When the Great Unraveling of the world financial system began in earnest three years ago, the the term “Wall Street” instantly emerged as the main shorthand for big business interests that pull the strings of global politics and the economy. In the US' increasingly impoverished political discourse, the phrase is often used interchangeably with “Corporate America” now.
Politicians from both major parties have recently issued forth countless verbal blusters about the undue economic influence wielded by “Wall Street” mega-firms — all the while helping enrich those same firms with nearly every figurative stroke of their legislative pens, as with the “tax cut” compromise measure just passed by the US Congress.
To the extent that this overriding focus on the activities of Wall Street bankers reflects some sort of new class struggle in the US, it is a fine and righteous tendency. In recent decades, America's class war has been almost entirely one-sided. Two-thirds of the income gains made between 2002 and 2007 went to the top one percent of U.S. households. By contrast, real wealth among the bottom half shrank in that same period, having stagnated since the mid-1970s. To say that most people would benefit from a renaissance of American working class militancy, ala the massive upheavals in the fields and factories of the 1930s, would be a gross understatement — particularly with Medicare and Social Security now inching ever closer to the chopping block.
But the popular narrative that suggests “Wall Street” as the source of all global economic woes obscures more compelling explanations for the financial crisis. It also serves to disempower those who might otherwise strive to combat the ongoing “structural adjustment” of their day-to-day lives (to borrow a term from the International Monetary Fund's lexicon), but who are continually bombarded by the idea that their problems spring from distant sources, wholly inaccessible to them.
In reality, the global economic meltdown does not originate in a single place — in this case, a street running east from Broadway to South St. in Lower Manhattan, through the heart of New York City's historical financial district -- but rather thousands of places around the world, which are dynamically interacting with one another. Many of the primary nodes of the global economy — San Francisco, Los Angeles, San Diego, the Central Valley, et al. — are located right here in California. Collectively, this state's numerous urban vortexes of financial accumulation have arguably been far more responsible for the global economic meltdown than New York City.
This past March, UC Berkeley professors Ashok Bardhan and Richard Walker published a crucial essay entitled “California: Pivot of the Great Recession” wherein they explore the primary role of financial institutions in the Golden State in precipitating the global economic crisis. As Bardhan and Walker put it, “if Wall Street was the eye of the financial hurricane of the last decade, then California was the equivalent of the tropical oceans that provide the heat to feed such raging storms.”
Given the concerted effort waged by American financial elites to mystify the immediate causes of the economic meltdown, a brief explanation for them is in order. In large part, the crisis stemmed from the unsustainable mortgage debt Americans have accumulated in the past four decades. From 1996 to 2006 alone, in fact, outstanding mortgage debt increased five-fold, from $2 trillion to $10 trillion. At the same time, the banks that issue these loans largely converted themselves during this period into the middle-men in a much larger speculative shell game, selling the mortgages to far-off investors in secondary markets in order to raise more capital for further lending.
In their rush to make the greatest number of loans possible — and thus, reap the greatest possible profits from interest rates — the banks made an increasing number of high-risk loans to low- and middle-income homebuyers with little regard for ability to repay. Black and Latino families, in particular, have borne the brunt of these predatory loans. In the end, risky investments mounted and debt ratios grew astronomically. Once interest rates began to rise in mid-2007, housing price started to drop. Refinancing became more difficult, the number of foreclosed homes began to rise, the investors ceased receiving a return on their investments, and the whole thing toppled over like a house of cards.
No two regions of the United States were more responsible for the rash of predatory lending than suburban Los Angeles and the greater San Francisco Bay Area. Walker and Bardhan, citing a study by the Center for Public Integrity, note that California lenders were responsible for a mind-boggling 56 percent of the $1.38 trillion in predatory (“subprime”) loans issued in the US from 2005 to 2007. The top five predatory lenders were located here in California, not to mention nine of the top 10 — and all nine of these were located either in Los Angeles County or the SF Bay!
A related fact is that California's home prices have been the highest in the nation for several decades, having been bid up over the course of countless years of unregulated financial speculation. That trend has only accelerated in recent years. The California median home price hit a peak of $594,000 in 2006, well over double the national average.
The highest prices of any metropolitan area in the United States, in fact, were in the San Francisco Bay Area — a trend that has dramatically impacted home affordability in the SF Bay's hinterlands, such as Mendocino County. For more than three decades, the SF region has had the most unaffordable housing relative to income of any region of the country. The low affordability of California housing created fertile ground for predatory loans, as low-income people sought to capitalize on the housing market mania to attempt to purchase the vastly overpriced homes.
The disproportionate role of predatory lending institutions in California's political economy has had undesirable side effects. One of those has been to empower the class of people who preside over the state's sprawling FIRE (finance, investment, and real estate) sector. These individuals, who specialize in speculative economic activity, leveraged buyouts, and privatization of publicly traded companies, have successfully imposed their business philosophy across the state's public sector, to perhaps a greater degree than anywhere else in the country.
Take the University of California. The UC is in the throes of the greatest fiscal crisis in its 140-year history, capped off during the 2009-10 academic year by a 32 percent across-the-board fee increase for undergraduate students. In recent years, the UC's powerful 26-member Board of Regents has become dominated by financiers. Executives at America's top leading predatory loan institutions, Countrywide Financial and Ameriquest Mortgage, have doubled in recent years as UC Regents. The university's current chairman, Russell Gould, serves simultaneously as vice chairman of another member of the top 10 predatory lending firms: Wachovia Bank, now owned by Wells Fargo.
No small wonder then, that as Darwin Bond-Graham and I noted in an article we published here in the AVA earlier this year, “As with the economy at large, these [financiers] have begun to run the university itself as a $19 billion dollar speculative bubble with ample opportunities for enormous growth through 'volatility.'” Furthermore, it is far from coincidental that the financing of the university begins and ends with massive public and student debts. These students loans are often owned by big banks like Wachovia and other financial outfits that many of the UC Regents and their business partners are shareholders or executives of.
Language does not just label things in the world; it helps to constitute it. On the bright side, the laser-like focus on “Wall Street” has helped to compel a critical examination of the obscure financial instruments, like securities and derivatives, that are now so crucial to the functioning of the global economy. So far it has done so, though, at the cost of papering over the role that countless local and so-called “sub-national” institutions have played in promoting the present moment of crisis in global capitalism.
It is significant to note that arguably the most significant fight-back against global capitalism now underway in the United States has occurred at California's public universities, where many students, faculty, and staff not only perceive the ways in which the class war at the heart of the larger economic crisis is responsible for the restructuring of their own university, but also understand how the UC has even helped in some ways to cause the global economic meltdown. This empowering knowledge helped to fuel the most radical and confrontational student-led direct actions that took place last year, ultimately leading to Governor Schwarzenegger's restoring a large portion of the funds originally cut from the UC's budget.
California has been at the leading edge of all of the US' most prominent economic bubbles of recent years. These range from the junk bond mania of the 1980s, embodied in the person of Michael Milken, to the bursting of Los Angeles' military-industrial sector in the early-1990s, to Silicon Valley's high-tech/dot-com boom that crashed hard in the early-'00s. In summing up, Walker and Bardhan note that “California has, more than any place other than Wall Street, been responsible for the bubble economy of the 2000s and the economic crisis that followed.”
A critical examination of the larger economic, political, and cultural dynamics that have produced California's prominent role in the Great Unraveling of the world economy are long overdue, particularly on the part of resistance movements based here on the west coast. In a future article, I will apply this insight specifically to resistance movements on the California North Coast.
Click here to read the essay "California: Pivot of the Great Recession." Contact Will Parrish at firstname.lastname@example.org. The final installment of Will's series on the North Coast wine industry is coming next week.