I think David posted about sub prime lending recently. There has been a bailout proposed by one of the states, it's only valued at $100M though.
US credit crunch?
According to the article in the Guardian I quoted in my Stock Market and Economic Crisis thread ...
"Sub-prime mortgages totalled $600bn last year, accounting for about one-fifth of the US home-loan market. An estimated $1.3 trillion in sub-prime mortgages - equivalent in size to the economy of California - are currently outstanding."
Freddie Mac and Fannie Mae have guaranteed loans equivalent to around 30% of GDP, $3.8 trillion!
$100 billion is probably the figure of those faced with immediate foreclosure, but the potential for the crisis to spread is clear. But even a $100 billion worth of damage can be significant once it ripples out into the rest of the economy.
As for the rest of GDP being built on credit, the current account has been in deficit for years now. This basically means the US has been importing more than it exports, i.e. spending more than it earns. This has been financed by the housing boom because consumers have borrowed against the increasing value of their properties and sucking up vast quantities of commodities mainly produced in China, etc. If this demand slackens, it will seriously damage the global economy.
Check out Michael Hudson's article, "The New Road to Serfdom: An illustrated guide to the coming real estate collapse":
As an aside, there is much argument about what is sustaining the housing boom in Britain. The general consensus, from what I can see, is that demand is outstripping supply. This essentially means that the population (also the way the population lives: more of us supposedly live alone, etc.) is growing faster than new build. This feeds into the current ideological themes that the main problems in Britain are that we're victims of our own success (we're now all too rich) and that it's the immigrants screwing things up.
In reality though, much of the boom is driven by the buy-to-let market. It's no longer the case that this market is sustained by some of the middle classes renting out one or two extra properties to students as this story in the Guardian last week points out with its case study of a couple that own over 700 houses!
The other reason is that there is a general belief in the UK that you cannot lose money investing in property. So if prices look like they will drop then that gives the market another kick.
There is some unsustainable credit but I think it will be a while before that can cause a collapse. For the moment there will always be people desperate to stop paying money to these leeches so they'll buy anything they can.
I'd kill to be able to get a mortgage, buy to let also means that rents are almost always higher than mortgages.
another debt problem is the US foreign debt used to prop up import of goods from overseas. this is massively larger than the subprime loan problem. the US has been running a huge excess of imports over exports, and it's been increasing. this means that the U.S. pays out more than the income derived from its exports. the whole neo-liberal "free trade" regime has driven this. U.S. firms have shown a huge appetite for the poverty wages paid in south China (about 1/20 of the average wage in the US). the result is that certain countries, such as China, end up holding a huge amount of US debt. they can't call it in because that might cause a big drop in US demand for their products. but it's not clear how this scheme is sustainable. this is discussed by Jeff Faux in "The Global Class War". he thinks eventually the US will be forced to leave the WTO because living beyond your means will eventually force a further lowering of the standard of living in the USA, which will generate political opposition in the US.
Joseph K. wrote:
[certainly from my limited understanding, contemporary credit is used massively to help plug the 'realisation gap,' to allow workers to continue to consume output while suffering declining real incomes, and that's presumably a strategy heading for a bubble.
The idea of a basic integration of interests between workers "consumer spending" and capital is very widely accepted now amongst capitalism's "critics", including neo-marxist varieties. I still prefer the old idea that capital tends to drive down workers consumption (as a proportion of all that is being produced).
Eg increased mortgage debt and payments dont constitute increased consumption on the part of the workers, rather the reverse. They are basically a way for banks to take a big slice of surplus value out of your wages.
House price inflation just means you have to spend more of your money for the same house. You have to get into more debt just to keep treading water in terms of consumption.
syndicalistcat wrote:
where are these graphs drawn from, btw.
It's not "ficticious capital" that is being "periodically destroyed" here, but workers in the main who are losing their homes and still being saddled with massive debt. The sub-pirme market in the US and UK is the first to be hit but the tremours are spreading through the housing bubble. The same trend is expressed in the increases in mortgage rates in the UK, where, far from this debt being 'periodically destroyed', it means further cuts in worker's take home pay. This is not a victimless crime. The working class is paying for this crisis both directly and indirectly. And individual debt, which is affecting the housing market, is nothing compared to state debt with the USA being the largest debtor nation in the world. The state has to use the recourse to more and more debt in order to dope an economy that would collapse without it. But this policy is going to hit the buffers and some indications of this are the problems expressed at the moment in the sub-prime markets.
Capitalism can't continue to write off debt and carry on as if nothing has happened. Such a view would imply capitalism as an eternal system. It would also imply that there's nothing to stop everyone borrowing without limit.
The US government passed a law in 2005 in anticipation of what is beginning to happen now, which significantly reduced the relief under the bankruptcy codes that private individuals have access to, and pointedly closed certain previously existing loopholes relating to homeownership.
http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act
Man, this should really be merged with the Foreclosures thread. It's the same crisis.
Catch, I'm not ignoring the increase in personal bankruptcies, nor the massive, massive, increases in personal debt, nor the massive, massive increases in workers in the sub-prime market in the UK (figures published last month) losing their homes and still being saddled with massive associated debt. This extension of credit has been a deliberate policy of the bourgeoisie in order to keep its economy afloat. I don't know about the timescale, but I think all the indications are pointing towards the failure of this policy. I don't underestimate personal debt or effects but this individual debt is nothing compared to the debts of the state, with the biggest, wealthiest state, the USA, being the biggest debtor.
Quote:
where, far from this debt being 'periodically destroyed', it means further cuts in worker's take home pay.
Suggests it's never written off - I'd say the rise in personal bankruptcy is a partial, highly individualised response to aggressive credit lending, one that can leave people better off than years and years of payments.
Also the 'periodic destruction of fictitious capital" isn't only about credit.
Have you read this? http://libcom.org/library/fictitious-capital-loren-goldner
I don't necessarily agree with it, but it's interesting.
Lazy Riser wrote:
what's going to stop eveyone borrowing without limit
fear.
people start to get scared that they might not be able to afford repayments, or that the Bank of England might put interest rates up, or both - then they stop borrowing, the economy cools down, people get more scared, and before you know if we're in economic meltdown (well, a heavy recession, including phenomena like 'negative equity' )
People can't borrow without limit for one basic reason. Credit that is not repaid essentially means that commodities have been given away for nothing. Someone, somewhere in the system has to absorb that loss. As far as possible, the bourgeoisie are going to ensure that it's not them.
The change in the bankruptcy laws (in the UK) were actually put in place to help the petit-bourgeoisie, to "stimulate enterprise" and make it possible for those who have failed in business have another go. The act that reduces the length of time of bankruptcy is not called the Enterprise Act (2002) for nothing.
The fact that individual consumers have made use of these laws to ameliorate their own situation is only a temporary unintended consequence. Already there is talk about the "moral hazard" the law is supposedly bringing about - the bourgeoisie may pay lip service to moral hazard in its own dealings, but it will certainly not worry about enforcing it on us.
It's also a myth that bankruptcy is a pain-free way of getting rid of debt. Depending on the precise circumstances the individual, in theory at least, surrenders the majority of their assets (except trade-tools) and will often have to continue to surrender a portion of their future income. Your chances of getting credit in the future are likely to be severely curtailed as well. No mortgage, no loans for a car, possible difficulty in getting a bank account, etc. The personal consequences may be better than the bailiffs knocking at the door but are still serious.
Most insolvencies are actually in the form of Individual Voluntary Arrangements where the debtor agrees to pay off all or at least a portion of the debt - it's simply the terms of this repayment that are changed. I've heard of some repayment incidences lasting over a decade, although 5 years is more usual.
Overall, by using credit in this way and shifting the debt burden to individuals rather than the state, the bourgeosie manages to create the impression that the economic crisis is a personal problem rather than something systemic. If we all just managed our money better we'd be fine and if there is a recession, rather than blaming a historic crisis of overproduction and a consciously planned counter-strategy of massive credit inflation, they can point to greedy, feckless consumers.
Demogorgon303 wrote:
People can't borrow without limit for one basic reason. Credit that is not repaid essentially means that commodities have been given away for nothing. Someone, somewhere in the system has to absorb that loss. As far as possible, the bourgeoisie are going to ensure that it's not them.
Again - not entirely. Fractional reserve banking means that banks lend out money that essentially doesn't exist (and earn interest on it as well). Obviously they get less money if it doesn't all get repaid, but there'd have to be a very high number of defaulters to actually hurt them. Same as most major retailers allow for shoplifting (and according to some studies, certain clothes/shoes retailers encourage it so their products will be worn by cool (but poor) kids).
Quote:
Overall, by using credit in this way and shifting the debt burden to individuals rather than the state, the bourgeosie manages to create the impression that the economic crisis is a personal problem rather than something systemic. If we all just managed our money better we'd be fine and if there is a recession, rather than blaming a historic crisis of overproduction and a consciously planned counter-strategy of massive credit inflation, they can point to greedy, feckless consumers.
Well I agree with all that. This Werner Bonefeld article covers the disciplinary nature of debt pretty well I thought: http://libcom.org/library/politics-debt-werner-bonefeld
Quote:
Credit that is not repaid essentially means that commodities have been given away for nothing.
It doesn’t follow. For instance Alpha Contracts borrows £100,000 from the Bank of Beta to buy equipment from Delta Kit Ltd to install at their customer Gamma Foods for a price of £125,000. The equipment is installed, but Gamma Foods goes bankrupt and the equipment is auctioned to pay off primary creditors, Alpha Contracts gets nothing and after many months of wrangling the bank has a bankruptcy issued towards Alpha who partially repay the bank through the auction of their own assets. The unemployment situation in the area is monitored by the government and if it looks like it might pose a serious problem with civil disorder then credit will be extended in order to soak up the jobless. Delta emerges largely unscathed, it hasn’t given anything away for nothing.
Quote:
Someone, somewhere in the system has to absorb that loss. As far as possible, the bourgeoisie are going to ensure that it's not them.
No doubt, however the lower orders will entertain any amount of belt-tightening just as long as it’s applied gradually.
Quote:
If we all just managed our money better we'd be fine and if there is a recession, rather than blaming a historic crisis of overproduction and a consciously planned counter-strategy of massive credit inflation, they can point to greedy, feckless consumers.
On the contrary, if there’s a recession they more likely to blame people for not being feckless enough.
Lazy Riser wrote:
Alpha Contracts borrows £100,000 from the Bank of Beta to buy equipment from Delta Kit Ltd to install at their customer Gamma Foods for a price of £125,000. The equipment is installed, but Gamma Foods goes bankrupt and the equipment is auctioned to pay off primary creditors, Alpha Contracts gets nothing and after many months of wrangling the bank has a bankruptcy issued towards Alpha who partially repay the bank through the auction of their own assets. The unemployment situation in the area is monitored by the government and if it looks like it might pose a serious problem with civil disorder then credit will be extended in order to soak up the jobless. Delta emerges largely unscathed, it hasn’t given anything away for nothing.
Alpha Contracts gave away its own assets for nothing?
http://news.bbc.co.uk/2/hi/business/6906914.stm
apparently mortgage debt is increasingly unsustainable, and the bosses are worried widespread defaults could bankrupt lenders (more than 30 have collapsed already) which could then ripple through the economy. looks like it could be one of the periodic destructions of 'fictitious capital' loren goldner talks about - certainly from my limited understanding, contemporary credit is used massively to help plug the 'realisation gap,' to allow workers to continue to consume output while suffering declining real incomes, and that's presumably a strategy heading for a bubble.
or is this not that big a deal? US GDP is $13 trillion after all so what's $100bn? i guess it depends on the extent that whole GDP is dependent on credit...