Los Angeles Business Journal: Backers of Housing Bubble Were Living in Dreamland

By Richard Risemberg
Los Angeles Business Journal, 10/27/2008

What really has brought us to the economic state we’re in? Fingers are pointing everywhere – perhaps rightfully so, as blame is everywhere to be encountered. Greed on Wall Street, greed in boardrooms, greed in bankers’ suites, greed behind loan office desks, greed among homeowners, and irrationality all around, as many assumed, with a religious certainty, that growth could and should go on forever, and values rise eternally and infinitely.

Many of us saw this as delusional.

But as long as you could buy a house at an outrageous price and flip it a few years later for an even more outrageous price, everyone was happy. It was a steady diet of cocaine and ice cream. And Los Angeles was the epicenter of such domiciliary speculation for many decades.

But at the same time that house prices and stock values were rocketing skyward, real income was dropping year by year. Unions were suppressed, minimum-wage increases opposed, labor outsourced to slave-wage countries, to the point that production workers in the 2000s were making less per hour than their parents had decades before – while becoming more productive.

Where did the money from this productivity go? To CEOs and boards, who justified their salaries and bonuses by pointing to increased share prices. But these increased share prices came at the expense of those productive workers – the ones who actually power the economic machine. As Holly Sklar notes, “Back in 1960, CEOs made an average 38 times more than schoolteachers, according to BusinessWeek. By 1990, CEOs made 63 times as much. In 2001, CEOs made 264 times as much as public school teachers. ... Worker pay was largely stagnant for decades. Average hourly earnings for production workers in 2001 were 9 percent lower than their 1973 peak, adjusting for inflation.”

So these highly productive workers couldn’t buy much. If the majority of the people loses purchasing power, economic activity must fall. How do you prop it up?

Apparently not by paying people what they’re worth. No, in this world of economic anarchy, you do it by giving them easy credit. Voila! They keep spending!

But how do they pay back the easy credit? Why, with more easy credit! All based on housing prices as the supposedly rock-solid fundamental value.

Only they’re not. Work is the fundamental value – not work juggling other people’s money, real or imaginary, but work making things, fixing things or doing things that people really need done.

But that kind of work didn’t pay anymore. Yet that’s what most people did.

So the cost of the wooden box on the rectangle of dirt went up, and people kept borrowing on that increased valuation to buy other things they wanted or needed.

Couple this with lax reserve requirements – not just for such things as credit default swaps, but even for banks, where the same dollar goes on the books multiple times as it is loaned and reloaned, often to people who have no chance of paying it back except by counting on the already inflated valuation of the box and the dirt becoming even more inflated – and you have the fundamental cause of our distress.

Our system is based on a doctrine of imaginary value – in stocks, in housing costs, in everything – everything, that is, except labor.

But we live in a real world.

L.A. impact?

What does this mean for Los Angeles and its suburbs?

It means trouble. Housing valuations have to drop further, or wages have to rise further, until a realistic balance is achieved. Average income looks better than it is in the United States, because a small number of hyperwealthy skew the curve. It is the middle class, however, that supports a real economy. The poor can’t buy what they need; the rich can’t want enough to spend all they hold. The middle-class citizen supports the economy. And, in the interest of inflating share valuations for investors, we have been pushing workers out of the middle class and toward the borderline of poverty. So housing and share prices must continue to fall, or wages must rise to a proportion of corporate income commensurate with that achieved in the union-dominated past.

In fact, fund manager Axel Merk wrote on Oct. 7 as the crisis globalized, “European economies are less fragile because of ... much healthier consumers and less elevated home prices.”

Adds L.A.-based economist Chris Thornberg: “The runup in home prices over the past decade was ludicrous and wasn’t accompanied by a comparable increase in income.”

Until this changes, we will continue to face disruption.

Los Angeles must lead the recovery, because the federal government will only push for more credit, not income growth, to support spending. Cities in general, and Los Angeles, in particular, must return to their role of protecting workers against exploitation, must support unions, and must lobby for effective and sharp-toothed legislation against criminal speculation and corporate malfeasance. Indeed, many of Mayor Antonio Villaraigosa’s efforts in that regard, much derided by some of the business community, are the sort of thing that may just save the business environment in our city.

Forcing housing prices still higher, with yet more credit, without recognizing the real fundamental value of the U.S. worker’s labor, will only bring us to a harder downfall later.

Because you can’t buy the real necessities of life with imaginary money. At least, not for too long.

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Richard Risemberg is co-editor of the urban sustainability Webzine the New Colonist, publisher and editor of bike commuter Webzine Bicycle Fixation and owner of a small business that designs and manufactures clothing for bicycle commuters. He lives and works in Los Angeles.