Asset Politics: Why debt is not the main problem

Even before the COVID-19 crisis all was not well with the Australian economy. While some groups have done extremely well for themselves over the past decades, growing numbers have been living precarious economic lives, moving from temporary job to temporary job in order to keep a rented roof over their heads.

Although every individual has their own unique set of circumstances, people seem to deploy what the sociologist C. Wright Mills called their ‘sociological imagination’—trying to make sense of their individual circumstances by connecting them to big-picture trends. In recent decades debt, and especially personal and mortgage debt, has become the main focus of our sociological imagination around economic precarity.

Debt is a lived problem for many ordinary people—perhaps because they have graduated from tertiary education with significant debt, or because they don’t earn much and have maxed out their credit cards, which they are now struggling to pay down, or because they could only buy a house by taking out a mortgage that they will have difficulty repaying, especially now interest rates are going up. At the same time, we see the likes of Elon Musk using debt for purely speculative purposes, financing takeovers with massive amounts of borrowed money and reminding us that while debt is a problem for ordinary people it allows billionaires to play around in financial markets, moving in and out of deals to enrich themselves further. At the same time, politicians of all stripes regularly remind us that public debt is a bad thing, weighing down the macro-economy and creating an unfair burden on future generations.

Anyone broadly concerned with the state of contemporary capitalism who tries to educate themselves about its causes and dynamics will quickly be routed to any number of critical books that see the core problem of contemporary life in terms of excessive debt: Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy; House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again; Empire of Debt: The Rise of an Epic Financial Crisis; The Debt Trap: How Student Loans Became a National Catastrophe; and so on. This line of critique suggests that something is out of sync, that the amount of speculative debt circulating is just out of balance with basic realities of the economic system. These approaches also generate particular kinds of predictions about where things are heading: invariably we are told that the disconnect between the economy’s productive capacity and the inverse pyramid of speculative debt is reaching breaking point, and that the whole constellation will collapse shortly.

This narrative is constant, but it finds particular traction when financial growth runs into trouble and people begin to experience difficulties financing their debt burdens. This is visible at the moment in Australia: as inflation has become a major economic threat and the Reserve Bank has indicated that it will continue to increase interest rates until it is under control, many households are starting to worry about their ability to keep up with mortgage payments. Commentators are usually quick to frame the problems that people are experiencing in terms of the size of their debts. A recent ABC feature, for example, warned that Australia was facing a ‘tsunami of housing debt’ that could crash under the weight of interest rate increases, leading to mortgage stress, arrears, defaults and foreclosures. The program told a familiar story of a recent first homeowner who had taken on too much debt on the basis of erroneous predictions by the Reserve Bank that it would keep interest rates low, raising the prospect of tighter lending standards as the solution. But these kinds of assessments do not sufficiently recognise the systemic drivers behind these debt levels, and are relatively uninterested in the question of why so many people have such high debt burdens in the first place.

Of course, the focus on debt is not exactly wrong: debt obviously plays a major role in current economic dynamics. And the confluence of rising interest costs and falling real incomes is creating genuine hardship. The issue is that the debt doom merchants simplify a complex situation in a way that turns it into a morality tale, one that lends itself to blaming people for living beyond their means.

If we focus too much on debt alone, we essentially assess the current dynamics of capitalism against an ideal image of a capitalist system—one that does not generate or require debt and that suppresses speculation. It is not clear that such a system ever existed or, indeed, that capitalism can exist without those dimensions. In the end the critique of debt therefore tends towards a moral critique that masquerades as a scientific one; it’s a way to dress up our misgivings in the language of social science.

The limits of the focus on debt are particularly apparent in the difficulty this perspective has always had in making sense of crises. Crises do occur, of course, but they are never the kind of comprehensive meltdown that the critics of speculative debt have told us we should expect. The system is never ‘reset’ to some baseline level of productive activity, and oddly similar speculative dynamics resume quite quickly. The aftermath of the Global Financial Crisis is a paradigmatic case in point: this was a crisis widely understood to be caused by inflated home values and risky lending and was expected to put an end to the growth of debt. Yet in the decade since, both levels of debt and property prices have increased steadily. Similarly, property values surged across the COVID shutdown periods.

One way of thinking about this more productively is to stay with our lived experience a little longer and to engage it more deeply before zooming out. Often, the reason for taking on debt is not ‘offensive’, that is, driven by a wish to exploit a speculative opportunity. Instead, it is ‘defensive’, that is, driven by a perception that unless we take on debt we will be unable to make ends meet or to build up longer term economic security.

This is particularly clear when it comes to housing. Younger generations often feel that the price of homes in contemporary Australia is absurd, and many balk at the prospect of taking on a million-dollar (give or take) debt to buy a first home. But they also know that there is every reason to assume that the situation is only going to get worse—that if they don’t bite the bullet now, they may have to take on even more debt later or find themselves cut out of the market altogether. In other words, it’s rising property prices that drive the demand for debt. Of course, these factors interact: property rises can only keep rising if banks are willing to extend more mortgage credit. But the point is that debt levels do not stand on their own.

The logic of this asset-based economy is only comprehensible if we stop thinking in terms of speculative debt chasing after capital gains on the basis of flimsy expectations. Debt buys assets, which at the same time serve as the collateral for the possibility of borrowing the funds with which they are purchased. When you start unpacking that somewhat paradoxical formulation, you are very quickly led into a complex web of political pressures, social forces, legal operations, accounting conventions and other institutional arrangements that give these configurations a definite consistency. Debt is supported and sustained by numerous social conventions and institutional constellations that ensure its system-level viability.

Again, this is particularly clear when it comes to housing. The value of homes is protected in all kinds of ways that militate against the idea of the free play of market forces. The home-owning middle class constitutes a ‘too-big-to-fail’ constituency: politicians and policymakers simply cannot afford to let home values go into freefall, and they therefore maintain an elaborate safety net for homeowners. This takes the form of ‘liquidity politics’: a key responsibility of public authority is to ensure that asset owners can continue to service payments on their mortgage debts.

As we document in our forthcoming open access article ‘Asset-Based Futures: A Sociology for the 21st Century’ in Sociology,i the COVID asset price boom was underpinned by government policies of mortgage forbearance and new household payments explicitly designed so that households could hold on to their asset-based futures. Such a liquidity politics maintains the value of speculative investments that do not seem to make sense from a ‘fundamental value’ perspective. This does not mean that authorities will never raise interest rates, as we are currently seeing, but it is equally clear that the ability of the average Australian home-owning household to repay their debt is front and centre in public debate. Debt reflects the social dynamics of the asset economy—including its inequalities, exclusions and politics.

The RBA’s aggressive tightening of interest rates means that the Albanese government’s first term will be punctuated by the middle-class politics of asset values. The housing-market booms that we have gone through since the turn of the millennium have made a lot of people wealthy, but they have also created a situation in which the housing market is no longer open to aspiring middle-class households unless there are wealthy parents on the scene who can help out. Yet as existing homeowners come under pressure, particularly those who have only recently bought into the market, political attention will inevitably focus not on those who are locked out of home ownership but those who are locked in. We can anticipate that the Albanese government will again encounter strong demands to bail out distressed mortgagors in order to put a floor under house prices.

Progressives will be tempted to focus their attention on what they see as the debt problem that got us into this mess. However, the idea that debt is the main problem and that we should have less of it is not a helpful contribution. In a situation where houses are essentially underwritten by governments in various ways, including negative gearing, the absence of inheritance taxes and capital gains tax discounts, the only objective that a rapid contraction of credit will serve is to cut new segments of the population out of the market altogether and force others to sell their homes while allowing the well-off to ride out the storm until the next expansion.

This is a scenario that could well unfold over the coming years, and people on the Left should have something better to contribute to the debate. Our focus should be on how to reform a society that has become structurally organised around a particular logic of asset values. This is no easy task, because seemingly common-sense measures to address the problem, such as restricting access to debt, can serve to worsen asset-based inequalities. A more politically fruitful avenue would be to address the institutional drivers of asset price inflation, such as subsidies for property investors and insecure tenancies for renters. This focus would reveal whose risks, and by extension whose asset values, are politically guaranteed, and whose are not, so we can begin to even up the ledger of the asset economy.

i Lisa Adkins, Gareth Bryant, Martijn Konings, ‘Asset-Based Futures: A Sociology for the 21st Century’, Sociology, https://doi.org/10.1177/00380385221129145 (open access).

About the authors

Martijn Konings

Martijn Konings is Professor of Political Economy and Social Theory in the Discipline of Political Economy at the University of Sydney.

More articles by Martijn Konings

Gareth Bryant

Gareth Bryant is Australian Research Council DECRA Fellow in the Discipline of Political Economy at the University of Sydney.

More articles by Gareth Bryant

Lisa Adkins

Lisa Adkins is Professor of Sociology and Dean of the Faculty of Arts and Social Sciences at the University of Sydney.

More articles by Lisa Adkins

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