Financialisation is worsening the housing crisis, and to understand why and how, we must abandon the myth that banks merely lend out the savings of other customers
First, you need to forget how you probably think banks work. Most of us are taught at school, university and through the media that banks take in savings and then lend the savings out as loans.
This is not how it works at all. Banks do not need to possess savings (capital). Instead, they possess a government provided “para-economic privilege” to create money out of thin air.
When a bank approves a loan, it simply types numbers into a computer and new purchasing power is born. This is not the recycling of a grandmother’s savings account; it is the creation of new money, determined solely by the bank’s profitability metrics.
Don’t confuse this for “fiat money theory” that underpins a lot of the right-wing, libertarian conspiracists that push Bitcoin and physical gold. Under fiat money theory, the central banks — the government — creates the money, and the commercial banks operate as neutral intermediaries, like a warehouse. Under fiat money theory, the prime movers are the central banks that control money supply to the banks.
The ideology of fiat money libertarians and right-wingers is to criticise the government — central banks — through claims that the central banks create money to fund immoral, profligate government spending, leading to hyperinflation and the debasement of currency.
However, the reality is that the commercial banks, not central banks, are the primary source of new money. They decide the volume of the money supply based on profitability, not public need.
The central banks are the reactive servants to private, profit-driven decisions — they subsidise the commercial banks by guaranteeing their bad debts. For example, the Australian government provides a guarantee for deposits for the big banks. (The government also subsidises the asset owners through tax policy like negative gearing and the capital gains discount.)
The housing crisis therefore is not just a result of a lack of supply, landlords or hoarding developers. The distinction of how commercial banks create and then distribute money in a financialised economy is crucial to worsening the housing crisis.
Banks prefer to create money for transactions that are backed by collateral, making real estate the perfect target.
Since the 1990s, it is estimated that only about 15 per cent of new loan capital has been created for productive investments in the real economy (like building factories or funding start-ups). The vast majority, roughly three-quarters of all credit volume, has been created to purchase existing assets, primarily real estate.
This creates a vicious cycle. Commercial banks create, then pump massive amounts of new money into the housing market.
When you flood a market with purchasing power (credit) to buy a limited supply of goods (houses), the price of those goods inevitably rises.
This massive expansion of mortgage credit drives up the price of housing continuously, decoupling it from wages and the real economy.
Combined with how banks make housing more expensive is the issue of asset inflation. Asset inflation is the rise in the price of assets (including housing, but also company shares, and bonds). It is caused by the creation of new money by commercial banks for the specific purpose of buying those assets.
It is crucial to distinguish asset inflation from consumer price inflation (the rising cost of things people buy daily in order to live, like food). While consumer inflation has increased dramatically in the past few years since the pandemic, overall inflation has remained relatively low in OECD countries since the 1980s. In comparison, asset inflation has skyrocketed.
In a financialised system, asset inflation creates a self-reinforcing loop:
- Commercial banks create money to buy houses.
- House prices rise (asset inflation).
- Because houses are now worth more, they serve as better collateral.
- This encourages banks to create more money to lend against them.
- House prices increase further (more asset inflation), ad infinitum.
This process transforms housing from a social good (shelter) into a financial asset used for speculation and wealth accumulation. Banks and the asset-owning elites are forced to pump this cycle because of the fundamentals of neoliberalism — over the past 30 years, the real economy has been hollowed and weakened so much so that the profit rate in the real economy is much lower than financialised profits
Understanding the “para-economic” power of commercial banks generally and their role in the housing crisis is essential because it reveals that the financial system acts as a mechanism for upward redistribution. The profits created have no basis in the real economy, the new money created by the banks is not connected to any real production (like a factory, machinery or employment of workers). It is pure speculation and gambling.
It also explains why just “more supply” and “less planning regulations” won’t solve the housing crisis. Building more houses will just create more assets for the already wealthy to buy. Similarly, less planning regulations won’t address the conflicted incentives of developers to profit. The property development system isn’t building houses for people to live in, it’s building assets for the wealthy to own so they can park their surplus capital.
Asset inflation does not benefit everyone equally — this is literally an example of how the axiom “a rising tide lifts all boats” is propaganda. Asset inflation concentrates wealth among those who already own assets. As housing prices skyrocket due to bank-created credit, the wealthy see their net worth dramatically increase.
Meanwhile, the working class and younger generations are locked out of ownership, forced into a “society of renters” where they pay an increasing portion of their stagnant wages to landlords. To follow the metaphor, the asset-less workers literally have no boat as the tide rises, and they’re anchored to the sea floor by chains of debt. In the past, this was called debt peonage.
Wealth accumulation at the top is predicated on the indebtedness of the bottom. It is a zero-sum extraction, not a mutual growth.
The housing crisis is a banking created (or at least, banking worsened) system that upwardly redistributes money from everyday people, workers and the middle classes, to the ultra-rich — the “patrimonial capitalists“.
Workers and the petit-bourgeoisie bear the costs of this system through incurring massive debts to secure their own house for shelter, where they incur 30-year mortgages (or rental payments) that siphon wealth — more than 47 percent of income back in 2017! — to the banks, their shareholders and the top tier of elite asset owners. Meanwhile, everyday people suffer from the instability of the financial bubbles this system creates.
Ultimately, we do not have a housing market; we have a debt market that uses houses as collateral. The banks have enclosed the most basic human need for shelter and transformed it into a high-yield asset class for the elite.
As long as we allow private corporations to create money for profit, they will always choose speculation over satisfying real human needs. They will always choose landlords over tenants and speculation over production. The solution isn’t just to build more houses, cancel mortgage debts or increase land taxes; it is also to break the banks’ monopoly on money creation. We must reclaim the power of money creation for the public good.