Housing, the welfare state, and the global financial crisis: What is the connection?

Politics and Society

Volumn 40, Issue 1, 2012, Pages 35-58

  Schwartz, Herman ^a  

^a UNIVERSITY OF VIRGINIA   (United States)

Author keywords

Deregulation; Mortgages; Pensions; Securitization; Welfare state

Indexed keywords

EID: 84856509573     PISSN: 00323292     EISSN: 15527514     Source Type: Journal    
DOI: 10.1177/0032329211434689     Document Type: Article

References (68)

1. Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1957).
2. Jacob Hacker, The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream (New York, NY: Oxford University Press, 2008).
3. Raghuram Rajan, Fault Lines (Princeton: Princeton University Press, 2010) makes a similar argument.
4. Elizabeth Warren and Amelia Tyagi, The Two Income Trap (New York: Basic, 2004) point strongly to the centrality of housing in families' strategies for (inadequately) coping with risk.
5. Peter Hall, "The Political Origins of Our Economic Discontents: Contemporary Adjustment Problems in Historical Perspective," in Miles Kahler and David Lake, eds., Politics in the New Hard Times: The Great Recession in Comparative Perspective, (forthcoming, Ithaca, NY: Cornell University Press, 2012)
6. Monica Prasad, The Land of Too Much (unpublished manuscript, Northwestern University, 2011) provide different broad historical surveys.
7. Simon Johnson and James Kwak, 13 Bankers (New York, NY: Pantheon, 2010).
8. Waltraud Schelkle, "Consumer Protection-Social Policy in Disguise or on Display? Attempts at Regulating Mortgage Credit in the EU and the US." Paper presented at the annual meeting of the SASE Annual Conference, Autonomous University of Madrid, Spain, Jun. 23, 2011.
9. Herman Schwartz, Subprime Nation: American Power, Global Capital, and the Housing Bubble (Ithaca, NY: Cornell University Press, 2009)
10. Donald MacKenzie, "The Credit Crisis as a Problem in the Sociology of Knowledge," unpublished paper, University of Edinburgh, September 2010, http://www.sps.ed.ac.uk/__data/assets/pdf_file/0019/36082/CrisisRevised.pdf
11. "Knowledge Production inFinancial Markets: Credit Default Swaps, the ABX and the Subprime Crisis," unpublished paper, University of Edinburgh, November 2010 http://www.sps.ed.ac.uk/__data/assets/pdf_file/0010/55936/ABX13.pdf for the second.
12. Herman Schwartz and Leonard Seabrooke, "Varieties of Residential Capitalism in the International Political Economy: Old Welfare States and the New Politics of Housing," Comparative European Politics 6, no. 3 (2008): 237-261
13. provide a more nuanced discussion of the causes and consequences of variations in the scale of mortgage debt and of homeownership in the OECD.
14. Jeffrey Ladewig, "Housing Starts and the Political Business Cycle," American Politics Research 36, no. 5 (2008): 776-798.
15. Edward Leamer, "Housing and the Business Cycle," Federal Reserve Bank Symposium on "Housing, Housing Finance, and Monetary Policy," Jackson Hole, Wyoming, August 2007, on the United States.
16. Schwartz, Subprime Nation, chapter 4 for an extended discussion of the differences in housing finance markets across the OECD.
17. In the United States, prime mortgages are those qualifying for Fannie Mae or Freddie Mac purchase. Mortgagers must have a credit score over 620 (about 25 percent of households fall below 620), commit no more than 28 percent of their gross household income to principal, interest, property tax, and insurance payments and no more than 34 percent of household income to all debt service, and make a 10 percent down payment (i.e. 'purchase money'). Alt-A mortgages are typically those in which the debt service-to-income limits are breached, i.e., the mortgager has good credit but takes on too much debt. Subprime mortgages are those in which two or more characteristics are deficient.
18. Yalman Onaran, "Banks' Subprime Losses Top $500 Billion in Writedowns," Bloomberg (12 August 2008), http://www.bloomberg.com/apps/news?pid=20601087&sid=a8sW0n1Cs1tY&.
19. Economics also largely ignored housing and housing finance;
20. Leamer, "Housing and the Business Cycle," 1-2.
21. http://apsanet.org/content_43579.cfm?navID=840 accessed 15 April 2011.
22. James Kemeny, "Home Ownership and Privatisation," International Journal of Urban and Regional Research 4, no. 3 (1980): 372-388.
23. Francis Castles, "The Really Big Trade-off: Home Ownership and the Welfare State in the New World and the Old," Acta Politica 33, no. 1 (1998): 5-19.
24. James Kemeny, "'The Really Big Trade-Off' between Home Ownership and Welfare: Castles' Evaluation of the 1980 Thesis, and a Reformulation 25 Years on," Housing, Theory, and Society 22, no. 2 (2005): 59-75 at p. 60.
25. Sociology also has a small literature on this issue.
26. Dalton Conley and Brian Gifford, "Home Ownership, Social Insurance, and the Welfare State," Sociological Forum 21, no. 1 (2006): 55-82.
27. Isaac Martin, The Permanent Tax Revolt: How the Property Tax Transformed American Politics (Stanford: Stanford University Press, 2008).
28. Francis Castles and Maurizio Ferrera, "Home Ownership and the Welfare State: Is Southern Europe Different?" South European Society and Politics 1, no. 2 (1996): 163-85.
29. Gösta Esping-Andersen, Politics Against Markets: The Social Democratic Road to Power (Princeton: Princeton University Press, 1985).
30. Peter Malpass, "Housing and the New Welfare State: Wobbly Pillar or Cornerstone?" Housing Studies 23, no. 1 (2008):1-19.
31. Ben Ansell, "Nest Eggs and Negative Equity: The Political Economy of Ownership," unpublished paper, 2011.
32. Gary Burtless, "Can Improved Financial Market Access Offer a Reasonable Substitute for Public Pensions? Lessons from the Economic Crisis."
33. Looking at only private pensions does not change the relationship much; the correlation only drops to 0.407. A graph with only private pension assets is archived at http://www.people.virginia.edu/~hms2f/PAS-figure2.pdf.
34. Ellen Immergut and Karen Anderson, "Sweden," in Ellen Immergut, Karen Anderson, and Isabelle Schulze, eds., The Handbook of West European Pension Politics (New York: Oxford University Press, 2007), 365.
35. Carsten Andersen and Peter Skjodt, "Pension Institutions and Annuities in Denmark," World Bank Policy Research Paper 4437, December 2007, 14-15.
36. The multi-employer pension fund LD still had 35 percent of its assets in covered bonds in 2008; LD Annual Report, 2008, 14.
37. And as Kenneth Snowden, 'Long-Run Impacts of Responses to the Mortgage Crisis of the 1930s in the U.S.,' presented at 'Never Waste a Good Crisis: The Social Policy Dimension of Regulatory Crisis Management in the EU & the US,' Social Science Research Center Berlin, 19-20 November, 2010, p. 11 notes, banks themselves had already begun agitating in the 1920s for some federal agency to help move mortgages off banks' books.
38. Sarah Quinn, "Government Policy, Housing, and the Origins of Securitization, 1780 -1968" (PhD Dissertation, University of California, Berkeley, 2010) also addresses securitization.
39. TIAA-CREF, TIAA Traditional Annuity: Adding Safety and Stability to Retirement Portfolios, Spring / Summer 2010.
40. Snowden S, "Long-Run Impacts of Responses to the Mortgage Crisis of the 1930s in the U.S.," 16;
41. Leonard Seabrooke, Social Sources of Financial Power (Ithaca, NY: Cornell University Press, 2006)
42. Sarah Quinn, "Government Policy, Housing, and the Origins of Securitization."
43. Snowden, "Long-Run Impacts of Responses to the Mortgage Crisis of the 1930s in the U.S."
44. Edward Gramlich, Subprime Mortgages: America's Latest Boom and Bust (Washington D.C.: Urban Institute, 2007), 14.
45. Schwartz and Seabrooke, "Varieties of Residential Capitalism in the International Political Economy."
46. Interest rate risk is the risk that a bank funds a long-term, fixed interest rate mortgage using short-term deposits. The interest rate on those short-term deposits might rise, shrinking the spread between the rate on the mortgage and the deposits used to fund that mortgage. Indeed, deposit rates could rise above the mortgage rate, as happened in the 1980s U.S. savings and loan crisis.
47. National Institute of Building Sciences, Study of the HUD Minimum Property Standards for One-and Two-Family Dwellings and Technical Suitability of Products Programs, http://www.huduser.org/Publications/pdf/mps_report.pdf.
48. Leamer, "Housing and the Business Cycle," 2007: 8-11,16.
49. For arguments on the desocialization and the individuation of risk, see respectively Herman Schwartz, 'Small States in Big Trouble: The Politics of State Reorganization in Australia, Denmark, New Zealand and Sweden in the 1980s,' World Politics 46, no. 4 (1994): 527-555 and Hacker, The Great Risk Shift.
50. Author's calculation from U.S. Census Bureau, American Housing Survey (2009), Tables 3.12 and 4.12.
51. Calculated by Edward Wolffe, Economic Policy Institute, from Federal Reserve Board, Survey of Consumer Finances data.
52. Kaiser Family Foundation, http://kff.org/insurance/snapshot/chcm030808oth.cfm.
53. Calculated by Edward Wolffe, Economic Policy Institute, from Federal Reserve Board, Survey of Consumer Finances data.
54. Author's calculation from Federal Reserve Board, Flow of Funds Accounts of the US, Table B.100, at http://www.federalreserve.gov/releases/z1/.
55. Ansell, "Nest Eggs and Negative Equity," 2011.
56. An unbelievable 81 percent of U.S. respondents still thought homes were the best possible investment as of April 2011, according to a Pew Research Center poll; http://pewresearch.org/pubs/1960/homeownershipstill-thought-best-long-term-investment-by-big-majority.
57. Harvard Joint Center for Housing Studies, State of the Nations Housing (Cambridge, MA: Harvard JCHS, 2009), p. 14.
58. Fannie Mae "Fannie Mae 2010 Third-Quarter Credit Supplement," (5 November 2010), http://www.fanniemae.com/ir/pdf/sec/2010/q3credit_summary.pdf.
59. Harvard University Joint Center for Housing Studies, 37.
60. E. A. Duke, "Stabilizing the Housing Market: Focus on Communities," (16 February 2009), http://www.federalreserve.gov/newsevents/speech/duke20090216a.htm.
61. Nonbank financial firm is a term of art for a lending entity that is not legally chartered as a bank, and thus cannot take deposits from the public or participate in the Federal Deposit Insurance Corporation.
62. A credit default swap, or CDS, is insurance against default by some debtor. The purchaser of a CDS is typically a creditor insuring themselves against default by their debtor. The issuer of a CDS is thus gambling that default will not occur. It is possible to buy 'naked CDS,' i.e., for a third party to gamble on default by an unrelated debtor. This obviously creates incentives to push that debtor into default.
63. Author's calculation from Federal Reserve Board, Flow of Funds Accounts of the US, Tables L.1 and L.2, at http://www.federalreserve.gov/releases/z1/.
64. Atif Mian, Amir Sufi, and Francesco Trebbi, "The Political Economy of the U.S. Mortgage Default Crisis," American Economic Review 100, no. 5 (2010): 1967-1998.
65. Nolan McCarty, Keith Poole, Thomas Romer, and Howard Rosenthal, "Political Fortunes: On Finance and its Regulation," Daedalus 139, no. 4 (2010): 61-73.
66. Binyamin Appelbaum and Ellen Nakashima, "Banking Regulator Played Advocate Over Enforcer; Agency Let Lenders Grow Out of Control, Then Fail," Washington Post (23 November 2008), A01 at http://www.washingtonpost.com/wp-dyn/content/article/2008/11/22/AR2008112202213_pf.html
67. Gramlich, Subprime Mortgages; Edmund Andrews, "Fed and Regulators Shrugged as the Subprime Crisis Spread," New York Times (18 December 2007), A1.
68. Jo Becker, Sheryl Stolberg, and Stephen Labaton, "The Reckoning: White House Philosophy Stoked Mortgage Fire," New York Times (20 December 2008).