On the Foreclosure Crisis and the Logic of Resistance IV

In August of 2001, I was on the verge of starting graduate school.  I still had almost $25,000 of savings in my bank account saved up from a job I'd had out of college and I had this naive thought that I could be a handyman home owner and landlord.  I went about the process of procuring a real estate agent to find myself a multi-family property in Greenfield or Turner's Falls (Montague) in Franklin County, western Massachusetts.  Oddly enough, I managed to hook up with a mortgage agent at a local bank in Greenfield who offered me a first-time buyer Federal Housing Administration (FHA) loan with a 20 percent down payment requirement, not subject to mortgage insurance.  I was on my way to becoming a home owner!  I checked out a property that I'd seen online on Hope Street in Greenfield, just down the road from the YMCA and the library.  I then checked out this really weird but oddly attractive property with hardwood floors and big attractive French doors on Avenue C(?) in Turner's, with a bunch of poor folks living on the first floor for whom I'd have had to make a significant bathroom renovation (it wasn't pretty!).  That being said, I had a lot to think about my first week of grad school.  Not just the relatively orthodox version of Marxian political-economy conveyed by David Kotz, my graduate program director and a really great, very honest and committed Marxist theorist, but the quantitative issues involved in mortgage financing on a two-family home, and the potentiality of commuting by alternative means from Montague to the campus of UMASS, a distance of about 18 or so miles, if I gave up my car to afford a mortgage payment.

Life puts weird things on our plates.  I was a National Guardsman at the time.  I never expected what was coming my second Tuesday into grad school.  I was up early at my parent's house to finish a paper for my economic history class on a book by Ken Pomeranz, The Great Divergence, on technological and cultural variations separating Western from Chinese economic development.  I managed to pepper the paper with some choice references from my limited undergraduate studies of Chinese, Japanese, and East Asian history in general.  As I was finishing, I turned on the radio in my room in time to hear that a plane had crashed into the North Tower of New York's World Trade Center.  After a few minutes more, I heard the report that a second plane had crashed into the World Trade Center and, only (what seemed) a few short minutes after that a third plane had crashed into the Pentagon in Virginia, realizing that my graduate school career was probably about to be interrupted! 

Suffice it to say, I was mobilized/federalized, but only, at the outset, for domestic duty.  My boss at my Guard unit was incredibly and thankfully accommodating to me - I was pulling the night shift in the command post at my unit, waiting for message traffic from the National Guard Bureau, Air Combat Command, or, directly, from the Pentagon, that I, and my unit, should be forthwith mobilized for immediate deployment to Afghanistan or God knows where else, tasked to perform close air support of ground troops against the Taliban, Al Qaeda, and all other foreign jihadist forces.  It was a really strange time in my life, waking up from more or less quiet night shifts for a month or so, leaving the base in uniform to go back to my parent's house, switch into civies, head up to UMASS to listen to David Kotz' lectures on Lenin's theories of imperialism (the highest stage of capitalism), and head back to the base, switch into my BDUs, write and transmit the unit SITREP of the day, and call it a night, hoping nothing came down from higher headquarters at one in the morning and that I would be able to do it all over again the next day. 

In all the confusion, I lost track entirely of my house up in Turner's or the place in Greenfield that apparently had a lead paint problem that I would have needed to address.  It was lucky that what happened actually did happen, in hindsight.  I wasn't ready to be a homeowner.  I was by myself (and still am), I didn't know much about taking care of electrical or plumbing issues, and still less about mortgage financing.  Under the circumstances, the bank was probably very willing to lend me money, secured by FHA through Ginnie Mae, Fannie's former Siamese twin.  It would not have been a good move.  My future income potential was uncertain, as was my geographic mobility as a PhD candidate.  Time flies when you're pissing your life away in graduate studies that don't end up getting you where you wanted to go.  Oddly, I'm still working in the butcher shop where I have been working since high school, and I've bounced around between various living conditions trying to find something affordable that will let me continue to live in Northampton, my location of choice (if you understand anything about Western Massachusetts, you'll know why), even if I'm no longer pursuing a graduate degree or entirely certain about where my life is going or what is going to maximize my income potential. 

Having said all of this, I do not think that I had any business being in the market for the purchase of residential property.  Like many other potential buyers in the high tide of American home ownership, I sported a naive faith in possibilities of a home, including the image of what the organic garden in my back yard might have looked like.  Luckily, I never found out.  It would have been a tragedy to find myself in a home and then find myself in default, if not because my mortgage reset (my loan offer was for a fixed rate, prime mortgage) then because I lacked any good income opportunities that would have reliably secured my monthly payments.  Over the period since, I've become quite satisfied with my apartments.  Renting works for me. 

This is not necessarily the place to compare and contrast the virtues of home ownership against those of renting, but there are of course very good reasons for individuals or households to invest in property ownership.  The ability to borrow from accumulated equity has come to be the biggest conceived advantaged of ownership in the contemporary U.S. economy, often as a means of paying for big ticket consumer purchases or to pay off large college tuition expenses for children.  If, in this sense, borrowing against equity has become a financial condition of existence for contemporary middle income U.S. families, then it emphatically demonstrates the reality that lagging real incomes for the majority of Americans in the face of a need for enhanced consumption and investment (e.g. education, personal retirement) expenditures is forcing tens of millions of households to take on massive quantities of debt and to transfer interest payments to the same income strata in the global macroeconomy that should be paying more in labor compensation to workers and in taxes to governments to expand the common wealth on which they rely and to which they should be contributing their fair share.  Ultimately, lower and middle income Americans and both professional and relatively unskilled manual workers throughout the global macroeconomy deserve a much larger share of an increasing pie made possible by contemporary technology and the global reorganization of production if only because, as consumers, their spending makes the world go round.    

The point is that the privilege of owning residential property in the U.S. is becoming more rarely accessible, and the mortgage market meltdown has much to do with the shrinking access of many Americans to this aspect of the "American dream."  Since 1965, the rate of owner occupancy as a proportion of total housing stock in the U.S. has oscillated around 64 percent, with occasional peaks (e.g. 65.6 percent in 1981) and troughs (63.7 percent in 1988).  In 2005, at the height of the housing price bubble, the rate of owner occupancy reached an all time high (at least in available Census records) of 69.1 percent.  It has since tumbled back to 65 percent, and, in my opinion, it should be expected to fall farther (see Census Bureau, "Housing Vacancies and Home Ownership (CPS/HVS)," Table 14, "Home ownership rates for the U.S. and regions: 1965 to Present," at: http://www.census.gov/housing/hvs/data/histtab14.xls). Conversely, vacancy rates for owner occupied residential housing stock, a rate which oscillated around 1.7 percent for much of the 1980s and 1990s, inflated to 2.9 percent in 2008 before coming back down to around 2 percent by 2012 (see Census Bureau, "Housing Vacancies and Home Ownership (CPS/HVS)," Table 2, "Quarterly Homeowner Vacancy Rates: 1956 to Present," at: http://www.census.gov/housing/hvs/data/histtab2.xls).  Like unemployment rates, however, vacancy rates on owner occupied housing conceal at least as much as they disclose.  They do not include vacant housing stock removed from the market or transferred into the rental market. 

We can derive a better measure for the scale of the problem using U.S. Census data from the Current Population Survey (CPS) estimating the total housing stock in the U.S.  If we take the annual CPS estimates for total "Year-Round Vacant" housing stock and subtract "For Rent" and "Rented or Sold" categories to eliminate the influence of these categories, we get an estimate of the total year-round vacant housing strictly for sale or otherwise withdrawn from the market ("Held Off Market") (see Census Bureau, "Housing Vacancies and Home Ownership (CPS/HVS)," Table 7, "Estimates of the Total Housing Inventory of the United States: 1965 to Present," at: http://www.census.gov/housing/hvs/data/histtab7.xls).  We can then add these totals to the estimates for total owner occupied housing units ("Total Occupied: Owner") to derive an estimate of the total housing units for sale, withdrawn from the market, and occupied by owners.  The vacancy rate is a ratio of these two calculations (Total Vacant and Withdrawn/Total Housing Stock for Owner Occupancy).  The results here are interesting.

Estimates of Vacant For Sale and Held Off Housing Units in the U.S., 2001 to 2012
Year            Total Housing Stock           Total Vacant and             Vacancy Rate
                   for Owner Occupancy    Withdrawn from Market
                             (Thousands)                   (Thousands)                    (Percent)
2001                         79,424                             6,831                               8.6
2002*                       77,860                             6,582                               8.45
2003                         79,033                             6,979                               8.83
2004                         80,666                             7,091                               8.79
2005                         81,688                             7,135                               8.73
2006                         82,994                             7,614                               9.17
2007                         83,457                             8,298                               9.94
2008                         84,371                             8,805                             10.44
2009                         83,771                             8,757                             10.45
2010                         83,893                             9,102                             10.85
2011                         84,259                             9,168                             10.88
2012                         83,918                             8,989                             10.71
*2002 Estimate is derived from a CPS Revision based on the 2000 census. 

Certain things should be fairly evident here.  First, the growth of the number of vacant for sale and withdrawn housing units has continued relatively unabated since 2007.  Moreover, the only evident reason to me why this total and the total housing stock for owner occupancy decline in 2012 is that over 1 million units previously designated for sale became rental units (the estimated total increase in occupied rental units between 2011 and 2012 is 1.14 million).  Accounting for this apparent shift, the percentage of vacant housing for owner occupancy has remained above 10 percent since 2008 and there is no reason to expect it to decline significantly in the immediate future.  Over one in ten homes in the U.S. that could be occupied by a home owner are currently vacant, collecting dust, and exerting downward pressure on housing prices as a function of supply and demand (however reinforced or counteracted by other market processes).  Again, where is the recovery in the housing market? 

The Question of Context - The Foreclosure Crisis and the Logic of Resistance III

The Global Macroeconomic Context and the Actions of U.S. Policy Makers

The previous post in this series sought to contribute a synopsis, however inadequate, of the causes of the foreclosure crisis, rooted in statutory changes and the financial innovations that they made possible.  To these ends, I prioritize the passage of the Gramm-Leach-Bliley Act in 1999 as a critical moment setting in motion an eminent financial crisis.  Being an honest theorist, committed to the notion that economic reality is irreducible to simplistic causes, Gramm-Leach-Bliley was not a sufficient cause for the mortgage market meltdown.  Here again, we have to examine everything in its proper context, separating out the contextual culpability of particular institutional agents (e.g. subprime and Alt-A borrowers, specialty primary mortgage lenders, investment banks, Congress and the Clinton and Bush administrations, etc.) for producing the crisis through the intersection of their actions from the idea that there was either diabolical intent or perfect foresight concerning where all of the elements to a financial perfect storm were leading from 1999 to 2006.  Most importantly, when it comes to the supply side of secondary mortgage markets, we have to consider the contours of capital investment in the global macroeconomy in the first half of the 2000s.  That is to say, we have to ask where capital investment by the major players (the investment banks, the pension funds, the hedge funds) was going and why it was moving in these directions. 

At the outset, there is an important point here that has be addressed (one that occupied part of at least fifty pages in my as yet unpublished and undefended doctoral dissertation!).  The question here involves capital investment within the global macroeconomy.  In this manner, I am not arguing that the macroeconomies of the U.S., the EU states, or any other national-political entity ceased to exist, but I am asserting that state political boundaries have been in the process of partially and selectively breaking down, and, thus, I am going to treat the macroeconomy for high level financial market players is relatively borderless.  Financial market agents operate within a world where their resources can readily and rapidly flow from the U.S. to the U.K., to China, to Russia, to Argentina, to South Africa, or to myriad other national economic contexts depending on where the opportunities for high rates of return, subject to appropriate risks, might be.  On the other hand, the idea that financial market processes are relatively borderless does not imply that they are placeless in the sense that they could ever take place outside of particular national contexts where the activities of financial agents are governed and, at least somewhat, regulated by state-political entities (i.e. by national governments and their bureaucratic agencies).  Entities like the U.S. Federal Reserve system and its Board of Governors remain important because their actions structure, in part, the financial system of the U.S., making it relatively open to continuity or change in patterns of capital investment.  Financial market capital may flow in a relatively free sense in contemporary globalization, but it never unilaterally reshapes individual national economies without the cooperative, collaborative, or constraining/restrictive hand of national governments and/or quasi-public national level agents. 

Having said all this, we have to understand the shift in investment toward secondary mortgage markets, in the U.S. and in other advanced industrial economies, in relation to the collapse of the high tech sector at the end of the 1990s, and the recession and the "jobless" recovery that followed it.  The high tech boom in the 1990s is responsible for shaping numerous conceptions that policy makers, theorists/analysts, and everyday workers and consumers have about what a post-industrial economy should look like and about the effects of economic globalization on individual national economies.  Emphatically, we developed a sense that advanced, human capital-intensive manufacturing processes, like those involved in the production of computer hardware, software, and virtual and physical information network infrastructures, could fill the void left by dirty, energy-intensive manufacturing processes (e.g. steel, automobiles, petro-chemicals) as the advanced industrial economies lost their comparative advantages in the latter processes.  On the other hand, we learned that such high technology manufacturing processes could be extremely decentralized, articulating buyer driven commodity chains stretching across the boundaries of numerous national economies (see Gereffi and Korzeniewicz (eds.) (1994), Commodity Chains and Global Capitalism.  Westport, CT: Greenwood Press.), with branded "manufacturers" acting as designers, marketers, financiers, and overseers over subcontracting networks of small scale firms at little offices or workshops in a handful of diverse, developing national economies. 

For the advanced industrial economies, manufacturing processes of all kinds had become so Twentieth century.  In the U.S., structural steel production was virtually gone by the mid-1980s.  Automobile manufacturing could have been the next to go.  By 2003, the largest share of GM's net income came from its financial GMAC division (74 percent, with almost half of this income coming from mortgage financing operations), not from the sale of manufactured cars and trucks (see General Motors Corporation, 2003 Annual Report, "Consolidated Statements of Income" on pages 58-59, available at: https://www.mlcguctrust.com/Document-Download.aspx?Document=1).  The macroeconomy of the U.S. was not only becoming increasingly intertwined with manufacturing supply chains contributing to a shift of manufacturing for a wide range of consumer and producer goods to developing economies but also becoming increasingly focused on the production of services, especially knowledge-intensive advanced producer service fields (finance, information technology, real estate, insurance).

The case of information technology, however, demonstrates something important, with consequences for every other contemporary and future center of investment and employment growth.  Employment in hardware and software development, together with capital investment and expectations about future returns, reflected in the pricing of equity shares, reached a climax.  It certainly was not a permanent climax, but its realization, conveyed by the collapse of stock prices in information technologies starting in the spring of 2000, suggests that technological development of all kinds must travel a temporal cycle, through which new technologies are integrated into the technological milieu of the population and, more specifically, its business community, and newer ideas must sometimes wait their time.  Cutting edge technologies do not merit immediate acceptance and will not attain value until they have proven their worth to investors at least as much as toward consumers. 

This is equally true for information technologies as it is for pharmaceuticals, advanced medical procedures, and diverse insurance innovations, a warning to anyone investing ahead of the curve/in anticipation of the curve that may never arrive in the medical or health insurance fields!  This warning must, likewise apply to hundreds of thousands of students, investing serious resources in training for information-intensive fields, like medicine and information technologies.  We as a country are presently accumulating hundreds of billions of dollars in educational debt for occupational opportunities that may never materialize in sufficient quantities to merit borrowing on this scale.  There are obviously no guarantees for workers and investors who sink labor and capital into growth sectors awaiting a positive (to say nothing of a sustainable, reliable) return. 

All this said, when the dot-coms went bust, the effect on the macroeconomy of the U.S. was relatively neglible.  Many high-tech start-up entrepreneurs want bankrupt, investors heavily exposed to the decline in high tech stock prices, especially on the NASDAQ, lost substantial value in their portfolios, and, between the end of 2000 and the end of 2002, 2.8 million workers had become unemployed (see Bernstein, "The Jobless Recovery: Suffering from the recession's aftershocks, labor market conditions continue to worsen," EPI Issue Brief, 186 (Jan. 24, 2003), at: http://www.epi.org/publication/issuebriefs_ib186/).  For many, the situation was clearly catastrophic, but, with regard to the larger U.S. economy, it was localized, with effects concentrated in the high tech sector.  In a more critical sense, it revealed the shallow character of high-tech as a sector that could bolster the post-industrial U.S. economy and develop sustainable sources of comparative advantage on the global stage.  Neither high-tech nor advanced producer service production as a whole adequately met the promise of transforming employment and investment in the U.S. to replace manufacturing industry. 

Nonetheless, the drop in stock prices when the bottom fell out of high technology, especially on the NASDAQ, was significant.  Moreover, the tense environment after the 9/11 attacks generated some predictable effects - the Dow Jones Average experienced a substantial decline in the weeks after the attacks.  Policy makers had to commit to serious actions to reassure investors and the general public that a lingering decline in one of the post-industrial economy's major growth sectors and a dramatic, lethally violent assault by a non-governmental paramilitary organization against one of the world's major financial centers would not precipitate a generalized economic downtown in the Western industrialized economies.  In general, the world needed to be reassured that the global economy was not coming to an end.  Truthfully, what are the U.S. federal government and the Federal Reserve Board of Governors supposed to do in circumstances like these other than to undertake pro-growth economic measures if for no other reason than to demonstrate that they are committed to maintaining the health of the U.S. economy and the global financial sector?  The problem, of course, is that such pro-growth measures do not take place in a policy vacuum - they are shaped by the particular contexts in which they are enacted, and the context in which the Federal Reserve was lowering interest rate targets on interbank overnight loans and in which the Department of Housing and Urban Development was promoting purchases of mortgages in designated under served tracts by Fannie Mae and Freddie Mac was shaped, to a great extent, by the development of the post-Gramm-Leach-Bliley secondary mortgage market.  In this manner, any response to the multifarious causes of the economic downturn in 2001 by federal policy makers was going to be analogous to playing a game of jenga.  The accumulated effects of financial market deregulation and subsequent stimulation would drive a proliferation of destabilizing investment patterns. 

For my purposes, two policy mechanisms are key in explaining what happened in housing markets (i.e. the price bubble): the extreme pro-growth monetary policies of the Federal Reserve Board of Governors between 2001 and 2004, and the Bush administration's promotion of expanded home ownership to low income populations in under served markets.  Addressing each of these mechanisms individually, the Fed Board of Governors began lowering the federal funds rate (i.e. the target rate for overnight loans between member banks) in January of 2001 and bottomed out at a 1 percent rate in June of 2003 before raising rates in June of 2004 (see "Historical Changes of the Target Federal Funds and Discount Rates," at: http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html).  At the time, these rates constituted historical lows.  They were intended to lower borrowing costs across the U.S. economy in order to support a recovery from the financial market correction on high tech stocks, increasing purchases by both consumers and firms.  In housing markets, they had the effect of bolstering both home purchases (by lowering rates on fixed and adjustable rate mortgages) and new home construction (by lowering the cost of borrowing for speculating contractors).  As a result, housing markets that were already aggressively sustained by the flow of new capital into secondary markets with the passage of Gramm-Leach-Bliley, experienced large increases in demand for housing stock, driving up prices even as new speculative increases in housing stock were being made.

Quantitatively, the impact of the Fed's reduction of interest rate targets on the housing price bubble is difficult to assess, again, in a timeframe when so many things about mortgage markets are changing.  Accounting for lagged effects, a possible impact of initial interest rate reductions becomes apparent in 2001, as home sales experienced a 3.5 percent increase over sales in 2000.  There is no meaningful way, however, to disentangle the effects of Fed monetary policy here from those of secondary mortgage market expansion/securitization (i.e. the impact of Gramm-Leach-Bliley).  A stronger case can be made that the bottoming out of interest rates in 2003 had the effect of producing a surge in demand in 2004.  Housing sales increase in this year by 10.8 percent over sales in 2003 as median prices increase by 13.3 percent. 

Total Housing Sales and Median and Average Sale Prices in U.S. 1996-2005
Year         Housing Units Sold       Median Sales Price              Average Sales Price
                     (Thousands)                                                                                            
1996                   757                            $140,000                               $166,400
1997                   804                              146,000                                 176,200
1998                   886                              152,500                                 181,900
1999                   880                              161,000                                 195,600
2000                   877                              169,000                                 207,000
2001                   908                              175,200                                 213,200
2002                   973                              187,600                                 228,700
2003                1,086                              195,000                                 246,300
2004                1,203                              221,000                                 274,500
2005                1,283                              240,900                                 297,000
Source: U.S. Census Bureau, "Houses Sold by Region: Annual Data," at: http://www.census.gov/construction/nrs/pdf/soldann.pdf;
and "Median and Average Sales Prices of New Homes Sold in United States: Annual Data," at: http://www.census.gov/construction/nrs/pdf/uspriceann.pdf.

It appears indisputable that Fed monetary policy nurtured the development of the housing price bubble that, in turn, sustained the flow of capital in secondary mortgage markets to support the issuance of larger and larger quantities of subprime mortgages.  More importantly, subsequent increases by the Fed in interest rate targets beginning in 2004 contributed not only to the deflation of the housing bubble but also the first waves of subprime mortgage defaults, as hybrid ARMs reset to interest rates indexed to the federal funds rate or other Fed interest rate targets.  On the other hand, in conformity with the larger goal of this post, we must examine the policies of the Federal Reserve Board of Governors in reference to the macroeconomic context in which they were enacted.  As much in the period from 2000 to 2004 as today, the Fed has responded with monetary policy tools to a lack of initiative by Congress at engaging in targeted countercyclical fiscal policies in response to recessionary developments.  Sadly, monetary policy tools by themselves were too blunt to deal with the particular problems introduced by the collapse of the high-tech stock price bubble.  As a result, the Fed traded a stock price bubble for a housing price bubble whose deflation posed much more severe and widespread consequences for the global macroeconomy. 

As I suggested in my previous post, the point of this effort to examine the foreclosure crisis is not to exonerate subprime borrowers or any other party of culpability for the mortgage market meltdown.  Neither is it to pointlessly concentrate blame.  If the Fed Board of Governors enjoys some degree of culpability for what happened with housing markets, then its role must further be situated against all the other cast of characters contributing to the meltdown.  Between 2000 and 2004, the Fed was attempting, in lieu of a more targeted effort by Congress to address strategic goals in domestic economic development, to bolster an economy suffering from both the collapse of value in high tech stocks and the shock of the 9/11 attacks.  Again, in this respect, what was the Fed supposed to do as the dot-coms went bust, producing palpable losses in financial asset portfolios and declines in GDP? 

Clearly, for conservatives and libertarians, committed to the notion that the responsibilities of a central bank should be strictly limited to sound money policies, effectively holding money supply growth steady in relation to the aggregate rate of growth in output/GDP, the answer would have been nothing (see the Austrian perspective of FreedomWorks CEO, Kibbe, "The Federal Reserve deserves blame for the financial crisis," Forbes Op/Ed (6/7/11), at: http://www.forbes.com/sites/mattkibbe/2011/06/07/the-federal-reserve-deserves-blame-for-the-financial-crisis/).   I am not convinced that such a course would have necessarily averted the mortgage market meltdown although it almost indisputably would have pushed it off.  In my view, securitization of subprime mortgage assets, expanded significantly through Gramm-Leach-Bliley, was critical.  Referencing 2011 data from Inside Mortgage Finance, Simkovic shows that securitized subprime and Alt-A mortgages, as a percentage of all subprime and Alt-A mortgages, accounted for over 60 percent in 2002, before the Fed's federal funds target rate bottomed out in 2003 (see Simkovic (2013), "Competition and Crisis in Mortgage Securitization," in Indiana Law Journal, Vol. 88, 213-288, at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924831).  To his credit, Greenspan appears to have reiterated a comparable assessment in his appraisal of the causes of the mortgage market meltdown (see Andrews, "Greenspan Concedes Error on Regulation," New York Times, 10/23/08, at: http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=0).  On the other hand, relying almost exclusively on monetary policy to provide a countercyclical stimulus in recessionary periods necessarily generates potential adverse consequences in the organization of capital markets, promoting excessive accumulations of debt for both firms and households.  In this sense, there is necessarily another side to the critique of actions by policy makers to the deflation of the stock price bubble and the 9/11 shock. 

In particular, apart from Fed monetary policy, how did Congress and the Bush administration respond to the economic downturn beginning in 2000?  The simplest answer to this question is that, in 2001, they cut income taxes modestly for lower and middle income taxpayers to stimulate consumer spending, cut income tax rates significantly for higher income groups to stimulate investments and domestic employment growth, and significantly increased the exclusion on estate taxes, contemplating the permanent elimination of the estate tax (re-labeled the "death tax") to give away billions of dollars to an exceedingly small segment of the U.S. population presumably in order to create a hereditary plutocracy!

 If, in this regard, monetary policies can be considered too blunt as a countercyclical measure in response to a downturn concentrated in particular economic sectors, then the same can be said for a vast, indiscriminate fiscal assault on marginal income tax rates, lacking any attention to particular sectoral objectives or structural constraints on domestic investment and employment growth.  A further critique can be leveled here, however.  If a monetary expansion most critically impacts domestic consumption and debt-financed capital investment, then a tax cut concentrated on higher income groups is more likely, by contrast, to produce at least some macroeconomic leakages in the form of foreign investment expenditures (insofar as higher income groups are more likely to exploit investment opportunities outside of the U.S.).  Again, the point is that the macroeconomy constituted by contemporary capital markets is global.  There is no reason to assume that an across the board tax cut to higher income groups will manifest a significant increase in domestic investment expenditures, generating consequent employment growth. 

There is, however, another side to the Bush administration's engagement with the domestic economy and, in particular, with housing.  This orientation concerns the conception of an "ownership society," committed to the promotion of private property ownership as a sine qua non of individual freedom through personal autonomy/self-control.  The tenor of this ideological commitment did not, in my understanding, perfectly correlate to the administration's commitment to the terms of the Community Reinvestment Act (CRA).  Previously, the Clinton administration and a Democratic Congress, in 1992 amendments to CRA, had committed Fannie Mae and Freddie Mac to purchase larger percentages of their total asset portfolios from census tracts designated "underserved," as a correlation to "redlining" by financial institutions.  Under the Bush administration, the Department of Housing and Urban Development (HUD) pressed this commitment further, raising 1992 statutory requirements on repurchases of mortgages by Fannie and Freddie from 30 percent to 56 percent of the total portfolios for the government sponsored enterprises. 

At this point we need to reconsider the roles of Fannie Mae and Freddie Mac in the mortgage market meltdown.  In 1968 and 1970, respectively, these enterprises were instituted as private, government sponsored entities, wholly owned by private shareholders but chartered by the federal government with a direct line of credit to the U.S. Treasury and a mandate to operate wholly within the secondary mortgage market.  Their sponsorship by the federal government tied their hands to follow policies dictated by Congress by virtue of their existence as private organisms arising from the consent of Congress.  With this in mind, the chief executives of these entities faced unreasonable choices in 2005.  Minding their fiduciary responsibilities for shareholders to maximize enterprise profits, their commitment to pursue a responsible, conservative policy in defining conforming standards for the repurchase of mortgages from originators, and their statutory commitment under CRA to support lending in underserved (urban, minority) communities, they confronted the demands of primary subprime mortgage originators like Counrtywide that they increase their shares of purchases of high-risk subprime mortgage assets and they balked!  Pressed by predatory lenders to one side and HUD (CRA) to the other, Fannie Mae and Freddie Mac were forced to swallow poison in massive quantities.  Between 2005 and 2008, Fannie Mae and Freddie Mac collectively purchased in the vicinity of $1.8 trillion in subprime mortgage assets.  When these assets, composed overwhelmingly of hybrid ARMs, reset and their borrowers defaulted, the two government sponsored enterprises were rendered, for all intents and purposes, insolvent. Congress was forced to step in and bail out each of the government sponsored enterprises, at a significant and avoidable expense to taxpayers (see Duhigg, "The Reckoning: Pressured to take more risk, Fannie reached the tipping point," New York Times, 10/4/08, at: http://www.nytimes.com/2008/10/05/business/05fannie.html?_r=1).

Summarizing the larger points of a very long post, the mortgage market meltdown and the subsequent foreclosure crisis were integrally related to the larger evolution of global financial markets.  In this regard, the bursting of the dot-com bubble in 2000 necessitated the development of a new basin of attraction for investment capital.  Gramm-Leach-Bliley opened the door into mortgage markets and securitization spelled out the method.  The Federal Reserve facilitated the development of an overheated housing market, driving up prices and leveling the cost of borrowing.  CRA prioritized low-income communities, even if these communities would have been targeted anyway as underserved, high-risk, high-profit opportunities for the global financial sector. 

Interrogating the Sources of the Foreclosure Crisis - On the Foreclosure Crisis and the Logic of Resistance II

Recognizing that monographs have been written on the mortgage market meltdown and the foreclosure crisis by more astute economists than myself, my own sense of intellectual honesty as someone who readily regards himself as an economic theorist and analyst still demands that I contribute at least some explanation of these events in the present context.  The purpose of this account, in following from my previous entry, is to assess the history behind the events on the ground in places like Springfield that continue to display relatively high rates of foreclosure on residential property.  Again, my intention here is not to absolve foreclosed homeowners of responsibility for their own situation and the broader economic crisis arising from the meltdown.  Rather, I mean expressly to say that we cannot place all of the blame in their hands. 

We need to situate the culpability of borrowing households in relation to that of the primary mortgage issuers, the secondary mortgage market actors, more distant institutional investors in mortgage backed securities and collateralized debt obligations, Federal Reserve governors as guardians of the banking sector's welfare, and the government executive/regulatory and legislative agents facilitating the unfolding of this entire process.  In view of this constellation of agents, how, in particular, did we get to a point where the number of foreclosures and the percentage of bank-owned housing stock, nationally and in individual, regional markets, has arrived at its current threshold level? 

My answer to this question, as with everything else in this blog, will not pretend to reflect absolute and universally objective truth.  Social science is not about expressing absolute and universal truths, but about making arguments that are intended to clarify a social problem in such a way that the agenda embodied by the theorist/analyst might be advanced in the problem's resolution.  No theorist is without an agenda.  Succinctly, I aim to portray the events leading up to the foreclosure crisis to show that, left with the independence to steer the financial sector in particular directions that would maximize short term returns at the expense of generating extreme sources of financial volatility, housing market financiers inflicted significant damage not only on the U.S. economy but on the global economy writ large.  Moreover, given the fact that no tangible statutory or regulatory actions have been taken to reign in these actors (and, notwithstanding the best efforts of Elizabeth Warren and John McCain to reinstate the Glass-Steagall Act, there does not appear to be any chance that the appropriate steps will be taken to separate commercial and investment banking), there is no indication that the actions of financial sector agents will not produce new economic crises emanating from mortgage markets in the near future. 

Financial Sector "Reform" and Its Effects on Capital Investment in the Housing Sector

In the late 1990s, financial sectors in multiple national contexts were engaged in an aggressive wave of mergers and acquisition, resulting, especially in European financial sectors, in the creation of universal banks, simultaneously incorporating commercial banking activities, investment banking, and, at least in some cases, insurance.  The apparent benefits from the consolidation process per se arose, typically, from the potential to decrease consumer service redundancies in branch banking, reducing manpower requirements.  The appeal of the universal banking model, on the other hand, arises both from the capacity to place a wide range of, in the U.S. context, traditionally unrelated financial services all under one roof and the capacity to more fully integrate capital investment strategies through securitization (i.e. developing new financial instruments so that financial market agents can gamble on economic activities traditionally excluded from financial exchanges) to target traditional retail banking markets (e.g. mortgage issuance).  American banks were, however, constrained in moving in this direction by the terms of the Glass-Steagall Act of 1933, which legally prohibited the intermixing of commercial and investment banking (i.e. issuance and underwriting of securities).  As European universal banks continued to increase in size and integration of domestic operations across multiple EU national economies, American banks could only watch and complain to Congress of their inability to compete and pursue the sorts of financial process innovations that the universal model held out. 

A cry went up across the land to preserve the competitive character of the American financial sector against foreign competitors.  The structure of financial sector regulations dating back to the Great Depression was no longer adequate to the turbulent, fast-paced world of 1990s global finance.  It was not enough for American investment banks to integrate new technologies to track financial exchange transactions in real time or for commercial banks to integrate full service online consumer functions - they needed to push the organizational envelope by opening up commercial banking for radical expansions in the flow of capital from financial exchange operations.  The Clinton administration, with its high-flying Wall Street innovators at Treasury (e.g. Secretary Rubin), agreed completely.  So did two Republican houses of Congress, who may have been utterly incapable of seeing eye-to-eye with Clinton on his sex life or his grand jury depositions, but obviously saw a mutual interest with the administration in doing Wall Street's bidding.  Thus, against the best efforts of many conscientious Congressional Democrats who (rightly) saw danger in diverging from time-tested Depression-era restrictions, the Gramm-Leach-Bliley Act of 1999 was passed, eliminating the firewall between commercial and investment banking and opening the U.S. financial sector to universal banking.  Not only could American banks harmonize their strategies in appealing to retail consumer markets for traditional banking products and financial market investments, but capital could readily flow into banking markets to expand lending opportunities in traditionally undercapitalized areas. 

Under the effect of Gramm-Leach-Bliley, the secondary market for mortgages, pioneered by the government sponsored secondary lenders Fannie Mae and Freddie Mac, exploded, nurtured by the influx of high-powered global capital.  As a further consequence, special purpose home mortgage issuers, like Countrywide Financial, assumed a greater prominence in mortgage markets because the expansion of secondary markets opened up a space for the packaging and resale of mortgages not conforming to acceptance guidelines for Fannie Mae and Freddie Mac based on loan limits for housing categories and loan-to-value ratios on property (i.e. down payment requirements).  Such special purpose lenders aggressively targeted the highly under served, undercapitalized field of subprime lending.  Borrowers in this field typically lack enough accumulated wealth to meet loan-to-value guidelines for Fannie and Freddie and have low credit ratings, reflecting past repayment of debts including late payments and outright default or bankruptcy.  In other words, they intentionally concentrated on mortgage submarkets for households that had no business purchasing residential property and, under conventional rules, would have been entirely locked out of the mortgage market.  They did so because secondary mortgage markets were awash with new sources of capital, divorced from guidelines established to protect the investment of financiers from elevated risks of default, and because they were able to manipulate the terms of mortgage agreements to make the terms both extremely attractive at the outset for the borrowers and extremely profitable over the term of the mortgage, in relation to conventional, conforming mortgages, for the financiers.

Before moving on to see how they did it, I want to first survey the field of battle in 1999.  To one side, we have hundreds of thousands of low to lower-middle income households in rental properties, afflicted with poor credit histories and unable to advance a twenty-percent downpayment or to afford monthly mortgage insurance payments to satisfy the requirements of a conventional conforming mortgage, but otherwise naively smitten with the fantasy of home ownership and all that it confers (e.g. status, capacity to borrow from equity for consumption purchases or to start a business).  On the other side, we have big banks (both big commercial banks like Bank of America and big investment banks like Goldman Sachs) , some of which would, one day, be too big to fail, who demanded a reform of the U.S. financial system so that they could become too big and so utterly complex in the scopes of their operations that they could never be allowed to fail by the federal government at the risk of inflicting a doomsday scenario on the U.S. economy.  We also have specialty mortgage issuers, salivating at the thought of accessing new fields of capital to exploit opportunities to pull many more subprime borrowers into the housing market.  These erstwhile allies are unified through secondary mortgage markets that the Wall Street players had always dreamed of getting into to exploit every last opportunity for high-risk profiteering.  Perhaps reluctantly, we have Fannie Mae and Freddie Mac, who thought to play by the rules and did so rather faithfully until they started to cave in on underwriting guidelines for conventional mortgages around 2005 both because the Bush administration pushed the expansion of home ownership as a national priority to be advanced through the government sponsored secondary market players and because non-conventional secondary market financiers were making significant inroads onto their turf.  We, likewise, have lots and lots of third party institutional investors (e.g. insurance companies like AIG, pension funds, and offshore hedge funds), in the U.S. and elsewhere, who purchased mortgage backed securities and collateralized debt obligations loaded with subprime and Alt-A mortgage agreements or insured such securities against default through credit default swaps (i.e. they accepted financial hot potatoes in whose values they could never have suspected such a poisonous trap). 

Beyond these direct participants in primary and secondary mortgage markets, we have the Federal Reserve Board of Governors and its Chairman Alan Greenspan, who own at least some responsibility for the creation of a housing price bubble between 2002 and 2006 when they initiated significant reductions in their interest rate targets between 2001 and 2004.  By making interbank lending extremely inexpensive, they made it possible for banks in areas with aggressive housing market demand to increase mortgage creation activities.  When they, subsequently, began increasing interest rate targets in 2004, their actions contributed to the housing market slowdown that inevitably caused prices to crash, leaving millions of homeowners under water in their mortgage obligations relative to the diminished value of their properties.  Conservatives and libertarians like to drag out the Fed as a culprit in the mortgage meltdown, in large part, because they object to the idea of using monetary policy (i.e. interest rate manipulation) to stimulate economic growth.  I want to reserve a comment against this critique of monetary stimulation until my next post.  For now, it suffices to say that the role of Fed in the mortgage meltdown remains rather ambiguous - it needs to be evaluated against the background of longer secular trends in the macroeconomy of the U.S. and its engagement with the global economy. 

And then we have the U.S. federal government that wanted to play both sides of the fight in the name of expanded home ownership and open ended financial sector profits in the contemporary age of economic globalization.  To the credit of conservatives and libertarians who continuously smell something rotten in federal government interventions in the U.S. economy, the federal government enjoys a great degree of culpability in the financial crisis that stuck the global economy in 2008, but not for the reasons that conservatives and libertarian like to assign.  No, the Community Reinvestment Act of 1977 was not the source inspiring a massive influx of capital into secondary mortgage markets after 1999, funding high-risk subprime lending.  Wall Street investors did not throw hundreds of billions of dollars into collateralized debt obligations composed of parcelized subprime mortgage assets because the federal Department of Housing and Urban Development put guns to their heads, anymore than did so out of an innate ideological zeal to eliminate redlining against low-income minority communities in the name of interracial harmony and community empowerment.  Rather, the prescription of conservative and libertarian voices for the financial sector, to relieve the financial sector of its extraneous limitations on innovation enacted under Glass-Steagall, appears to have most contributed to creating the mix of perverse incentives and moral hazard characterizing primary and secondary mortgage markets before the meltdown. 

A Republican Congress eager to accept ready quantities of Wall Street electoral contributions passed Gramm-Leach-Bliley, the enabling legislation for the 2008 financial crisis.  And a Democratic president eagerly signed it into law.  If Republican George W. Bush deserves palpable quantities of blame for the unnecessary, ill informed, extravagantly expensive (in both financial and human terms), and reckless preemptive U.S. invasion of Iraq, then he at least deserves to be, largely, exonerated of direct responsibility for the debacle in U.S. housing and financial markets that took place under his watch.  At the most, Bush can be blamed for too aggressively pushing home ownership for low-income populations and, as such, contributing to a loosening of conforming standards for loan purchases by Fannie Mae and Freddie Mac, ultimately undermining the viability of both these organizations.  The larger blame for setting this process in motion, however, falls squarely on the shoulders of one William J. Clinton, once again illustrating how small differences between the Democrats and Republicans actually are when it comes to pandering to Wall Street.    

The Mechanisms of Financial Market Disaster

Subprime borrowers are, by definition, at high risk for default on loans.  As a result, they must pay higher interest on loans they accept to account for the fact that lenders have an elevated expectation that they will be unable to collect on the full value of their loan - in relation to prime borrowers, subprime borrowers owe a risk premium.  The fact that subprime borrowers needed to pay more for mortgages historically kept the scale of subprime lending very small in relation to the total residential mortgage market.  In the mid-1990s, subprime lending accounted for only about six percent of the total mortgage market.  If the subprime component of the mortgage market was to increase, there had to be institutional innovations that would make subprime borrowing and lending more attractive to both low-income potential home buyers and potential secondary market investors. 

The first step in this process was Gramm-Leach-Bliley, opening the door to a much wider range of secondary market investors.  The ground level innovations, however, involved the creation of new non-conforming hybrid adjustable rate mortgages (ARM).  Such devices combine initial fixed interest rates with adjustable interest rates against a defined price index after a stipulated reset date.  Mortgages of this variety enabled lenders to offer relatively low initial fixed interest rates to subprime borrowers, deferring the eventual necessity to pay risk premia as a condition of borrowing.  Rather, the risk premium would be assessed after the reset date.  In and of itself, there is no reason why, if the structure of such loans is properly understood by borrowers, a hybrid ARM should be so attractive to subprime borrowers that they would revolutionize subprime mortgage lending in the U.S. and generate a dramatic increase in home ownership for low-income groups.  The magic of the hybrid ARM is twofold.  First, the complex terms of the mortgage agreement, including the initially indeterminate character of interest rates after the reset date, make it possible that the borrower will misconstrue how much he may eventually be paying every month once the loan resets.  Second, even if the borrower realistically comprehends the fact that the loan will reset to a much higher interest rate after the initial fixed rate period, he may overestimate the potential to refinance to a lower rate before the adjustable rate sets in.  Borrowers might have had reasons to expect that they would be able to subsequently refinance their mortgages, if home prices continued their secular inflation and if individual borrowers' own financial circumstances stood to improve before the reset date. 

Approaching from the other side of the desk, the popularity of hybrid ARMs can only be explained by the environment created by Gramm-Leach-Bliley.  The creation of a much wider secondary market, especially for mortgages not conforming to the loan standards for purchase by Fannie Mae and Freddie Mac, meant that any mortgage issued could potentially be rebundled with many, many other mortgages at diverse levels of default risk into mortgage backed securities (MBSs) and passed off the balance sheets of the issuing lender.  With cash in hand from the sale of MBSs and freed from possession of mortgages that might be expected to result in default after the reset date, lenders could continue the process of writing and rebundling new hybrid ARMs for high risk borrowers.  The inherent profitability of such processes (as long as the secondary market constituted a viable source of liquidity for high-risk assets) encouraged subprime lenders to maximize their creation of hybrid ARMs by reducing the formal qualification requirements for borrowers.  Specialty mortgage issuers like Countrywide mastered the process of watering down qualification requirements, circumventing basic background checks on the credit worthiness of most borrowers.  Why bother to check whether a home buyer is credit worthy if you are going to sell his mortgage to some secondary market investor anyway?   

Once on the secondary market, MBSs could be cut up based on the relative riskiness of mortgage assets and rebundled into collaterized debt obligations (CDOs), resold to other institutional investors.  Finally, investors holding MBSs or CDOs containing assets at high risk for default could insure their assets by entering into off-balance sheet credit default swaps with other institutional investors.  Such securitization processes enabled high-risk subprime mortgage based assets to spread throughout the global financial sector, raising the stakes for the health of housing markets and the continued inflation of home prices.  In effect, by increasing their exposure to high-risk mortgage market assets, banks, pension funds, and other institutional investors throughout the global financial sector were playing catch with live hand grenades, somehow convinced, perhaps by their own ignorance of what was going on in primary mortgage markets and perhaps by a faulty and corrupted rating process, by ratings agencies with pecuniary incentives to understate risk, that they were not going to eventually go off in their hands. 

Assessing the culpability of all actors at this stage, it is clear that the millions of subprime borrowers who achieved home ownership by accepting the terms of hybrid adjustable rate mortgages had no business buying residential property in the first place.  If they were forced to go through the traditional process of mortgage issuance by savings banks or other dominant, pre-Gramm-Leach-Bliley primary mortgage lenders, involving extensive checks on credit worthiness and the necessity to conform to rigorous standards on loan-to-value ratios for repurchase by Fannie Mae or Freddie Mac, then they would have been completely locked out of housing markets.  My larger point here is, however, that Gramm-Leach-Bliley transformed both primary and secondary mortgage markets, enabling the meltdown of these markets and overexposure to mortgage based assets across the global economy.  Subprime borrowers would never have been enabled to take on unsustainable debt if there were no investors who somehow believed that they could profit handily from lending to them, and the change in statutory standards by Congress, removing Depression-era protections against such capital flows into high-risk mortgage lending, led directly to the creation of such circumstances. 

No one leaves! Nadie se mude! Springfield - On the Foreclosure Crisis and the Logic of Resistance I

This post seeks to address the grassroots community response to the foreclosure crisis in the Springfield, Massachusetts region.  The response has centered around the local sister organization of a Boston-based movement "No One Leaves/Nadie Se Mude," which has constituted the Springfield bank tenants organizing campaign (at: http://www.springfieldnooneleaves.org/).  The term "bank tenant" in this circumstance connotes individuals or households renting apartment space in post-foreclosure, bank owned properties and/or former property holders in bank foreclosed properties.  In my understanding, the group does not contest the foreclosure process, per se.  Rather, it challenges the eviction of bank tenants through direct confrontation (blockades, occupation, vigils) with law enforcement officials attempting to enforce eviction orders and, further, facilitates the use of legal remedies for bank tenants to prevent or stall evictions, and to advocate for a renegotiation of the principle for mortgages in which the collapse of housing prices has left homeowners under water.  In this manner, the group has achieved small victories in a region characterize by a fairly substantial rate of mortgage foreclosures relative to the total housing stock, particularly within lower income areas.
        
Organizations like No One Leaves/Nadie Se Mude hold a special place in my heart for several reasons.  Most notably, the group's mission hearkens back to that of the committees of the unemployed and tenant anti-eviction committees organized within numerous U.S. cities during the 1930s, in many cases through the work of activists associated with the Communist Party of the United States (a big reason, alongside the defense of the Scottsboro boys, why I briefly joined this organization until I discovered the anachronistic and unrealistic nature of their take on communism).  These organizations stood up for the fulfillment of a basic need for housing among unemployed or low income populations subjected to the indignities apparent in the regular functioning of an integrated market system where the everyday lives of the most vulnerable people are frequently laid waste by the buying and selling decisions of investors a thousand or more miles away.  Market systems can be wonderful for the entrepreneurship they inspire and the variety of goods and services they generate, but they can also be torturous for the tumultuous effects of shifts of supply and demand they inflict.  During the early 1930s, as today, when the state neglects the negative impacts of market processes on vulnerable populations, doing little or nothing to mitigate the adverse effects of a changes in housing markets on low income groups, we need grassroots fighting organizations to stand up to private financial sector entities in the name of social justice, peace, and sustainable, equitable economic development. 

This is not to say that low income people should be given free property in housing stock at the expense of lenders.  Rather, we need to more fully examine the unique context of the mortgage market meltdown to evaluate what exactly happened here and why we cannot simply allow the financial sector to dictate the ongoing course of the transition in the U.S. housing market back to economic health.  For my purposes, ownership of residential property is never a right - it is always a privilege conferred on individuals and households capable of making sacrifices in organizing their intertemporal consumption portfolios to make durable consumption investments.  Today, as a result of the mortgage market meltdown, fewer households will be able to make the choice to buy residential property than was the case a decade ago because the income and wealth-based thresholds for access to mortgage markets have increased, as a stung financial sector seeks to exclude the higher risk, lower income households that left them holding non-performing mortgages and large inventories of foreclosed properties.  When we look back at much of the first decade of the Twenty-first century, however, history may present us with the high tide of residential property ownership in the U.S., a time in which more people than ever were admitted to indulge in the fantasy (the "American dream") of being a homeowner, whether or not they could sensibly afford to engage in housing markets.

It is tempting, especially for homeowners in middle income groups who "played by the rules," got traditional mortgages with substantial down payments at closing, and made sacrifices in intertemporal consumption to make timely mortgage payments and accumulate equity, to place 100 percent of the blame for the mortgage meltdown on foreclosed homeowners.  For middle income homeowners who feel secure in their property, the fault in our extended housing market crisis lies with the irresponsible borrowers who simply failed to make the consumption sacrifices necessary to pay their mortgages according to their loan agreements.  Maybe it was because they had to have luxuriant cable t.v. packages or they had to go out and buy new cars or they had to eat lobster and filet mignon when they should have been eating hamburger and mac and cheese - for some reason they just spent too much money on other things they didn't need when they should have been paying off their mortgages every month just like every other responsible suburban homeowner.  When this basic framework in the assessment of who is to blame for the housing situation in America is taken as a point of reference, a predictable evaluation emerges on the work of an organization like No One Leaves - they want the government to step in and give irresponsible households who pissed their money away on extravagant, profligate living free housing when I worked my ass off to earn every penny of equity in my home!

The emergence of this very reaction among a number of my coworkers to a No One Leaves action in West Springfield gave me the impassioned impetus to write this post.  Notwithstanding my best efforts to argue the point that, yes, foreclosed low-income homeowners were at least partially responsible for the situation with the housing market, I could not get around the seeming insistence of my coworkers that, in defending what No One Leaves stands for, I was actually trying to absolve them of any responsibility.  The most that I could elicit in a recognition that foreclosed households were not completely to blame was the typical right wing argument that the government enjoyed some of the blame for forcing the banks to stop redlining poor neighborhoods!  Truthfully, I can recognize that there is a fairness issue involved here ("I played by the rules, so why should they get free property for breaking them?").  It is difficult getting around the  righteous indignation of someone who honestly believes that someone else is getting something they don't deserve while I have to earn everything I have. 

In his New York Times commentaries, Krugman often scolds the average American for analogizing the fiscal situation of the federal government to that of individual households, neglecting the "big picture" that any effort at government austerity/deficit reduction is going to deprive lots of Americans of an income.  After all of the semesters of graduate level economics that I have sat through, I certainly get his point, but I can't help but think that he still just comes off to readers who aren't already approaching with a nuanced appreciation for the role of government in the contemporary macroeconomy as an ivory tower liberal who doesn't get it.  It isn't enough to quote statistics and point out the economic impacts of allowing the housing market to continue to accumulate foreclosed property.  The argument that I advance here isn't going to be satisfying to my friends simply because they've worked too hard to accept the logic of the economic "big picture" explanation when, in the end, it still leaves them feeling like they've gotten screwed. 

That said, I am not going to suppose that I can change the mind of anyone who rejects, as a matter of morally buttressed personal spite, the logic of measures like principle renegotiation.  I am writing, in a manner of speaking, out of my own personal moral indignation, to defend the worth of organizations like No One Leaves, because I want to make that point that there is plenty of blame to go around for the mortgage market meltdown, and the financial sector not only deserves to be taken to task for their role, but forced to pay up by accepting losses from making irresponsible investments in a housing market with vastly overinflated prices and allowing the effects of a collapse in prices to spread like a cancer from primary mortgage issuers to the heights of investment banking.  Moreover, I want to make the larger point that we need to get beyond the basic assignment of blame to ask the larger question of what is now best for the health of the housing market and for the fiscal health of municipalities affected by high foreclosure rates.  Until we turn the corner and accept that assigning blame is not very helpful, our local economies will continue to suffer adverse effects.               

On the NSA Surveillance Scandal and the Peculiar Mr. Snowden III

3.  Mr. Snowden’s actions must be appraised against the need for principled governmental transparency in a democracy and the imperative to maintain operational secrecy within civilian and military intelligence agencies.  To these ends, he needs to come home, not merely to face justice, but also to participate meaningfully in the broader social inquiry on privacy and national security raised by his revelations. 

Proceeding from my two previous posts, the revelations made by Edward Snowden to The Guardian (see Greenwald, “NSA collecting phone records of millions of Verizon customers daily,” in The Guardian (5 June 2013), at: http://www.guardian.co.uk/world/2013/jun/06/nsa-phone-records-verizon-court-order) suggest that, legally speaking, the Obama administration never actually did anything legally suspect in its collections of metadata under the legal requirements of the Foreign Intelligence Surveillance Act (FISA).  On the other hand, the reaction to NSA’s actions in the collection of metadata and other Internet-based surveillance programs directed toward U.S. citizens on American soil suggests that a more fundamental violation of trust by the administration and Congressional Intelligence Committee members, transcending the statutory requirements of FISA or even the protections afforded by the Constitution (e.g. Fourth Amendment protections against illegal searches and seizures), has been committed here.  Democratic societies do not just endure violations of personal privacy without some tangible effort to debate the necessity of a sacrifice in liberties attendant to the needs of national security. 

As I’ve suggested, Mr. Snowden appears to have, thus, done something very valuable in restoring the vitality of democratic discourse around these issues against the best efforts of the Obama administration, its agencies, and their legislative overseers to decide what was best for the American people behind their backs.  In this respect, again, I do not think that it would have been necessary, practical, or inconsequential to the effectiveness of intelligence collections for the administration to reveal every incremental element of methodology/technique required to undertake the massive scale of its collection efforts, but we need to have a principled debate over these issues, with tens of millions of citizens telling their Congressmen and Senators whether they think such efforts are necessary for national security and, possibly, expressing their outrage that there was no effort made to inform the American public that information about their phone calls and e-mail traffic was going to be monitored by government agencies.

Beyond these initial reflections on the potential good that may have been done by Snowden’s revelations, I simply do not know all of the things that Snowden revealed to The Guardian, Der Spiegel, other news organizations, and, most importantly, foreign governments.  Through contractor Booz Allen Hamilton, Snowden had apparently performed work for both CIA and NSA, domestically and in foreign locations.  Notwithstanding the best efforts of NSA officials to argue to the contrary, there does not seem to be anything intrinsically damaging to national security in Snowden’s revelations about metadata and e-mail information collection programs.  If Al Qaeda agents in Pakistan or Algeria are going to communicate to supporters in the U.S., they will continue to need a means to exercise secretive communications halfway around the world on a time-sensitive basis.  Without telephone and Internet means, monitored in some ways by U.S. government agencies, there is just no other meaningful way to accomplish such communications.  Notwithstanding the fact that Snowden has revealed the existence of these collection programs, there does not seem to be a way that international organizations attempting to engage in actions to the detriment of U.S. national security will be able to circumvent good intelligence collection work by U.S. agencies. 

A more pressing concern in Snowden’s revelations concerns the possibility that he revealed the identities of U.S. agents abroad, collaborations with allied foreign intelligence agencies, and specific programs damaging to U.S. diplomatic efforts (e.g. the claim that NSA was performing surveillance on the headquarters of the European Union).  Such actions might be expected to put the lives of intelligence personnel at risk, deliver palpable damage to intelligence collection efforts abroad, and damage the interests of the U.S. in relation to allied governments.  If, under these circumstances, U.S. espionage against allied governments may have constituted an ill-conceived measure on the government’s part likely to paint the Obama administration in an unflattering light (something closer to the image the world had of the second Bush administration), no quantity of self-righteous indignation on Snowden’s part, in defense of the Constitutional liberties of U.S. citizens, could have justified a revelation of U.S. spying on the E.U. outside of his own personal satisfaction at embarrassing the administration.  As it stands, this particular revelation appears to be damaging the U.S. case for a free-trade agreement between the U.S. and E.U. (concerning both the stakes behind a trade agreement and the French threat to stall any talks pending U.S. assurances to respect European data privacy laws, see Rushton, “Battle lines drawn for EU-US trade talks,” on The Telegraph, at: http://www.telegraph.co.uk/finance/globalbusiness/10164644/Battle-lines-drawn-for-EU-US-trade-talks.html).   

The proper place to assess and evaluate the impact of Snowden’s revelations and, thus, to evaluate his guilt in damaging U.S. national security, is in a U.S. federal court.  He needs to return to the U.S. and face trial for violating the Espionage Act, and it would be far better, at least as a reflection on his own moral character, if he returned willingly rather than suffer forced extradition.  His prolonged layover in the Moscow international terminal and attempts to secure asylum in various Latin American states is neither helpful in efforts by the Obama administration to assess and deal with the damaging impact of his revelations, nor is it helpful for his case as a “whistle blower” on the allegedly illegal clandestine activities of the U.S. government, in the name of individual liberty and the personal privacy of everyday Americans.  In the most basic sense, Snowden is no hero if he wants to raise allegations on shady, intrusive, and Constitutionally suspect actions by the NSA and then hide in the protective custody of governments unfriendly to the U.S. who would be unlikely to cooperate in his extradition.  If it was worthwhile to reveal the NSA’s actions, then, provided he actually sees himself as a patriot rather than a traitor, he should be willing to face the consequences of his actions. 

Reflecting further, French blogger Thierry Meyssan has made an important point regarding the actions of “whistle blowers” like Snowden, Bradley Manning, and, now apparently, Marine General James Cartwright, all of whom have either already been charged or potentially face charges under the Espionage Act of 1917(see Meyssan, “The Price of Truth,” on Voltairenet.org, at: http://www.voltairenet.org/article179196.html).  The primary purpose of the Espionage Act, as it was initially framed during World War I and as it has subsequently evolved, has not been to impede foreign intelligence collection (we have FISA for that purpose anyway).  Rather, it has served to punish political dissent during wartime (i.e. “seditious” speech by war resistors and other erstwhile opponents of foreign policy) and to punish government whistle blowers, “exposing a system of fraud or crimes committed by the state” in the national security community during peacetime.  Enforcement of the law often acts to muzzle speech directed toward conducting debate on policies that might simply be embarrassing to the government but not palpably detrimental to national security or endangering the lives of American citizens.  On the contrary, revelations, like those Meyssan cites from General Cartwright on U.S. operations toward Iran, might actually have the long-term effect of saving the lives of U.S. military forces. 

           
          With this argument in mind, maybe it is about time to review the usefulness of the Espionage Act in relation to the greater need for debate over national security in our democracy.  I do not mean to suggest, as Meyssan explicitly argues, that the American public should have been informed of military technological developments as sensitive as the Manhattan Project during World War II.  As I have argued in this rant, certain things need to remain in the confidence of government officials with a need to know such information in the specific exercise of their duties.  On the other hand, broader principles need to be publicly debated in ways that will reinforce and legitimize what the government necessarily must do behind closed doors.  In line with Meyssan’s example, maybe it would have been possible to undertake public debate on the use of weapons of mass destruction, capable of being used against essentially civilian targets, as a means of bringing an enemy government to sue for peace without disclosing the particular nature of the weapons at the government’s disposal.  If the Espionage Act functions to gag such debates, then we are doing a disservice to our own self-government by allowing Presidential administrations and closed-door Congressional Committees to dictate what is required to maintain our national security without our informed consent.  My argument here should not be construed as implying that Bradley Manning, Edward Snowden, and other figures currently accused of violating the Espionage Act should not face justice for their actions.  Rather, in the future, the government needs to better evaluate the critical thresholds for maintaining official government secrets in a way that opens up a wider field for public debate on national security policies prior to the initiation of particular programs, like those recently revealed from NSA, rather than retrospectively in response to a “whistle blower.”