Against the backdrop of sweeping Republican advance in the 2010 us mid-term elections—a surge of 64 seats to take the House of Representatives, six more senators and eleven new state governorships—California stands out.footnote¹ The Golden State confirmed its position as the country’s Democratic stronghold, delivering convincing wins for the party’s candidates in the gubernatorial and Senate elections. Democrats retained a solid two-thirds majority—32 out of 53—of the state’s delegation to the House of Representatives and held onto their heavy majorities in the State Senate (25–15) and Assembly (52–28).

That California bucked the anti-incumbent trend this November is all the more striking, given that the state has been battered by the Great Recession and boasts the third-highest unemployment rate in the country—at 12 per cent, only Nevada’s and Michigan’s are higher. Indeed, California played a leading role in triggering the us economy’s slide after 2007—a bleak inversion of its longstanding historical role. From the gold rush of the 1840s to the hi-tech boom of the 1990s, it was a world centre for inventiveness and fantasy production. The crucible for much of the economic, political and technological character of the American Century, it has been the leading engine of the us economy for most of the last fifty years. Yet today it is sputtering badly. What explains this disturbing turn of events?

Since the apotheosis of the state’s favourite son Ronald Reagan, California has been at the forefront of the neoliberal turn in global capitalism.footnote² The story of its woes will sound familiar to observers across Europe, North America and Japan, suffering from the neoliberal era’s trademark features: financial frenzy, degraded public services, stagnant wages and deepening class and race inequality. But given its previous vanguard status, the Golden State should not be seen as just one more case of a general malaise. Its dire situation provides not only a sad commentary on the economic and political morass into which liberal democracies have sunk; it is a cautionary tale for what may lie ahead for the rest of the global North.

More than any other place except Wall Street, California was responsible for the bubble economy of the 2000s, and for the disaster that followed.footnote³ The financial bubble that burst in 2008, bringing about the collapse in investment banking in New York, had been centred on mortgage lending in the us housing market. While the alchemy that turned secondary mortgages into credit derivatives and investment vehicles took place on Wall Street, the lending itself was concentrated in what were called the ‘sand states’: Florida, California, Arizona and Nevada. The principal fount of mortgage origination was California, which served as the us’s equivalent of Spain—the speculative frontier of a continent. Though around 15 per cent smaller than Spain in terms of area and 20 per cent smaller in terms of population, California’s gdp is a third larger, which puts it among the world’s top ten economies.

Between 2000 and 2008, the state’s lenders issued 6 million original mortgages and 10 million refinance loans, worth $3–4 trillion—about 20 per cent of all us mortgage lending. California was, moreover, responsible for a stunning 56 per cent of the $1.38 trillion in subprimes issued nationally in 2005–07. The state was home to the top five subprime lenders: Countrywide Financial, Ameriquest Mortgage Bank, New Century Financial, First Franklin Bank and Long Beach Mortgage Bank. Hyperactive finance was not new to California: in the 1980s it featured Michael Milken’s junk-bond mania and the Savings & Loan implosion, and in the 1990s it was the heartland of the largest stock bubble in history, as investment in the marvels of Silicon Valley pushed the nasdaq to uncharted heights.

The booming mortgage business of the new century nonetheless produced a significant expansion of the financial sector. Between 1996 and 2006, the number of jobs in finance, insurance and real estate (fire) rose by 27 per cent to almost one million. No state had more real-estate agents, brokers and mortgage sellers—60,000 by 2008. They and their backers in the banks were happy to funnel the billions of investment dollars showered on them by Wall Street to unsuspecting homebuyers. Californians by the hundreds of thousands were cajoled into subprime mortgages with no down-payment, teaser rates, adjustable rates and paltry documentation.

Fuelled by mortgage mania, the housing bubble blew up more dramatically in California than anywhere else in the us. Home prices had already eclipsed those in the rest of the country in the 1970s; they powered further ahead during the booms of the 1980s and 1990s, before surging in the 2000s. At the peak of the bubble in 2006, the median house price hit $594,000—more than two and a half times the national average of $221,000 (see Figure 1 above). The San Francisco Bay Area boasted the highest prices of any metropolitan region in the country, at nearly quadruple the national average. In no other state except Hawaii is housing so unaffordable. With the average house selling, in 2006, at over ten times the median income of $57,000—a ratio comparable to those in London or Tokyo—this was fertile ground for the peddlers of subprime loans, as young people stretched their incomes to buy overpriced houses and older people refinanced their homes to help out their children, all on the premise that house prices would never stop rising.