November 2010: Mid-Term Elections

On November 2^nd, we had a general election in the United States.  It is called the mid-term elections because it is the election in the middle of the presidential term.  Barack Obama was elected President two years ago in 2008 and will most likely run again in 2012.   The mid-term election is seen as a referendum by the electorate as to how the President is doing.

President Obama was easily elected in 2008.  His election was seen as a mandate not just because of his margin of victory but also because the Democrats took both the House and the Senate.  It was a big deal.

The economy crumbled in September of 2008 and most people blamed President Bush for the mess the country was in.  It was a time for a change and people voted that way.  John McCain did not really stand a chance given that the economy melted in the very month preceding the election.  He did not help his own cause by downplaying the magnitude of the free fall we experienced at that time.

I voted for Obama.  That surprises many people when I divulge this little tidbit.  Mostly, I did so because I thought we needed a change.  The Republicans had moved too right of center, the wars in Iraq and Afghanistan were dragging on too long, and mostly the economic mess that was due to way too much deregulation which contributed to the sub-prime disaster that mostly caused the recession. 

I thought Barack Obama was as bright a candidate as we have had since I have been voting.  He is a very good speaker.  He was the opposition and we needed a change in approach.  I did not buy into the “Change” rhetoric of his campaign that extolled change without exactly specifying what that change would be.  I voted for Barak Obama contrary to what my demographics would normally have indicated.

Shortly after the inauguration as the President, his staff, and Congress quickly got to work to stop the economic hemorrhaging, people began to grumble.  The grumbling was about this country, The United States of America, being on verge of socialism.  Indeed.   

I had several discussions with this with my friend and advisor John Surak.  He was truly concerned beyond simple TEA Party rantings that this country was moving in a socialist direction.   He also argued that when we come out of this recession we will look more like a European.  The only question being was would we look more like the UK, Italy, or Greece. 

I agreed with him on what we might look like coming out of the recession.  I believe there is a fundamental macro-economic change happening.   I agreed that the policies were more socialist in nature than we had seen the past 20 years.  I disagreed that these changes would be permanent.  I believed that the recession would be long enough and severe enough that there would be a change in the Congress in the mid-term elections moving away from and even undoing any socialist policies.  I guess I am right.  I am not sure that is a good thing.

The Not American Century?  The 20^th Century is called the American Century.  It was the century when we became the most powerful military and economic country in the world.  We took over that mantle from, I suppose, the English.  Because of the US, the Lingua Franca of the world became English instead of the old Lingua Franca, which was French.  The dollar was THE standard in the world.  Countries like Argentina and Ecuador pegged their currency exactly to the dollar.  Hollywood exported the American image and aura to the world adding to mystic and envy.  Countries sent some of their best and brightest to our colleges and universities.   We funded projects wonderful projects through our aid and horrible interventions via other agencies.

Our industrial infrastructure was spared the ravages of World War II.  As a result, our industrial prominence solidified to the point of monopoly until the Japanese economic engine rose up in the 1970s and 1980s.  In the 1980s, we thought our reign might have ended.  We staved off the Japanese until their economy imploded and stagnated in the early 1990s.

With the turn of the century, we have been worried about our century literally being over and the Asian or perhaps Chinese century beginning.  The Great Recession has raised this possibility almost as evident to practically everyone whether they vocalize it or not.  This includes me.

Why am I inclined to believe this?  I do believe that we will come out of this recession, this Great Recession, as something less than what we were when we went into it.  We have exported so much of our manufacturing base that we are essentially a service economy.  Our deficit is out of control. 

Pensions except for government positions are essentially gone.  And as so many states are near bankruptcy, we will have to deal with the elimination of these pensions next.  I will not even get into Social Security. 

Most of what I have just said is my impression.  It is my view of what I am seeing and hearing around my.  It feels real and sadly it feels like what is actually happening:  a realignment of the wealth of nations.  Of course, I thought or was led to think this way during the 1980s and early 1990s.  Then, as mentioned earlier, we were worried about Japan as we are now we are worried about China.  Only time will tell what will actually happen.

One thing that really bothers me is the growing disparity of the haves and have nots in this country.   The distribution of wealth in this country has shifted measurably in the past 50 years and not in the favor of the middle class.  To me it goes hand in hand with the evolution from being a manufacturing country to being a service economy. 

·   1976:  8.9% of income went to the Top 1% of US households.

·   2008:  the Top 1% of households was took 23.5% of income 

·   The average hourly salary was $20.06 adjusted for inflation.  In 2008?  $18.52
http://extremeinequality.org/?page_id=8

·   66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.

·   36 percent of Americans say that they don't contribute anything to retirement savings.

·   A staggering 43 percent of Americans have less than $10,000 saved up for retirement.
http://finance.yahoo.com/tech-ticker/the-u.s.-middle-class-is-being-wiped-out-heres-the-stats-to-prove-it-520657.html?tickers=^DJI,^GSPC,SPY,MCD,WMT,XRT,DIA

The New Normal:  There is a lot of talk about the “New Normal.”  What is meant be this?   I have seen it used when both referring to the economy and also in regards to Supply Chains.  Basically, the New Normal is simply a quick way of saying the coming out the turmoil of this Great Recession things will not be the way they were.  Things will not return to what, going into the recession, we considered normal.  That is the Old Normal.  We will come out of this crisis different,  somehow.  There will be level set change in jobs, banking regulations, government control, etc.  We will never be what we were.  There will be a, simply stated, New Normal.  To those who use this term, the New Normal is something less than the Old Normal.

I do believe we will more like a European country hopefully more like the UK, France, or better yet Germany than Greece, Italy, or Ireland.  Our expectations will be less because we have lost so much of the GDP and middle class because of the loss of our manufacturing base and the jobs that came with it.

You have read in these pages the belief that the US was the market place of the world.  Our consumption of, well, just about everything was head and shoulders above that of consumers in any other country.  With the dampening, if not erosion, of the middle class and perhaps a chronically higher rate of unemployment, a more modest and more frugal American consumer be part of the New Normal.  Not to worry, there are enough up and coming consumers in India and China to more than make up for whatever we stop buying.

This is what I feel.  This is what I believe I am seeing.  It is not based on any real analysis or econometric modeling.  I could be wrong.  It also felt this way before Reagan was elected and the economy revved up for what was essentially a twenty five year run.  Could that happen again?  Many people are counting on it.  Many more are hoping for it.  My mind is not closed to such an eventually.  I just think there the probability of returning to the Old Normal is less than 50%.

This may not all be a bad thing.  We need to get a little of our fighting spirit back.  Certainly, we absolutely should learn to live within our means.  That applies to both the government and individuals.

We have a great university infrastructure.  We should encourage the study of engineering, science, and math.  We should encourage architects of factories and meaningful new technologies and products instead of architects and engineers of sophisticated and arcane investment schemes.  We need more Apples and absolutely no more Enrons or subprime mortgage schemes.  We need to build a sustainable economy that benefits all.

The other thing I know for sure is that the world is more complicated and unpredictable.  China could implode like Japan did in the 1990s and 2000s.  There may be other disruptive technologies that would favor American industry and workers that I just do not see.

Another point to consider is that the major economies are more inter-connected and inter-dependent than ever before.  Corporations are global entities more so than ever before.  That trend will only continue.  The headquarters may be based in one country but need to have a presence in one form or another in all their major markets.   Furthermore, in our fast changing world, economic drivers force businesses to have to be agile and nimble.  Transportation continues to become more expensive.  As freight costs grow and currencies fluctuate, the definition of lowest cost source can change just as fast.

We hear in the US that China is holding down their currency in order keep the balance of trade in their favor.  If this is true, that can only last so long before there has to be a correction.  The longer they wait the more disruptive the correction will be.  Tampering always adds variation to a business or economic process.

Vacillation:  Speaking of variation in processes, this mid-term election bespeaks of it.  Every two years, it seems, there is a flip-flop in one or both of the houses in Congress.  We move left and then right, states change colors from red to blue to red to TEA.  With each election the new president believes he has a mandate from the American people (maybe not in the hanging chads of 2000).  With this mid-term election, we hear the Republicans speaking of mandate again.  All I can think of is vacillation and that is bespeaks of an unstable process oscillating between… mandates.

Under Bush there was a free market and anti-regulation movement.  It was done, in my opinion to the point where carpet-baggers ran amok and practically destroyed our financial infrastructure.  At the next minute, we are over regulating and trying to emulate certain European socialist policies.  Two years later, we have a change in Congress with the winners vowing to unravel the recently enacted health care package.  Where is the steady hand?  Where is the sensible strategic course?

Such vacillations add variation to our economic processes.  I am not even mentioning the shear waste of money and legislative energy in raveling, unraveling, and then re-doing major initiative like health care  over again.  It is a serious time and these kinds of actions do not get us to the sane national plan we need to renew and invigorate our economic engine again.

The economy imploded under eight years of Bush.  Period.  No argument.  The keys to the car were hand over to Obama and crew while it was about to fly off of a cliff.  The new administration had to act and act quick. 

Were they too socialist in nationalizing large segments of the economy?  Would we have been better off letting GM and a major bank or three go under?  If we had done that would the unemployment rate be 5 points lower or 6 points higher?

We can argue that until the next election when the mantle of power changes again.  The bottom line is that they did what they thought was best.  No one will argue that what was done was done pretty fast.  No one will argue that we have probably bottomed out.  Certainly no one should argue that recovery is so shallow that the case for the New Normal makes a lot of sense.

I am a centrist really.  I tend to listen to both sides and pick and choose what makes sense and then develop an opinion and policy that is solid and lasting.  Such policies need minor tweaks and adjustments not major overhauls.  That is either my wisdom or my naiveté. 

Extremes in terms of being too liberal or too conservative either cost too much or not enough social welfare respectively.  Extremes in terms of no regulation to over regulation lead greed to flourish or stifle growth respectively.   Having a population with way too few haves and ever increasing number of have-nots is what?  It is not a definition of a top tier economy.  Things are not always optimized at the extremes.  I think I learned that in 1970 when I first took calculus.

Appendix – Mortgages:  Let’s look at the craziness of regulation and de-regulation in terms of mortgages. 

When I was growing up, bankers wrote mortgages and then owned the paper.  The people who sold and profited from the mortgage were essentially the same entity.  The entities were usually banks.  Mostly, they sold and managed mortgages in a 10-20 mile radius of their office.  i.e. They were part of the community and had to take care in the loans they made because they counted on that income for the next 25-30 years.

In these same times there were solid, tried, and true rules of thumb for qualifying for a mortgage.  They would not grant a mortgage for any more than say 30-35% of the buyer’s cash flow or take home pay.  Why did they have this rule of thumb?  They knew this was the limit of what people could afford and still have enough money to live on.  They knew that this policy good and while it could also be altruistic, the bankers followed this rule to minimize faults on the loans that would require foreclosures.  It was a good centrist, stable, and sustainable policy.

Fast forward to the recent real estate boom before the Great Recession, things had changed a lot.  The people that sold the mortgages rarely owned the paper (held the mortgages).  The people that sold the mortgages were brokers.  All they were interested in was making sales that generated commissions for themselves.  Period.  The entities that held the mortgages rarely held them for the term of the mortgages.  With the mergers of banks, mortgages moved around a lot. 

To sell more mortgages, the rules of thumbs regarding qualification and approval went out the window.  People were allowed to go in debt up to their eyeballs with balloon mortgages and other enticements designed for people to take on debt way beyond what they can afford.  This was done by making the payments cheaper the first few years.  I know, it sounds stupid and is certainly ill advised.  It presupposes that interest rates will not substantially increases and that housing prices continued to increase. 

People need to be protected, sometimes, against themselves.  If credit is too easily come by with limits beyond what people can afford, more and more people will get into severe economic troubles.  The laws of basic economics cannot be violated without consequences no matter what a mortgage broker might say in their sales pitch.

It goes against our sense of freedom and independence, or so the argument goes, to have too much regulation.  People must have the freedom to make choices and take individual responsibility for their finances.    I do not subscribe to that entirely for two reasons. 

First, there is the need to have some regulations to protect people.  Why do we have traffic laws?  Why don’t we simply rely on the freedom and independence of individuals to make good decisions?  Because without traffic lights, stop signs, and speed limits, it would be pure chaos on the roads. 

Second, many people do not have the financial wherewithal to make the right decisions when offered bad choices.  Variable rate and balloon mortgages certainly have their place for people who understand how to use them for short periods to bridge between a purchase and a sale.  Using such financial devices to take out a mortgage larger than one can afford simply adds risk to the equation.

On top of this, secondary investments were created on mortgages.  These futures and derivatives are only understandable to a select few.  To me they are Enron-esque devices that should be severely limited simply because they are not easily understood by the common person.  I figure that if I do not understand it easily, it is by definition arcane and simply a way for a few to make money off of the confusion of others.

The biggest argument that the system is out of control and needs to be revamped is the foreclosure mess we are in.  The record keeping is a disaster and bespeaks of just how much paper was sold solely to generate commissions.  The proper record keeping necessary for sound management from a mortgager standpoint was simply not done.

We need a system where people are free to make decisions within some sane guides and guidelines.

Appendix – Foreclosures:  It is Sunday, November 28 having spent the Thanksgiving weekend at my parents’ home in Livonia, a suburb of Detroit.  I woke up this morning to retrieve the Detroit Free Press to read about the University of Michigan’s seventh loss in a row to The Ohio State University.  I guess I want to wallow in the dismal recent record.  I wanted to read about all the speculation of what would happen to Michigan’s beleaguered coach, Rich Rodriguez.  Would the University keep him for a fourth season or show him the door for taking too long to turn things around and compete with the elite teams in the nation.

Instead of getting to the sports section as I was amazed at how thick the newspaper was.  In this day and age of shrinking readership, shrinking advertising, and hence shrinking newspapers, I was kind of surprised to see such a thick fat Sunday newspaper.  I wondered why?  Was it Christmas advertisements?  No.  It was something different.

It was instead an extra eight sections of the newspaper totaling 142 pages of what looked like want ads. It was not want ads.  It was the 2011 Notice of Forfeited Property Subject to Foreclosure.  It was a paid supplement to the Detroit
Free Press from Raymond J. Wojtowicz, Wayne County Treasurer (www.treasurer.waynecounter.com).   The supplement will be repeated on December 5^th and December 11^th as well. 

Wayne County is the county of the City of Detroit and the eastern, western, and southern suburbs of the city.  One would expect a large number of foreclosures here in one of the most depressed areas in the United States.  I was shocked to look at 142 pages of foreclosures.  I noticed 9 in the 14000 block of Strathmoor, the street we lived on in Detroit.  Amazing.  Depressing. 

I then read the finer print of the first page of this massive listing.  These 142 pages only include foreclosures due to lack of property tax payment.  Wow. It is even worse.  I shudder to speculate how many pages the list would have been if they had included all foreclosures.

On the front page, there is information on how to and criteria for applying of financial hardship consideration.  There was information on payment plans.  I wondered how many of the poor and disenfranchised actually get and read the paper.

It depressed me.  It made me appreciate the magnitude of the job Detroit Mayor Dave Bing is facing.  It made me sad for my hometown of Detroit.  It made me wonder about the recovery and the prospect for real estate going forward.