“Creative Destruction:” The Political Economy of the Failed US Housing Market

In the Great Transformation (1944), Karl Polanyi described how the capitalism created abstract market forces which detached people from place. Two years earlier, in his treatise on economic history, Capitalism, Socialism and Democracy (1942), Joseph Schumpeter made similar observations about the immense destructive power of markets. Capitalism, Schumpeter remarked, was a “perennial gale” that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In the contemporary political economy capitalism’s “creative destruction” is acting wildly to destroy landscapes and recreate new geographies of power.

The continued centralization of decision making in financial centers such as New York, London, Tokyo and Shanghai has further removed the (abstract) market from place. Banks and corporations move further and further away from the places that depend on their services, these entities know and care less about the communities that provide them with surplus-value, and even less about the people that work for them. Finance, in particular, has globalized the search for higher profit margins, further detaching itself form the material realities of everyday urban life.

The recent meltdown of the US housing market can, in large part, be connected to market tendencies described by Schumpeter and Polanyi. In its revolutionary search for new forms of capital accumulation, US financial and insurance institutions developed an abundance of securities for the mortgage market (including the much maligned high-interest rate mortgages), selling an ever-expanding menu of packaged securities to a thirsty international capital market (including unsecured debt). The securitization of the mortgage market increased the distance between the asset (the home) and the debt (the security). As a result the financing and servicing of mortgage debt has become ever more distant from the homeowners, and the number of intermediaries has exploded. On the global level, large financial institutions such as UBS and Crédit Agricole had no idea what kind of debt they held. On the local level, homeowners were unable to negotiate with their banks to hold onto their houses. The result was dire: Banks with write-offs and cities such as Cleveland with large swaths of empty, abandoned areas. The failure of the housing market is indicative of the detachment from place, and the incessant “creative destruction” of urban landscapes.