David Harvey: Chinese urbanization, construction and real estate speculation is saving global capitalism – will it burst as in the US?
Story Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in New York City. A real estate bubble bursts, a stock market crashes, and the economy spirals into recession. Two thousand and eight? Uh-uh. Nineteen twenty-nine, although I suppose you could say Depression rather than recession. But the role of real estate in increasing and intensifying the crisis and triggering economic crisis is nothing new. Now joining us to talk about how that’s affecting our life today is David Harvey. David is a distinguished professor at the City University of New York, director of the Center for Place, Culture and Politics, and the author of numerous books, including The Enigma of Captial and the Crisis of Capitalism. Thanks for joining us.
DAVID HARVEY, DISTINGUISHED PROFESSOR, CUNY: Thank you.
JAY: So talk about this issue of urbanization, real estate speculation, and crisis.
HARVEY: It does two things. One is the speculative bubbles, which you mentioned, historically have been always extremely important. In the 19th century, it was the railroads that led it all. And in the 20th century, it was more sort of real estate and commercial property development that led it all. But the other interesting thing about it is that real estate development has been one of the ways out of crisis. That is, if you look at what happened in this country after World War II, one of the major things that happened was suburbanization of the United States, vast investment in housing. The rate of housing construction doubled compared to what was going on in the 1930s and the 1920s. And a vast amount of capital was absorbed, general employment absorbed in suburbanization. So real estate rescues capitalism. But the thing about real estate is it takes a long time to find out whether it’s really, you know, worth anything or not. And it’s always speculative. And so you find that actually it rescues capitalism, but then people say, hey, this is a great thing, and it becomes a kind of Ponzi scheme, and in the end it bursts. And that’s what we went through just recently.
JAY: Yeah. These cities have departments of urban planning, but often the planning has more to do with how to create a bubble than it has to do with–maybe it’s not coming from the city hall urban planning department, but in terms of the real estate industry, it’s more about how to manipulate the prices for–.
HARVEY: [crosstalk] even worse than that, it’s more about the finance and the financiers. I mean, if you look in this country and you look at these institutions like Fannie Mae and Freddie Mac, which are the mortgage institutions, they played a crucial role in developing the bubble in the 1990s onwards. And, actually, the bubble we’ve just seen burst actually really took off in the Clinton years, with Fannie Mae beginning to say, we’re running out of demand, how are we going to get demand. I mean, they lend money to developers, and then they say, we’ve got to lend money to buy the stuff. And now they couldn’t find people to lend it to who are good credit risks, so they started going down further and further and further in this sort of [crosstalk]
JAY: Of course, nobody wants to look at the possibility that maybe wages should go up instead of artificially create credit for people [crosstalk] perish that thought.
HARVEY: Although, since wages didn’t go up, the other way in which people got money, of course, was to do the sort of refinancing. So they actually treated the rising property prices as an ATM machine to take more money out.
JAY: So, then, why is and how does real estate play such a fundamental role in the triggering of crisis?
HARVEY: Because–think of it this way. You know, capitalists start the day with a certain amount of money. They go into the market and they buy labor power and means of production, and they put it to work and they make a commodity. And then they sell the commodity for more money at the end of the day. And then the big question arises: what do you do with more money at the end of the day? Well, let’s suppose you’re making shoes. Well, you can expand the production of shoes, and so you keep on making more shoes. But at some point or other, the market for shoes disappears. So you’re then stuck there with money–.
JAY: Or you’re saturated.
HARVEY: You’re saturated.
JAY: You can’t grow any more.
HARVEY: You can’t grow any more. So you then say: where can I put the money? You know. And somebody kind of says, well, you know, in ten years’ time, this area over here will be a great place, provided we build it right, and all this kind of stuff. So people start to sort of take their money and put it into real estate development and real estate speculation, which is always a long-term development. I mean, it takes, you know, three or four years at minimum to sort of get this thing underway, and it’s usually 10 or 15 years before you know whether you’ve really made money out of it. So it’s always a long-term thing. During that time before you know whether you’ve got any money out of it or not, a lot of money’s being used up, you’re buying materials, and you’re buying the bricks and all this kind of stuff, and you’re employing labor and all this kind of stuff, so the economy is booming along because of all that employment, and you still don’t know whether it’s going to be successful or not.
JAY: [crosstalk] be any demand for it.
HARVEY: Any demand for it at the end of the day. Well, then the question of demand comes up. Now, who provides the demand? Well, the consumer does, but the consumer says, I can’t buy it all on my own; I need a finance company to give me a mortgage to buy it. And then that depends on the conditions of is it easy to get a mortgage, is it hard to get a mortgage. And once upon a time, of course, it was very hard to get a mortgage if you’re African-American, or it’s very hard to get a mortgage in certain areas of town. In the 1930s, it was extremely difficult to get a mortgage for longer than about three years. So you reform the mortgage institutions. So you set up these institutions in the 1930s so you can get a 30-year mortgage, which is completely different. And then, after World War II, you start to say, well, there’s a GI Bill and there’s all these other things, and oh, we’re going to have this interest rate deduction on your income tax, all this kind of stuff. So you start to favor mortgage finance. So you start to subsidize it so more and more people take on mortgages. But they’re taking on mortgages ’cause the banks have money to lend. So the banks are providing money for the development and money. They’re supplying money–they’re giving money for the supply and they’re giving money for the demand. And at some point or other, then the question is: where is the demand?
JAY: Where is there demand that isn’t based on debt?
HARVEY: That isn’t–yeah. So you really start to push that. Now, in the 1990s what began to happen–and this began under Clinton–was you started to say, look, there are a lot of people out there who want to join the American dream, and everybody’s American dream is to be a homeowner. You know. And so, you know, we’ve got to incorporate everybody in. So let’s get immigrant groups, let’s get African Americans, let’s start to make it easier for them to get mortgages. And at that point, some of the charlatans come in and say, yes, okay, we can start to do this. And so they start to come up with this subprime thing. And, of course, the subprime thing doesn’t work. And we already see by the end of the 1990s that a lot of that subprime stuff is not working. And it should have been obvious that there was going to be a problem with that. But then there’s a little hiccup around, you know, 1998 to 2000 in the market. And then, after about 2001, suddenly the whole thing takes off big-time and organizations like Countrywide lend millions and millions of–actually, trillions of dollars [incompr.] mortgage. And then they pass it over to these institutions like Fannie Mae or Freddie Mac, or they package them into these CDOs and sell them off to everybody else, saying these investments are our safest houses. You know. And of course everybody says, well, of course, houses. Safe, of course, yes. [crosstalk]
JAY: Especially in California. How could real estate ever crash in California?
HARVEY: How could it ever crash? Yes. But then of course what turned out was, you know, that you were going into a market that really didn’t exist. And it became a fiction. It became a total fiction. And that was what crashed. And that is what’s very difficult to see reviving right now. In fact, the rate of house building right now is back where it was before 1940. In 1940, the rate of home ownership in the United States was about 40 percent of the population. By 1960, it was up to 60 percent. In 2004, it was close to 70 percent. Now it’s coming back down, ’cause, you know, obviously, people just move, can’t do that anymore. So what you see is this urbanization’s track development around San Diego and Las Vegas, all this kind of stuff, condominiums in Florida, all being built to meet a market which is a fictitious market. And then, of course, it goes bang. But this is again not [incompr.] happened the first time. And we have very short memories in this country. For instance, there was the savings and loan crisis in the late 1980s, early 1990s, and it was something like 1,300 institutions went under. It cost, you know, something like $200 billion for the feds at that time, you know, and $200 billion was rather more than it–$200 billion to bail out the savings and loan. So we’ve seen this crisis with us before. The same thing happened back in 1973. We’ve seen a crisis of this before. And, interestingly, if you look globally, the end of the Japanese boom in 1990 came with the crash of land prices. The Swedes had to nationalize their banks in 1992 because of a crash in housing prices. And so you see this going on all the time. But right now what’s rescuing–this is what’s really interesting–what’s rescuing global capitalism right now is urbanization in China. Almost 50 percent of the world’s output of steel is going into urbanization in China right now. They’re building high-speed networks, highways, high-speed train stuff, you know, mega-buildings. And, you know, you’ve seen those things [crosstalk]
JAY: And not yet clear that it isn’t a repetition of what went on here. The state’s putting in tons of stimulus money, and they’re putting mortgages out the window.
HARVEY: Absolutely. And what we see now is that actually there’s a suspicion that the banking system of China is on the rocks, and they’ve got a lot of, quote, toxic assets there. So it’s a repetition. But on the other hand, if that crashes, then all of those countries which are supplying the raw materials, like–Australia’s doing very well, ’cause it’s supplying all these raw materials.
JAY: And Canada.
HARVEY: Canada’s doing very well. You know, Chile’s doing very well. You know, so the boom in China–and China’s growing by about 10 percent a year–a little bit less now, but–.
JAY: So much of that housing and infrastructure spending.
HARVEY: Absolutely. Absolutely.
JAY: And not clear where the real demand is.
HARVEY: Yes, right. And–you know, and I was looking at this, you know, a few years ago, and I suddenly looked and I said, how many airports have they built in this area, in the Pearl River Delta? Well, they built five major international airports. And I happened to visit at the time, and I went to one of them and I said, how come you’re going to survive? And they said, we’re going to be the hub for the whole region. And I went to the next one, and they said, we’re going to be the hub for [crosstalk] region. So they’re all going to be hubs. Like, and actually there are some incredible things in China. There’s a huge–one of the biggest shopping malls in the world stands kind of almost empty. It gets built, and then–.
JAY: They have a whole model city there, actually. They built all this–this model city, and then no one can afford to live there.
HARVEY: Yes, ’cause nobody’s in it. No, nobody’s–well, nobody’s in it. That’s right. No. So urbanization has this kind of very interesting relationship with capitalist development and very interesting relationship with crisis formation. And I would watch out right now for what’s going on in China in terms of the urbanization of China, because they’ve still got a situation where only about 40 percent of the population lives in cities, and they want to make it up to 70 or 80 percent.
JAY: And I know I sound like a broken record, but again it comes back to this issue. The real wages are stagnant or go down, and all the measures they’re taking, either austerity measures or various other things that are driving wages further down.
HARVEY: Yeah. Well, Chinese aren’t.
JAY: I’m talking here.
HARVEY: Oh. Well, here, no, no. No, here [crosstalk]
JAY: Like, here they’re trying–in China they’re trying to do some measures to raise wages.
HARVEY: They’re raising a little bit. But here, no. But that comes back to the politics of the thing here. The politics of the thing has nothing whatsoever to [do with] reviving the economy on behalf of the people. It has everything to do to developing the economy in such a way that the, you know, people in the really top income brackets are going to do very well.
JAY: Thanks for joining us. And thank you for joining us on The Real News Network.
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