![]()
Part I
Introduction
![]()
Subprime Cities and the Twin Crises
Manuel B. Aalbers
Introduction: Urban Political Economy
From the early 1970s to the late 1980s debates on homeownership and mortgage markets were at the center of urban sociology and human geography. Although the interest in mortgage markets in social science has waned since, the importance of mortgage markets to cities and societies has not. To the contrary: homeownership rates have steadily increased in most countries and mortgage markets have grown dramatically and now represent almost €12/$16 trillion worldwide. This expansion has happened at a time when most social scientists, including those in urban studies, have paid little attention to mortgage markets and have left the analysis to economists. The rise of subprime lending and securitization has resulted in a new interest among social scientists in mortgage markets; and this interest has only increased since the mortgage market crisis, and indeed the global financial crisis, of 2007–09. The authors represented in this book all started working on mortgage markets before the recent crisis, but their work, in many different ways, helps us to understand the origins and scope of this crisis.
Traditionally, the mortgage market has been the domain of economists. Other social scientists, most notably geographers, sociologists, and political scientists, have studied the mortgage market, but generally they were considered to work outside the mainstream and their work has largely been ignored by economists. There have been times when geographers and sociologists have contributed greatly to the understanding of mortgage markets. Usually this was at times of turmoil and change as well as when exclusion in mortgage markets was an important issue. One explanation for this may be that mainstream economics, with its obsession with equilibrium, has trouble understanding change. As the political economist Thorstein Veblen already observed 75 years ago, “The question is not how things stabilize themselves in a ‘static state’, but how they endlessly grow and change” (Veblen 1934: 8). It is here that some forms of heterodox economics (including some forms of political economy) shake hands with sociology and geography. It is, to some degree, also the difference between “clean models” and “dirty hands” (Hirsh et al. 1987): while mainstream economics prefers “clean, abstract, and parsimonious modeling,” sociology and geography
produce empirically rich accounts of concrete and socially situated economic processes; they each emphasize the essential diversity of economic phenomena, favoring context-rich explanations in which history is taken seriously; they each attach greater significance to plausibility and explanatory power than to elegance and predictive power; and they each strive to explain, and often improve, the characteristically messy economic worlds that they encounter. (Peck 2005: 132)
This is not, as some have interpreted it, a clash between quantitative and qualitative methods. Although clean models are generally very quantitative (and often have to do more with mathematics than with statistics), not all quantitative work fits the idea of clean models. Indeed, many sociologists and geographers have been getting their hands dirty by presenting both quantitative and qualitative research on issues like redlining and predatory lending (see Glossary). Many of them, in particular in the US, also got involved with local communities and the wider, national community reinvestment movement (e.g., Squires 1992).
Among the various non-economists who have worked on mortgage markets, the work of David Harvey from the late 1970s and early 1980s is probably most well known (e.g., Harvey 1977; 1985). It is part of a broader interest of mostly Northern American sociologists, geographers, political scientists, urban planners, and political economists in redlining and related forms of discrimination in mortgage markets from the 1970s onwards (e.g., Bradford and Rubinowitz 1975; Marcuse 1979; Shlay 1989; Dymski and Veitch 1996; Wyly and Holloway 1999; Gotham 2002; Stuart 2003; Aalbers 2007; 2011). Here, the discipline of political economy should not be taken too narrow. There are many schools of thought that call themselves political economy. Political economy is sometimes referred to as a specific group of heterodox economists, but also as a group of political scientists interested in the economy, often in what is called “international political economy” or “comparative political economy.” In addition, there is also political economy within sociology and geography, which in its origins is heavily influenced by Marxist thinking as we can clearly see in the work of David Harvey. It is also related to the so-called “new urban sociology,” which seeks to situate urban sociology
within an equally emergent political economy, which requires urban sociology to be a more interdisciplinary enterprise (with economics and, to some degree, political science) than it has been. … By tying together urbanization, the quest for profit and domination, and the state’s attempts to moderate domestic conflict between social classes, the new urban sociology achieves a coherence the field had lacked since Weber typified “the city.” (Zukin 1980: 579)
What these different political economy traditions have in common is that they analyze “the economy within its social and political context rather than seeing it as a separate entity driven by its own set of rules based on individual self-interest” (Mackinnon and Cumbers 2007: 14). Therefore, political economists may come from different disciplinary backgrounds and they may be in dialogue with their “disciplinary home” more than with other political economy traditions, but each of these traditions is, almost by definition, interdisciplinary. This book includes a lot of work by academics who would often by referred to as urban sociologists and urban geographers, but they are all, to some degree, influenced by the political economic currents in their respective disciplines. In addition to these “urban political economists” this book also includes work by comparative political economist Herman Schwartz who has recently been seeking to establish a dialogue between comparative political economy and housing studies (Schwartz 2009; Schwartz and Seabrooke 2009) and by (political) economist Gary Dymski, who has been trying to build a relationship between economics and geography for a long time (e.g., Dymski 1996; 2009).
Presently we are living through another episode of turmoil and change in mortgage markets, and again the work of political economists of different traditions sheds new light on what is actually happening in the mortgage market. This book will not so much focus on how this crisis has spread to other sectors of the economy, but will look at the mortgage market and how problems have spread throughout mortgage markets. In all chapters, changes in the mortgage market have a central place. Some chapters present evidence of the changes that have resulted in what is often called the subprime mortgage crisis; others are more focused on some of the structural changes in the mortgage market than on the crisis itself.
The term “subprime mortgage crisis” is misleading, not only because the problem has spread throughout and beyond the mortgage market, but also because the problems did not start with subprime mortgages. Subprime loans (see Glossary) have been one important ingredient in the recent crisis, but other ingredients go beyond subprime lending. What the mortgage boom, at least in the US, has created, however, are “subprime cities:” cities modeled by the flow of capital in and out of neighborhoods. This dynamic of making profits on the production, and indeed reproduction (or revitalization, or gentrification), of the built environment has resulted in suboptimal or subprime cities. In the next section I will elaborate on the idea of the twin crises (subprime and financial) as an inherently urban crisis. In the later sections of this chapter I will look at the twin crises as a combination of a number of interrelated causes, including: (1) deregulation and re-regulation, (2) financialization and globalization, and (3) bubbles and poor credit ratings. Different media and most economists have focused mostly on the latter, but one cannot explain what went wrong without attention to the first two as they, together, explain in which context bubbles could develop. I do not present a full theory of the twin crises here, but I do present a framework in which the authors of this book move and in which we have to look not only for the causes of the crisis, but also for the solutions.
The Centrality of Cities in the Crisis
In a publication released in early 2008, Gregory Squires asks the question “Do subprime loans create subprime cities?” His answer is yes, in the US, they do. Unequal access to conventional financial services is linked to rising inequality of income and wealth, and intensified segregation by class and race. The resulting uneven development is not just costly to disadvantaged areas, but “to all parts of many metropolitan areas and to the U.S. economy as a whole” because it undermines “the political stability, social development, and economic growth of the entire region” (Squires 2008: 2–3). Indeed, cities, and in particular US cities, are central to this crisis for at least four reasons.
First, the urban is the site of racial and ethnic inequalities in housing that can be exploited by brokers and other local actors who have knowledge of these geographies of inequality. Decades of financial deregulation have not resulted in wider access to mainstream financial services, but in a two-tier banking system with mainstream finance in most places next to a landscape of financial exclusion and predatory lending where banking services and the number of bank accounts have declined while fringe banking (pawn shops, payday lenders, etc.) and predatory lending flourish (Caskey 1994; Dymski 1999; Immergluck 2009; Leyshon and Thrift 1997; Squires 2004). Both quantitative and qualitative research show that “subprime loans are making credit available in communities where credit likely historically has not been – and likely still is not – as readily available” (Goldstein 2004: 40). The old geography of place-based financial exclusion (redlining) has not disappeared, but has been replaced – and to a large extent reproduced – by a new geography of predatory lending and overinclusion (see the chapters by Wyly et al., Newman, and Hernandez). Moreover, subprime lenders exploit uneven development that resulted from these earlier rounds of urban exclusion.
Second, cities take a special place in the subprime and foreclosure crisis because this crisis is not merely a financial crisis but also an urbanization crisis: at the root of this crisis is the real estate/financial complex (akin to the military/industrial complex) that fuelled both (sub-) urbanization and financialization. As David Harvey has argued, capital surplus has been absorbed into urbanization. Urban restructuring, expansion, and speculation are all ways to deal with this surplus. Indeed, cities have become huge building sites for capitalist surplus absorption – not only in the US but also elsewhere. In line with Harvey (1985), we can see how, through subprime lending, the urban has become the place of capital extraction (Wyly et al. 2006; Newman Chapter 8, this volume). Capital switching from the primary (production) to the secondary (built environment) circuit of capital may, at first sight, seem to benefit people who want to buy a house, but since it has resulted in dramatic increases in house prices, homeownership has simultaneously become more accessible and more expensive. The expansion of the mortgage market has not so much facilitated homeownership as it has facilitated capital switching to the secondary circuit of capital. By simultaneously expanding the mortgage market, by means of granting bigger loans, and by giving access to more households (so-called “underserved populations”), the growth machine (Logan and Molotch 1987) kept on working smoothly for a while. Yet, every growth machine or accumulation regime needs to keep on growing to function smoothly and it seems that the recent crisis has announced the beginning of the end of ever expanding mortgage markets (Aalbers 2008).
Third, the urban is the scale that matters for people who make decisions about housing and borrowing, and these decisions result in vast differences in mortgage supply. For example, in American Rustbelt cities subprime lending expanded first and foremost in neighborhoods of color; by contrast, the fastest-growing American Sunbelt cities became targets for the “exotic” loans targeted to middle-income and speculative house-flippers (see Glossary) as home prices crested. House prices can go down because of a structurally faltering economy, like in the Rustbelt, but also because they have been going up extremely fast, like in many cities in the Sunbelt. House prices in the Sunbelt were simply more inflated than elsewhere in the US: the housing bubble was bigger and more likely to bust. In addition, some local and regional economies in the Sunbelt also show signs of a declining economy, perhaps not structurally, as in the Rustbelt, but conjuncturally. Finally, high economic growth also meant a lot of new construction and more homeowners who had recently bought a house, thereby increasing the pool of possible victims of falling housing prices (Aalbers 2009).
Fourth, the securitization of mortgage loans (see below and Glossary) increasingly takes place in global cities: highly concentrated command points that function as a global marketplace for finance (Sassen 2001; see also Langley 2006; Pryke and Lee 1995), such as New York and London. It is here that securities, bonds, and swaps are designed and sent into the world. At the height of the crisis – fall 2008 – publications such as the New York Times and New York Magazine had headlines like “Wall Street, R.I.P.” (Creswell and White 2008) and, with a reference to the novelist Tom Wolfe, “Good-bye, Masters of the Universe” (Cramer 2008). In a city where 20 percent of personal income tax and 45 percent of business income tax come from Wall Street, and many others are dependent on Wall Street employees’ spending, the crisis has its own geographies. About a quarter of the 188,000 Wall Street jobs are said to be lost and, since every Wall Street job supports two others in the city, the loss of jobs turns out to be quite dramatic. Not only are the financial services sector and the housing market impacted by the crisis, the services industry – from luxury retailers to restaurants, and from nannies to hotels – is also highly impacted: one high-end massage therapist, for example, lost 50 percent of her Wall Street clientele (Dominus 2008). Cornell medical College received $250 ...
