Monday, September 29, 2008

Let's see the cash first

I've been following the credit meltdown for well over a year, and it's played out the way I expected. Today is sickening. Thank God so few people know any history or have any idea where this thing is going.
It's particularly strange to teach university students who don't have any recollection of recessions. Most of the weren't even born during the recession of the early 1980s.
This one is going to be far worse. The 1980s recession was a contraction of manufacturing. This is a total vapor-lock of credit. This hasn't happened since 1929 and we haven't seen bank failures like this since the winter of 1932-1933, when, at least, a bank relief bill made it through Congress with bi-partisan support. I can't imagine what would have happened in 1933 without the Reconstruction Finance Corp. and the federal re-organization of banking. Unless Congress acts, I fear we will find out.
As for Canada, we're doing exactly what we did in 1929: pretend the downturn will be kept to the States. In early 1930, the Toronto Star sent Parliamentary reporter Wilfrid Eggleston across the States to write about the lousy conditions down there and, by comparison, praise William Lyon Mackenzie King's policies. That didn't save King in the 1930 election campaign. And by the end of 1930, we were worse off than the Americans (but our banks did survive the storm of 1932-1933, when banks collapsed across the States, money disappeared from circulation in America, and people resorted to barter and municipal scrip until a deal was reached between the outgoing Hoover administration, the incoming Roosevelt team, Congress and the banks.
As I said above, today's politicians don't have it in them to work for the betterment of the economy. And, if anything, this collapse is worse. The 1932 collapse began when individual savers pulled their funds from regional banks. It was solved by getting cash to those banks so people would have faith in them and return their savings). Our exports were killed by American tariffs, cheap Soviet wheat came on the market, and pay cuts ruined the purchasing power of those who had jobs.
There's a myth that the war ended the Depression, when, in fact, the economy grew fairly steadily from 1934 until 1939. Without the war, the economy probably would have recovered by the early to mid 1940s, and much faster if there had been a concerted effort to end trade barriers.
Now, banks are not only afraid to lend to businesses and individuals, they're afraid to lend to each other for fear they will lose their money. Quite simply, trade and investment cannot function without this credit.
If you want to know what I think of this mess, read through the blog. It's all here, beginning last August. What's the way out? Well, a lot of people are going to offer a lot of ideas over the next few years. Some of them will be pretty scary as people look for easy answers.
First, we'll have to absorb and work off the losses. A lot of people are going to end up as debt slaves, since American bankruptcy laws were changed by the Bush administration to prevent the types of walk-aways that we have in Canada. House prices are going to have to drop to a level in which it makes sense for the average family to buy.
They way out involves a shift in how we do business and politics. It involves investment in real productivity, not in paper assets. It also involves seeing business differently, especially in the way quarterly results are so over-emphasized. That, much more than anything, has resulted in the drying up of real physical investment.
Many companies will need to be de-leveraged. Eventually, this will be good for the media as it emerges from the debt heaped upon it by the various buy-outs and asset sales of the last twenty years.
But the only real way out is to invest in communities, especially in manufacturing. Quite simply, we don't make anything. We don't process our natural resources. We've become a nation of hole diggers and paper-pushers. We don't even hew wood anymore.
It's the same in the States.

But I am too whacked from watching the day unfold (and lecturing for two hours) to deal with this.

So, instead, I'll mock this guy. I don't think he has more than 4 trillion pounds at his disposal. As for proving evolution, it's fairly easy, to anyone with an open mind.
In fact, it's easy as hell to disprove Noah's Flood as the cause of the deposition of continental sedimentary rocks, but that isn't the bet.

HT to Norman Spector for the link.


Anne said...

So how about investing in communities that are sustainable in size now? I live in Owen Sound, on Georgian Bay. We have 20,000 people, high speed internet, a college, a hospital, and were named one of the 100 best art towns in North America. We have rock climbing, kayaking, skiing, and one of Canada's best beaches, all within 1/2 hour. We have a strong local food supply. AND my house is a 4 bedroom, 2 bath Victorian brick, all renovated, 5 minutes from schools, library and the Y and walking distance to Georgian Bay - and it was recently appraised at $225,000. This seems to me to be the sustainability factor for families that is out of reach in Ottawa and Toronto. That's why people who grew up here are coming home to buy real estate and raise their families. Way more discretionary income after mortgage payments are paid.

Ottawa Watch said...

Exactly. I was thinking about Owen Sound, Collingwood, Midland, Goderich, Leamington, places of that size. We've concentrated growth in the Toronto area, and to a lesser extent Montreal and Vancouver, and left the rest of the country to its fate.
I'm not sure a place like Owen Sound needs a lot of development, in the sense of population growth and new housing. It needs a new manufacturing base and workforce training so the productivity and skills of workers is high and is compensated accordingly.

MJMartin said...

Agreed, this has been coming for a long time. in my former life as a finance director in a mid-sized lending institution I saw the the writing on the wall over 2 years ago.

Our firm borrowed money from the largest commercial bank in the U.S. to fund our primary and secondary lending products. The agreement at the executive level was based on volume. More volume meant a reduction in the rate we would have to repay to the larger bank.

Basically our volume grew every month by a brisk percentage, no matter what(always a sign something isn't right). The growth wasn't due to a growth in qualified borrowers. Instead greed from the executive level drove the growth by allowing unqualified buyers to be approved for loans they will never be able to pay back. Once the brokers learned from the loan analysts what information to omit or just blatantly lie about on customers credit applications it was a free for all.

Once these loans were funded they were red flagged and sold off to managing companies and likely became part of the mortgage backed securities pool of death. Commercial mortgages were also handled this way. The problem has trickled down to the roots, on the pavement level with brokers and consumers.

if the bailout doesn't come, or doesn't work, looks like everyone will learn a thing or two about fiscal conservancy.