Marcuse and Davies: two views on the roots of crisis

Thought I’d start out with a funny quote I’d forgotten about, courtesy of Howard Davies. It’s all downhill from here though…

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”
–Dan Quayle

Peter Marcuse spoke on Tuesday night at University College of London, and Howard Davies spoke in the heart of LSE on Wednesday at noon, so technically I suppose they weren’t speaking to each other. But they should have been. So they shall through me. This is my interpretation and expansion on events of course, not a faithful recording of exactly what I heard…just to be clear.

Who are these guys exactly?

Peter Marcuse is the son of Herbert Marcuse, and a lawyer and planner. He has been a professor of Urban Planning since 1972, for three years at UCLA, and at Columbia since 1975. He has also been president of the Los Angeles Planning Commission, and has written extensively on housing and planning issues.

Howard Davies is the director of the London School of Economics, and the former head of the Chairman of the Financial Services Authority, the UK’s single financial regulator since 1998. He also served for two years as Deputy Governor of the Bank of England after three years as Director General of the Confederation of British Industry.

Two basic summaries of root causes:

Marcuse started with what are commonly seen as the underlying roots of the current economic crisis (then he tears those apart, but I’m saving the best bit for last!). In his view (his headings with with my own filler) these are:

• The housing bubble – you know, that whole mortgage crisis thing. The inflated price of land, the mad speculation in it, the crazy loans to people with no equity. Those damn NINJA loans (I’ve always been with the pirates myself).
• Unscrupulous people – the greedy bankers, the banks, those bastards who were out there sweet-talking your grandma into a loan worth more than her house, one that she would never be able to pay back. So she now lives with you instead.
• Securitization – this is a big word, and of course it’s complicated. It’s deliberately complicated to get around annoying regulations and the agencies that tried to enforce them. Thousands of mortgages all packaged up together and insured and sold and then maybe reinsured and sold again and then maybe one more time…the important thing to know is that it made a lot of people rich as long as the housing market kept going up.
• Deregulation – Not only were those “unscrupulous” people getting around existing regs and preventing the implementation of new ones, but they succeeded in getting rid of the Glass-Steagall Act which was made law in the 30’s to ensure that the Great Depression never happened again. Nice work.
• Too much money floating around looking for something to invest in. You have to laugh at that really (and then cry), I’m sure none of us have known the feeling of too much money, too few options of what to do with it. But apparently there were trillions of dollars floating around the world economy that needed a home. I wished they’d asked me, but if equality and a just distribution of wealth around the world aren’t issues, than I suppose perhaps that could be seen as a problem.

This isn’t actually all that different from the analysis of the problem given by Mr. Davies, though he got much more technical around issues 3, 4 and 5, and sliced them up rather differently. I didn’t catch his final “summing up slide as he was talking fast and out of time, but the earlier top 4 underlying causes were:

• Global imbalances – There was a huge increase in global imbalances, I know this is bad. I can’t remember exactly why, I do apologize! You can see the chart of global imbalances here, along with many other charts full of much technical financial information. I will, of course, be correcting my ignorance.
• Loose monetary policy leading to a mispricing of risk and a credit bubble. What was Greenspan thinking keeping interest rates so low? There was just way too much money out there, anyone could borrow anything, and god help us all, they did. Luckily China was able to come in and sell the West lots of cheap goods (since they don’t really pay their employees) and then buy US treasury bonds. A third of them. That kept the wolf of inflation from the door, but confused everyone as to what kind of market they were operating in. Especially Greenspan.
• Excess leverage facilitated by procyclical regulation and regulatory arbitrage. Yikes, no? It just means that banks were doing the same thing that all of those “gullible” homeowners (the same ones who are now getting evicted) were doing, taking out massive loans with no down-payment and not enough savings in the…er…bank. They had nowhere near enough money to cover their asses. And why did they think this was ok? Because their advanced historical and cyclical analyses of the housing market told them it was one market that would always go up. So everything would be fine. The equations promised.
• ‘excess’ unmanaged growth of the financial sector – it exploded into one area really, securitizing mortgages and playing with derivatives, and by moving into this area the financial sector thought it was diversifying risk (you know, putting down bets on lots of horses, not just one. And placing bets as part of a pool so to speak, by insuring your bets and…it’s complicated). But turns out so much money was being put into trading these property related bonds and CDO’s and etc, they were actually creating risk rather than managing it. A failure of betting strategy if you like. The fall of dominoes was insanely impressive however.

As a combination of factors it all makes some kind of sense, it certainly hangs together. And if you’re a bit rusty on your economic jargon, it makes your eyes glaze over but it sure sounds damn impressive. I think I’ve got a handle on most of it, but who really knows? Understanding the ins and outs of what actually happened takes a massive amount of energy, involving remote corporate skyscrapers, hundreds of acronyms, and unfathomable sums of debt being sliced up, repackaged, insured, reinsured, moved constantly from one major player to another. And it’s all happening on a global scale. And let’s not forget the distracting million dollar bonuses and offshore accounts…

And so these kind of explanations lead to even more complicated solutions, we are witnessing a grand escape into the technical. For Howard Davies? We need more and better regulation, better internal management of banks, better global coordination and so on into excruciating detail and even bigger words.

But instead of delving into all of that, let’s return to Peter Marcuse’s lecture: everything I have written above is interesting, but really it is missing the point entirely. You got it. Missing the point entirely. How is it that so many incredibly smart people are missing the point?

Focusing on technicalities of regulation and management hide the reality that the economic system itself is fundamentally flawed.

Some of us take that for granted, others will never believe it is true. Capitalism? Well, you know what they (or some of us) say. Crisis happens. We’ve been in crisis quite regularly for several hundred years, and that will continue as long as the system continues. Because crisis is inherent to the capitalist system.

What is the motor of the current system? Adam Smith called it self-interest, but it seems rather silly to expect people to hold the contested and rather imaginary line between self-interest and greed. Greed ultimately is the motivating force, it is the entrepreneurial way and a constant pressure. When you see regulation as the answer, you really aren’t giving people enough credit. They are hell of smart. And there are thousands if not millions of them trying to get around any rule keeping them from their self-interest. And they will. The mass securitization of incredibly risky mortgages as sound investments was just one clever proof of the power of invention to get around regulation. We can fix that loophole, but there will surely be others as it is symptomatic of the fundamental basis of the current economy.

Why is this particular crisis concentrated in real estate, as so many of them are? When buying real estate, you aren’t just investing in land, you are investing in a commodity that has only a fixed supply. There’s only so much of it, and it’s all spoken for. Because of this, you can sit on it, do absolutely nothing at all to improve it, and it will continue to grow in value. This value is due entirely to population and urban growth, it is socially created, it is ‘easy’ money. It invites speculation, always has and always will until we change how the housing market and property ownership work, and we change it completely. As long as housing is seen as a means of profit and vehicle for investment, this kind of crisis will be a recurring one. There’s nothing new about housing bubbles!

Too much money? No, there isn’t too much money, there is too much capital. Capital is what is produced by the exploitation of workers, it is profit extracted from production and at great cost to those who actually produce, and it is money whose sole purpose is to be reinvested to make more money. For me, this distinction goes some way to explaining a world where we can have simultaneously the problem of ‘too much money’, and millions earning less than one or two dollars a day. Clearly there needs to be change there, as the fundamental dark absurdity of such a world is obvious. Isn’t it?

So if Marcuse is right, and I rather think he is, it renders much of current policy and debate a bit meaningless really. All of these solutions are looking at the “fundamental” roots of an issue that really has foundations much deeper still. And if we dig those up, what will we build instead? That is the perennial question.

So the next blog will be about Marcuse’s vision of the Right to the City and the role of critical theory in building a new world…very exciting, even my cynical self can get somewhat excited about that. And I will.

The other very exciting note is that Howard Davies admitted that we’ve seen the failure of the efficient market hypothesis, a mainstay of economics for years. The idea that investors will act rationally? Well, obviously, that’s been proved laughable, so we really need to start all over again there. They’re creating something to take a look. I’m going to have to watch the aftermath of such an admission, I mean, where can they go after that while keeping within their framework? I have no idea, but do hope it will be interesting. It should be, I have immense respect for their intelligence. So we’re all rebuilding, though not quite together, and not quite for the same people. But it’s an interesting time to be alive.

LAPD officer wounded, resident killed, in Boyle Heights

Yesterday a gun battle broke out on Malabar Street, when police tried to serve a narcotics warrant. The four hour stand-off left one of the men in the building dead, and a police officer in the hospital with a wound in his leg, and the mark of a ricocheting bullet on his helmet…the swat team evacuated 30 residents from the block, and this is what they looked like to the folks living in Boyle Heights:

It’s an armed invasion team really, how can this make anyone feel safe?

I was talking to my friend Leonardo yesterday, who has been organizing in Boyle Heights for years upon years…they’ve done a lot of work on the issues of gangs and drugs. And the reality is that there are systemic reasons that these things exist, the lack of jobs, good schools, opportunities. The reality is that our economic system is broken, and while it remains broken we will continue to struggle with gangs and drugs because they provide for very real needs, whether an escape or income or sense of belonging or protection.

And so while fighting to change the system, we must also fight to control the violence. And in Boyle Heights the community is beginning to do it, people are beginning to walk the neighborhoods at night, to talk to their youth, to build altars together to those have died and work together to try and stop it. It is slow, but sure, and Union de Vecinos is having an impact. The idea that humvees full of police carrying automatic weapons can bring any kind of security seems almost funny, if an endgame where people die riddled with bullets could ever be funny.

Love and Hate

Los Angeles hurts.

It has always hurt, and all the things I love here do not seem to be quite enough to protect me from its teeth. Not now, when I am hurting so much already. Happiness carves its price into your flesh only as it goes. Los Angeles makes elections small, we had a historic day yesterday in the world of symbols, but symbols will change nothing. And I suppose if elected, Obama will carve his own price into the hopes of the nation. We saved rent control for another year, but in winning only defensive battles we are still pushed back. What are we doing? There were kids today on the train selling candy, perhaps they were 5 and 8? if that? I have seen them on the train before, and they are not the only ones. There are a few more kids, and a middle aged black man who has taped signs to his glasses saying 50 cents. He makes people laugh, and he makes people buy candy. We are being pushed deeper and deeper into a third-world economy, as the community crumbles around us.

I am writing. The words drip and smudge across the page, sometimes I think that if I were to dip a pen into my own veins it might be enough, the very ink itself my exorcism, because words alone fail. They cannot speak of pain enough, they cannot burn, they cannot taste of salt and hurt my eyes the way this does. The emptiness that night brings shudders along. I write and the words mock me, the powerlessness of them. I rage and it changes nothing. I imagine happy endings and know that in life they do not come true. I write but people remain broken, friends remain dead, battles remain lost, love remains bitter, the poor remain fucked. I smile at my own sweet exercise in futility.

If I could write the stars the way they should be seen, and can never be seen in Los Angeles, perhaps then…

Economic Bubbles and the Blue Line

I rode the train home late last night, the blue line down through South Central and Watts; L.A. makes me sad sometimes. There is so much speculation on the state of the economy, you can read it in the papers. Taking the blue train late at any time through South Central and Watts, most of that speculation seems rather out of touch. There haven’t been any good times here for a very long time, and when the economy turns, it hits here hardest. And it keeps on hitting. The contrast is stark between this world inhabited by tens of thousands of people, and the world of financial speculation. From here the bubble is very clear, and entirely maddening. Most maddening is that the bubble requires the world of poverty to exist, it is built upon it, immense wealth cannot be held by everyone. It depends on millions of poor in this country, many millions more around the world…

I was talking to an older guy who was only wearing one shoe last night, and white tube socks pulled up high. He was riding the green line train up and down, having nowhere else to go. His legs were swollen the way my gran’s legs became swollen with her diabetes and lack of exercise, the way my friend Mark’s legs became swollen when he was turned out into the streets. Like age and diabetes, the streets swell you up, make you sick, kill you. He was voting for Hillary Clinton, he said he had a crush on her. I laughed at that. He asked me if I was a model and I laughed at that too. He told me I could be anything I wanted to be, this was America, told he was working on his own modeling career. I can forgive this man his bubble, I can forgive him almost anything he needs to survive.

I can’t forgive the people who speculate on the economy night after night on the news, and I can’t figure out who they’re talking about. I don’t know the world they’re talking about either. None of them address the growing gap between rich and poor, growing numbers of people in the streets, growing poverty, growing legions of police to control the poor and protect the wealthy. The only things shrinking are the job pool, the supply of affordable housing, the access to health care, the number of teachers, support for veterans and the elderly, the water table, the ice in the arctic…

Was it the Economy that Slapped Michael Jackson?

So many of us waited this week with bated breath, on the edge of our seats. Some of us wanted the dirty bastard to lose it all, some of us wanted the misunderstood superstar to keep it. FInally, the suspense has ended. Neverland is safe. For now.

But all of us know it is a sad sad day when the economy digs its foul claws of recession into even the richest of men. The nation mourns, for the wake of foreclosures has left not even the most priveleged amongst us safe. And now that this national wave of catastrophe has lapped upon Neverland’s shores, how can anyone sleep at night? Who could possibly dream of ever attaining Michael Jackson’s immense wealth? Yet even he has had to face the pinch of poverty. Even he has had to work to scrape together the last minute deal to save his property from auction and certain occupation at the hand of strangers. What the hell happened to Elizabeth Taylor? What can lie in store for the rest of us?

It is certainly not a road trip to Bahrain to hang out with the Crown Prince.

For those of us not cushioned by multi-million dollar homes and exotic wild animals that we can sell to cover our asses, there sits between us and homelessness only a few gold chains and the toaster oven at the pawn shop. Those won’t get you very far, we all know that. We are, most of us, one major illness away from eviction or foreclosure, one lay-off, one arrest, one unexpected expense. Most of us pay more than a third of our income in rent or a mortgage. And to be sure, most of us don’t have those large settlements to pay off to the parents of kids we’ve had over just to “play” with our toys…we’ve got expenses like food. And gas. And this broadband wireless connection. Boyfriends run the tab up too, fancy underwear when you’re with ‘em, liquor when you’re not…it all adds up. But the point here is that a national landmark like Neverland, almost put up for auction so that any multi-millionaire at all could just buy it, well, that should send a clear message to our leaders that something is wrong. Something must be done. The housing crisis must be averted, and I am paying them more than enough to do it. Not to save the Michael Jacksons of the world of course, they can just sell one of their Malibu homes. But I ask it for the rest of us, the ones with nowhere to turn, the ones even now soldiering on without their jewelry or their toaster ovens…