Housing market crisis threatens economy
Published Apr 27, 2005 4:31 PM
The housing industry, a key component in the
recent expansion of the capitalist economy, is sending mixed signals. For almost
three years, the Federal Reserve Board kept interest rates at 1 percent so the
banks and other financial institutions could flood the currency markets with
cheap dollars. The resultant home-buying craze triggered a huge spike in prices
and construction of new homes.
“The national median home prices
[for March 2005] jumped 11.4 percent to $195,000 from the same month a year
ago ... the biggest since December 1980. ... Home sales have been bolstered by
low mortgage [rates] ... but some analysts said the housing sector has begun to
show signs of easing. ... Last week a U.S. Commerce report showed a 17.6 percent
plunge in housing starts for March.” (USA Today, Mar. 25)
institution that capitalized on the frenzy in the housing market is the Federal
National Mortgage Corporation—popularly known as Fannie Mae.
Created by Congress during the Great Depression, it was designed to
provide stability and liquidity in the mortgage market. When the housing market
collapsed, Fannie Mae provided local banks with federal money for financing home
mortgages. It raised the levels of home ownership and the availability of
In 1968, President Lyndon Johnson shifted Fannie Mae
to the private sector, to remove it from the budget deficits accumulated during
the Vietnam War.
Today, Fannie Mae is a publicly-traded company on the
stock market. Its primary aim is to accumulate huge profits for its corporate
heads and big-time investors.
Fannie Mae is a Government Spon sored
Enterprise (GSE)—a monopoly with special privileges, including borrowing
money below market-interest rates, exemp tion from state and local taxes, and a
credit line at the U.S. Treasury.
It is the largest non-bank financial
services company in the world. Fannie Mae and its junior partner, nicknamed
Freddie Mac, have grown rich on these freebies. Their combined assets are 45
percent greater than those of the nation’s largest bank. On the other
hand, their combined debt is equal to 46 percent of the current national
Fannie Mae and Freddie Mac are the only two Fortune 500 companies
that are not required to inform the public about any financial difficulties they
may be having. In the event of financial collapse, investors believe U.S.
taxpayers will be responsible for hundreds of billions in outstanding
Another Enron in the making?
Last year Freddie Mac
revealed accoun ting errors of $4.5 billion to $4.7 billion, resulting in the
termination of three of its top executives, who were bailed out in a golden
parachute of benefits.
This year the Office of Federal Housing Enterprise
Oversight, a government agency, charged Fannie Mae with cooking the books.
Fannie Mae was significantly under capitalized and covered up a $9 billion
shortfall. Two of Fannie Mae’s top exe cutives resigned with golden
Beginning in June, Fannie Mae will be required to add 30
percent to its reserves —-calling for about $7 billion of additional
On Feb. 17, the Wall Street Journal carried the banner
headline, “Greenspan urges limits on Fannie portfolio growth.” The
article set off alarm bells. “Fannie share price fell ... to its lowest
level since August 2003. ... Limits on the finance providerenormous mortgage
portfolios, which reached $1 trillion, 500 billion, would hurt their profits.
‘It’s an earnings killer,’ said an independent financial
consultant, adding that a growing number of investors appear to be selling the
If Fannie Mae went down, the entire housing
industry would collapse. The mortgage behemoth is integrated into Wall Street
banks and other major financial institutions. Fannie Mae borrows from the banks,
which profit from unloading high-risk mortgage portfolios back to them. Fannie
Mae in turn packages and guarantees these volatile high-risk mortgages, and
sells them to the highest bidders in the billion-dollar secondary mortgage
market. It receives humongous fees for this service.
Fannie May has
entered the world of derivatives and hedge funds, and since there is neither
transparency nor oversight, there is only speculation about whether Fannie Mae
has accrued huge losses. It is casino capitalism and Wall Street’s
favorite game. This GSE is suspected of establishing trusts to cover up its
hedge funds investments.
Since European and Asian banks, private and
public, have invested billions in the U.S. housing market, any significant
downturn would have incalculable worldwide repercussions.
Is this a rerun
of the Savings and Loan (S&L) collapse of the 1980s that cost consumers and
tax payers billions of dollars? At that time, speculation, rapid inflation and
high interest rates burst the housing bubble. The S&Ls hyped the price of
real estate, which led to huge accounting frauds.
There has been no
oversight since Pre sident Ronald Reagan deregulated the industry. Reagan made
it easier for the S&Ls to lend recklessly. He increased the Federal Deposit
Insurance Corporation’s (FDIC) guarantee to cover bad loans from $20,000
The S&Ls approved huge numbers of highly leveraged loans
at high interest rates. If they panned out, fortunes were made. If not, the FDIC
would cover each account. Bankers and real estate developers, with their
political clout in the Reagan and Bush senior administrations, were able to milk
the S&Ls dry.
And they crashed.
A new S&L catastrophe
Is the Bush administration following in the footsteps of his
predecessors? Are there similarities today to the housing and real estate bubble
of the 1980s?
Currently housing prices have reached stratospheric levels
because of low mortgage rates, strong demand and outrageous speculation. A sharp
rise in interest rates can kick the props out from this critical market. The
housing market directly affects a multitude of other industries, including
lumber, steel and construction. It’s also tied to consumer products like
furniture, appliances, outdoor items, etc.
The Bush White House is
following the Reagan administration policy of attacking labor and the poor while
bestowing tax cuts on the corporations and the wealthy 1 percenters. Huge
military spending and the endless occupation of Iraq and Afghanistan have
created massive current account debt and budget deficits.
Reserve Board has raised interest rates to 2.75 percent, its seventh
quarter-point increase since June 2004, to slow down inflation. It has failed.
Reagan, too, raised interest rates that many economists believe led to the
October 1987 stock-market crash.
Is the housing industry about to follow
the demise of the 1980s S&Ls? Is the auto industry, led by GM and Ford, a
barometer of an ill wind facing the capitalist economy? Are they all the product
of overproduction, inflation and speculation, leading to a growing stagnation?
Even in its early stages, stagflation—economic
stagnation plus inflation—is bad news for the housing market. With an
exploding debt, Fannie Mae is facing a crisis of monumental proportions. Raising
interest rates to head off inflation will soon discourage the home buyer who
can’t afford increased mortgage costs.
The consumer/worker is
already overloaded with debt. Wages are lagging way behind the rate of inflation
and workers can’t buy back the super-abundance of goods and services they
The cycle of overproduction and under-consumption has begun.
Housing is the most expensive, yet necessary, commodity the consumer/worker can
buy. The housing inventory is overloaded and priced beyond the reach of millions
of low-paid workers and oppressed people. Home lessness is on the rise, rents
have sky-rocketed and evictions and foreclosures are increasing.
Mae was created during the 1930s to supply equity to prevent these hardships.
Today, as a corporate housing monopoly, its main concern is profits and
dividends for its investors. It is up to workers and their communities to
protect the basic right to decent, affordable housing, private or
As May Day is about to be reclaimed by a progressive and
class-conscious coalition of opponents of endless wars and U.S. imperialist
occupations, along with resisters of the war at home, the issue of decent,
affordable housing, fighting homelessness, evictions and foreclosures, must be
at the top of the agenda.
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