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Commentary :: Globalization
Real Estate Crisis in the US
14 Sep 2007
Credit failures in the real estate business threaten the whole payment system between banks, private businesses and households handled through short-term credits. The US real estate crisis affects other economic sectors and countries and can also lead to a shift in class relations.

By Ingo Schmidt

[This article published in: SoZ-Sozialistische Zeitung, September 2007 is translated from the German on the World Wide Web,]

Times change. In June and July, the stock market world feverishly approached a new record. Today people rejoice when firm bankruptcies are delayed and the ruin of bond prices is stopped through financial injections of the central banks in Washington, Frankfurt and London.

The causes of this crisis that started from the US real estate sector can be traced back to the end of the New Economy in 2001 when a decline of security prices began. That decline continued to 2003 along with a decline in production and employment.

In the US, this economic slump was shorter and weaker than in most other capitalist metropolises. This was owed above all to the US Federal Reserve that injected massive funds. Private enterprises in the US are very reserved in claiming this cheap money given the over-capacities that arose in the preceding upswing as a result of considerable investments.

Private households helped out even more courageously. Parts of the working class and middle class that either already suffered income losses or feared such losses in the future owing to rationalization and production outsourcing were glad to keep their familiar living standard. The real estate sector played a special role. Firstly, home ownership, even if only a house in a trailer park, is far more widespread in the US than in Germany. Therefore many households utilize the favorable financing possibilities for purchasing homes. As a result, real estate prices rose enormously. A massive expansion of consumer credit and financing expenditures was possible on the basis of higher prices offered to banks as credit securities.

In the course of the boom, the number of poorer households unable to pay the interests and service charges soared. Many faced a tight situation because they accepted credits at variable interest rates that were adjusted to the rising interest level during the upswing. As a consequence, more and more families had to sell their homes, limit their consumption or become even more indebted at considerably higher interest rates. An inflation of second-class mortgages occurred. These mortgages were moved around by firms specializing in sub prime credits and drove some into bankruptcy.

The sales and prices that are now declining have led to a crisis that goes far beyond the real estate sector. On one side, credit risks are traded on currency markets and land in the funds of many banks and institutional investors. The whole securities market is ruled by a selling mood since the planned yields cannot be realized.

Credit failures in the real estate business threaten the whole payment system between banks, private businesses and households handled through short-term credits. Therefore payment problems can arise for enterprises and households doing business on the real estate or the securities market. To prevent that credit crunch, central banks in the capitalist metropolises have recently pumped considerable liquidity in the private financial system. By such or similar interventions, collapses of the financial system were prevented in 2001 and in every crisis since the 1929 stock market crash that triggered a unique economic depression. Therefore the effects of the current real estate crisis on the US and world economy depend on the reactions of economic and political actors. The central banks of the main imperialist powers play a key role.

An acute liquidity crisis paralyzing the capitalist circulation of goods and the production of goods may be prevented by robust financial injections of the central banks. For borrowers, the times o cheap money and spending financed by cheap money may be over since banks are becoming reserved in awarding credits. Households and governmental borrowers are affected much more intensely than private industrial enterprises.

In times of massive redistribution from wage to profit incomes, the latter could accumulate financial reserves making them largely independent from credit- or stock market financing through credit-financed transactions. From the sales side, declining consumer spending could bring problems for industry. The optimistic economic forecasts of institutionalized economists may be soon corrected downwards.

Given the competition of countries for the largest possible shares in solvent global demand, currency turbulences or long-term changes in exchange rates that could be triggered by the US real estate crisis should be considered. Even before the eruption of the crisis, the US dollar had lost value over against the euro and the yen. Although the real estate crisis affects the investment strategies of European and Asian investors, the US remains the center of the crisis. That is why a further decline of the dollar could occur.

With regard to the US balance of payments deficit, economists for years expected a downward slide of the dollar that would drastically increase limiting imports from other countries. Slackening capital imports could be connected with that downward slide. Those capital imports made the US into the nerve center of international financial markets and the control center of the capitalist world economy.

How the ruling class of the US will react to a loss of control in the course of the falling value of the dollar and capital imports cannot be foreseen at the moment. On the other hand, the American working class may expect an end to job destruction in domestic industry from the declining imports that will at least stabilize their economic position and reduce dependence on consumer- and real estate credit. Workers in countries like Germany and Japan could also experience that wage renunciation accepted in the name of export promotion is ineffective when euro- or yen exports have higher upgraded prices on the world market.

The US real estate crisis affects other economic sectors and countries and can also lead to a shift in class relations. The established model of national and international could be put in question. At the end, the question remains whether the crisis could have been prevented. Many economic journalists who could hardly restrain their enthusiasm over rising stock prices a few weeks ago now criticize the cheap credits and negligent bank oversight as causes of the real estate crisis. They are right. A speedy mastery of the 2001 economic and stock market crisis and a speculatively-fired upswing would not have occurred if the US Federal Reserve had not taken counter-measures with drastically lower interests and increased the money supply. Demand breakdowns and the decline of production and employment in the US and the world economy altogether would have turned out much stronger and led to the sudden impoverishment and political destabilization of several countries.

This was not politically intended and could have been prevented. Political intervention cannot rescind the capitalist crisis cycle but could give it a viable form that prevents total collapses and temporally extends and socializes the destruction of capital lacking profitable investment possibilities. Seen in this way, politically-kindled speculation bubbles and politically-moderated crises like the one on the real estate market are the price for the relative stabilization of capitalist development. There is no guarantee that the political regulation of crises will always succeed. People should not expect that ruling classes under all economic and political circumstances will seek such a solution.
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