Subprime Nation

Subprime Nation: American Power, Global Capital, and the Housing Bubble

Copyright Date: 2009
Edition: 1
Published by: Cornell University Press
Pages: 280
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  • Book Info
    Subprime Nation
    Book Description:

    In his exceedingly timely and innovative look at the ramifications of the collapse of the U.S. housing market, Herman M. Schwartz makes the case that worldwide, U.S. growth and power over the last twenty years has depended in large part on domestic housing markets. Mortgage-based securities attracted a cascade of overseas capital into the U.S. economy. High levels of private home ownership, particularly in the United States and the United Kingdom, have helped pull in a disproportionately large share of world capital flows.

    As events since mid-2008 have made clear, mortgage lenders became ever more eager to extend housing loans, for the more mortgage packages they securitized, the higher their profits. As a result, they were dangerously inventive in creating new mortgage products, notably adjustable-rate and subprime mortgages, to attract new, mainly first-time, buyers into the housing market. However, mortgage-based instruments work only when confidence in the mortgage system is maintained. Regulatory failures in the American S&L sector, the accounting crisis that led to the extinction of Arthur Andersen, and the subprime crisis that destroyed Lehman Brothers and Merrill Lynch and damaged many other big financial institutions have jeopardized a significant engine of economic growth.

    Schwartz concentrates on the impact of U.S. regulatory failure on the international economy. He argues that the "local" problem of the housing crisis carries substantial and ongoing risks for U.S. economic health, the continuing primacy of the U.S. dollar in international financial circles, and U.S. hegemony in the world system.

    eISBN: 978-0-8014-5927-6
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Selected Figures and Tables
    (pp. ix-xii)
  4. Preface
    (pp. xiii-xviii)
  5. 1. Our Borrowing, Your Problem
    (pp. 1-22)

    International financial flows and speculation appear to be irredeemably universal, abstract, and delocalized. By contrast, housing appears to be irredeemably local, impacted, and granular. Yet the two became inextricably bound together and formed the basis for the revival of U.S. global economic power during the long 1990s (1991–2005). It is no accident that falling house prices and mortgage defaults have halted the current cycle of global growth because houses and mortgages—and especially U.S. houses and mortgages—were one of the main gears transmitting growth to the U.S. and, thence, the world economy. Given a disinflationary environment and what...

  6. 2. Global Capital Flows and the Absence of Constraint
    (pp. 23-51)

    How can a superpower have continuously rising net foreign debt? Why is that debt not a constraint? As we see in this chapter, the United States benefited from a huge system of financial arbitrage that transformed short-term, low-return foreign investment into the United States into long-term, high-return U.S. investment overseas and above-OECD-average U.S. domestic growth. U.S. economic power is not reducible to this transformation of short-term borrowing into long-term investment. But foreign debt was one of two key factors that allowed the United States to generate differential growth relative to what I call here the Repressed Rich, a group of...

  7. 3. Investing in America: Three Creditors and a Brassplate
    (pp. 52-82)

    U.S. global financial arbitrage helped drive differential growth favoring the United States. But foreign investment into the United States was not uniformly distributed. Foreign investors differ in ways that bolster U.S. global economic power in the long run. In chapter 2, I disaggregated the U.S. balance sheet and argued that not all debt is created equal. The United States has been able to maintain a net positive investment income despite being a net debtor because the U.S. claims on the world return more money than the U.S. debts to the world. In turn, this helps free the United States from...

  8. 4. Homes Alone? Housing Finance Markets and Differential Growth
    (pp. 83-113)

    Until the cascading crises of 2007–2008, nothing seemed more distant from a discussion of U.S. global economic power than housing. Most explanations for differences in growth rates between the United States and other economies focused on differences in systems of corporatist intermediation or social protection. Housing, or more properly housing finance systems, are not intrinsically the pivot of the international financial system. But over the past two decades, housing finance systems have become central to global financial flows. The central point of this chapter is that U.S. housing finance institutions translated global capital flows into U.S. MBSs and, thence,...

  9. 5. U.S. Industrial Decline?
    (pp. 114-139)

    In chapter 4, I document differential growth in the United States and the Americanized Rich during the long 1990s at a macroeconomic level. Was this growth a mirage? Recall that some realists and Marxists have argued that the 1990s were a period of long-term U.S. economic decline, focusing on the shift from a manufacturing to a service economy and using the nineteenth-century British industrial decline as an analogy. But both arguments misappropriate this analogy. In this chapter, I pick up the threads I start in chapters 2 and 3 and look at the external microeconomic consequences of U.S. global arbitrage...

  10. 6. The External Political Foundations of U.S. Arbitrage
    (pp. 140-173)

    Why did foreign investors tolerate and even abet U.S. global arbitrage and differential growth; why might they continue to do so? In chapter 4, I show that the housing finance systems in the United States and the Americanized Rich translated global disinflation and capital inflows into greater local aggregate demand and differential growth. As the primary recipient of global capital flows, the United States benefited disproportionately from this process at the macroeconomic level. The United States never absorbed less than 60 percent of net global capital outflows from 2000 through 2006; even in 2007, the United States absorbed nearly 50...

  11. 7. Boom to Bust: Housing, Politics, and Financial Crisis in America
    (pp. 174-202)

    What went wrong? Why did the housing bust happen? In this chapter, I argue that the housing bust grew endogenously out of the same dynamics that produced the housing boom. Joseph Schumpeter argues that all economic booms require some cheap “raw material” to fuel growth: new production processes that lower labor or capital costs, cheaper energy, cheaper transport, or abundant primary commodities.¹ In earlier chapters, I identify the cheap raw materials fueling the housing boom as disinflation and U.S. arbitrage. During the 1990s, U.S. multinational and retail firms off-shored more and more labor-intense production to low-cost Asia, producing a flood...

  12. 8. Toward the Future: Arbitrage, Differential Growth, and Economic Power
    (pp. 203-228)

    The United States grew faster than the Repressed Rich countries even on a population-adjusted basis during the long 1990s, increasing its economic power among the rich OECD countries and maintaining its share of global GDP despite rapid growth in developing Asia. U.S. differential growth relied on the availability of two crucial inputs: continued disinflation and the recycling of U.S. trade deficits via U.S. financial arbitrage. In chapter 7, I discuss the exhaustion of disinflation and how it flowed through to mortgage defaults and financial crisis. In this chapter, I examine the potential exhaustion of U.S. global financial arbitrage, the second...

  13. Notes
    (pp. 229-254)
  14. Index
    (pp. 255-258)