Introduction
The global financial crisis of 2007-2008 changed business and political outcomes in the United States. The desire by the United States government to ensure that its citizens get affordable housing led to a concerted government and business effort that led to the housing bubble and then bust. The new housing policy had its basis in the idea of American exceptionalism. The term "American Exceptionalism," coined by Alexis de Tocqueville in 1831, has historically referred to the perception that the United States differs qualitatively from other developed nations, because of its unique origins, national creed, political philosophy, and religious institutions. The phrase sometimes also connotes the notion that America's canonical commitments to liberty, equality, individualism, populism, and laissez-faire somehow exempt it from the historical forces that have led to the corruption of other societies (Edwards and Weiss 9). In an exceptional country, individuals have the right to own their own homes.
2. Problem and Question
What does the housing bubble, in particular, the mortgage financial crisis say about the relationship between American government, business and society? This paper seeks to examine the origins of the housing bubble and intersection between government and business, as it relates to the idea of American exceptionalism. It further explores the role played by government in bringing in foreign capital to the United States economy which precipitated the housing bubble as this capital tried to find profits in vulnerable housing economy. The last part looks at the relationship between and government and business in China and how it managed to shield the Chinese economy from the effects of the global financial crisis.
3. Hypothesis
Government effort to increase accessible housing led to limited oversight of the housing industry leading to predatory lending and the growth of the subprime mortgage industry. The growth of the housing industry was part of the American dream and American exceptionalism.
4. The Subprime Mortgage Crisis
The subprime mortgage crisis began in the United States with the bursting of a housing bubble and the growth of mortgage defaults, particularly those involving subprime mortgages that had been extended in growing numbers at the height of the bubble to less creditworthy borrowers (Helleiner 4). Helleiner suggests that securitization was part of the core cause of the crisis (6). Mortgages were placed in one poll to limit the amount of risk banks and lenders had to deal with. The mixed pool was then sold to investors who made a lot of money because of the high risk that was associated especially with the subprime mortgages. Banks or loan originators easily removed assets it wanted to get rid off and sold it to investors. This bank innovation helped to satisfy investors as well of individuals who were in high need of affordable homes. The government was aware of the developments in the banking sector but they did little to limit the practice since the results also favored the government’s goal of home provision to all Americans.
Fligstein and Goldstein analyze the role of securitization in their article “The Anatomy of the Mortgage Securitization Crisis”. They argue that the success of the residential real estate market and the Mortgage-Based Securities (MBS) business caused a rapid expansion of that business from 1993 until 2003 (Fligstein and Goldstein 22). The expansion of business brought inspired big banks to join the housing market.Banks were taking advantage of a government innovation in mortgage backed securities that had its origins in Lyndon B. Johnson’s desire to see that all Americans are homeowners.
5. Government and the Mortgage Based Securities Business
The United States government played a big role in the mortgage securitization field. Besides banks and businesses Fligstein and Goldstein locate another important set of actors in the MBS crisis, which are the ratings agencies. The complicity of the rating agencies legitimated the massive influx of subprime MBS which flooded the market from 2004 to 2007. The final and perhaps most important player in Fligstein and Goldstein’s analysis of the mortgage securitization crisis field is the federal government.
They note that the role of the government within the mortgage securitization field has been twofold; According to Helleiner, the idea that government has two options which are to let the free market flourish or to intervene does not apply to the mortgage backed securities were the role of government and the private sector changed overtime. The government created mortgage backed securities. The question on why government did not come in to save the industry by effective regulation misses the point that government was aware of the innovations it had made and was proud of the harmony that was existed between the market and government. This was one of the few industries where government did not interfere with the market. Fliegstein and Goldstein’s attempt to distinguish the various actors involved in the crisis, helps in correcting the often agreed upon “fact” that the crisis was merely the product of greedy Wall Street investors (23). Those who protest the loss of homes and their livelihood look at the greed of Wall Street as the architect of the housing bubble. They however miss the point that all these instruments were a government innovation and government should have been aware of how easy Wall Street was going to innovate of government’s innovation. In a desire to ensure the political promises, government created something it was not able to control in the long run. All the money from foreigners abroad also made its contributions. This leads to the next point on how banks dealt with mortgages they originated.
Scholars argue that it is a myth that the banks that originated mortgages and packaged mortgage securitization never held onto the securities themselves (Fligstein and Goldstein 70). It is asserted that this perverse incentive made them more likely to take on larger risks. Fliegstein and Goldstein show that this is not true and that every large originator and packager of mortgages held onto substantial numbers of MBS and this increased dramatically after 2001 (24). Simply put, they believed that they could control the amount of risk they held. Another commonly voiced myth about the MBS market is that it was highly dispersed, with too many players to control any facet of the market. On the contrary, we show that over time all of the main markets connected to MBS – the originators, the packagers, the wholesalers, the servicers, and the rating companies – became not only larger, but more concentrated. By the end, in every facet of the industry five firms controlled at least 40% of the market (and in some cases closer to 90%) (Fliegstein and Goldstein 19).
The subprime mortgage crisis shows that uneasy between government and society relations in the United States. Schwartz cited in Fliegstein and Goldstein observe that two changes that happened to the securitization field had adverse effects on the economy and society. Credit which is at the core of United States economy became very cheap to the point that everyone can afford it. Individuals could easily borrow money because of low interest and they used that money to buy their first mortgage. The mortgage industry also provided an avenue for investors from all corners of the globe. This was also complemented by the fact that prime mortgages had disappeared on the United States market. This was not a problem all sections of the society. Businesses were well saved because they were making profit, the government’s housing ownership program was working and individuals who never thought that it was possible could easily afford new homes. There was no need for the conventional mortgage market. This played into the idea of an exceptional United States, that was able to provide homes to all those who needed. The right to own property that is enshrined in the constitution was honored until the crash which left thousands homeless.
The question of how easy credit became accessible to everyone even those not able to pay back can also be explained by the internationalization of the American economy especially the fact that the huge mountain of securities and derivatives built on U.S. mortgages not only magnified the financial impact of the bursting of the U.S. housing bubble but also spread it worldwide.
The large inflow of foreign capital which normally one expects to grow the economy can have such devastating consequences on the society and the economy (the same point that Jeffrey Sachs makes in his book Lost Decades: The Making of America’s Debt Crisis and the Long Recovery, 2011). During the last two decades, recessions in developed economies were caused by large inflows of foreign capital, which created cheap credit conditions and contributed to financial bubbles within the country (Helleiner 79). Many of the countries affected worst by the 2007–2008 crisis had a similar experience during the years leading up to the crisis. Particularly important for the global system was the experience of the United States, which absorbed large amounts of foreign capital before the crisis from various countries in Asia, Europe, and the Middle East with large current account surpluses and high savings (Helleiner 85). These capital inflows drove “down the cost of credit in the United States, helping to explain why long-term interest rates and fixed mortgage rates remained low even after the Federal Reserve began to raise the federal funds rate in 2004–2006” (Helleiner 83). Capital inflows contributed to the U.S. financial bubble not just at this aggregate macroeconomic level but even in a more direct fashion in the housing sector.
Just like Helleiner, Schwartz identified foreign capital inflows as drivers of the U.S. housing boom in work written before the crisis broke out (42). He argued that cheaper credit, induced partly by foreign capital inflows, generated a particularly strong stimulative effect on the U.S. economy because of high levels of homeownership and mortgage debt, as well as the structure of U.S. housing finance, which enabled easy mortgage refinancing. Although he did not predict the crisis, Schwartz gives important insight into the causes of the crisis.
6. China and the Regulated Economy
While the United States suffered from the financial crisis of 2007-08, China’s economy continued to grow at a faster pace. This was attributed to the difference in approaches to government and business between the United States and China. Hsueh notes that the Chinese state’s perception of strategic value of a sector shapes dominant patterns of reregulation in the context of macro-level liberalization. State control of economic sectors comes in two forms; incidental control and deliberate control. Hsueh observes that, “the higher the strategic value of a sector, the more likely the state will exercise deliberate control and the lower the strategic value, the more likely the state will exercise incidental control” (32). The less competitive a domestic sector is during exposures to economic downturn, the more likely the state would exercise deliberate control; the more resources the state would devote to promote industrial development and to direct market competition.
In addition, the more competitive a domestic sector is during such exposures, the more likely the state will exercise incidental control. According to Hsueh, strategic value is defined by a specific sector’s importance to national security on the political dimension and it is defined by a sector’s contribution to the competitiveness of other sectors and the rest of the economy on the economic dimension. The economic and political spheres are not disparate elements but complementary spheres were security objectives and economic growth contributes to social and political stability.
During the 2007-08 recession, China’s housing economy did not suffer. It is only recently that China’s subprime mortgage prize had been brewing. Just like in the United States economy, China’s housing bubble and near burst is directly related to government activities in the economy. Buoyed by excellent performances in the manufacturing sector, China like the United States began a drive to lift people out of poverty and this meant providing affordable housing.China is now home to ghost cities due to the low price of houses. The government provides loans to citizens who are hungry to own property. It is cheap loans at are at the center of China’s near burst and there is nothing the government can do to right the economy and avoid collapse (Bloomberg Review n. p.). Businesses, the government and society agree that housing ownership is good for the country but they are also well aware of predatory tactics from business and the government that can lead to the collapse of the housing market.
7. Conclusion
In conclusion, the housing market collapse in the United States helps illuminate some of the advantages and challenges to government and business relations. The government created the mortgage backed securities industries and welcomed the private sector to invest heavily in the housing industry. The fact that government agencies or agencies supported by the government were behind the creation of mortgage backed securities shows that the relationship between business and government is more complex than reported. Securitization was a way for banks to manage risk at the expense of vulnerable and desperate home seekers. Cheap credit and predatory lending led to the subprime mortgage crisis and the revision of the kind of American exceptionalism that was at play when the housing industry was going through such epic transformations. Foreign capital was key to the growth of the housing industry as well as its collapse. Even though the political systems are different, China and the United States follow similar aggressive housing policies. In the United States they led to a recession and in China there is a threat of a burst.
Works Cited
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Helleiner, Eric. “Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of
International Political Economy”. Annual Review of Political Science 14.2 (2011): 67-87.
Hsueh, Roselin. China’s Regulatory State: A New Strategy for Globalization. Cornell University Press.
2011.
Pesek, William. “China’s Brewing Subprime Crisis.” Bloomberg Review. 16 Jun 2014. Web 10
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Edwards A. Jason and David Weis. The Rhetoric of American Exceptionalism: Critical Essays.
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