Geographies of the
financial crisis
Real estate is, by definition, local as it is
spatially fixed. Mortgage lending, however, has developed from a local to a
national market and is increasingly a global market today. An understanding of
the financial crisis is ultimately a spatialised understanding of the linkages
between local and global. This article looks at the geographies of the mortgage
crisis and credit crunch and asks the question: how are different places
affected by the crisis? The article looks at different states, different cities,
different neighbourhoods and different financial centres. Investors in many
places had invested in residential mortgage backed securities and have seen
their value drop. Housing bubbles, faltering economies and regulation together
have shaped the geography of the financial crisis on the state and city level
in the US. Subprime and predatory lending have affected low-income and minority
communities more than others and we therefore not only see a concentration of foreclosures
in certain cities, but also in certain neighbourhoods. On an international level,
the long-term economical and political consequences of this are still mostly unknown,
but it is clear that some financial centres in Asia (including the Middle East)
will become more important now that globalisation is coming full circle. This
article does not present new empirical research, but brings together work from
different literatures that all in some way have a specific angle on the
financial crisis. The aim of this article is to make the geographical
dimensions of the financial crisis understandable to geographers that are not
specialists in all – or even any – of these literatures, so that they can
comprehend the spatialisation of this crisis.
Key words: mortgage market, globalization, credit crunch,
subprime crisis, predatory
lending, financial centre, regulation,
securitization
Introduction
A mortgage is money lent on the security of property
owned by the borrower, usually in order to enable the borrower to buy property.
When we speak of mortgages today, we generally refer to home mortgages: mortgages
issued on residential real estate. Real estate by its very nature is local as
it is spatially fixed. Mortgage lending, however, has developed from a local to
a national market and is increasingly a global market today. An understanding of
the mortgage crisis and the credit crunch is ultimately a spatialised
understanding of the linkages between local and global, between the space of places
and the flow of spaces. My aim here is not to come to a geographical
understanding of the linkages between local real estate, national mortgage
lenders and international markets for residential mortgage backed securities.
Others have provided the building blocks for such an approach (most notably
Gotham 2006, 2009; see also Dymski 1999; Sassen 2001, 2009; Wyly et al. 2004,
2009; Aalbers 2008, 2009; Wainwright 2009). Instead, this article looks at the geographies
of the mortgage crisis and credit crunch and asks the question: how are
different places affected by the crisis? In doing this I look at different states,
different cities, different neighbourhoods and different financial centres. In
four different takes, this article describes what the crisis is currently doing
to these places: the first explains how mortgages in the US are connected to
global financial markets, the second and third look at the geography of the ‘default
and foreclosure crisis’ in the US (the second take focusing on states and
cities, the third on neighbourhoods) and the fourth take looks at the global
reshuffling of money and financial centres.
This article does not present new empirical research, but brings
together work from different literatures that all in some way provide a
specific take on the financial crisis. The aim of this article is to make the geographical
dimensions of the financial crisis understandable to geographers that are not
specialists in all – or even any – of these literatures, so that the spatialisation
of the crisis becomes tangible.
What’s Norway got to
do with it?
The current financial crisis originates in the housing
and mortgage markets, but it affects financial markets around the world. A few
decades ago most mortgage lenders were local or regional institutions. Today,
most mortgage lenders are national lenders who tap into the global credit market.
This is not so much the case because lenders are global financial institutions –
most lenders are national in scope – but because they compete for the same
credit in a global market. Before the financial crisis of the late 1980s,
savings and loans institutions (S&Ls) granted loans based on the savings
that got into the bank. Generally speaking, the savings and loans were made in
the same geographical market. The fact that the S&Ls only worked in local
markets was seen as a problem: what if the savings are available in one area,
but loans are needed in another?; and what if a local housing market busts? The
solution was to connect local markets and thereby to spread risk. Interest rates
on loans would fall because there was now a more efficient market for the
demand and supply of money and credit.
The trend from local to national mortgage lenders was
one thing, but, it was argued, mortgage markets could be even more efficient if
they were connected to other financial markets and not just to savings. In the
wider credit market it would be easy for mortgage lenders to get money as
mortgages were considered low risk. Mortgages would be an ideal investment for
low-risk investors. Cheaper credit, in return, would lower interest rates on
mortgage loans.
Securitisation was already introduced in the 1960s by
Fannie Mae and Freddie Mac, two government-sponsored enterprises that were
meant to spur homeownership rates for low- and middle-income households.
Securitisation enables mortgage lenders to sell their mortgage portfolio on the
secondary mortgage markets to investors. Following the S&L crisis,
deregulation favoured securitisation, not only through Fannie Mae and Freddie
Mac, but also through so-called ‘private labels’
(Gotham 2006; Immergluck 2009).
Securitisation also meant that mortgage lenders could
work according to a new business model whereby mortgages are taken off balance.
This frees up more equity for more loans. It also enabled non-banks to enter
the mortgage market. Mortgage portfolios could now be sold to investors
anywhere in the world and because these investors thought mortgage portfolios
were low risk and there was a lot of money waiting to be invested, especially
after the dot-com bubble crash (2000–2), there was a great appetite for such
residential mortgage-backed securities (RMBS). In other words, the S&L
crisis, the following bank merger wave (Dymski 1999), securitisation, the entry
of non-bank lenders and the demand for low-risk investments together shaped the
globalisation and financialisation of mortgage markets.
The credit crisis started in 2007 when foreclosure and
default rates went up and housing prices went down. This implied that investing
in mortgages was not as low risk as people thought. The value of RMBS fell even
more dramatically. This is not only the case because many people had mortgage
loans that were granted without down payments, but also because RMBS were sold
with the idea of high returns. These high returns were partly based on high
interest rates and not just on the value of the house, and partly on
speculation, which increased the value of RMBS beyond what they were actually worth.
In sum, not only were risks underestimated, returns were also overestimated
(even if there hadn’t been rising defaults). In addition, even though housing prices
on average fell by 20 per cent, the impact on the RMBS market was much bigger.
This is not just a result of inflationary prices, but also of leveraging. Major
players in the RMBS market like investment banks basically invested with
borrowed money (ratios of 1:20 were not uncommon, 1:14 being the average) and
because of this leveraging both profits and losses would be disproportionally
big.
It now becomes easier to understand why the impact of
partly local and partly national problems in housing and mortgage markets (I
will return to this in the next two sections) is global in scope and also
affects other credit markets. The crisis does not just hit investment banks on
Wall Street, European banks and pension funds that bought RMBS, but also
individual investors and small towns around the globe. The example of Narvik in
the far north of Norway is widely discussed. The city council of Narvik
(population 18 000) and three small, nearby municipalities had invested $78
million of the revenues of a nearby hydroelectric plant in RMBS and lost most
of it. The city of Narvik was advised by the Oslo-based firm Terra Securities
to buy RMBS that were put together by US bank Citigroup. Terra had not
explained these products to the city and most city councillors actually thought
their revenues were being invested in low-risk Norwegian funds. The city’s
investments were meant for the construction of a new school, a nursing home and
a child-care facility. Instead, the city has cut the budget and as a result
several small rural schools will be closed, budgets for elderly care have been
cut, the city is behind with payments to civil servants, and the fire department
will cease their 24/7 service and will switch to daytime service (in a city
with mostly wooden houses). The Norwegian state has declared it will not help
Narvik and other municipalities, as it does not want to set a precedent by
which the national state has to bear the losses of local authorities.
Unfortunately Narvik is not the exception as municipalities
around the world had invested in RMBS or the financial institutions that went
down in this crisis such as the American Lehman Brothers or the Icelandic
Landsbanki. Narvik illustrates well how connected the world has become in the
twenty-first century. It also illustrates well the world is not flat today: the
old geography of local housing markets has not been replaced by a global
housing market, but by a chain that starts with local (a mortgage loan on a
particular property), turns national (through lenders), then global (in the
RMBS market) and then local again (by the effects in places like Narvik). Nearly
everyone in North America, Europe and Australia, and many in Asia are in some way
involved in this crisis, often as passive investors, e.g. through pension funds
or investments by their municipalities. We may not all be capitalists now, but
most of us are investors, whether we want – or know – it or not.
From the Rustbelt to
the Sunbelt
Subprime mortgage lending has been growing fast, from
about $35 billion (5% of total mortgage originations) in 1994 to $600 billion
(20%) in 2006 (Avery et al. 2006), 75 per cent of which is securitised. In
some states like Nevada, subprime loans accounted for more than 30 per cent of
the loans originated in 2006. Subprime lending is often defined as lending to a
borrower with poor credit, but this would be a misrepresentation of the essence
of subprime lending, which is lending at higher fees and interest rates whether
or not the borrower actually has bad credit. Some estimates suggest that more
than half of the subprime loans went to prime borrowers (Brooks and Simon
2007). In 2006, 13 per cent of outstanding loans were subprime, but 60 per cent
of the loans in foreclosure were subprime, up from 30 per cent in 2003 (Nassar
2007). Recent subprime loans not only go into default and foreclosure more
often, but also much faster.
The default and foreclosure crisis that was at the origins
of the credit crunch has hit American households across the country, but people
in some states and cities are more likely to be in foreclosure. The rise in
default rate started some years ago in the Rustbelt where housing prices went
down and unemployment up. The combination of lack of employment and falling
housing prices is perilous as people who lose their job in a high unemployment
area not only have a smaller chance of finding a new job within a few months,
but they also run a bigger chance of not being able to pay off their mortgage
loan and might then be faced with negative equity. This implies that banks will
not only see higher foreclosures as a direct result of default, but also
because homeowners with financial problems in declining housing markets are less
likely to sell their house which would have enabled them to pay off their loan.
The rise of subprime lending started in the early 1990s
with refinance loans, often in the poorer parts of Rustbelt cities (see next
section). Increasing default rates led to a first subprime mortgage crisis in
1997–8, 10 years before the second subprime crisis. Party as a result of the
crisis, many specialised subprime lenders were acquired by general banks. The
growth of subprime lending halted for a few years, but picked up again after 2000
when subprime loans were no longer exclusively targeted at borrowers with low credit
scores; ‘exotic’ mortgages were designed to be sold to middle class borrowers,
in particular in rapidly growing parts of the country (Ashton 2009).
As a result, the fastest increases in defaults and
foreclosures in recent years were not in the Rustbelt but in the Sunbelt where
housing prices had been going up most rapidly and exotic mortgages with
adjustable interest rates and teaser rates were more common.
Compared with fixed-rate mortgages, adjustable rate
mortgages (ARMs) are more than twice as likely to default (Schloemer et al. 2006).
Since most of these ARMs were originated in 2005 and 2006 with 2 or 3-year
low-interest teaser rates (so-called 2/28 and 3/27 loans), their interest rates
were going up rapidly in 2007 and 2008, with even higher defaults and
foreclosures as a result. It is estimated that about $1 trillion in ARMs were
subject to resetting interest rates in 2007 – more than 10 times as much as in
2005. The loan sum of almost a quarter of the ARMs was bigger than the value of
the house (Cagan 2007). This is already problematic, but becomes very dangerous
when interest rates go up and housing prices down. Cagan shows that with
housing price declines of 10 per cent, almost half of the ARMs would have
negative equity. In fact, just 2 years after the top in 2006, housing prices
have fallen by 20 per cent nationwide, 30 per cent in big cities like Las
Vegas, Miami and Phoenix and even more in some smaller cities.
A few years ago, the top 10 of foreclosure cities almost
exclusively consisted of Rustbelt cities. In 2007, when the crisis started, the
list was a mix of Rustbelt and Sunbelt cities, but since the summer of 2008,
the top 10 of foreclosure cities is entirely made up of Sunbelt cities. There
are several of such foreclosure lists and they look slightly different, but generally
speaking cities in California now make up more than half of them, with cities
in the South and Florida completing the list. The differences across the US are
huge: the foreclosure rate in Richmond,
VA is almost 100 times as low as in Stockton, CA, the foreclosure
capital, as about 5 per cent of Stockton’s homes are currently in foreclosure. Housing
prices can go down because of a structurally faltering economy, like in the
Rustbelt, but also because they have been going up extremely fast, like in many
cities in the Sunbelt.
Housing prices in the Sunbelt were simply more
inflated than elsewhere in the US: the housing bubble was bigger and more likely
to burst. In addition, some local and regional economies in the Sunbelt also
show signs of a declining economy, perhaps not structurally, as in the
Rustbelt, but conjuncturally. Finally, high economic growth also meant a lot of
new construction and more homeowners who recently bought a house, thereby
increasing the pool of possible victims of falling housing prices.
A weak economy and a housing bubble together explain a
great deal of the variation in default and foreclosure rates across the US, but
one other factor is also important: regulation. Lately, we have read a great
deal about how regulators have failed to see what could go wrong in the
mortgage market. This is partly true: many regulatory agencies have not done a
lot to prevent the current crisis. Yet, it is also the deregulation and re-regulation
of mortgage and credit markets that have enabled both securitisation and subprime
lending. Rather than turning a blind eye, the re-regulation of the mortgage
market has been a political project and, as such, part of a wider
neoliberalisation of states and markets alike. The outcomes are partly an intended
consequence of continuous negotiation between lenders, securitisers,
politicians and regulators, and partly an unintended consequence of related
legislation. One important outcome is that non-bank lenders, who provide the
lion’s share of mortgage loans, face a dramatically weaker regulatory regime
than bank lenders. This is not the place to review how regulation and
deregulation have enabled, and indeed stimulated, securitisation and subprime lending
– other have done this job in more detail (most notably Gotham 2006; Immergluck
2009; see also Squires 2004; Dymski 2007; Ashton 2008). Here it is important to
note that because of failing federal regulation of mortgage markets, several
states in the US have geared up their own regulations to impede some of the
many excesses of subprime lending. As Wyly et al. (2009) show, states
like North Carolina, New Mexico, Massachusetts and West Virginia regulate a
wide range of practices, related to foreclosure rules, loan flipping, prepayment
penalties amongst others. New Mexico, for example, introduced the Home Loan Protection
Act (2003).
Not only has the level of regulation varied from state
to state, but also the quality of oversight. In many cases local and state
initiatives, however, were blocked by state and federal institutions. North
Carolina passed tougher predatory lending laws but faced opposition from two federal
agencies (pre-emption). Since 2000 Cuyahoga Country, Ohio, which includes Cleveland,
has seen 80 000 foreclosures on less than 400 000 properties (Simon 2008). The
city of Cleveland, one of the early Rustbelt victims, replied by introducing local
measures to make predatory lending more difficult, but the state of Ohio –
heavily lobbied by Ohio banks (Hirsch 2008) – deemed these illegal as authority
lay with the governor and not the city (pre-emption).
The geography of
predatory lending
The financial crisis is not simply a result of the growing
number of defaults and foreclosures – these are symptoms of the crisis. The
crisis originates in a subset of subprime lending known as predatory lending. Predatory
loans are designed to exploit vulnerable and unsophisticated borrowers. A
predatory loan has one or more of the following features (NCRC 2002, 4; cited
in Squires 2004):
1 higher interest and fees than is required to cover
the added risk of lending to borrowers with credit imperfections;
2 abusive terms and conditions that trap borrowers and
lead to increased indebtedness;
3 fails to take into account the borrower’s ability to
repay the loan;
4 violates fair lending laws by targeting women, minorities
and communities of colour.
Most subprime and predatory loans are granted to people
to refinance their mortgages or as second mortgages. This means that most of
these loans do not enable homeownership among low-income and minority groups,
as is often argued. Subprime, and in particular predatory, loans are targeted
at low-income and minority populations, often living in areas with high
unemployment and declining housing values (Hernandez 2009; Newman 2009;
Pennington-Cross 2002; Squires 2004; Wyly et al. 2009). Even after controlling
for borrower and lender characteristics, African–Americans relatively speaking
receive more than twice as many high-priced loans as Whites (Schloemer et
al. 2006). Almost half of the loans in minority areas are high-priced
compared with 22 per cent in predominantly white areas (Avery et al.
2007); 20 per cent of all loans in minority areas are classified
as ‘high risk’ compared with only 4 per cent in white areas (Bromley et al. 2008).
Many of these communities were ‘underserved’ as a
result of earlier waves of redlining, the place-based exclusion of financial
services. Decades of financial deregulation have not resulted in wider access
to mainstream financial services, but in a two-tier banking system with mainstream
finance in most places next to a landscape of financial exclusion and predatory
lending where banking services and the number of bank accounts have declined
and fringe banking (pawn shops, payday lenders etc.) and predatory lending
flourishes (Caskey 1994; Dymski 1999; Immergluck 2009; Leyshon and Thrift 1997;
Squires 2004). Both quantitative and qualitative research shows that ‘subprime
loans are making credit available in communities where credit likely
historically has not been – and likely still is not – as readily available’
(Goldstein 2004, 40). The old geography of redlining and financial exclusion has
not disappeared, but has been replaced – and to a large extent reproduced – by
a new geography of predatory lending and overinclusion. This is why Squires
(2004) refers to predatory lending as ‘the new redlining’. In line with Harvey (1985),
we can see how, through subprime lending, the urban has become the place of
capital extraction (Wyly et al. 2004; Newman 2009).
Predatory lenders make profit ‘by stripping equity and
wealth from home owners in underserved communities through highcost refinance
loans’ (Taylor et al. 2004, 27). Teaser rates and other tricks are used
to sell these loans. Rapidly increasing interest rates and balloon payments are
used to increase returns, and in some cases also to increase the likeliness of
default. Repeated default then allows lenders to repossess homes and acquire
equity. In this way lenders do not enable homeownership but effectively strip home
equity from borrowers. This frequently leads to mortgage foreclosures at the
individual level and housing abandonment at the neighbourhood level. It is not
just defaulting borrowers who are hit; in addition, there are severe spill-over
effects on housing prices, crime and neighbourhood decline (Immergluck 2009; Lardner
2008; Newman 2009). Areas that are over 80 per cent minority have more than
five times as many foreclosures as areas that are less than 10 per cent
minority (Smith 2008). Although some cities in the Sunbelt are now hit harder
than those in the Rustbelt, on a neighbourhood level the Rustbelt still tops
the foreclosure lists. On the list of most foreclosed zip codes, four are now
in Detroit; the Slavic Village in Cleveland has the most foreclosure filings. This
neighbourhood was hit hard by redlining and suburbanisation from the 1950s
onwards. Due to a combined economic and foreclosure crisis, demand for housing
has fallen so dramatically, that one can now buy many homes in the Slavic
Village that are priced under $30 000; on eBay you could even buy one for less
than $5000. The Slavic Village, now referred to as foreclosure’s ground zero,
has seen a rapid increase in crime (Christie 2007).
Besides borrowers and neighbourhoods, municipalities are
also hit hard because tax income goes down due to foreclosed properties and
lower real estate prices, while expenses are increasing as a result of
foreclosures and property crime. Local governments around the country have cut
expenses on education, infrastructure and social services. The public school
system in California alone faces a loss of $4 billion in funding. Foreclosure
rates are now so high that we may expect three million foreclosures by the end
of 2008. If housing prices keep on falling, job losses increase and inflation
keeps on rising, 2009 may be even worse, especially since very little of the
$700 billion plan is designated to help defaulting homeowners from being
foreclosed on. The American Housing Rescue and Foreclosure Prevention
Act (2008) will probably help up to 500 000 homeowners (most of whom are not
in default), but since foreclosures for 2007–9 may add up to 8 million,
this is far too little.
The next Wall Street
Just as the financial crisis of the late 1980s led to
a bank merger and acquisition (M&A) wave (Dymski 1999), the present crisis
will also lead to a new M&A wave. So far, much of the M&A activity is
government initiated: at the time of writing (September/October 2008) banks and
other financial institutions are collapsing, get bailed out, bought up and
nationalized on a daily basis. We can see how some big financial conglomerates
are growing even bigger, partly as a result of government-engineered M&As.
JP Morgan Chase and Bank of America seem to be two of the big banks that become
even bigger, but outside the US, we can also see M&A activity. Banco
Santander, Spain’s biggest bank, for example, has been buying national and
foreign banks for a number of years, but is now increasing its activity with
the acquisition of Sovereign Bancorp (US), former building society Alliance
& Leicester (UK) and parts of savings bank Bradford & Bingley (UK). The
credit crunch will likely force more financial institutions into M&As, not
just nationally, but also internationally. Another consequence of this crisis
is a shift in who owns financial institutions. For example, the Abu Dhabi Investment
Authority, a sovereign wealth fund, is now the largest shareholder of
Citigroup; Prince Alwaleed Bin Talal Al Saud of Kingdom Holding of Saudi Arabia
the second largest. In the past, crises in ‘the West’ often had severe
consequences for ‘the Rest’ as investors would usually flee and re-concentrate
on the West. Oil-exporting countries as well as the so-called BRIC countries
(Brazil, Russia, India and China) are all hit by this crisis, but this crisis
has generally hit the West more than the Rest. Brazil is said to have $200
billion in reserves, China $1800 billion. Even though many of these countries
are still export dependent, they are now less export dependent than they were
10 or 20 years ago, as their national markets have grown and trade between
non-Western countries is also on the rise.
As a result, we may also see a shift in the dominance of
financial centres. The financial crisis does not directly lead to the fall of
Wall Street (New York) and The City (London), but it does accelerate the trend
towards a shift in financial centres. There are now more secondary financial
centres in the world and the centres of increasing importance are to be found
outside Northern America and Europe. As the German finance minister, Peer
Steinbrück, recently said: ‘This world will become multi-polar’ (cited in Benoit
2008). He expects the emergence of stronger, better capitalised centres in Asia
and Europe, but considering how much Europe is hit by this crisis and how fast
Asia’s economies are growing and changing, a shift towards Asia seems more likely.
As Asian economies grow and their current account surpluses grow alongside
them, Asian money becomes more and more important globally. While the US over
the last 10 years had an average current account deficit of $800 billion,
several East Asian countries together had an average $400 billion surplus, more
than a third of the world’s surplus. China and Japan have the largest surpluses
in the world (currently $372 billion and $213 billion). Other countries with big
surpluses (in absolute rather than relative terms) are European countries like
Germany, Switzerland, Norway and the Netherlands; the Middle Eastern states of
Saudi Arabia, Kuwait and the United Arab Emirates; and Eurasian giant Russia.
The chief economics editor of the Financial Times, Martin Wolf (2008), suggests
that among the most important tasks ahead is to create a system of global finance
that allows a more balanced world economy, with excess savings being turned
into either high-return investment or consumption by the world’s poor, including
in capital-exporting countries such as China. A part of the answer will be the development
of local-currency finance in emerging countries, which would make it easier for
them to run current account deficits than proved to be the case in the past three
decades.
Related to this, Thaksin Shinawatra (2008), the former
prime minister of Thailand, recently proposed to construct a basket of Asian
currencies which could be used for packing Asian bonds and then be traded on
the financial markets of Tokyo, Singapore and Hong Kong. Asian economies may
increasingly want to turn their current account surpluses into profitable investments
while at the same time withdrawing from the US dollar as the global reserve
currency. Many Asian currencies may be considered too volatile and in some cases
too small, but a basket of currencies – in some ways like the Euro started out when
it was still the European Currency Unit (ECU) – would spread volatility risk,
disengage from the risky US dollar, and shift power from those on the receiving
end to those on the giving end. In addition, stronger Asian currencies, whether
weighed in one basket or not, would allow Asian customers to buy goods from
outside their own country more easily, which in return would benefit other
economies. The increased role of Asian investment, combined with a rise in the
importance of Asian currencies, will help to increase the role of Asian
financial centres.
Many in the financial sector now consider Chung Wan/Central
(Hong Kong), not Marunouchi (Tokyo), the runner-up behind The City and Wall
Street. But the rise of Hong Kong is contested by other fastgrowing financial
centres such as DIFC (Dubai), Lujiazui/Pudong (Shanghai), Bandra-Kurla
(Mumbai), and Shenton Way/Raffles Place (Singapore). Nevertheless financial centres
do not simply pop up where the money comes from – the availability of skilled personnel
and the regulatory environment are at least as important as the access to
financial markets (Mainelli 2006). The stability of a country and its political
regime are also crucial. Therefore, Singapore and Hong Kong (with its special
status) are better positioned than Mumbai and Shanghai. In addition, quality of
life and cultural factors also play a role:
London and New York are not just global financial centres,
they are also global cultural centres. Most of the financial centres in Asia
are merely national cultural centres. Dubai may be investing heavily in high
culture; it lacks the cultural networks of cities like London and New York.
Shanghai and Tokyo may represent important markets, but these cities may be too
Chinese and Japanese respectively to become expatriate magnets. Again,
Singapore is positioned better. Much will depend on which cities the Chinese and
Arabs will accept as their offshore market and which cities will be accepted by
international financial conglomerates and workers as attractive financial centres.
In the coming years we will see a continued dominance of London and New York
and a number of rising stars in Asia. In time, one or two of these cities may
be able to rival the big two.
But the geography of financial centres is not merely a
global geography, it is also has a local geography as the case of New York
illustrates well. Publications such as the New York Times and New
York Magazine had headlines like ‘Wall Street, R.I.P.’ (Creswell and White
2008) and, with a reference to Tom Wolfe, ‘Good-bye, Masters of the Universe’
(Cramer 2008). In a city where 20 per cent of personal income tax and 45 per
cent of business income tax come from
Wall Street and many others are dependent on Wall Street
employees’ spending, the crisis has its own geographies. Almost a quarter of
the 188 000 Wall Street jobs may be lost and since every Wall Street job is
said to support two others in the city, the loss of jobs may be dramatic
(Gapper 2008). Prices for huge mansions in the rich suburb of Greenwich, CT –
the hedge fund capital – have fallen dramatically: the New Yorker presented
examples of mansions that were priced $25 million and sold for $8 million (Paumgarten
2008). Twenty-five miles south, 15 Central Park West, the most expensive recent
condo development in Manhattan, accommodates mostly Wall Street people, including
a dozen investment bankers. They are not expected to sell – many of them paid cash
thanks to the huge bonuses of the past years (totalling $33 billion in 2007) –
but further price increases are considered unlikely and the small but very
lucrative market for eight-figure apartments is drying up. Not only the
financial services sector, but also anyone from luxury retailers to restaurants
and from nannies to hotels is already seeing the impact: one high-end massage
therapist for example lost 50 per cent of her Wall Street clientele (Dominus
2008). Cornell Medical College received $250 million from Citigroup in 2007,
the New York Public Library $100 million from private equity group Blackstone (Gapper
2008) – in the light of the current crisis such contributions can only go down.
Conclusion
The financial crisis is redrawing the world in lots of
ways and at many levels. Financial globalisation’s impacts are logically speaking
global, but that doesn’t mean the impacts are the same around the globe. Investors
in many places had invested in RMBS and have seen the value of their securities
drop. This has affected both financial institutions and non-financial institutions.
There seem to be few financial institutions that remain unaffected by this, but
even if they were not involved in RMBS, they now feel the pains of the credit
crunch. The impact on non-financial institutions has been more spread and will,
for example, affect some towns in Norway. Housing bubbles, faltering economies
and regulation together have shaped the geography of the financial crisis on the
state and city level in the US. Subprime and predatory lending have affected
low-income and minority communities more than others and we therefore not only
see a concentration of foreclosures in certain cities but also in certain
neighbourhoods, often those places inhabited by low-income and minority groups
that have been excluded by earlier rounds of exclusion and exploitation.
Locally, the impact is also felt in New York, a city that is heavily dependent
on its financial sector. Finally, we see how investors from outside Northern
America and Europe come to the rescue by not selling stocks in financial firms
when others do – and by even investing additional billions of dollars, thereby
slowly but surely expanding their reach. Increasingly, stocks in financial
firms are held by investors outside the developed world. After decades – or one
could argue, centuries – of uneven globalisation, we can witness the rise of
what we could call ‘reversed globalisation’ or ‘globalisation has come full
circle’ as investments and returns are now moving in both directions.
Structurally increasing oil prices (despite temporarily declining oil prices)
and the rise of many emerging economies, two of them backed by billion-people
populations, have contributed to a shifting global power balance. The long-term
economical and political consequences of this are still unknown, but it is clear
that some financial centres in Asia will become more important now that globalisation
is coming full circle. Yet, the meanings of globalisation, not unlike the
causes and consequences of this crisis, remain geographically uneven. It is
important to understand that geography is an essential element in both, and
that the fates of places like Stockton and Narvik are not only related to each
other, but also to those of Wall Street and Raffles Place. The space of places
is intrinsically linked to the flow of spaces.
