The United States as Subprime Nation?

Herman Schwartz

Much is said and written every day about the impact of the current economic crisis on individual Americans. In his latest book, "Subprime Nation: American Power, Global Capital and the Housing Bubble," author and professor Herman Schwartz takes a look at what it means to America as a global power.

His answer lies in a new sort of theory of relativity. "The core argument of this book is that what really matters is relative growth," he said. "Up until 2005 the US outgrew Europe and Japan, which increased US global power. And while in 2007 European countries were still growing as the U.S slipped into recession, what we saw by 2008 was that the European countries are going into recession and the Japanese are going into deep recession."

The book takes a deep look at the role of housing in the international economy, and in particular, in the current crisis. "There is a big disparity between global supply and global demand. Global supply is growing faster than global demand, which is forcing prices down. So the housing connection is that the rising price of housing and financial deregulation created an asset that people could borrow against so they would have money to buy stuff, and that brought supply and demand back in balance."

Schwartz focuses heavily on the multifaceted role of China in the whole equation, from the role the shift in manufacturing there played in diminishing purchasing power to the key role China played in the housing boom by its willingness to purchase U.S. mortgage backed securities.

"The fact that the Chinese were willing to take all of those dollars they got from Bed Bath and Beyond and Target and whomever else and recycle them as loans was one of the fuels that made all this happen. What it allowed the U.S. economy to do was to escape the usual constraints that economies face. Usually you have a tradeoff between domestic consumption, domestic investment and overseas investment.  The U.S economy in the 90's overdid all of these things. How could we do that?  Because there was a ton of money flowing into our economy and this allowed U.S. power to expand. We were borrowing short term at low interest rates to invest in long term, high-return projects. That is why this is a story about power as well as growth."

You can say the counterintuitive message that comes out of this book," he said, "is that this is a huge crisis for American capitalism, it's a huge crisis for America's position in the global economy, which it is, but it is an even bigger crisis for everyone else because they can't grow without US growth. And because of this, American power is unlikely to be radically diminished, because power is about differential growth, not just absolute levels."

That "good news" aside, Schwartz puts himself on the slightly pessimistic side when looking at the future of the crisis. "On a scale of 0 to 100 with 0 being the most pessimistic, I'm probably at about 35." He puts the recession's prospective duration at two years, with the end coming at the end of '09 or the beginning of '10.