Trained as a geographer, David Harvey (born 1935, Gillingham, England) is a leading Marxist thinker and an exponent of what he calls “historical-geographical materialism.” His most important theoretical work, The Limits to Capital (1982), reconciles the account of industrial capitalism offered in volume 1 of Marx’s Capital with the somewhat confused and contradictory reflections on financial capitalism in the later, posthumous volumes of Marx. This contribution has gained in importance over recent decades, as financial services have displaced manufacturing as the largest sector of the American economy; as levels of consumer indebtedness have neared or surpassed annual GDP in several wealthy countries, including the US; and as wracking financial crises have migrated from Latin America to Southeast Asia to the heartland of global capitalism.
If Marx in the Communist Manifesto ironically produced an unsurpassed hymn to the bourgeoisie, Harvey’s Limits gives stirring testimony to the wonders of finance: “Credit can be used to accelerate production and consumption simultaneously. Flows of fixed and circulating capital can also be coordinated over time via seemingly simple adjustments within the credit system. All links in the realization process of capital bar one can be brought under the control of the credit system. The single exception is of the greatest importance. . . . There is no substitute for the actual transformation of nature through the concrete production of use values.” Credit—including housing finance—is created in vain unless wage laborers continue to convert the natural world into commodities at increasing speed. Otherwise, an economy is literally banking on fantasies.
n+1: We’d like to start by asking you to take us through the subprime crisis. Build it from your analytic perspective.
David Harvey: How far back do you want me to go? To its theoretical roots? It might be useful to do that, because part of the problem is that the explanations that are given are very much about, “Oh, it was predatory lending,” or, “Oh, it was excessive optimism on the part of consumers.” Instead of saying there’s a systemic problem here, which periodically erupts in the history of capitalism, we tend to look at this as a peculiar incident of the present. But property market crises have played a very crucial role historically in triggering major downturns in particular economies, and sometimes the global economy.
For instance, the global downturn of 1973—everybody says, well, it was oil. But actually the recession started about six months before the oil embargo, and it started with a global crash in property markets. If you look at what brought the Japanese economy down at the end of the 1980s, it was speculation in land and property markets. If you look at the recession in this country during the savings and loan crisis—which was huge, something like a thousand banks were on the watch-list—it was a property market thing.
Very frequently when there’s excess capital around, and nobody knows what to do with it, it goes into some sort of asset building. And asset building in property markets is a good place to go. One of the reasons is that when you build something, the rate of return stretches way into the future, so it displaces a current surplus of capital with long-term capital investment. So you only find out what you’ve done—bought too much of it—sometimes four, five, six years later.
Now if you look at property markets in this country, you see that they were taking off in the middle of the 1990s. And by the time you get to the high-tech crash—1999, 2000—you see even more money flowing into property markets. Property markets are debt-financed—you have to borrow in order to build condominiums and to buy. So the debt structure becomes terribly important; there’s a correlation between the buildup of excessive liquidity within the financial system and the tendency of that liquidity to flow into property markets. That’s not the only place liquidity can go. It can go into military expenditures. It can go into raw-material commodity bubbles, too, and we’re seeing a bit of that right now, sort of displacing the property-market bubble. Food prices are shooting up, energy prices are shooting up, so we’ve got a lot of excess liquidity flowing into those sorts of things as well.
This is not unique in the history of capitalism. What is different this time around is the extent of it, and the degree to which the financing changed its manner. For instance, when the property market crashed in 1973, it was mainly local banks that got caught out, because if you had a mortgage, you had it with a local bank, and the developer would also borrow from a local bank, so the mortgage market was localized. During the 1980s the mortgage market became securitized, and they started to put together all these mortgages and push them into organizations like Fannie Mae and Freddie Mac, or they would get packaged into collateralized debt obligations and then sliced up and sold to some innocent party in Norway, or a pension fund in Florida, or a bank that had excess liquidity in Germany. So the mortgage market became really global.
That was supposed to spread risk, which to some degree it did. But as it spread risk, it also built more risk. People at the financial institutions, I think, really did start to think that because you’d spread risk, you’d eliminated risk, which of course you hadn’t done. And then you have all of these practices of gulling people into home ownership—those have been around for a long time, but, predictably, they began to crop up more and more frequently, and then people couldn’t pay because of the employment situation and all the rest of it, so suddenly you get the unraveling. Everybody says, “It’s safe as houses,” but it turns out that housing finance is not that safe—it was destined to run into trouble. I was sure it was going to burst about two or three years before it did, and I was going around saying, “This can’t possibly go on.”
n+1: So you stopped flipping houses?
DH: Actually I was in a difficult situation. I needed, for all sorts of reasons, to buy into the New York market. And I said, “Delay it, because there’s going to be a crash.” And I kept on delaying and delaying until last summer, which was the peak of the damn thing! So don’t trust me on predictions. Timing is everything. Of course a lot of people who did flip things made a lot of money, and a lot got caught.