Blackstone, Neoliberalism, and the Housing Crisis

David Harvey (: 00:02

Hello and welcome to the Anti-Capitalist Chronicles. I'm David Harvey and apologies for the delay in resuming these podcasts today. I wanted to add to the podcast I did earlier about inflation and pay some attention to one specific form of inflation, which is housing prices and housing rents. Because this is the other big hue, which it turned out in the election, was something that was extremely bothersome and it led a lot of people to who vote trump back in rather than attempt a rational program of solution to the problem. The heart of the problem is a simple formula that wage repression plus rising rents equals increasing homelessness. Now, that's the formula, if you like, but the lot needs to be said to unpack that formula.

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Let's look at it from the housing side. The housing side is such that yes, there needs to be the production of new housing, and this was something that was being proposed by Harris and the election and with some sort of a financial assistance, which would allow people to maybe think towards joining the American dream as having home ownership. But what we've seen over the years is that home ownership has been vulnerable in all kinds of ways, particularly to what's going on in housing markets, but also what's going on in financial markets because most people who purchased a house, and most people who provide housing landlords and the like for rent are very vulnerable to the interest rate. And when the interest rate shoots up, and as it started to do an immediate response in the housing market was to increase rents and the increasing problems of finding adequate housing for the mass of the population.

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But one of the things that immediately pops out is that there are all sorts of stresses in the housing market and all kinds of reasons why there are inflation in housing prices and housing rents and how those housing rents are established. Now in developing this argument, I want to come back again to something which I mentioned last time, which is the relationship between the rate of increase and the absolute level of rents. It's one thing to say, well, the absolute level of paying 2000 or $3,000 a month rent is one thing. But then there is the question of, well, what's the rate of change? And if the rent is increasing by 10%, you find 10% on 2000. And so therefore, instead of paying 2000 a month, you're going to have to pay 2020, and then the following year it goes 20% of that.

(: 04:22

In that kind of way, that starts to escalate rents and the rate itself can in fact come down, but the absolute amount of extra rent you need to pay still goes up. And it is that question of the rate and absolute level, which is important that a 10% increase in rent on your housing if your housing is $1,000 a month is one thing, a 10% increase in rent if you are in a housing unit, which is costing say, $3,000 a month. And so this whole kind of question of what is the absolute level of rent becomes very, very significant and just as significant as the rate of change in rent because as I'm saying, a slow rate of change on a high rent produces an even higher rent than a high rate of change on a low value unit. So this is just a sort of simple kind of mathematical kind of question as to what we're dealing with here.

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And then the other thing that happens is that so many people are, if you like, on the edge, and I mentioned this also last time, that the number of people in the United States who are trying to get by on say 30,000 or $40,000 a year is probably half of the population of the United States is in that situation, which means that half the population in the United States is not in a position to provide adequate housing for itself, particularly in a situation where housing prices and rental prices are rising and rising even slowly because even a slow increase is such as to create a great deal of stress. So where then many of these questions being posed and what are the issues involved in housing provision? Well, one of the things that has happened and happened in the United States in particular back in 2007, 2008, was we had a financial crisis, which was basically predicated upon housing costs and upon speculation and housing markets that what you had was a fictitious creation of capacity to pay mortgage or pay rent, which was largely, largely due to financial maneuvers.

(: 07:11

And these financial maneuvers are such that a lot of people ended up becoming homeowners who didn't have the weekly income, which was able to sustain that homeownership. And therefore what they found was this choice that I mentioned last time between existential choice between paying the rent or putting food on the table if they chose to put food on the table, then they got delinquent on their mortgage and after a while they couldn't pay back what they owed. And we ended up with a large number of houses being foreclosed upon. And then there were about 7 million households lost their housing when the crisis of 2007, 2008, and those houses were sort of standing empty. So here you have a situation where in 2007, 2008, you have a lot of empty houses, you have a high level of homelessness, and those empty houses are not actually being valued very highly.

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In fact, the market value of them has gone down because nobody has the money anymore because of financial stresses and financial repression. So you put together financial repression and wage repression, and you suddenly find yourself with a pool of a population who has no adequate access to housing, and that is the population of which the tip of that iceberg is homelessness on the street and all the rest of it. But the iceberg itself is very, and you have a situation in which the mass of the population have no access to adequate housing. The result, interestingly at that time, was a tremendous number of empty housing units. Now, you would've thought with empty housing units, the price of rent and housing and other street would go down and people would start to move in, but they didn't have access to credit. The credit markets were frozen, and it's pretty impossible to imagine becoming a homeowner with cash payment for the mass of the population.

(: 09:28

So here's the financial situation, which is difficult, but produces the following paradox that there are all these empty houses around and there are large numbers of people who have lack of adequate housing. This is the height of irrationality and why of the reasons why I find capitalism so irrational that it's constantly producing these situations in which there's a social need of some kind, which is not being met, not because there is not the physical capacity to do it, but because it's not the financial instruments which allow you to access to that asset. One of the things that came out of 2007, 2008 was as often happens in crisis, the crisis actually led to a reallocation of asset values. The asset value is the house. And a lot of people in the United States over the years have cultivated an asset value through home ownership and continued to do so.

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But when the crisis came, the homes were not worth anything in the crisis. The asset value was not there, and a lot of people were foreclosed upon because they couldn't afford to keep up the mortgage or they couldn't afford up to keep up their rental payments. So there is a vast amount of empty housing. And into that space came a speculative company called Blackstone. What Blackstone did essentially was to say, well, we are going to try and buy up a lot of these empty houses. The empty houses were basically held by the banks. The title of the housing was held by the banks. The foreclosure was such as to end up transferring the right to the house to the banks. So the banks were sitting there with a large number of these housing units, which they controlled, and Blackstone basically went to the banks and said, look, we'll buy these from you at a discounted rate.

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In other words, instead of a hundred percent of the value, we'll buy 'em from you for say 40 or 50 or 60% of the value. And the banks who are anxious to get rid of these housing said, okay, fine, good. And they could do that for a very simple reason that to the degree that there was a state intervention, what the state intervention did was to encourage the banks to transfer the houses to some really like Blackstone. In so doing, of course, there was a gap between what the original housing value was and what Blackstone paid, and that difference, which could be $60,000, a hundred thousand dollars, $200,000 or whatever that difference was essentially made up by the federal government. In other words, the federal government moved to help bail out the situation, bailed out the banks by relieving them so the banks could get rid of all of the housing that was needed for them, that they could get rid of their housing by selling off to Blackstone and they'd be recompensated for the difference.

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So Blackstone ended up with a huge amount of properties, which it had purchased at a discounted rate. Those properties, by the way, were not bought up by Blackstone with cash. Blackstone went into the market and given its reputation on its size and its property and all the rest, it was able to borrow large sums of money to buy up all of this housing from the banks at cut prices. And that was a very good situation for them in the sense that they could then take the house over, maybe fix it up a little bit, and then rent it out at a premium. And as a result, they made, Blackstone started to make a lot of money renting houses out of this market, which was set up of the transfer, the transferred property rights from the banks to the Blackstone, and then Blackstone was borrowing money to.

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So you can see how the whole thing was set up financially to benefit big capital and in particular to benefit the banks, but also of course at the end to benefit Blackstone. So Blackstone started to buy up crazy stuff, huge amounts of property, and within about four or five years, Blackstone had gone to a kind of minor kind of player to being a major player, being one of biggest landlords in the United States started to work overseas. There were parallel problems overseas in places like Spain and Ireland and so on. So Blackstone started suddenly to pop up all over place as being the great borrower of money from the financial institutions, particularly from credit fund, from pension funds and the like pension fund money was lent to Blackstone, and Blackstone used it to set up this whole thing. This was a very, very, very going proposition.

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And Steven Schwartzman, who was the head of Blackstone, became a billionaire almost overnight on this. And of course, Schwartzman was a big backer of Trump. He had a little tiff with Trump at a certain point and withdrew. But basically the sort of Trump world was highly supported by Blackstone. So this is the situation in which the housing started to be brought back into the market, but notice it's not brought back in such a way as to keep the rents low. Blackstone was going to do as much as it could to raise the rents up to as far as it could go in relationship to the living wages, which you hope would materialize in society. So Blackstone is doing very well in this way. What this then did, however, was to suggest that there is a fantastic way in which you can earn lots and lots of money and augments your wealth and power by speculating and housing markets.

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So the Blackstone example, if you became very attractive to whole sets of different players within the billionaire bourgeoisie, and the report came out recently by the Institute of Policy Studies, which talked about billionaire invasion into housing market purchases. And you can see the situation here that there's a vast amount of surplus capital around the surplus capital has to find someplace to go the surplus capital in say 1980 or 1990 I think it was. There were about 600 private equity companies which were managing about, I don't know, 400 million or maybe a billion worth of assets. But more and more money is pouring into these private equity companies. And so by the time you get to 2020 or so, you find there are something like 12,000 equity companies which are actually sitting around with something like $12 trillion of investment money. Now look at this situation in 2020, particularly after the pandemic had passed.

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Here's the situation. There is a vast pool of investment money and people don't know what to do with it. They're looking for a secure place to put it, and you can speculate further and support AI companies and use the stock exchange and all the rest of it. So they have plenty of ways. But one of the places which people started to look at for as a dumping ground, if you like, for surplus capital was in the housing market because the argument went, people always need a house to live in. So there's never ever going to be a situation in which housing is very long going to be out of the market. It's going to be in the market. Secondly, housing is something where finance is very well established and the asset markets and the financial markets are very deep and well proven, particularly in the United States.

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So that you start to say, well, actually I want a good chunk of my wealth instead of going to speculative activity with AI companies and stock market and land and all the rest of it, I'll put it into housing. So increasingly housing becomes a speculative instrument, and it had become a speculative instrument in the 1980s, 1990s to some degree and increasingly so, and that speculative instrument went bust in the 2007, 2008. But the rapidity of the recovery was remarkable and in a sense that it came back into its role as a speculative instrument. And that speculative instrument is something that is very attractive to all the billionaire dollars that are out there where people are looking for good investment opportunities. And of course, the billionaire start to go in and follow in Blackstone, in other words, Blackstone became the load star of a whole bunch of things going on in housing markets, which were actually connecting billionaire wealth to purchases of houses in large numbers and the use of the housing market as a speculative instrument for their own gain.

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Now, do investors of this kind do billionaires with investments in housing markets or not like any increase in housing values? The answer is they love it to increase. In other words, irrespective of what the state, the actual demand for housing and shelter is, you have the speculative instruments which are being used speculatively to try to increase the value of the asset and increase it by of course increasing rents and increasing housing values. In other words, what we have now is a whole sector of the economy, which is dedicated largely to try to increase the asset values, which constitute the housing market. And that is being done by financial speculation of an enormous amount. And when we talk about those trillions of dollars which are sitting in the private equity fund, the private equity company will partially go in and say, well, part of what we're doing is going to be, now what this does is to inflate the value of housing and inflate it from standpoint of home ownership and to inflate it from the standpoint of rentals.

(: 21:36

And so what that does is to, when you take the initial equation I started with, what it does is produce homelessness. And actually then you start to look at what the speculative instruments are being used for. Many of them stand empty. We have a huge history and many of the big cities in the United States have a large number of empty unoccupied dwellings in a situation where the number of homeless people is rising and is desperately searching out for rent for housing, cheap cheap housing. So cheap housing and speculative instrument, forget it, it's going to increase. And the result it is that what you find from what the report IPS put out suggested was that when you go to most of the major housing markets, you find many, many more empty houses than there are homeless people. Now, this again is the irrationality of the market system, the irrationality of capitalist system, and therefore what you have to start to look for is to find new ways again, instead of Harris saying, well, okay, we're going to build more housing.

(: 23:02

Well, it'll help with some build more housing, and we were going to build it and offer more some financial assistance to people to get into housing. Instead of doing all of that, what should happen is that physical housing should be commandeered by housing associations with different configurations, municipal governments and all the rest of it, and actually offered to that population which is desperately in need of housing at the cost. Again, we're dealing with a population which is trying to live on 50,000, on 30 or $40,000 a year, very large population, which is essentially homeless or is homeless in the sense that they're surfing from one friend's house to another. So in other words, in other words, we need to rationalize the social meaning of the housing market, and we need to cut out all of this speculative instrument stuff because the speculative instrument stuff is what is forcing housing up in price and rents up in price beyond the level of sustainability for the mass of the population.

(: 24:14

So the mass of the population is suffering from this. Again, it seems to me that if you had combined a real attack upon inflation and the way that I was suggesting in the last podcast and the attack upon housing speculative activity and housing and the effect that is having upon inflation, in other words, you could cut the inflation down immensely by having a massive program of buyout and instead of taking it from the banks to give it to Blackstone, what should have happened was that they should be municipal corporations, which could have taken the housing from the banks probably at even lower price than Blackstone did. And then the banks would've been compensated by the federal government so they wouldn't lose anything. So this would've been a very good thing to do back in 2008 and so on. And it's still possible to do it to some degree.

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So we have to look for new forms of financing, new institutions which can purchase their way into housing to provide affordable housing at cost by creating housing as a speculative instrument. And this, again, is going to make a major difference to inflationary pressures. In other words, inflationary pressures are going to come down if you can take more and more people out of the situation of homelessness and put them into housing of adequate cost, which is going to be subsidized to some degree for the mass of the population. But at the same time, this whole situation depends very much upon having a program of reversing wage inflation, reversing wage repression, in other words, instead of wage repression. And this is the core, it seems to me, of the political situation right now that until we deal with wage repression, we're going to have all of these social kind of problems which are going to get articulated in all of these different ways, going to lead to all these half-assed solutions, which end up putting all the money into Blackstone's pocket and into Steven Schwartzman's power and all the rest of it.

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So these are the sorts of situations where during this election, none of these questions were put forward. No, these ideas are put forward. We could have pushed very hard and again addressed the bottom 50% of the population and not be concerned about whether they're gay or straight or male or female or whatever. So that we have, again, an equitable form of support for access to housing and adequate supply of housing, not through building so that you're supporting the developer profits, but through appropriation so that the appropriation of housing as it historically came onto the market at very, very low cost. And we can then start to reconfigure what urban life is about based on a non-inflationary situation with respect. But the key to all of this, as I said, is the reversal of wage repression and wage repression is the problem, and it's a central problem, which of course is at the heart of the neoliberal rule, which really took over in 1980 and has continued to this day.

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That is what has to be reversed, and it's a very simple task, as it were, but very difficult of course to accomplish because it will be described in all kinds of awful ways. By meanwhile, the problems of housing provision and of inflation, it seems to me, are unlikely to be solved as this ship of fools that Trump is creating sails away into some sort of mystical distance and does its thing of a non-vaccinated world and all the rest of it. So there are some of the issues that have for me have risen out of this election. There are some other questions which I will take up in later podcasts. Thank you.