Occam’s Razor

Quantifying incompetence

I can understand why most Americans do not want to look at their financial statements. If you take the time as I did yesterday, it is scary. I do not have all the numbers for my household yet but a year ago, our net worth was around $938,000. Today our net worth is about $771,000. That means in just one year about eighteen percent of our wealth has vanished.

Our real net worth is probably lower. How much is our house really worth? I will not know unless I actually sell it, so I go with our county’s assessed value, which was done before the sub-prime mess fully exploded. There are no bright spots in my portfolio. Our T. Rowe Price New Era fund is worth just 52% of what we paid for it. If this is what our “new era” will look like, it does not sound hopeful. This fund was supposed to be used for our daughter’s college education. We are drawing on other funds for now but unless stocks turn around dramatically over the next few years, we will have lost money set aside for her education, despite investing consistently for fifteen years. It suggests that we would have been much better off putting the money in a mattress.

Our other funds show a similar but less dramatic story. I can only hope that since most of our investments are for the long term that they will actually turn out to be investments rather than places to throw away our good money. Perhaps Michael Moore had it right all along: keep your money in government insured accounts only. Granted, the money may not grow that much, but at least it is unlikely to disappear when you need it.

A year ago, my personal financial adviser forecast that there would be a significant economic upturn toward the end of 2008. This was based on reading and listening to other people he respects. He was proven wrong of course. I cannot hold it against him. Even Warren Buffet lost money in 2008. This was a year when no matter what financial strategy you chose, unless you invested solely in bonds, you were going to lose money. The Washington Post today crunched the numbers and put the total loss on Wall Street during 2008 at $6.9 trillion. How much money is that? Consider that the federal government spent about $2.9 trillion in fiscal year 2008. In one year our investments, and consequently our national net worth, dropped by more than the federal government spends every two years. Gone. Poof.

Despite his prediction a year ago, my personal financial adviser is optimistic for 2009. “We are now convinced that the stock market has either hit its low, or is very close to it,” he tells me in his latest newsletter. He may have something this time. One measure, the Dow Jones Industrial Average, shows signs of bottoming out. It slipped briefly below 8000 and has floated between 8000 and 9000 for a while now. If we have hit a bottom in the stock market then now is the time wise investors should be purchasing stocks. Of course, there is no way to know. With all due respect to my financial adviser, anyone who tells you they do know for sure is bluffing. We will only know in hindsight when the bottom occurred.

Unless you need money from your investments right away, the current value of your investments should not matter too much. What is more important is whether you retain your job and lifestyle. One thing we have noticed in our family is that many information technology jobs have become commoditized. This is not good news for someone like my wife, who lost her full time job on an IT Help Desk in 2004. She was making close to $50K a year. Her job was outsourced to someone who did the same work for a lot less money and who conveniently was not on “staff”. She now has a part time job doing similar work but took a substantial pay cut to get the job. As for benefits, the doctor’s office she works for has little in the way of a 401-K other than a general profit sharing plan. Unfortunately, the money they contribute toward it would not let you live on dog food in retirement. I am more fortunate but even in the software and systems development area where earn my living, many people are hurting. The bottom line is that our standard of living was hurt too and our income (adjusted for inflation) is down substantially from the start of the Bush Administration.

Perhaps this explains why three out of four Americans are glad to see President Bush leave office in nineteen more days. Bush has been saying in interviews that he will be judged by history as a far wiser president than we give him credit for now. I would suspect him of sniffing glue but I think hitting the bottle is more likely. I am confident that historians will not be kind, for reasons I outlined here, but which you already understand.

Our falling net worth is a meaningful measure of the price of incompetence and of the failure of government to, well, govern. It is not as if we were doing stupid or risky things. Rather, our government was doing stupid and risky things by placing inordinate faith in a free market and by actively reducing its oversight role. Frankly though in this economy I feel lucky. $166K of my family’s worth may have vanished in the last year, but we are both gainfully employed and we have maintained our standard of living.

Like most Americans, I feel that January 20th cannot come soon enough. I admire Barack Obama for having the audacity to believe that he can move us out of the national wreckage of these last eight years. When the dung is piled this high, it is hard to see daylight. While I hope my financial adviser is right, my intuition tells me that the dung is much higher than we think. I suspect it will be quite a while before we see the sun. Good luck, President Obama. You will need not just exceptional competence but extraordinary luck if our country is to successfully emerge from the wreckage of the Bush Administration.

January 1st, 2009 at 07:58pm Posted by Mark | Politics 2009 | no comments

The end of the middle class

My thanks to commenter George who, five years after it was published, left the first comment to my 2003 post, The Dual Income Trap. George is one of millions of average Americans who has meticulously played by the rules and done all the prudent things. By doing so, he now finds his family preciously hanging on to its middle class existence. In a way, George is lucky. Millions of others are not so lucky. They have lost their houses and in many cases, their jobs too and are now scrambling. I hope that most have some place of refuge for hard times, perhaps just a spare bedroom in Mom and Dad’s house. Others have downsized their lives and are living in apartments, which hopefully are more affordable. It was clear that their house was not.

The pain Americans are going through can be understood not just in unemployment statistics but also by other shocking statistics. For example, one in ten Americans are receiving food stamps. Autoworkers are feeling in a particularly precarious position. It is not just the members of the United Auto Workers that are wondering how long they will be employed. Demand for cars, including foreign cars, is way down, despite gas prices at $1.60 a gallon. If you are a UAW worker, you have the sinking feeling that you are about to kiss a living wage goodbye forever. Yesterday President Bush approved $17.5 billion in emergency loans to GM and Chrysler. He did so not because he has any sympathy for the UAW and its workforce (whom you can tell he detests) but to ensure they do not collapse until after he leaves office. That way he cannot be blamed for their demise.

This economic crisis should pretty much kill off the middle class as many of us knew it. I define “middle class” as being able to own your own and maintain a single family home, have a car or two, raise a couple kids and live in a generally safe neighborhood. In reality, this life was going anyhow. George mentions that his family income is around $100,000 a year. The real price of admittance to the middle class these days is about $100,000 a year in family income. There are exceptions of course because there are parts of the country where the cost of living is remarkably low. Particularly if you live along one of the east or west coasts, if you do not have $100,000 in family income you can pretty much rule out a standard of living similar to the one (presumably) your family had growing up.

As for those with a family income in the $40,000 to $80,000 range, these people have now largely been priced out of the middle class. Unsurprisingly, they are the ones who have been predominantly getting the shaft during this severe recession. Our nation’s autoworkers have epitomized the collapsing middle class. However, their situation is hardly unique and is emblematic of a very broad problem.

There is little in the way of silver linings here. One lesson these people have learned is that they can no longer charge the difference between their desired standard of living and the standard of living they can afford. Now, assuming they are not in bankruptcy, many find that their credit limits have been reduced and their monthly payments have increased. Some sort of credit correction was probably due anyhow, but this is a hell of a time to go through it. Much of the economic shock we are now enduring is due to the collapse of credit. No wonder we are spending less. No one is willing to lend us the money to live beyond our means anymore. Frugality has become necessary. This means fewer dollars circulate, which translates into a large economic downturn.

Many of the formerly middle class are moving swiftly into what can charitably be called the lower middle class. I prefer to be more realistic and call them the working poor. You are in this class if you find that one or more of the breadwinners are working two or more jobs just to survive. Granted, finding any job in these times is going to be challenging. Good luck even finding a job paying starvation wages at your local Wal-Mart. Most likely, any health insurance, if you had it, has vanished. You may have been living paycheck to paycheck before this economic crisis. Now you are in survival mode, desperately trying to keep a roof over your head and your aging cars usable until the economy turns around.

Even when the economy does turn around, do not expect that your financial situation will markedly improve. Perhaps with the collapse of housing prices you will be able to afford a single-family house again. The dual income trap though will not be going away and is likely to only be exacerbated.

The middle class has been destroyed. It was not an accident because to kill it you had to move money from the middle class to either the poor or the rich. It went to the rich because, unsurprisingly, they have power. Starting in earnest with the election of Ronald Reagan, the rich pulled every lever to make sure they paid less in taxes and you effectively paid more. Government costs what government costs, after all. Whether by increasing taxes for those of modest incomes or through deficit spending, the effect either way is to push the burden on the rest of us less capitalized. If your taxes were cut too but deficit spending made up the difference, it meant that wealth was moving overseas. The effect was to move our collective wealth elsewhere and since most of it was vested in the middle class, the middle class lost wealth. That is one reason why unsecured credit card debt kept climbing. Think of it: when President Carter was in office, we were the world’s largest creditor nation. We owned much of the world. Now we are the largest debtor nation. We are owned by much of the world.

How to change the situation? I wish I could be as optimistic as our new president, but I think he is on the right track. We have to transform our country so that it is the engine of a new 21st century economy. We have to offer products and services that this new resource-constrained world will need. Being the leaders in manufacturing clean technologies will be key, because these will be new technologies will be in high demand, hence profitable, hence wealth builders. If we can do this then perhaps the broken middle class will reemerge.

Our middle class needs to reemerge because our nation cannot be wealthy if its wealth is vested mainly in its aristocracy. Ordinary people power an economy. Until ordinary people have money to power it again, the economy is likely to remain poor. Unfortunately, this transformation process, if it can be done at all, will take decades. We have no choice but to start now. Let us hope our competitors are less adept at creating this new economy than we may be.

December 20th, 2008 at 09:09pm Posted by Mark | Politics 2008 | no comments

Kissing the Rust Belt goodbye

If you want to know why the Republican Party is rapidly becoming the party of the Deep South only, you only have to observe the votes this week by Senate Republicans to block a bailout of our domestic auto industry. Thirty-five Republican senators blocked the bill, which actually won in a 52-35 vote. However, Republicans chose to invoke the cloture rule, which meant that 60 votes were needed to actually pass the bill. Therefore, it died leaving President Bush in the ironic position of deciding that maybe he needs to find $15 billion of the $700 billion bailout of Wall Street to keep millions of automotive and automotive related jobs from vanishing in this country.

Senate Republicans effectively gave the finger to Americans autoworkers this week, while also scorning them by telling them that they were paid too much. (This takes a lot of chutzpah when a senator’s salary is $169,300 a year, and a senator’s pension benefits for even a short stint in the Senate would make autoworkers swoon.) Yes, a bankrupt GM, Ford and Chrysler would probably destroy the evil United Auto Workers. It would also destroy the livelihood of millions of Americans, not just the autoworkers themselves, but a vast network of suppliers, dealers and merchants that eke out a living based on Detroit. But hey, that evil UAW would sure learn a lesson!

Yes, color the Midwest blue. If it is not entirely that way today, it will be in the next election. Moreover, if the key to winning the White House is to win Ohio, I may be in my grave before the next Republican ascends to the White House. (That would be fine with me, providing I live to a very ripe old age.) It used to be that you were showing your patriotism by buying American cars. Maybe you paid a bit more and maybe your car was not as reliable comparable with a foreign model. Nevertheless, it was “Made in America”, and that helped put food on your table, your neighbors’ tables and kept your community vibrant. Now in the bizarre world inhabited by a majority of Republican senators, you are showing true love of country by killing off our domestic automobile industry!

You see this is love. When your father beat your bums black and blue with his leather belt, he was doing it because he loved you. It was tough love. Never mind this sort of tough love that many of us endured growing up would now be considered child abuse. But it is okay to do it with auto industry workers and the vast numbers of workers who earn their living off our auto industry because, well, they are all adults! After all, it is not child abuse if they are not children.

Now the truth is that those of us who did have their bums beat black and blue by our dads (or in some cases, our moms, or both) do generally love them, in spite of their past proclivity toward inflicting violence on minors. You cannot divorce mom and dad. However, you can throw your senator out of office when their term expires. If they just don’t get it, that they are there to serve the interests of the American people, you simply vote for someone who does.

It is unsurprising that those Republican senators that voted for the bailout seemed to represent swing states. Few Republicans from swing states voted for the bailout, but there were some, including Allard from Colorado, Burr from North Carolina, Coleman from Minnesota, Ensign from Nevada and Gregg from New Hampshire. One thing these senators do have in common is that there is little or no auto assembly in their states. I have some advice for these senators: do not expect much in the way of contributions from the National Automobile Dealers Association for your reelection campaign.

There is no question that Detroit has been a follower rather than a leader in the auto business. Its management has been abysmal. However, the United Auto Workers has been accommodating about cuts in wages and benefits, somewhat begrudgingly of course, just not enough to keep up with the competition. What is true is that American automakers cannot be as agile as the foreign competition. For in most other countries the government provides universal health care for all, liberating manufacturers from these costs, or at least allowing them to be controlled. In our country, they are generally borne by employers. However, American cars no longer really deserve a bad quality rap. As Consumer Reports has documented, American cars are now often as reliable as their foreign competition. Part of the problem is the perception, which is often no longer true, that buying American means you will get a less reliable car.

You would think that if American autoworkers were so well paid that they would be living opulent lives. That is clearly not the case. The average assembly line worker for GM makes $28 an hour in wages. This is about $58,000 a year, which is certainly nothing to sneeze at, but not outrageous for a skilled assemblyman. All this assumes of course that they have steady employment. The auto industry has many ups and down, so it is unwise to count on full employment. It is true that autoworkers receive benefits too, but so do many of us who are employed. The cost of benefits is nowhere near the inflated $70 an hour figure bandied about. The Big Three’s pension costs are so high because they also have the legacy of pension costs for existing retired workers and their spouses. Foreign car companies do not have this baggage.

We should look on the $15 billion bailout as an interim measure to help put in place a structure that will make our car companies competitive again. At some point, this will likely mean shifting costs for pensions off the car companies and onto the taxpayer. Then American car companies can compete on something like an equal footing.

Meanwhile, by their votes, Senate Republicans have simply gained the contempt of many in auto producing states. Once you hold someone in contempt, it is nigh impossible to be held in esteem again. This is why Republican opposition to the automotive bailout was so needlessly counterproductive. Even the White House gets it. President Bush understands that his legacy rests on very shaky premises. To leave the White House with the American automobile industry collapsing around him will seal his fate in history.

Based on Senate Republicans’ foolish votes, people like me hoping to see even larger Democratic majorities have new reason for optimism. Any Joe the Plumbers out there living under the illusion that Republicans actually care about people like them are now thoroughly disillusioned. Instead, Senate Republicans are reminding them of their dear old dad and his leather belt, and senators are telling them to lower their trousers and assume a right angle. Why is Dad punishing them? Apparently, they had the audacity to expect a living wage.

Maybe they should run for the Senate instead.

December 13th, 2008 at 08:56pm Posted by Mark | Politics 2008 | 2 comments

Weathering this recession

It is sadly clear to me that our current economic problems are going to be even more severe than they already are. They sure are plenty miserable already. The Labor Department reports today that the nation’s unemployment rate is at 6.7 percent. The real rate is likely quite a bit higher. Moreover, 553,000 jobs were lost in November alone. In the last three months, 1.25 million jobs were lost, which is fully half of the jobs our president elect says he wants to create or save!

Those of us of a certain age have lived through miserable times before. My most painful financial memory was surviving the stagflation recession of the late 1970s and early 1980s. In three years (1979-1981) prices roared ahead almost thirty five percent. The official unemployment rate hovered between six and eight percent and in 1982 peaked at nearly ten percent. When I graduated college in 1978, I joined a dismal labor market. I lived at just above poverty trying to sell lawn and garden equipment at a Montgomery Ward store. It was a miserable few years. It was not as bad as the Great Depression, but it was miserable enough. It was also a lesson that I could not take my prosperity for granted. I concluded I had to work real hard to reinvent myself because poverty sucked.

This recession, if it does not turn into another depression, is likely to be worse than those miserable years. It will almost certainly be the largest economic downturn most of us will live through. Fortunately, we learned a few things on what not to do from The Great Depression. Granted, we did not absorb that a lot of the misery we are currently experiencing was entirely preventable had the government been doing its job. Once our current economic masters dusted off their books on The Great Depression, they discovered that policies back then exacerbated if they did not actually cause the depression. Severe economic downturns are not times for trying to balance federal budgets. If consumers are not going to spend and businesses are not going to spend, you do not improve the situation by governments cutting back on spending too. As unwelcome as additional deficit spending is, there are unfortunately times when it is necessary. It looks like President Elect Barack Obama will follow many of the same strategies as President Franklin Roosevelt, and will massively invest in our crumbling infrastructure and in the technologies we will need to succeed in the 21st century. Whether this and other moves such as recapitalizing credit markets and creating cheap 30 year fixed term mortgages will be enough remains to be seen.

Some characteristics of this recession are unique. While recessions in America have tended to drag down other economies, this recession is truly a global phenomenon. The sole exception may be China, which is still growing rapidly by Western standards, but not fast enough for its population. Unemployment is increasing in China and the natives are getting restless. This means that investors looking for places to make short-term profits are probably not going to find any. In this market, you succeed by not losing the value of your money.

The outlines of our new economy are murky at best, but the old financial rules seem to have turned on their heads. Like most Americans, over the years my wife and I have been practicing what most regard as prudent financial investing. We have put lots of money into mutual funds, 401-Ks and IRAs on the expectation that they would grow over time. Having started this process mostly in the early 1990s and looking at the value of my portfolio today, I seems like I might have been better putting the money into a mattress. If I am to gauge the future value of my investments by what I have done so far, I should do something differently.

So, no question, people are being screwed now. The American dream is unraveling for millions of honest and hardworking Americans, who feel like they have been hit by a two by four. Large numbers of them have joined the unemployed. Others have lost their homes. Others are massively overleveraged, having bought houses at inflated prices only to see housing prices collapse. They have negative equity and negative net worth. If they can hold on to their jobs maybe they can maintain their standard of living. If they cannot they face bankruptcy, possible homelessness and generally bleak prospects. Four years ago, I wrote about the fading middle class. In 2008, we are watching its painful unraveling. There are only a few spots of good news. First, those of us watching our dreams recede have plenty of company. Second, we will have a pragmatic president that is assembling a team that could actually turn this colossal economic mess around. Third, if we have the cash, we can afford to drive our cars again. All it takes is a global financial meltdown to bring gas prices to under $2 a gallon.

I feel fortunate. Mainly, my wife and I are employed with little likelihood of joining the ranks of the unemployed, no matter how bad the economy tanks. It is true that our portfolios are down but so are everyone’s. We have a lot of money saved up for our daughter’s college education, which she started this year. However, the part that is invested in mutual funds is worth thirty to forty percent less than it was a year ago. I expect we will be able to finance our daughter’s education somehow, but it may be painful. While I feel fortunate, I also feel grateful. I am a baby born of parents who endured The Great Depression so I picked up their thriftiness. I have mostly succeeded in living prudently.

What do you do if you lost your job? Obviously, you should feel highly motivated to find another job, but the reality is you are like a salmon swimming upstream. You will face a lot of competition so your hope is to have a marketable skill and be excellent at it. You need to brush up your resume, your job interviewing skills and network your friends like crazy. Unfortunately, despite doing your best you may still find yourself unemployed for a long period. There is no sugar coating it. Your joblessness is likely to be a miserable experience. However, there are things you can do to survive. If you are a new member of the miserably unemployed class, you should read this diary on dailykos.com. It was obviously written by someone who has learned some painful lessons and had the courtesy to take notes for others.

For the rest of us who are just running scared, I have some suggestions. If you have a decent paying job, count your blessings. Do you best to stay in your boss’s favor by exceeding expectations. Second, if you feel overextended, you probably are, so you should try to find ways of simplifying your life. That means reducing expenses, paying down debt and deflating your lifestyle and your short-term expectations. You might want to trade down in houses (assuming you can sell your house) so it comes with a payment you can realistically afford. Third, realize that in the today’s wacky economy, cash is king. That is not to say that credit cards will go away, but credit will be harder to come by and you will not have as much of it. You cannot assume anymore that others will be willing to lend you money, particularly for unsecured debt.

So pay with cash, which these days often means using your check card. Start hording cash, which means you need to set aside a certain percent of your income per month into a savings account. How much? Enough so you feel your lifestyle is substantially diminished. I recommend at least five percent. You may need that cash should you become unemployed. Even if you do not become unemployed, you are likely to need a horde of cash to pay for expenses that invariably come up and for which you used to say, “Charge it!” You know, events like fixing your car. Wall Street has seen the light on the value of cash. Investors are spurning risk and figure the U.S. Treasury is the only source of safety. So they are buying Treasury Bills even though they pay almost no interest. If you are concerned about your finances in the short term, realize that it is better to hang on to your money you need in the short-term even if you are not earning any interest rather than watch it disappear in the stock market.

It is hard to imagine what America’s financial landscape will look like in ten years. We may have an experience like Japan had in the 1990s and much of this decade: a recession that never seems to go away. Nevertheless, it is likely that this current recession will be long behind us in ten years. Millions of Americans are going through excruciating financial pain right now. While painful, they are also learning important financial lessons. I hope that when the economy improves they will not revert to old financial habits and live beyond their means. Millions of us have been living with a hole in the roof of our financial houses, assuming that the weather would always be sunny. Now we know the rain comes eventually. If we live within our means, while we may feel poorer, in fact we will be more financially resilient.

If you are going through misery right now, it is likely that at some point the economy will improve to the point where you will find a job again. Your new life may resemble a downscaled and more hassled version of the life you had. With luck, tenacity and ingenuity, you may get it back. Also, realize that while it is raining heavily now the rain does stop eventually. This storm must eventually pass.

December 5th, 2008 at 05:44pm Posted by Mark | Sociology | one comment

The meaning of money, Part 2

Banking is another one of these activities that to an outsider unschooled in finance seems a bit mysterious. Just how is it that you can put your money in a bank, know that it is safe and somehow your money will grow?

We understand that if we were to put our money in our mattress, it would not be particularly safe. If no one knew it was in our mattress then at least it would be safe but most of us cannot take the chance that it will be discovered. However, even if we kept our savings in our mattress, the money would not grow. In fact, over time it would be worth less because in most countries inflation is an unpleasant reality. If you want to keep your money safe, it is better to put it in some sort of financial fortress where it is hard for anyone other than you to get the money out and where it is always safe: a bank.

You would expect that if your goal was to safeguard your money the bank would charge you money for the privilege of banking it, rather than the other way around. After all, if you have a million dollars in gold bullion you do not want to find that it mysteriously disappeared one day. Instead, it is just the opposite. We give the banks our money and somehow they manage to give us some modest amount of interest for letting them guard it. (Granted, with the many fees banks are charging these days, it may negate some or all of your interest.)

Most of us understand on that our money rarely sits in a vault somewhere. Instead, it goes to someone else who doesn’t have enough of it to meet his or her needs. Over time, debtors repay the principle to the bank with a fee for use of the money. At least some portion of the money earned goes back into our account as interest. The bank gets the rest. So it sure seems like a symbiotic relationship. Your money is protected. Both you and the bank are more prosperous as a result.

As we relearned recently though, money you put in a bank is about as safe as the U.S. dollar. The dollar is not backed up with gold and silver. As you may have learned from my last post, the real value of the dollar is that it is a representation in the faith that the U.S. government will be around in the future and the idiots will not be running it. The crisis of confidence that is painfully underway is a crisis of confidence in the United States government. It would be charitable to say our government was asleep at the switch these last eight years. In fact, it was worse than that. Our crisis of confidence was not a result of a lack of competence, but rather faith in a financial ideology and the free market that was misplaced. In short, the ideologues, not the idiots, were running the asylum, practicing some weird sort of Zen-like financial alchemy. The only gold they were producing was fool’s gold.

In some ways, a bank is like the federal government because in reality the proportion of its assets in cash is rather small. The vast majority of its assets are in loans to other people and businesses. Its job is to stay solvent and make sure it does not give out the money to just anyone, but only to people who are creditworthy. If it has confidence that the people it gives money to will repay the loans on time, it can stay solvent, maybe turn a profit and throw some small change into your account as interest.

Banks sell trust. That is why bank names so often have trustworthy names, like First Fidelity Bank. That is why bankers tend to look and dress soberly. They hope it will make you think they are sober people. They want you to believe that their bank will be around and will only lend prudently. Just in case they do not, because they are a bank, they are required to pay a fee to the FDIC that insures your accounts up to $100,000 (well, $250,000 temporarily under the Wall Street bailout legislation). As we learned though, the money banks paid into the FDIC looked like it might not be big enough to handle a major run on the banks. That is when the FDIC petitioned Congress to stand behind it. Congress passed a bank bailout and hopefully the crisis is contained. What has not happened, and would be more devastating than a nuclear strike, would be if our creditors lost financial faith in our government. Fortunately, we are not there yet.

One problem is that banks can have an embarrassment of assets. This happened quite a bit during the last eight years. The Federal Reserve, primarily under its former chairman Alan Greenspan, had this notion that the economy needed low interest rates, providing inflation did not go up precipitously. With interest rates low, the message was that it was okay to borrow more money than you could comfortably afford. Therefore, we did. In fact, those low interest rates may have been something of a facade. Most of the time, low interest rates were offset by higher prices, particularly for commodities like homes and automobiles. With interest rates so low though, we could and often did supersize our financial dreams, buying bigger homes, fancier cars and upscale furnishings. At some level, this made sense. Because historically low interest rates have been an aberration, it made some sense to purchase these items because interest rates were lower. Low bank interest rates also gave us more incentive to buy stocks, on the assumption they would offer higher returns. Otherwise, the effect felt like stuffing your money into your mattress.

All this purchasing through debt had the consequence of causing the economy to grow. This growth was real in the short term, but artificial in the long term. Growth financed by shaky debt generated more growth financed by shaky debt. One effect is that all this purchasing caused a lot of economic activity, which resulted in many dollars ending up at institutions like your neighboring bank.

In general, banks do not like to keep assets in their vault. They would rather loan the money out to someone else and collect the interest on the money, making their bank more profitable. We Americans were glad to borrow this money, but so much growth was happening so fast, particularly in places like China, that creditors became a bit desperate. They did not want to figuratively put money in their mattresses. They wanted it to grow too. Unfortunately, there was a dearth of borrowers. Wall Street rode to the rescue by creating new investment vehicles. Specifically it invented the sub-prime mortgage-backed security, which bundled high-risk securities into one large package for which shares were sold. Even though these individual loans were riskier, buyers of these securities thought they were protected because the risk was spread out among a larger number of loans. As long as too many debtors did not default at once, all was well.

It was a foolhardy mistake driven by need and greed. Risky borrowers proved why they are risky and defaulted in large numbers as soon as the economy got a bit shaky (and much of it was caused by rapidly rising oil prices). Sub-prime mortgage backed securities became like a pin puncturing a balloon. Moreover, all the complex financial instruments created to take the risk out of risky ventures also proved to be risky. Insurance giants like AIG did not expect everyone to make massive claims at once.

These financial mistakes trickled down perhaps even to your local bank, which in trying to find places for the rush of incoming money may have also invested in shady financial instruments. Some of these banks, like WaMu, you now own, at least partially, as a taxpayer.

Let us hope that next time we do not let new ideologues run the asylum.

October 20th, 2008 at 08:44pm Posted by Mark | Sociology | no comments

The meaning of money, Part 1

Money is on the mind of most people these days, with the collapse of stock markets and the bankruptcy of major financial institutions, including some names that epitomized trust. To many of us, it seems surreal that inside of a month or two our portfolio can drop ten or twenty percent even though we have been following “correct” wealth building strategies. Why all of a sudden has the worth of our investments changed so dramatically? Why can I not go up to Fort Knox with a few hundred dollar bills and get their equivalent value in gold? Just what is money anyhow? Why is our financial system set up the way it is? Why can a dollar be worth less next week than the current week?

I have been pondering these questions as I watch our own portfolio fall. This is the first in a series of periodic posts that I plan to make on the topic of money. I should point out that I am only an economist in the sense that I took one required course in economics in college. That is probably not relevant because I am not trying to explain economics, but instead I am trying to understand what money is and why it matters, which as you will find out is more an exercise in sociology than economics. In this post, I will look at the relationship between money and important intangibles, like confidence.

We all have a sense of what money is and why it is important, but it feels wholly abstract and therefore surreal. Yet we want it to be real. We crave the assurance that a nest egg of say $100,000 will always be there until we spend it and its value, if it changes, will only go up, not down. We understandably get very upset when it is not there, or its value is deeply discounted. Someone screwed us. Who? Why? How can we prevent this from recurring?

To understand money you have to go back to ancient times before money even existed. Back then, we all survived on our wits. Few of us though actually survived entirely on our own wits. Instead, we were part of a clan or a tribe. We generally worked together for the common good of our clan because we learned when our clan prospered we were all better off. We could not all be masters of everything.

This worked for a while until we encountered more powerful clans. If we had things the other clan valued a battle often ensued. After a while, clans saw some value in federating. We learned that there was power in joining into larger and larger groups that shared similar values, such as a common culture or language. Thus, we evolved feudal societies and early rudimentary civilizations, like the Sumerian dynasty.

When a nation reached sufficient size and complexity, the barter system broke down. More efficient ways of exchanging value were needed. Hence, money became a necessary invention. The value of money is easy to understand, but what is easier to miss is the context that money represented. Aside from an objective measure of wealth and a means to acquire life’s necessities, money also meant that we were vested in our nation. With a common currency of exchange, we had every incentive to bond together. Money promoted peace, integration and the survival of the nation.

The downside was that a form of currency was valuable only while the nation existed. If the money were coinage, it might retain some value, but more often (particularly in modern times) if the currency was a paper currency it became worthless as the nation disintegrated. Zimbabwe is but the latest example of a country whose currency became essentially worthless because it became a failed state. In general, the value of a currency is directly proportional to the cohesion of the state and the industriousness of its citizens. It is affected by many other factors. In modern times, one of these major factors has been international trade.

As you may have noticed over the last few years, the value of the dollar has been falling in relation to most other currencies. What does this mean? Aside from the facts that our goods tend to be cheaper to purchase with other currencies and it costs more for Americans to travel overseas, when the dollar falls in relationship to most other currencies it signals a societal problem. Either America is doing some things wrong compared with other nations, or other nations are doing things better than we are. It amounts to the same thing.

If you think about our societal cohesion lately, you should ponder the discord in the current presidential campaign. For example, a McCain-Palin supporter hung Barack Obama in effigy from a tree in his front yard. Perhaps this has happened in other presidential campaigns, but I cannot remember it happening in my lifetime. That it happened at all is potentially an ill omen for America as is the Alaskan Independence Party, that Sarah Palin’s husband belonged to.

Obviously, the United States government and many of us as private citizens have lived beyond our means. With all the financial bailouts, the federal government may add a trillion dollars to our national debt this year. The rise in unsecured credit card debt is well established and is at record levels. While by itself this is unlikely to cause our nation to break apart, it does suggest that we are seriously off track. A responsible government would have noted this trend and changed policies to disallow it. Ours did not.

Most governments no longer have vaults filled with precious metals to back up their currencies. Since 1971, the dollar has been a fiat form of money, meaning that the government declares it has value simply because it says so. China for example owns about a trillion dollars of U.S. Treasury debt. It cannot cash it in for gold or bullion. Their value lies in the fact that the U.S. Treasury assures China that they can be redeemed with interest at a future time, to be paid out in the future value of the dollar. By purchasing our treasury bills then, China is essentially betting that it believes that this nation will be around when these bills come up for redemption and is betting they will have retained substantial value. They are betting that the United States, as a two hundred year plus democracy, is not going to go seriously off course for a sustained period. As a consequence, by lending its money to the United States, it is not only generally put toward a productive use but retains its value, offering some stability in an inherently unstable world.

If you are an American, whether you like it or not you too are a stakeholder in the United States of America. You do not have to hold Treasury bills or Savings Bonds to be a stakeholder. You simply have to live here, or have your livelihood depend on the success of the USA. When things get seriously off course, as they have recently, it is in your financial interest to take actions to correct it. The primary means of correcting these problems is to elect new leaders who are looking out for the solvency of its currency and prosperity of the nation as a whole.

The value of the dollar then, and your wealth, is intimately linked with our overall confidence in our government and its markets. Clearly, we veered off course by creating financial instruments like risky mortgage-backed securities whose value was impossible to measure. The rest of the world, driven by greed, generally looked the other way also. Thus, our inability to adequately regulate our markets, as well as our sustained inability as a nation and as citizens to live within our means, mushroomed into a global crisis of confidence. The United States was supposed to be the world’s financial pillar. With no way to assess what these new types of assets were worth, but with plenty of evidence that the United State is vastly overextended, fear drove the market, with the most fearful anxious to redeem securities into something they believed to be of enduring value, such as gold. This in turn created a cascading effect and lowered prices generally for all forms of securities. The value of our securities then is directly proportional to the level of trust and confidence that we have in our governments and financial institutions.

Our portfolio values may recover when we know their actual worth. Of course, they are currently discounted by the collapse of so many financial institutions and our bloated government and personal debt. To be prosperous again we must have transparency in our financial markets (a much harder thing to do with so much electronic trading). We also have to have confidence that consumers will start living within their means and (just as importantly) creditors will not allow people to live beyond their means. Money invested into products and services that inflate the value of money is not a real investment. Money that is invested into products and services that we all find useful and innovative builds wealth, and thus confidence, and thus makes us wealthier.

The United States of America can also become wealthier by becoming united again. We have let partisans on both sides of the aisle pulls us apart rather than allowed pragmatic politicians to move us together again. Back in 1994, Newt Gingrich led a Republican revolution on Capitol Hill. While his intentions were noble, the effect was to unleash a new and dangerous level of partisanship that eschewed compromise. Both Senators Obama and McCain promise bipartisanship if they are elected president. The best president though will be able to do this as well as intelligently guide government policy to make financial markets more transparent and to direct resources that build genuine wealth.

As a de-facto stockholder of the United States of America, you should insist on leaders who will deliver on the bipartisanship pledge and who can demonstrate clear pragmatic leadership based on sound economic principles, not ideology. Your portfolio will thank you.

October 18th, 2008 at 07:55pm Posted by Mark | Sociology | no comments

The Wall Street villain in your mirror

Well, who would have thought it possible? Liberals and conservatives are finally united! Not on everything, you understand, but definitely on the plan to bail out Wall Street. By a vote of 228 to 205, the bill was ingloriously defeated today in the U.S. House of Representatives. We agreed: we do not want to bail out Wall Street for its malfeasance with $700 billion or more of our tax dollars.

The stock markets did not react well at the news that no one might be coming to their rescue. The Dow Jones Industrial Average fell like a large jetliner, a 777 in this case, falling 777 points, a new one-day record. Not being an economist, I do not know whether this decision by the House was correct or will ultimately become self defeating, but I know it gave me I short vicarious thrill. If it results in a severe recession or a depression, taxpayers may ultimately wish their congressional representative had gone against their wishes. Nevertheless, when the mail runs 100 to 1 against a bailout and your reelection is but a month away, then you might want to pay attention to your constituents. Oddly, 205 members of Congress voted for the bailout anyhow, perhaps gambling that in the end their votes would look smart.

The biggest danger of inaction is not plunging stock values, but a collapsing credit market. For now, credit markets will be squeezed tighter and tighter. Financial firms, sensing hard times, seek to remain solvent by hording cash. This makes the cost of borrowing money pricier, at least for those on Wall Street. Community banks and credit unions currently seem to be holding their own and are in fact taking in new business. However, their funds are not unlimited. Businesses large and small need access to ready credit for major things like meeting their payrolls. So we may find that by punishing Wall Street we are doing something akin to amputating our own foot. However, if your foot is gangrenous, perhaps its amputation is not a bad idea.

Dr. Paulson, i.e. Secretary of the Treasury Henry Paulson thinks the foot can be saved with the application of $700 billion, or perhaps even more, if only we would stop dickering with him about whether the surgery is needed. Paulson is likely a smart guy, but there are many other economists with different opinions. I doubt any of them really can say for sure how to fix the financial markets because this seems to be a different kind of financial experience.

Well, perhaps it is not entirely new. It bears more than a passing resemblance to the Savings & Loan Crisis of the 1980s, a crisis for which current presidential candidate John McCain bears partial blame. He now claims his involvement with the Keating 5 was the worst mistake of his political life. It is unfortunate that he did not learn from his mistake because he generally voted in lockstep with other Republicans and the Bush Administration who were anxious to “free” the free market. Apparently, the free market does not need as much freedom as we gave it and instead should be kept on a big, thick chain attached to a stake in the ground.

Therefore, our stock portfolios are taking a nosedive. Many of you are probably like me. I have most of our daughter’s college education funds invested in mutual funds. Some were moved into income bond and money market funds months ago, but that was just an ordinary thing to do when your child begins college. We are partly protected, but it is clear that unless markets rebound considerably in the years ahead, we will lose tens of thousands of dollars that we painfully invested for her college education. We feel fortunate that we are not more vulnerable to the stock market. Of course, we own many other funds, but we fully expect in twenty years time when we need to draw from them that their value will have recovered.

Anyhow, we sure hope they recover in time. We may be naïve too. This financial crisis may take us a generation or two to dig out of. It may result in the reordering the financial sector from the ground up. One thing is clear: our houses and our stocks have been overvalued for a long time. We are now discovering their true price.

Why are they worth so much less than we thought? Again, I am no economist but I think we all know the answer in our gut: debt. It is not just our individual debt, but also government debt. We are mostly all leveraged to the max so we can live beyond our means. The effects of our indebtedness could be masked for a while, but not forever. Debt in fact discounts the value of our assets.

Secretary Paulson’s attempt to reopen the credit markets may save the patient for a day, but is unlikely to lead to a full recovery without systemic changes. You can hospitalize a severely obese patient who is in the throes of a bad case of diabetes. Yet, unless they also commit to losing weight, eating healthier and exercising regularly they are unlikely to have many more years ahead of them. My suspicion is if by reopening the credit markets we go back to bad habits then we will find that another financial crisis will not be far off. Perhaps this explains my feelings of shadenfruede at Wall Street after the House vote today. The bastards deserved this vote to go against them! However, to really see the bastards, we have to look in the mirror. Just as we chose to live beyond our means, we also chose to elect people that made it possible for us to live beyond our collective means. We did this to ourselves. We were done in by our own reckless greed.

We have to learn how to live within our means again. Not only that, we must reduce our indebtedness too. This is not a platform that is likely to be good for political careers. It may make President Obama a one-term president. Yet, this appears to be what we have to do. We must learn to embrace austerity. How un-American!

The good news is that like it or not we are all in this together now. Wall Street’s pain is our pain, and our pain is its pain. I think it is fine to limit executive compensation for executives of firms we have to bail out. Perhaps as a result the next generation of financial managers will invest money more prudently. Perhaps they will invest in companies that actually produce useful stuff, rather than become enamored with shady financial instruments like repackaged second rate mortgage debt. The world is learning as well. It is learning that its economy is tied with our own. China is learning that putting its surplus in U.S. dollars is a bad investment.

After the immense pain of the Great Depression, it seemed we could never unlearn its lessons. Yet, our hand has been burned on the hot stove yet again. This time, will we finally learn the lesson?

September 29th, 2008 at 09:01pm Posted by Mark | Politics 2008 | no comments

The ownership society has arrived!

On February 21, 2003, President Bush gave a speech in Kennesaw, Georgia. There he first talked about America becoming an “ownership society”. In those heady days of neo-conservatism, an ownership society meant power was going to trickle down to the masses. We would be in charge (own) our health care and drive down medical costs through the magic elixir of medical savings accounts. We would have more ownership over our children’s education by using government furnished vouchers to send them to the local charter or private schools, rather than the nearby public school. Moreover, we would “fix” the social security problem by empowering each citizen to own his or her retirement. We would do this by allowing them to invest at least a portion of their social security withholdings into the stock market. Over forty or so years in the workplace, the value of those assets would compound and compound. Thanks to the magic of our free market we would all retire, if not exactly millionaires, then comfortably indeed. You can easily see how much better life would be if we could just become owners of these things instead of, well, renters!

Good news Americans! We have indeed become the ownership society! Today, more and more of us cannot afford health insurance, so we now get to pay for all of our medical expenses out of pocket! This gives us a feeling of ownership over our health care we never had before in those horrid insured days. Now we have plenty of incentive to shop around although, admittedly it may be hard to drive a bargain with an emergency room physician at 2 AM, particularly when you are profusely bleeding or are unconscious. Many of us are choosing to own the problem of our health care by not seeking medical help at all. We hope that we can find relief in over the counter medicines or $4 generic prescriptions at Wal-Mart. For those of us who used to have health insurance, how can we claim that we are not owners? In the past, you were at the whim of your health insurance companies, who stipulated what they would cover in their expensive, take it or leave it contracts. Now you are unencumbered, free of the HMO and PPO bureaucracy to make your own informed health care choices and to shop around. Perhaps my family doctor will reduce my rate if I threaten to buy an over the counter medication instead.

Those school vouchers sound pretty good too. They do have a few minor drawbacks. First, your voucher probably will not be made up with additional revenue to finance our local public schools, but that’s their tough luck. That’s what they get for providing mediocre education. Second, it is likely that whatever voucher you receive will not cover the full cost of your children’s tuition. Maybe some cheap local charter school will not ask you for additional tuition yet will magically provide high academic standards. Anyhow, it looks like vouchers may involve significant extra out of pocket tuition expenses. When you write those tuition checks instead of putting the money away for junior’s college education, you should feel a sense of ownership. Perhaps you can get stock in the local charter school, and use your shares to vote for principals that you like.

And as for financing our retirements with gains from the stock market, good news there too! You may be asking, “Mark, haven’t you read the papers? The stock market is in the toilet because of the sub-prime housing mess! How could there possibly be any good news?” Well, you see it is good news because, citizens, now we are all going to be owners, whether we like it or not! As usual, our fine financial leadership leapt into action. After finally determining that our financial system had a severe case of constipation (due to consuming too much sub-prime mortgage backed securities of uncertain worth), the Secretary of the Treasury, working with the Chairman of the Federal Reserve and the president of the Federal Reserve Bank of New York, decided that a pricey dose of Ex-Lax was in order for Wall Street. Apparently, the U.S. Treasury underwriting Fannie Mae and Freddie Mac was not enough. The government, already the insurer of last resort for floods, will now own eighty percent of the mega-insurance underwriting company AIG in exchange for providing it with a huge line of credit in order to ensure it stays solvent. In addition, our administration is readying to ask Congress to spend up to seven hundred billion dollars to buy these sub-prime and other securities that Wall Street cannot unload. We are told that this will solve Wall Street’s constipation problem for good since those Fannie and Freddie bail out suppositories did not do the trick. The good news, citizen, is that the federal government will now own all these properties, which means you are entitled to your share! No wonder the stock market finally roared back at the end of the week. Those traders were positively euphoric. You would be too if you went to Las Vegas and lost everything you own in the casinos, including your house and cars, only to find that your older brother, in his largess, was going to cover your reckless losses. In fact, you would probably head right back into the casinos to see if you could work some more of this magic.

So we the taxpayers are the winners here, see? Wall Street gets to go back to its business and we the taxpayers get to own all these properties, many of which are spanking new! I know I want my property. I know that soon the government will own all sorts of properties across the country. I want my sub-prime house! I was thinking about requesting my free house in Flagstaff, Arizona as a possible retirement house. That way I could sell my current house and keep the proceeds. Sweet!

There is the little problem that the government is not planning to raise my taxes to purchase all these sub-prime mortgage backed securities. Raising taxes of course is evil, even when completely necessary, which means that we will petition our creditors, most of who are foreign, to lend us seven hundred billion dollars so we can in turn buy these mortgage backed securities whose value no one can actually assess. I suspect our creditors will be accommodating because they have no idea what their investments in these sub-prime securities are actually worth either. Yet, they have an idea that the U.S. Treasury will still be in business in ten or fifty years when their U.S. Treasury bonds come due, with interest, of course.

So maybe I will not get my free house as I hoped. Maybe instead it will be our foreign creditors since technically it appears that they own the country, not me. My job as taxpayer is apparently mainly to cough up the interest on our federal debt.

Hmm. So perhaps I was premature to suggest that the Bush Administration succeeded in making us all homeowners, even those of us who rent. On the surface though it looks like, sure enough, neo-conservative principles have worked! We now have that ownership society they promised us! Who says we have a miserable failure as a president? He delivered on his ownership society in just five years!

And yet, this new ownership society just doesn’t quite look and behave the way we expected. It is like buying a Rolex watch only to find out it is a cheap rip off.

Well I am sure that by doing more of the same and electing John McCain and Sarah “I can dress a moose” Palin as our next president and vice president, during the next four years we can become even more of an ownership society. It’s funny though. This ownership society sure looks like an ower-ship society to me. From the greatly deflated value of my stock portfolio, it looks like I am already paying the price for other’s incompetence and malfeasance.

September 20th, 2008 at 09:28pm Posted by Mark | Politics 2008 | one comment

Learn lessons today for the next recession

Some years ago, I wrote about the fading middle class. Today, the recent hikes in oil prices appear to be driving a stake through the heart of many in the middle class. I can point you to scary NPR stories like this one. If you are not experiencing the uncomfortable feeling that your middle class lifestyle may be slipping away permanently, consider yourself lucky.

The middle class has been living on its margins for a long time. For years, an accounting was postponed. We postponed it by drawing equity out of our inflated home values and by putting more and more of our debt on plastic. Now the middle class is faced with a triple financial whammy: declining home prices, rising unemployment and rapidly escalating gas prices. For many families this means living very precariously.

As the NPR story documents, some people are drawing from their IRAs just to pay their mortgages. The Washington Post reports today what I wrote about recently: the rapid extinction of the SUV. In some cases car owners are so anxious to ditch their SUVs that they sell them for less than they owe. This assumes of course that they can sell them at all. Gas prices have escalated so quickly that some people paying with credit can no longer pay at the pump. Many cards restrict at the pump purchases to $75 per transaction. Meanwhile, those of you who have a credit card debt, but have been responsibly making your payment every month, may be in for sticker shock. Many credit card interest rates are going up, even if your credit history is spotless. Someone has to make up for all those credit card defaults, so the cost is being pushed down to responsible borrowers. Oh, and by the way, interest rates in general are likely to go up, because The Fed is finally tackling inflation as the primary economic threat.

I hope that our economy is on a sound enough footing where we will experience just a mild recession, but that is looking more dubious. Stock markets reached bear territory today, and the price of oil shows no sign of falling. Perhaps the middle class can take some comfort in that many others are in far worse pain.

As I noted, this recession was probably preventable. I chastised our Congress for emulating its citizens by going so deeply into debt. Nevertheless, Americans are also at fault, spending way beyond our means. This has so many bad effects it is hard to know where to start. Perhaps the worst effect of all this deficit spending is that it pushes up the cost of oil. Since oil is traded in dollars, when the dollar is worth less, it makes oil disproportionately expensive. There is little we could do as a nation to restrain global demand, but had both government and its citizens lived within their means the dollar would not have dropped as much, which would have meant we would be less affected by the current oil shock.

There are compensations for our economic maladies. The rock bottom value of the dollar has made our goods and services a good buy, so our increased exports will help pull us out of recession. (However, the increased cost of transporting these goods may negate many of these benefits.) American productivity has also been amazing. It is infuriating that despite all our increased productivity, wages have been stagnant. The benefits of our increased productivity have gone disproportionately to the wealthy, who are also disproportionately enjoying lower capital gains taxes. In short, they are laughing all the way to the bank on your dime.

Proactive leadership, if it exists, can at least ease most economic hard times. Clearly there has been little evidence of it in Congress, which accounts for its rock bottom approval ratings. No spending of significance has been restrained. Just a few weeks ago by veto proof majorities Congress passed yet another bloated farm subsidies bill.

The Great Depression taught us the painful lesson that banks need to be regulated so they do not do stupid stuff and wipe out their customers’ assets. (This lesson was more recently reinforced in the 1980s during the Savings and Loan debacle.) We seem to have forgotten some other lessons from those Depression years. Then, as today, people lived beyond their means. While credit cards did not exist, brokerage credit abounded, and was used to purchase overvalued stocks with someone else’s money. In this recession, it is our overvalued houses, sold even to people with bad credit or who could not afford them, that triggered the downturn. We should have learned our lesson in 1929.

In short, most economic calamities are self-inflicted. They result from either absent-minded government and/or absent-minded people.

In case you have not noticed, Occam’s Razor has tried to be something of a prophet. Granted, foreseeing the current economic mess was not that hard, I just chose to do something about it. Back in 2004, I purchased a hybrid. A year ago, we installed new energy efficient windows and compact fluorescent lights. I began biking to work. I hired a financial planner. I lived within my means and did not carry a credit card debt. I downsized my life compared to that of my financially distressed neighbors who are now trying to sell their overvalued McMansions and SUVs. I kept a low debt-to-earnings ratio.

Sure, I have financial concerns, but I know that my family will weather this economic downturn. Long ago, I made sure that we were ready to quickly batten down our financial hatches. So many of us though gave nary a thought to our financial comeuppance, living way beyond our means. It is not the least bit surprising that now that an economic storm is upon us that these people are suffering disproportionately. I know my ship’s hull is dry. It appears though that many of my neighbors are busy bailing water.

Should I chastise my fellow human beings? Or should I say that they were just being optimistic? Optimism is generally considered good, but sometimes it can be a foolish trap. Optimism has to be based on something tangible. When it is not, optimism degrades into foolishness. Certainly, it is not possible to be completely prepared for all life’s possible financial hits. If I were to lose my job, I would be in tight straits too, although I am fortunate to have a financial cushion where I could ride out my unemployment for a while. Only the very wealthy can protect themselves against all financial risks. Most of us though through the exercise of intelligence and by living modestly can weather most financial storms.

If you are one of the unfortunates caught in this financial storm, you have my sympathy. I hope you learn a lesson when good times reemerge, as they must eventually. Try to avoid the urge to resume your former lifestyle. Scale it back, even if you feel flush. Apply the difference to building long-term assets and an economic safety net. I doubt anyone going through financial pain today wishes they had overextended themselves, now that the storm is here. The reality is that when these storms occur, it is the financially savvy who profit from the detritus. Money, like matter and energy, does not disappear. It simply moves from one place to another. OPEC countries are clearly profiting. It is likely that by being prudent I will be a bit ahead of everyone else when this storm ends. If you were caught in this one, you should have a goal to end up ahead too when the next one happens.

July 2nd, 2008 at 08:26pm Posted by Mark | Sociology | no comments

An era is passing

My family and I are making plans to vacation in New England this August. We have never really explored it so it makes for a convenient destination. Also part of our calculus is that New England is not that far away (we live in Northern Virginia). Like many Americans, with gas over $4 a gallon we are downsizing our vacation. We will be staying closer to home and will not be as extravagant with our spending as we were.

An era is passing that I do not think will return. Just as my parents remember an era when the milkman arrived every morning and their parents remembered a world where personal transportation meant a horse, our era, centered on the convenience and affordability of the automobile, is ending. Let’s call it The Era of Living Large. The evidence is everywhere but it will take a while before this fundamental reordering of our society will be apparent. Yet there are signs aplenty.

Amtrak, our stodgy national rail system that almost everyone ignored, is getting record usage. Despite our increasing population, we drove 1% fewer miles from November through April than we did during the same period a year earlier. At our local Silver Diner today, there were plenty of empty parking spaces right near the front door. A year ago, we would have had wait for a table. Perhaps the statistic that cemented it for me was this story in The Washington Post. The Washington region has one of the highest foreclosure rates in the country. House prices are dropping in most areas but less so the closer you are to the city or to public transportation. In Fairfax County, where I live, home prices have dropped on average 3.2 percent between April 2007 and April 2008. In our outer suburbs, the change is dramatic. In Loudoun, Prince William and Frederick counties, all about an hour’s drive (in no traffic) from the capital, house prices dropped on average 25 percent during that period. Within the city of Washington D.C., most home prices have stayed steady or have even risen.

Since 9/11, there has been a national malaise. We are trying to enjoy the same lifestyle we always have had but it is harder to come by and not as enjoyable when acquired. The economy throughout much of this period did relatively well, but little of it was felt where it mattered most: in our wallets. In 2005, when we traveled to Chicago I remarked how surreal it felt to pay nearly $2.50 a gallon for gasoline. There was a sense of unease even then. Three years later, we would pop a bottle of champagne to celebrate buying gas at that price.

Americans are discovering a new and inconvenient truth: we can never go back to the way things were. To expect that we will have the lifestyle that our parents knew is folly. Those days are swiftly passing. We do not know what the new order will look like, but we have a good idea what it will not look like. This uncertainty breeds unease and malaise. It contributes to polls that show Americans are far more disgruntled about the shape of the economy than the statistics merit.

The era of the SUV is ending. We are not all ditching our SUVs at once but news stories like this one are a harbinger. We demand fuel-efficient cars. I am trying to order a Honda Fit for my daughter only to discover there are few on the lots. We will have to wait for one to be delivered. I hope that it will arrive before her classes start. When we add on the cost of $4 a gallon gasoline, her choice to go to a community college now looks a little less affordable,

The far-flung suburbs are likely to disappear too. What may eventually replace them is the quaint notion of a village. It is hard for many of us to imagine actually living in the same community where we work. In the future employees may be forced to give preference to employees with short commutes. My friend Sokhama lives in Columbia, Maryland. Columbia is about halfway between Baltimore and Washington. She quit her job at a D.C. law firm a few months ago and is currently unemployed. She has had a few job offers, but she has spurned them because all involve a bad commute. She has decided that her next job will be much closer to home.

She is one example of a general trend. Americans everywhere are realizing that they have to rethink their lifestyles. This is why in D.C.’s far-flung suburbs house prices are down 25% from a year ago. Certainly, the sub-prime housing debacle has a lot to do with it. Yet $4 a gallon gasoline is also a major factor. We crave certainty in our lives. Uncertainty is lowered by moving closer to diverse sources of employment and public transportation. A new urban migration is beginning. Modern prospectors know that this is an excellent time to buy before everyone else jumps on the bandwagon.

Bicycle commuting, which I took up a few years ago, is becoming chic. Among all the new light rail projects, expect many communities to also construct bike trails for easy commuting. This will give them a competitive edge against other communities and help encourage progressive businesses to move to their cities. Many families are trying to orient their lives so they need only one car. This will give these families thousands of dollars a year to spend.

The global climate change skeptics are reduced to a crazy handful. Academics suggest that recent flooding in the Midwest is likely a direct result of global warming and using the land in ways for which it was not meant. So far, hurricane season has proven to be benign, but it is just beginning. However, this year tornadoes have been unusually numerous and powerful and have begun earlier. It is hard to escape the feeling that we are reaping the results of ignoring our impact on the environment.

One of our retirement goals is to take a cruise around the world. We are allocating $60,000 for the once in a lifetime experience. Now I am wondering if this is enough money. Perhaps we will have to settle for a cruise of the Pacific instead. With the cost of diesel exceeding the cost of gasoline, I have to wonder if the cruise industry will be one of the casualties of this new reordering.

Our round the world cruise, along with the cross country car trip I had planned, are possible activities we will have to give up due to the societal reordering underway. Perhaps instead of using a car we will take a train across the country. It will likely to be crowded.

I am also looking at my third of an acre lawn, which I meticulously mow weekly with $4 a gallon gasoline. I am wondering if it is time to give up the lawn in favor of a more natural terrain. A lawn is yet another invention of man. Grass has been around for millions of years, but keeping it neatly trimmed is not possible without either a lawn mower or many goats. I do not see our homeowner’s association approving us keeping a herd of goats in our backyard.

If oil prices continue to skyrocket, society may look a lot shabbier in the future. I passed a tree service truck today. Will there be the petrol to fuel these behemoth trucks in a couple decades? If there is petrol available, will anyone be able to afford it but the rich? It is hard for me to escape the feeling that thirty years from now, if I am still alive, that I will hardly recognize the crowded, denser and noisier world that I will be passing to my daughter.

June 20th, 2008 at 03:04pm Posted by Mark | Sociology | no comments