Personal Debts and US Capitalism

Personal Debts and US Capitalism

by Rick Wolff

<http://mrzine.monthlyreview.org/wolff151005.html>

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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