturers, trade unions, and newspaper advertising departments, all of which had every incentive to keep the party going.” (174)
Though in other places in his book he might appear to contradict this apparent position, for Obama, the party started with the home buyer who had little or even no down payment. And it ended up with everyone buying into their share of the unsupported acquisitions in expectation of profits. A community of self-interest had been created that became an economic hazard for the commons.
But this is a terrible analysis of what happened and why. Obama’s analysis was upside down. You have to start with the brokers, the hedge fund managers and the banks to understand the bubble and why it went awry. The fault does not begin with the imprudent home buyer. (Obama later makes this argument.) Further, Obama saw the solution beginning with saving the financial institutions. That is where the analysis not the solution should have started. In contrast, the remedy should have started with how to save the homes for most home buyers who occupied those houses.
This isn’t bravura. Nor is it an attack on the rich and powerful. This critique is based both on personal experience and theoretical analysis. I begin with the experience. When I was a young untenured assistant professor at York University, I was invited to give a talk at the Harvard. Kennedy School. I was enormously flattered. But puzzled as well. My book, The Holiversity, with a few exceptions, had only a parochial interest. Perhaps it was my article on the new left as it was a rare self-critique that might have attracted attention. But it was published in Social Praxis, a journal with only a small circulation. Finally, and I mean finally, I figured out what it must have been. I had appeared as a keynote speaker at a Washington conference just before Eric Fromm gave another keynote that was really a preview of his book, The Art of Loving. The response to Fromm had been exhilarating. In contrast, my talk was derisively ignored, derisively because it was negatively compared to Fromm’s as the wheelie talk that preceded the feelie one. I spoke about the various techniques communities could use to acquire housing.
I was right about the reason for the invitation, but only came to that conclusion after my talk. I had not dared ask why I had been invited beforehand lest they discover they had invited the wrong person. When I got to Harvard about a half hour before my talk, I was taken to a conference room that normally would hold perhaps 40 people comfortably. The room was packed. There had to be 150 people in the room. Students were even sitting on one another. “Late-comers,” that is, those who came on time, had to stand in the hall and the double doors to the room were left open. I was in shock.
I was duly introduced and I should have suspected why I had been invited. Instead of citing any of my academic credentials, they noted how I had been the leading figure in creating student owned housing at UCLA, Ann Arbour in Michigan and at a number of campuses in Canada. They estimated, relatively accurately, that I had been involved in the acquisition and construction of real estate worth an estimated fifty million dollars in 1969 figures.
I had prepared a very academic talk. After all, this was Harvard. I turned my Washington talk, which was a mixture of practicality with a smattering of theory, into a purely theoretical exposition of my philosophical economic theory. It was called “Joyful Capital.” I reviewed theories based on beliefs in inherent natural value versus John Locke’s and Karl Marx’s views on the labour theory of value, with the notion that Marx had added to John Locke and Adam Smith the notion of excess value that capitalists exploited and skimmed off the top.
Both of those theories had represented ancient capitalism where value was based on the past – either an inherent natural one, or one based on traditions that envisioned different degrees of value inhering in different types of substances. Alternatively, modern theories were based on the amount of labour invested and present in converting what was found in nature into artifacts. However, in capitalist practice, the current market determined what an item could be sold at, not the amount of labour invested. In my theoretical position, capital value was based on future expectations. Could the item retain or even have its value enhanced in the future. Current markets did not matter so much as future desire. Manufactured cars depreciated. But property appreciated as it grew scarcer and scarcer. There was a finite amount. The trick for a growing economy was to use increasing land values to fund productive enterprises where one could envision the value increasing in the future. Capitalism was based on future hopes and bets rather than on labour inputs.
Then the questions came. I received not a single question about my theory. It was simply ignored. As I later summarized the crushing discounting of my intellectual ideas, all they wanted to know was how actually I did what I did – acquire property for those who had no or few assets against which they could borrow money, at least nowhere near the percentage normally required in standing lending practices. While I was disappointed deep down, I easily segued to how it was done. After all, building developers did it all the time. That is how huge real estate empires had been built relatively quickly (and, more recently, high tech companies in which investments had been acquired based on future earning projections).
In concrete terms, I broke down the process. First, there had to be a willing lender. After a significant lobbying effort, we had convinced the Canadian government to include an additional clause in their mortgage lending corporation (Canadian Housing and Mortgage Corporation – CMHC) to amend it to allow lending 90% of the costs of a building project to student-owned as well as university-owned housing. We had presented figures that demonstrated that we could build student housing to residential standards (in contrast to traditional university institutional standards) at one-third of the capital cost even when the costs included the acquisition of land.
Further, even though co-ops paid municipal taxes and universities did not, the operating costs, and hence the residential fees, would be 25% less for students than the costs of living in a university residence. At a time when enrollment in universities was expected to increase exponentially, the demand would always be there. Further, in the summer months, the co-op could run its facilities as a hotel.
But we still needed 10% equity. The mortgage was only for 90% of the project costs. The 10% was raised by:
- Selling the ground floor rights to build commercial space back to the developer for a $1 provided the developer gave us a second mortgage on the property equivalent to 5% of its gross costs;
- Selling one floor of the building to a fraternity whose property had recently been expropriated by the university;
- Getting the architects and engineers to give back 1% of the fees for the project.
These, and a few other methods, in fact, raised more than 10%. Variations on this system were adapted to the different circumstances of different campuses. The Harvard faculty and students had invited me as they had become engaged in activism and wanted to figure out how to build co-op housing for minority populations in Boston and Cambridge. The goal was laudable, but I still went home very depressed that my theoretical position had been totally ignored.
Further, I doubted if they could pull it off. After all, I had learned that whether the project was state owned, institutionally owned or user owned, entrepreneurship was required to develop it. From all the questions, I was not able to identify an entrepreneurial spirit in the bunch.
I had come to recognize this problem when I had been hired as a consultant by the Martin Luther Jr. Health Center in the Bronx to see if they could develop their own housing around their new facility. Every Friday, I flew down to La Guardia Airport on the first early flight to go to the Bathgate area in the Bronx to consult and study the problem. I quickly learned that it took deception to get there. I would get into a cab and fumble around among my papers to get the address until we were out on the highway. When I finally pronounced where I was going, the driver – every single one of them – swore at me. I had to pay before we arrived and when we did, the driver practically threw me out of the taxi and sped off. He would, I am sure, have abandoned me on the way except that he would have to line up again in the airport taxi lineup after missing a fare and a fee. So he just cursed.
Why? Because the Bathgate area of the Bronx was then a disaster zone. The largest medical centre built by the American government was located there to be used as a training facility to provide health skill training for residents of the Bronx and as a stimulant for redevelopment. The only problem was that this was an area in which one third of the homes had been burnt out, one-third had been vandalized so that they lacked plumbing and electricity, but most were occupied by squatters, and the final one-third were occupied but the housing would have been condemned if located in Toronto. Garbage was piled high in the street with lots of heroin needles scattered about. My hosts took me on a tour of four high rise public housing apartment buildings nearby. Windows had ben smashed. The walls were painted with graffiti. The exit stairwells were filthy. And several of the elevators in each of the buildings were out of order. To my shock, I learned that the complex was only three years old.
The plan to train locals had worked magnificently. The actual management was now in the joint hands of a Black woman and a Puerto Rican one who were superb administrators. But as soon as they got their jobs and saved some money, they moved out of the area. The problem was how to get people to move back into the area. The acuteness of the problem was made readily apparent every other Friday when I prepared to fly back to Toronto and got a lift out of the area. Just before I left, the employees collected in posses to be escorted out with armed guards, for on that day they had received their pay cheques.
In my research, I found that the landowners all around would have been happy to dispose of their lands for a $1 plus the payment of back taxes. We developed a plan developing owned housing within gated communities at great prices compared to other apartments in New York. The problem was that the residents in a survey indicated that even at a significant saving, they would not buy into the project. At the time, no developer was willing to take the risks. The plan was never implemented.
If there had been government leadership at the time, it would have helped considerably. For example, Ontario had a Tory government but, after the student co-ops had demonstrated how inexpensively student housing could be built, the government set up a student housing corporation to produce student housing for universities. I was induced to join the government to head it. But I declined, not wanting to give up my academic career and in fear of working within a bureaucratic environment. I also did not care for the legalized method of rewarding law, architecture and engineering firms who were party donors; I was unwilling to select firms only from those lists.
This was neither the first nor the last time my stubborn unwillingness to conform to what were then accepted practices closed off opportunities for me.
What has all of this to do with Obama? I merely want to communicate that Obama lacked any real experience with the housing market or any feel for how it operated. In the end, it was about facilitating ordinary people buying their own homes and how the various societal institutions facilitated that activity. The key ingredient was not the amount of equity the purchaser had but the amount of debt he or she could afford to carry provided there were normal income opportunities available.
If there were virtually none, then many homeowners would not be able to retain ownership unless there was assistance on the income side. Whatever the faults of the financial system – and there were many – this was the bottom line. The health of those financial systems would only be assured if homeownership was reinforced.
Further, if students lacking any significant and guaranteed income could end up owning property without any initial equity, why could not individuals already active in the employment market?