Wall Street and global financial markets have been on a roll-coaster, waiting for the Fed. But lowering the benchmark interest rate, now or later or both, is not going to have the desired calming effect. The best way to stimulate growth, out of the recession, is to break the mold that put the national economy in such dire straits in the first place.
We are slowly inching toward a national discussion about that mold and its nature.
Florida was the epicenter of the housing boom, now in cinders. The state's only native industry is construction and development. Here, the most powerful lobby is based on the conversion of farmland and open areas into suburban sprawl.
Today, the economic elite is counting on a timely reversal of the current malaise in order to stop the hemorrhaging of cash flow due to bloated home inventories and massive monthly cash service to lenders for speculative land purchases in the past.
What the elite tend to ignore is the overhang of massive debt piled up during the building boom, based on a bankrupt model of suburban growth.
The myth of sprawl is that platted subdivisions are “what the market wants”: it is simply not true.
The land use patterns that have scarred Florida and its wetlands, destroying drinking water aquifers and foreclosing options to environmental restoration in places like the Everglades, are because those are what the market can finance most easily, at the lowest cost.
But not just in Florida. This is the mold that put the national economy in dire straits.
Instant suburbs like Weston or Wellington or West Palm Beach—with community names as common as lakes or bays or other identifiable places—all look the same and are without cultural identity for the same economic reason that applies to growth in outlying areas across the nation.
Mortgages underlying suburbia are pooled in structured financial derivatives and sold to distant investors who require rating agencies to approve risk parameters as a condition of investment. The pooling is meant to diversify risk. It all sounded good because it looked good: it all looked the same.
Multiply the sameness of lowest cost denominator at whatever price point by 10,000 or 100,000 and you have a good picture of what has been driving the US economy, even as asset creation based on manufacturing has been drained to low-cost labor nations. Multiply the rash of defaults by 10,000 or collateral mortgage obligations now worth only 50 percent of face value, and you have a solid reason that a 25 basis point cut by the Fed, or even 50, isn’t going to calm financial markets.
Trillions of dollars of securitized mortgages have thus determined what America looks like and even how Americans are conditioned to live, enduring long commutes for instance from suburbs to places of work, depriving families of valued time together. It takes religious fervor to support the insupportable growth mold of suburbia, one reason that megachurches proliferate there.
This unspoken collaboration of Wall Street financial engineers and state and local zoning and permitting authority has been chafing environmentalists, taxpayer advocates, and community activists: that the true costs of growth should be postponed—whether infrastructure for roadways, water supply and quality, wetlands impacts, and natural habitats.
Call it what you want: a race to the bottom, the price of progress. Dancing around the problem will not do.
Congress needs to impose friction for harmful development patterns—that securitize easily—and incentives for growth that maximizes the potential for energy conservation, preservation of natural habitats, and enhancement of regions already served by infrastructure as in dense, urban regions.
At a local level, the grand poo-bahs and muftis of suburban sprawl are indignant when their mold of wealth creation is challenged: we are God-fearing contributors to the common good. We are members of the chamber and give to the YMCA. We love our Walmart, even if Walmart is the twenty third province of China.
All this is true, but it doesn’t change the fact that the growth model for the national economy, based on the values of suburban sprawl, is bankrupt.
On July 31st, I wrote a first “ open letter to Congressman Barney Frank”, chairman of the House Financial Services committee. (Our blog, eyeonmiami.blogspot.com, archives: housing crash), “The structured debt debacle in housing markets is the reverse side of the costs of suburban sprawl… Excesses of the building boom are still going on in places like Miami where local legislators are so accustomed to doing the bidding of the development lobby, they don't know any other way to behave: approving new development right into the teeth of market failure.”
Keeping development cheap as possible is not just a goal of securitization, it is the whispered fact of life of government—that future taxpayers should be held accountable for the accumulation of deficits in the current generation. This is, literally, the antithesis of conservative values presumably represented by the “free marketplace”.
Congressman Frank in his September 14th Boston Globe editorial, “Lessons of the subprime crisis” notes, “New pools of capital are structured in a fashion that allows them to avoid the scrutiny that is required of firms and financial institutions in the regulated sectors. We should not be surprised. It is a fact of life that investors and firms will seek to innovate their way around whatever regulatory strictures apply, whether they deal with health and safety, labor protections, or reporting obligations. This tendency has been exacerbated by a 30-year attack on the very notion of a regulatory role for governments and loud professions that the market not only knows best, but knows everything.”
The presidential candidates are beginning to move to the point of view that the major issue in the 2008 election will be the crisis in the nation's housing and mortgage markets.
In a Financial Times OPED on August 29th, Barack Obama ventured to the front of the pack: “Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185 million lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible… Washington needs to stop acting like an industry advocate and start acting like a public advocate.”
In July I suggested to Congressman Frank, “Call Wall Street to account, now. Hold Congressional hearings on the trillion dollar array of financial derivatives and the market the risk breeders have created that cares not a whit about the costs it imposes on society.”
Frank edges in that direction, writing, “(this) leads to a second and more difficult task that the Financial Services Committee must undertake: examining whether or not in the broader financial markets we have the same pattern that we saw in the subprime market; namely, a massive increase in innovative financial activity that brings a good deal of benefit to society, but also poses serious dangers.”
But it may be necessary for Wall Street to endure a 1000 point down day to give Congress the tailwind to publicly recognize that these dangers aren't "posed".
In that first letter to Congresman Frank, I wrote: “Now is the time for a reckoning about the brain-dead policies that lead to triumph of suburban sprawl, the explosion of unallocated costs of growth, and the massive risk in teetering credit markets.”
These are all linked and until sufficient regulation is in place to decouple these linkages, the American economy will continue to suffer.
The upside is that a new model for growth in America, based on sustainable building and design, on energy conservation and not growth-at-any-cost, based on fiscal prudence and not the endless postponement of costs of growth, can restore both the power of our economy and the value of the US dollar.
It is possible. It can be done. But to do so, we need national leadership to step out of the comfort zone and the lure of Wall Street that spun real assets into confection to the advantage of a divided society and a diminished America.
2 comments:
Blogger ate my last comment so this one will be shorter: Interesting letter. You might want to look at Jim Kunstler's blog.
I'd like to agree with your outlook but I think there are too many forces arrayed against it. Until we figure out that we are all in a kind of unwitting conspiracy driven by a cheap energy fantasy we'll continue to put off the day of reckoning; neither Jane Doe nor Wall Street wants it to stop.
But that doesn't mean you should stop writing.
Interesting article in The Independent (UK) questioning the Anglo-American debt financed speculator real estate growth model.
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Steve Richards: No one wants a return to the Seventies, but state intervention need not be stifling
Published: 20 September 2007
So far, the political dimension of the banking crisis is seen through the prism of the opinion polls. Gordon Brown is up. David Cameron is down. It seems the oscillating fortunes of Northern Rock and its nervous savers made the Government more popular rather than less. Labour's current substantial poll lead may or may not be fleeting. No one knows for sure – which is why some of Mr Brown's allies are advising him once more to hold an autumn election while he is ahead.
While the fuzzy speculation intensifies, a more lasting political consequence of the banking drama is overlooked. Through this single act of intervention, the Government has challenged the fashionable consensus that the state should play no role in protecting companies from the consequences of their actions. What makes the hyper-activity at the centre more significant is that Labour has played a leading part in reinforcing the consensus over the past decade.
It is almost as if, after a long period in the darkness, the spirit of the 1970s is back. Within the space of a few days, Led Zeppelin has announced it is reforming and the Government has intervened to save a company that is in trouble. I could never get to grips with the Zeppelin song "Stairway to Heaven", a regular at parties in the late 1970s. I recall dancing with an awkward intimacy during the slow phase of the song and then never knowing what to do when the tempo intensified maniacally towards the end. While I struggled on the dance floor, governments agonised similarly over how fast they should move in their attempts to save failing industries. They had the same success as my clumsy efforts to dance with girls. The harder they tried, the more disastrous the consequences.
But those disasters brought about an equally extreme response in the 1980s and 1990s. I stopped dancing. Governments stopped intervening altogether. Margaret Thatcher became popular by promising to get the state off our backs. Any mention of state or government intervention and images of the 1970s were immediately invoked. Even the idea of "regulation" was seen as heavy-handed and, as a result, Britain became the lightly regulated financial capital of the world. Fearful of any echo from their vote-losing past, New Labour stood back fearfully too when it won power: Help – we must not touch the railways! If a successful manufacturer is in temporary trouble we wont do anything to save them! It is up to the regulator what happens to mortgages, it's nothing to do with us!
Suddenly, it is everything to do with them. Now the Government intervenes spectacularly, in effect protecting the reckless managers of Northern Rock from their misguided judgements. By implication, they protect other bankers too. I agree with Simon Heffer who wrote in yesterday's Daily Telegraph: "The bankers, as I see it, have carte blanche to take the most awesome risks with the money of their depositors, knowing that if they goof badly the taxpayer will compensate their aggrieved customers". I concur also with Mr Heffer that this act challenges some of the fashionable values from the 1980s, in particular that in all circumstances markets must be left alone.
My difference with Mr Heffer is that I welcome this reality check and note that suddenly, across the political spectrum, there are calls for greater regulation of the banking industry and support for the government intervention. The mood has changed in weeks. Only last month, John Redwood was winning plaudits in most newspapers for advocating further deregulation of the mortgage market in his policy review for the Conservatives. I doubt if the proposal will get very far now. Instead, stronger regulation is back in fashion. There is life in the supposedly dead hand of the state.
The escalating panic after the Government's initial intervention last Friday has prompted much comment about the lack of trust in politicians. I suspect the novelty of the ministerial act had more to do with the scepticism of savers. In the midst of various crises, voters are used to coping on their own as ministers make clear they are not directly responsible. Suddenly last week, small investors were told they could relax as the Government was rising from its slumber to protect them.
But the voters were too used to the slumber. When MG Rover at Longbridge became vulnerable in 2005, the Government did little to prevent the collapse of what was the last remaining British-owned car manufacturer. On a wider front, when trains fail to turn up no one knows who to complain to. So many institutions are theoretically responsible, no one gets the blame.
One of the reasons for the early chaotic attempts to deal with the banking crisis was a similarly blurred division of powers. Mr Brown and Alistair Darling were hyper-active. Yet the supposedly independent Bank of England was in charge. Meanwhile, the Bank of England was seeking to act in a regulatory context determined by the Financial Services Authority, a separate body. Out of political desperation, Mr Darling gripped all the necessary levers, but at first few of the small investors believed this was happening, as it had never happened before. Out there in the big intimidating global market, they feared they were on their own because they so often are.
The tragedy of the 1970s was the excesses of corporatism, the wasteful state subsidies for inefficient firms that did not deserve to stay alive. The extreme reaction to those mistakes was the tragedy of the 1980s and 1990s. In particular, timid New Labour has been too scared to encourage and support manufacturing industry, leaving Britain dependent on consumer debt and speculative activities of the city. Above all, it has accepted the myth that entrepreneurs should be hailed for taking risks when no risk exists. Banks cannot be allowed to go under. Tube lines cannot close even if a private company fails to deliver. Oddly, Mr Brown has recognised the limits of markets in the NHS, pointing out that a government could not allow financially reckless hospitals to close. Yet in other areas Mr Brown has been as keen as his Thatcherite predecessors in calling on the private sector to take the risk, when there was no risk.
Simon Heffer is right to be worried. This is a political moment in which events have propelled the debate very slightly away from the Thatcherite right. The next time you hear a rant against "regulation", do not forget that a light regulatory touch allowed banks to lend money as if there was a limitless supply. Remember also that the state is not always stifling, but can use its financial muscle to intervene effectively. No one wants a return to the 1970s, not least those who remember dancing with me at the time. But that does not mean governments should step back always and never offer a stairway to heaven to those individuals and industries struggling with the eccentricities of the global market.
s.richards@independent.co.uk
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