Introduction
There is something unique about the way in which cities have grown and transformed in recent decades that relates to the financialization of the economy in general and to the real estate and urban development sectors in particular. Globalization scholars have proposed that political and economic transformations related to the adoption, at the national level, of neoliberal policies have often included financial liberalization and have just as frequently contributed to rising urban inequality (Sassen 2011). These analysts have pointed to a relationship between the penetration of global capital into local development projects and real estate restructuring, a process marked by verticalization of the industry and the increased primacy of exchange values relative to user values in development decisions (Fainstein 1994, Logan 1993). Integration of property and financial markets has also been associated with urban sprawl (Knox 1993) and inner city gentrification (Smith 1996). Recent financialization literature has explored the specific mechanisms through which otherwise opaque, place-based commodities have been transformed increasingly into financial assets tradable in the global market (Aalbers 2008, Gotham 2006, 2009, Newman 2009) and examined the role of the state as a key agent in such initiatives (Gotham 2009, Weber 2010). These authors have also posited a relationship between rising financialization and growing inequality (Aalbers 2011, Fields 2013, Gotham 2014).
Financialization of the urban: what is it?
To explore this topic, it is important to define it. Economic financialization, which began to occur in the United States (US) and United Kingdom in the late 1970s and 1980s as part of a transition from Post World War II Keynesianism to Neoliberalism, is a pattern of accumulation characterized by a shift from commodity to finance production (Krippner 2005). Financialization of the urban is a product of economic financialization and involves the integration of property and financial markets through restructuring of the real estate sector and urban policy. This dynamic seeks to accord liquidity to real estate assets that are otherwise inherently ‘fixed,’ so as to facilitate global trading (Aalbers 2008, Gotham 2006 2009).[1] Moreover, it involves the financialization of city bonds and adoption of “new, risk-laden instruments to [municipal] debt portfolios” (Weber 2010: 256) as a way to attract private capital to invest in public infrastructure and services. As such, the financialization of the urban is marked by the transformation of “mortgage markets as facilitating markets to mortgage markets as markets in their own right” (Aalbers 2008: 150).
The financialization of the urban occurs through a series of mechanisms involving state-driven deregulation of the finance and banking industry, development and adoption of new monetary products involving higher investment risk, strategic incorporation of mortgage markets and intensification of pro-growth alliances between local and state level administrations and rent seeking private developers (Weber 2013, Gotham 2014). Scholars concerned with these processes have investigated the specific circumstances in which they take place in order to identify their associated characteristics and outcomes.
The restructuring of the real estate mortgage industry in the US in recent decades is one example of state-led financialization that expanded an urban market (i.e., commercial and housing mortgages) by exposing buyers to greater risk, and that ultimately resulted in the creation of a new form of inequality. In the housing sector, government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac, and the public institution Ginnie Mae,[2] deregulated the nation’s housing finance system to attract global investors to the secondary mortgage market. They did so by integrating localized property loan markets into a single system, and by creating “a system of credit score and risk-based pricing” (Aalbers 2008: 154). This framework stimulated subprime and predatory mortgages that were further securitized and sold in the financial markets. This turn ultimately led to the housing bubble and foreclosure crisis (Gotham 2009). This major change in the US housing finance system and subsequent crisis affected not only the overall American economy, as represented by the great recession of 2007-2009, but also, and disproportionately, racial and economic minorities targeted for the underwriting of subprime and predatory loans (Squires, Hyra, and Renner 2009, Wyly et al. 2009). This shift resulted in what Aalbers (2011) has dubbed a new geography of exclusion and affected millions of families directly via foreclosure and reduced access to affordable mortgages.
Other scholars in the literature have examined financialization from the perspective of urban policy and offered in-depth, case analyses of local economic development processes such as municipal tax increment financing (TIF) and, more recently, disaster recovery zones. TIF “allows municipalities to bundle and sell off the rights to future property tax revenues from designated parts of the city” (Weber 2010: 251). These policies are risky because municipal bonds are issued based on an estimated or expected property value increase, and a different-than-predicted outcome can lead to tax default. At the same time, ‘successful’ TIF districts can represent a financial burden on a targeted area’s lower income residents who may be unable to afford a required property tax price increase. One analysis of TIF development in Chicago between 1996 and 2007, for example, indicated strong mayoral control and close association between elected officials and a small number of development firms and intermediaries resulting in “the extraction of near monopoly rent for development services” and oversupply of real estate (Weber 2010: 269). In another analysis of the Gulf Opportunity (GO) Zone, set up in response to the disaster in that region following hurricanes Katrina and Rita, the author found that the initiative “operated as a state supported financialization strategy that reflected and reinforced socio-spatial patterns of uneven development” (Gotham 2014: 2-3). The Zone inaugurated a disaster recovery model based on the distribution of financialized tax incentives to attract private actors to invest in devalued assets. Gotham (2014: 14) has observed that a significant share of Gulf Opportunity program development incentives were directed towards large transnational corporations rather than disaster affected communities. Furthermore, by relying on private investment decisions based on risk assessment, the GO Zone strategy reinforced existing patterns of uneven development while also opening vulnerable disaster areas to the volatilities of the financial market. Public TIFs and financialized disaster recovery zones carry a high level of uncertainty due to their dependence on private developer decisions. They are also quite risky as a result of their reliance on securitized interest-bearing capital. More importantly, most of the risk assumed in such transactions is imposed on city residents and local governments, while private developers enjoy significant benefits (Weber 2010, Gotham 2014).
Conclusion: Why does financialization of the urban matter?
Urban inequality is on the rise in the US (Baum-Snow, Freedman, and Pavan 2014). Periodic capitalist crises such as the subprime-led foreclosure recession of 2007-2009 in the US and around the world affect vulnerable individuals and communities disproportionately. The financialization of the urban is an on-going process that is constantly being adapted to new contexts, as exemplified by disaster recovery efforts through GO Zones. Understanding the multiple ways in which this trend manifests itself in different settings and investigating whether it reinforces or creates additional forms of inequality is a necessary first step in efforts to protest and ultimately transform it.
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[1] Historically, the real estate market has been characterized as illiquid, immobile and spatially fixed (Gotham 2009: 359) as a result of the built environment’s relative longevity, and the effect of location on property value. While open floor plans have allowed for flexible unit size (i.e., single or multiple) and type (i.e., commercial, residential or mixed use), property assets evidence a noteworthy turnover period when compared to other commodities, such as apparel or electronics. Furthermore, local characteristics, such as infrastructure and available services, significantly affect property value. ‘Capital fixity’ makes property unattractive to financial investors seeking more liquid investments (Fainstein 1994).
[2] These are, respectively, the National Mortgage Association, the Federal Home Loan Mortgage Company and the Government National Mortgage Association, best known by their above-mentioned nicknames.
References
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Priscila Izar is a fourth year PhD student and graduate research assistant in the Planning, Governance and Globalization Program at the National Capital Region. She explores the relationship between globalization, transformations in the real estate sector and the built environment, and social justice, in the US and international contexts. Priscila holds an MA in International Development Policy from Duke University (2000) and a professional degree in Architecture and Urban Planning from Mackenzie University in Brazil (1992).