Subprime Crisis and Marx's Theory on Ground Rent

Notes

1. In addition to this, the theory also can be helpful to understand other contemporary urgent problems worldwide related to private landed property and to find solutions for them. Here is a fragmentary summary:• The ongoing expulsion of rural population in countries of South America, Africa, and Asia, thus developing slum areas in towns;• The increase of real-estate prices in towns, housing shortage in métropoles, with unaffordable rents.• Land acquisitions (land grabbing) in all parts of the world by so-called investors in correlation with the tendency to undermine national sovereignty respectively for neocolonial purposes.• The yelling contradiction between the hunger of millions of people and the relative overproduction, spoilage, and the waste of food, in parts financed by subsidies of governments like in the European Union (EU).• Using food as arms (food power strategy of US imperialism) to ruin farmers and the agricultural base of complete countries to make them dependent of imperialist mercy.• Trade wars between imperialist countries about the domination of food markets correlated to various subsidizing of their own big landowners and trade barriers and chicanes against others. This happens in connection with highly cartelized markets and stock exchanges, concerning wheat, soya, etc., which are dominated by a few powerful monopolies.• Clearing of rainforests to create profit first by selling the timber, then by clearing the land to extract mineral deposits and use the land for plantation economy and ranching.• The allocation of the oceans and of the sea floor, especially of the Antarctic, is in full swing. It is connected to military conflicts, natural disasters, etc.• This is the consequent continuation of what becomes visible in the struggle about oil but also about other raw materials. The Gulf Wars, the war against Afghanistan, threatening Iran, the intervention in Syria, the intrigues about the Caspian oil, and the connected wars in and around Azerbaijan, Armenia, Georgia, Russia/Chechnya, etc. are all manifestations of the struggle of monopolies or groups of monopolies and of the imperialist powers about a new partition of resources.• The so-called energy turnaround in Federal Republic of Germany (FRG) including such new colonial ventures as “Desertec” raises the question of which land arrays of solar panels, wind parks, power lines, etc. will be used for erection and which materials will be used to produce storage batteries and cables.

2. According to German central bank, “from the countries hit by the Asian crisis, Indonesia, Korea, Philippines and Thailand, ca. 75 bio. US\(flowed off from July 1997 to December 1998, which ultimately ended up in Europe and in the US.” See Deutsche Bundesbank (2000).

3. The current account deficit of the USA increased from 125 bio.US\) or 1.6% of gross domestic product (GDP) in 1996 to 640 bio.US\(or 5.5% of GDP in 2004. See the blog of Mark J. Perry, a professor at the University of Michigan, http://mjperry.blogspot.com/2011/04/another-name-for-trade-deficit-capital.html, accessed October 20, 2013.

4. During a broadcasting of This American Life on May 9, 2008, Adam Davidson (correspondent for international business economics of NRP) talked to the head of capital market research at the International Monetary Fund (IMF) about a “Giant Poll of Money,” of the worldwide deposits and savings, on which investment banks and hedge funds are out to make their profits. This staff member of IMF (Ceyla Pazarbasioglu) stated that the volume of deposits and savings had increased from US\)36 trillion in 2000 to US$70 trillion in 2007, http://thisamericanlife.org/radio-archives/episode/355/transscript, accessed on December 17, 2013.

5. See “State of Sheila C. Bair” (FDIC 2007). Here the participants are shown as follows: The securitization structure diagram shows the components of a typical securitization. It is important to note that not all securitizations are identical … Nevertheless, the diagram generally illustrates the roles of the various participants in a securitization structure …The key elements to a typical securitization include the following:Issuer—A bankruptcy-remote special purpose entity (SPE) formed to facilitate a securitization and to issue securities to investors.Lender—An entity that underwrites and funds loans that are eventually sold to the SPE for inclusion in the securitization. Lenders are compensated by cash for the purchase of the loan and by fees. In some cases, the lender might contract with mortgage brokers. Lenders can be banks or nonbanks.Mortgage Broker—Acts as a facilitator between a borrower and the lender. The mortgage broker receives fee income upon the loan's closing.Servicer—The entity responsible for collecting loan payments from borrowers and for remitting these payments to the issuer for distribution to the investors. The servicer is typically compensated with fees based on the volume of loans serviced. The servicer is generally obligated to maximize the payments from the borrowers to the issuer, and is responsible for handling delinquent loans and foreclosures.Investors—The purchasers of the various securities issued by a securitization. Investors provide funding for the loans and assume varying degrees of credit risk, based on the terms of the securities they purchase.Rating Agency—Assigns initial ratings to the various securities issued by the issuer and updates these ratings based on subsequent performance and perceived risk. Rating agency criteria influence the initial structure of the securities.Trustee—A third party appointed to represent the investors' interests in a securitization. The trustee ensures that the securitization operates as set forth in the securitization documents, which may include determinations about the servicer's compliance with established servicing criteria.Underwriter—Administers the issuance of the securities to investors.Credit Enhancement Provider—Securitization transactions may include credit enhancement (designed to decrease the credit risk of the structure) provided by an independent third party in the form of letters of credit or guarantees.

6. See the blog of Mark J. Perry, http://mjperry.blogspot.de/2012/02/bank-profits-and-roa-highest-since-2006.html, accessed October 20, 2013.

7. See, http://www.theguardian.com/business/2010/jun/02/warren-buffett-financial-crisis-inquiry-live.

8. For example, in Germany today the feudal background from which land property evolved into capitalism is noticeable. Many substantial landowners derive from aristocracy and once again staked out claims—after the annexation of the GDR—on land which was expropriated after 1945. In Germany, landed property of the Catholic Church and a bit less of the Protestant Church is considerable. The issue of compensation for church property which was confiscated by the “Reich” (secularization of 1803) is not finally regulated by law even today; the German government still pays annually substantial amounts of money to the two main churches, €459 million in 2012 (see Handelsblatt , January 16, 2014).

9. Marx criticizes Ricardo first of all for the faultiness of the postulated tendency of progressing from better to worse plots of land and falsifies the “law of decreasing land yield” (by citing natural science in agriculture and also growing cities). He reveals the latter as an attempt to blame nature for the contradictions and limitations of capitalism.

10. Marx states, concerning this, in the chapter titled “Chapter 46. Building Site Rent. Rent in Mining. Price of Land” (emphasis added),Wherever rent exists at all, differential rent appears at all times and is governed by the same laws, as agricultural differential rent. Wherever natural forces can be monopolized and guarantee a surplus-profit to the industrial capitalist using them, be it waterfalls, rich mines, waters teeming with fish, or a favorably located building site, there the person who by virtue of title to a portion of the globe has become the proprietor of these natural objects will wrest this surplus-profit from functioning capital in the form of rent. Adam Smith has set forth, as concerns land for building purposes, that the basis of its rent, like that of all non-agricultural land, is regulated by agricultural rent proper (Book I, Ch. XI, 2 and 3). This rent is distinguished, in the first place, by the preponderant influence exerted here by location upon differential rent (very significant, e.g., in vineyards and building sites in large cities); secondly, by the palpable and complete passiveness of the owner, whose sole activity consists (especially in mines) in exploiting the progress of social development, toward which he contributes nothing and for which he risks nothing, unlike the industrial capitalist; and finally by the prevalence of monopoly prices in many cases, particularly through the most shameless exploitation of poverty (for poverty is more lucrative for house-rent than the mines of Potosi ever were for Spain), and the monstrous power wielded by landed property, when united hand in hand with industrial capital, enables it to be used against laborers engaged in their wage struggle as a means of practically expelling them from the earth as a dwelling-place. One part of society thus exacts tribute from another for the permission to inhabit the earth, as landed property in general assigns the landlord the privilege of exploiting the terrestrial body, the bowels of the earth, the air, and thereby the maintenance and development of life. Not only the population increase and with it the growing demand for shelter, but also the development of fixed capital, which is either incorporated in land, or takes root in it and is based upon it, such as all industrial buildings, railways, warehouses, factory buildings, docks, etc., necessarily increase the building rent … The demand for building sites raises the value of land as space and foundation, while thereby the demand for elements of the terrestrial body serving as building material grows simultaneously.Marx cites further the “testimony of a big building speculator in London, Edward Capps, given before the Select Committee on Bank Acts of 1857. He stated there, “No. 5435”:I think a man who wishes to rise in the world can hardly expect to rise by following out a fair trade … it is necessary for him to add speculative building to it, and that must be done not on a small scale; … for the builder makes very little profit out of the buildings themselves; he makes the principal part of the profit out of the improved ground rents. Perhaps he takes a piece of ground, and agrees to give £300 a year for it; by laying it out with care, and putting certain descriptions of buildings upon it, he may succeed in making £400 or £450 a year out of it, and his profit would be the increased ground rent of £100 or £150 a year, rather than the profit of the buildings at which … in many instances, he scarcely looks at all. (Marx 1970, 781ff.; without footnotes)

11. See “The price of land is nothing but capitalized and therefore anticipated rent” (Marx 1970, 816).

12. In larger cities, the prices for land increased during capitalist development because of high differential rents. So, skyscrapers in the center of towns are not only a manifestation of technical progress but also a manifestation of the limits of profit calculation driven by the pressure of ground rent, which literally is pushing up the heights of the buildings. The obvious calamitous crowding in inner-city traffic shows the mark of ground rent, which enriches every square meter in certain locations for the owner of the land, and brands public areas like parks or streets as pure waste. In such locations, landowners claim a monopoly rent and impose a tribute on the society, which pushes up the rents in the towns universally. All the time, affordable housing becomes scarce as a result. Yet, in wealthier countries, slums are created again and become “deprived areas,” as the riots during recent years in Paris or London indicated.

13. But Marx points out that the faster development of the industry compared to the agricultural/ building industry is not insurmountable. “This is a historic disparity that can disappear” (Marx 1976, 87).

14. This only applies by taking into account all of the agricultural production worldwide. Big agricultural plants can have a higher organic composition of capital than those in the industrial production.

15. See “The Housing Question” (Engels 1974, 282). Especially since 1989, since the downfall of socialism in Europe, the ruling class does not even need to make easing state interventions as the former program of “social housing” in FRG. Housing subsidies being reduced, public services like libraries and swimming pools are going to rack and ruin. Only in this context, the unashamed involvement of publicly respective US institutions like Fannie Mae and Freddie Mac, in the operations of the investment banks, is possible and understandable. Something that was created initially in the “New Deal” 1938, to “protect” the workers from communist tendencies, appeared not to be necessary any more to the financial oligarchs, since they felt safer again, after the fall of the Soviet Union.

16. In regard to the difference of agricultural sector and building sector, Marx points out “… that ground rent … solely originates from surplus profit (this part of the surplus value, which is not adopted to the general rate of profit) which is contained in the raw product and is paid by the farmer to the land lord” (Marx 1970, 70). Marx makes an exception concerning “building houses,” as the rent in this case is not paid out of a raw product but out of a “fabricated product” (70) and so the surplus value created in the building sector is adopted in the equalization of the average rate of profit.

17. An example for this is Saudi Arabia. It is state owned and ruled by a very small stratum of big ground owners. When the curtain of Monarchy, Sheiks, religion, and romantic desert is taken away, there are oil wells owned by big landowners. They claim royalties for the privilege to exploit the oil wells. The earnings gained by the big landowners flow mainly back into the imperialist centers, after deduction of expenditures for a luxurious lifestyle and the safeguarding of it (army, police, and adequate equipment). The earnings get invested in real estate and bonds of all kind. Things have come full circle. However, the characteristic of this circle is that a totally parasitic class claims a part of the fruit of labor of capital production outside this relationship. Together with this go rows among monopolies and imperialist countries about their share of the deposits from Saudi Arabia about delivery of weapons, food and other consumer goods, consultants, etc. The example of Saudi Arabia, above, has its parallel in German history: 1878 initiated protectionism (parallel to the oppression of the workers movement) with protective duty on wheat, timber, livestock, and iron. Concentration of coal, iron, and steel (bearing elements of private property and ground rent) to heavy industry especially in the Ruhr area created the development of the most aggressive parts of German financial industry, which supported prematurely Hitler's accession to power. And nevertheless, the big landowners especially in Prussia (Junker) were those which put in place President Hindenburg, field marshal of World War I, who backed the appointment of Hitler, as Chancellor of the Reich.

18. See V. I. Lenin, “New Data on the Laws Governing the Development of Capitalism in Agriculture,” Part one, Chapter 15. This work has been written at the same time as “Imperialism, the Highest Stage of Capitalism” (Lenin 1974b, 93).

19. Corell (2001) also writes,…while France wanted to make use of the situation in Germany to hold down German imperialism, while the US and the UK tried to make use of the German crisis to weaken France, Deutsche Bank was planning to make use of the crisis to eliminate its most aggressive competitor. This is the answer to the question asked above: By whom and why was the Danatbank let down on July 11^th 1931?The crisis of overproduction, which began in summer 1929, was the real background for the collapse of the stock exchange in October 1929. However, the collapse had no resolving function, but only exacerbated the crisis of overproduction itself. The economic crisis only makes the transformation of the produced commodities into money more difficult. It so increases the demand for credit, if the process of production is to be continued. At the same time by this the crisis enlarges the risks for the lenders, for the banks, for the state and other domestic and foreign lenders, the credits get “frozen,” default, and are not paid back. Through this the conditions develop that the credit crisis can turn into a banking crisis. Even to overcome the banking crisis only for a short period it needs the intervention of the government by credits again, i.e., support by using fictitious capital as bond issues, promissory notes, etc. By this nothing is spend on the expansion of production, but only for the financial recovery of the bankers.According to the growing government debt on one hand the pressure on the currency increases to devaluation, on the other hand the creditworthiness decreases outside of the country's territory. By this the pressure increases on the working people in their home country, which has to cope with less social welfare benefits (by increasing demand caused by the crisis) and higher taxes (potential for tax income decreased by the crisis) which are squeezed out to service the government debt, and the drive for exterior expansion to force the credit worthiness, for example by the ability to go to war and to extend their own home territory.

20. At this point, we do not go to a deeper analysis about the influence to the development of the crisis by rating agencies, national legislation (like net capital rules), or regulation authorities (like the Securities and Exchange Commission [SEC] in the USA or the BaFin in the FRG) or international regulations (like Basel II).

21. Here applies what Hegel says, referring to certain mathematical formulas, that, what ordinary common sense finds as irrational, is the rational, and its rational is the irrationality itself (Marx 1970, 787).

22. See Mao Zedong's article “The situation after the victory in the war of resistance against the Japanese Aggression and our policy” (Mao 1996, 17).