An Economic Meltdown Primer
Mar. 16th, 2008 11:16 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peristaltorJerome a Paris wrote a wonderful recap of the causes of our current economy's bad, bad problems. Some predicted this housing meltdown years ago: "The fact is that the boom in house prices in the US is outstripping any growth in the average wage - which essentially means that, at some point, the prices will have to fall."
And fall they did, didn't they? I found Jerome a Paris' description of why they fell concise and illuminating:
I emphasized that phrase because the word "emergency" seldom refers to unforeseen crisis. The housing market crash certainly constitutes crisis; those homeowners, faced with staggering payment increases without a corresponding increase in income, have a very real personal financial crisis emergency, a potentially unresolvable situation (sometimes resolved with nihilistic desperation). Some people, however, did see it coming, as the first quoted post reveals. Like a car driving too fast in poor conditions, the crisis literally emerges from the factors that, once set in motion, take their inevitable toll. Other coming emergencies might be prove just as foreseeable.
I got to thinking once again about what is going to happen when millions of boomers retire at once, and try liquidating their retirement portfolios at roughly the same time. I think this situation mirrors Jerome's twin crisis of liquidity and solvency. I was discussing my thoughts with a professional economist friend of mine, who doubts there will be a crash in stock values as I anticipate. I asked him why he thought the stock market was more robust than the current housing market.
He didn't know. He literally assumed there would be US securities buyers from more financially responsible countries waiting to pick up a bargain. I countered with two observations. First, "bargain hunters" by definition only buy once the price has fallen drastically, something that really doesn't help the retiring seller. Re-read Jerome's quote to understand this. Secondly, I noted that these same countries did buy our securities recently, many of these based on sub-prime paper, rendering them of dubious value. With this lesson so recently learned, why would they again reinvest our publicly-held industries?
He countered that the value of stock is based on the financial situation of the company it represents, and that the sale price should reflect that. I noted the same is true in the housing market, that the better homes sell for more than others, yet even the best homes fail to sell when there are no buyers. "How much is your house worth?" I asked.
"Whatever someone is willing to give me," he answered.
"Exactly."
I didn't intend to sound entirely doom-and-gloomy. I actually started posting after reading the end of Jerome's article, where he discusses a financial strategy alternative to our current credit-based illusion of wealth.
Here he is actually re-articulating elements of Energize America, an inspiring manifesto I have mentioned before and which has received too little attention. My favorite of the 25 Acts remains Act I -- The Passenger Vehicle Fuel Efficiency Act ("500mpg Cars"), where current CAFE standards are scrapped in favor of a market-driven "feebate" approach to valuing efficiency:
I love this approach simply because it attempts to reestablish the market connection between automobile manufacturers and drivers, a connection lost when the auto dealership system was established. The other 25 Acts deal with transportation efficiency, passenger rail restoration, clean coal generation, wind and solar production incentives, home efficiency . . . acts which should effectively pour liquid capital into efforts that improve our economy's basal consumption and thus our future.
Of course, none of this is going to happen, not anytime soon. Before January 20? Highly unlikely, and I doubt much will happen soon thereafter. Sadly, we find ourselves in a situation where all of our immediate efforts must be spent putting out fires rather than spent remodeling and refitting the fire station. Iraq and the ill-will it generates in much of the world, our falling worldwide fuel reserves, this country's completely gefucked and underfunded health care and social security systems: These fires are raging. The best minds we have will undoubtedly not be dedicated to future strategy anytime soon.
Even my favorite Energize Act is in trouble. A variation of this Act has already been tried and scrapped in the UK (sorry, I forgot to note and cannot find the link. If anyone can find it, I would be greatly appreciative!). Why? The auto dealers hated it. It lowered sales on the highest margin product they pushed, reducing their profits. Why else?
Some change is happening, perhaps in spite of leadership efforts. Science Friday's Ira Flatow recently explored the promise of solar thermal power, which is very close to cost-competitive with petroleum and natural gas generation. The one common element all players in the solar thermal game emphasize? The need for financial incentives to even the cost-competitiveness with carbon fuels. STP might eventually become dominant, they say, but it's something the country needs now, not later.
Which is a simple fact more need to foresee. . . lest more troubles emerge.
And fall they did, didn't they? I found Jerome a Paris' description of why they fell concise and illuminating:
A crisis of liquidity means that you have assets, but cannot sell them in time to pay the debts you have. A crisis of solvency means that the assets you have are worth less than what you owe. It is often hard to tell which is which (is your asset illiquid because it takes time to sell, or because it is worth less than you are expecting to get for it?). A liquidity crisis can turn into a solvency crisis, if people are forced to liquidate assets in emergency fashion, and thus to drop prices to raise cash as quickly as possible - thereby creating market prices for these assets that are lower than before, and putting others that hold similar assets in the situation where their assets are suddenly worth less. (Emphasis mine.)
I emphasized that phrase because the word "emergency" seldom refers to unforeseen crisis. The housing market crash certainly constitutes crisis; those homeowners, faced with staggering payment increases without a corresponding increase in income, have a very real personal financial crisis emergency, a potentially unresolvable situation (sometimes resolved with nihilistic desperation). Some people, however, did see it coming, as the first quoted post reveals. Like a car driving too fast in poor conditions, the crisis literally emerges from the factors that, once set in motion, take their inevitable toll. Other coming emergencies might be prove just as foreseeable.
I got to thinking once again about what is going to happen when millions of boomers retire at once, and try liquidating their retirement portfolios at roughly the same time. I think this situation mirrors Jerome's twin crisis of liquidity and solvency. I was discussing my thoughts with a professional economist friend of mine, who doubts there will be a crash in stock values as I anticipate. I asked him why he thought the stock market was more robust than the current housing market.
He didn't know. He literally assumed there would be US securities buyers from more financially responsible countries waiting to pick up a bargain. I countered with two observations. First, "bargain hunters" by definition only buy once the price has fallen drastically, something that really doesn't help the retiring seller. Re-read Jerome's quote to understand this. Secondly, I noted that these same countries did buy our securities recently, many of these based on sub-prime paper, rendering them of dubious value. With this lesson so recently learned, why would they again reinvest our publicly-held industries?
He countered that the value of stock is based on the financial situation of the company it represents, and that the sale price should reflect that. I noted the same is true in the housing market, that the better homes sell for more than others, yet even the best homes fail to sell when there are no buyers. "How much is your house worth?" I asked.
"Whatever someone is willing to give me," he answered.
"Exactly."
I didn't intend to sound entirely doom-and-gloomy. I actually started posting after reading the end of Jerome's article, where he discusses a financial strategy alternative to our current credit-based illusion of wealth.
And the solution is simple: stop debt (this is happening on its own anyway). and boost income.
How do you do that when there isn't enough money around?
By creating real activity rather than the money-shuffling kind.
And, as it were, there is a sector that is "real" and has an urgent need for action: infrastructure, and in particular energy-related infrastructure.
A plan that focuses on a few simple things:massive public support for energy efficiency refurbishment of existing homes; a massive, New Deal rural electrifaction scale plan to build renewable energy assets and the corresponding grid infrastructure; a similarly massive plan to develop smart public transportation, both locally and intercity. . . .
Here he is actually re-articulating elements of Energize America, an inspiring manifesto I have mentioned before and which has received too little attention. My favorite of the 25 Acts remains Act I -- The Passenger Vehicle Fuel Efficiency Act ("500mpg Cars"), where current CAFE standards are scrapped in favor of a market-driven "feebate" approach to valuing efficiency:
The Passenger Vehicle Fuel Efficency Act will provide Americans who buy a new car, SUV or light truck with a $200 rebate for every "mpg equivalent" the vehicle comes in above the average for new cars, adjusted annually. . . . For example, a 2006 Ford Escape hybrid, which has a 33mp rating, would qualify for a rebate of $2,200 ($200 x 11mpg, based on the current 22mpg average for light vehicles in America). At the same time, a fee of $150 per mile per gallon equivalent would be applied against vehicles falling below the fleet average. Thus, the Hummer H2 -- with a reported 9mpg -- would have a $1,950 fee added to its price in 2006. . . .
I love this approach simply because it attempts to reestablish the market connection between automobile manufacturers and drivers, a connection lost when the auto dealership system was established. The other 25 Acts deal with transportation efficiency, passenger rail restoration, clean coal generation, wind and solar production incentives, home efficiency . . . acts which should effectively pour liquid capital into efforts that improve our economy's basal consumption and thus our future.
Of course, none of this is going to happen, not anytime soon. Before January 20? Highly unlikely, and I doubt much will happen soon thereafter. Sadly, we find ourselves in a situation where all of our immediate efforts must be spent putting out fires rather than spent remodeling and refitting the fire station. Iraq and the ill-will it generates in much of the world, our falling worldwide fuel reserves, this country's completely gefucked and underfunded health care and social security systems: These fires are raging. The best minds we have will undoubtedly not be dedicated to future strategy anytime soon.
Even my favorite Energize Act is in trouble. A variation of this Act has already been tried and scrapped in the UK (sorry, I forgot to note and cannot find the link. If anyone can find it, I would be greatly appreciative!). Why? The auto dealers hated it. It lowered sales on the highest margin product they pushed, reducing their profits. Why else?
Some change is happening, perhaps in spite of leadership efforts. Science Friday's Ira Flatow recently explored the promise of solar thermal power, which is very close to cost-competitive with petroleum and natural gas generation. The one common element all players in the solar thermal game emphasize? The need for financial incentives to even the cost-competitiveness with carbon fuels. STP might eventually become dominant, they say, but it's something the country needs now, not later.
Which is a simple fact more need to foresee. . . lest more troubles emerge.