From Bricks to Clicks

I am a little worried that we are going to make a huge mistake trying to solve this global economic slide, and we are going to do it out of the best intentions.

It’s easy to look at the past to learn lessons and, in most cases preferable, but just because the World dug itself out of this ditch 70 years ago, doesn’t mean that we can do it again by using the same tools. The World is in a far different place than it was in the Depression of the 1930’s, we earn our money in a different way, and we didn’t come out of a global war in 1996: A warning, too, that the remedy for the cure then didn’t sit well with everyone on Earth, then. This time we can identify ahead of time the countries that will feel slight6ed by any kind of first world recovery. It is important to get as many nations onside as we can, because if we get another Germany or Italy in a decade, desperate to expand its lands in order to a perceived threat of some nationalistic kind, we could all be back at war, again. From the height of the depression to the outbreak of World War 2 was only seven years. 2017 could be a very bad year! But let’s stay close to home to start with.

The whole ‘New Deal;’ was based on home ownership. Although the quest for this in the US was most of the problem that got us in here in the first place, it shouldn’t be the focus of any recovery plans. We are more like the mid 19^th century as an agrarian economy began to blossom into an industrial one

Hardly anyone travelled to start new careers, or left their home state because somewhere else had more and better careers. Communication in the 1930’s was still by word of mouth or by written correspondence – look how we communicate today. We are in a much more fluid society today that virtually requires people to move toward ‘centers of Excellence’ around the world – cities that have proven that they are the places that people want to live, and have cashed in the most on the technology boom of the last 20 years. In fact, taking a wider historic view, perhaps individual home ownership is a tried and failed experiment, that started growing in the late 1940’s, and has now proved itself to be outmoded, old fashioned, and useless.

This is a bold idea, obviously but let’s look toward a future when everyone takes a job for 5 years, and enjoys 4 careers in a lifetime. For anyone under the age of 35, this is a reality, not a ‘what if.’ If we as the largest two generations are looking toward retirement (which we are), there will have to be a new model on the way up, and it has started, believe me.

Education will also have to change – away from a one-size fits-all model where everyone is shoe horned into the same small array of boxes. After all, if you don’t know what career you are going to go into, what’s the point of preparing a child for a future they may not be able to get – we have already realized that this system is broken. A massive commitment to early-childhood development is required, and then into a multi-streamed program of learning that readies people for the realities of life as well as working-time.

 

If we know that everyone wil be moving around, and the only homes left on a permanent ownership basis will be for this soon dwindling generation or two, whole areas of foreclosed properties could be cleared for low cost rental units (based on neighborhoods, not tower blocks. Something else that we have learned), that are ready for this transient future. These neighborhoods would also attract creative businesses, because they know that a new generation would be moving in. Cars wouldn’t be required, so we would also be helping the environment. The retail and other support services required would create a market for the old Mom and Pop store to return – although in a new guise. The banking industry should be looking ahead to this new model (or something like it.). Now is the time since JP Morgan is the largest depository institution, and Wells Fargo reported a $1.6 Billion 3^rd quarter.

In those three paragraphs we have re-designed the future, corrected the education system, softened Man’s impact on his planet, and readied ourselves for the next generation, while solving the economic crisis, and showing the developing world the next step forward. If the phrase:”You shouldn’t waste a good crisis”, voiced by the President-Elect’s financial guru recently upset some, then this plan is bound to, but that phrase is correct. It’s about time we moved away from a brick-based economy to a click-based one – and haven’t we been saying that for a few years, now?

This Week’s conspiracy theory

The announcement this week that two small, regional banks have gone under due to the credit crunch, and were promptly snapped up by Mutual of Omaha leads many to believe that the entire ABCP crisis was engineered, or at least encouraged. While I like a good conspiracy theory as much as anyone, I think that there is a far more easily digestible siuation going on than a hands on market manipulation: It’s called human nature.

Firstly, what would someone gain from allowing a situation  such as the US credit crisis to get out of control. The answer is property. Let’s say you have won the lottery, and are looking to take a $40 million stake and double it. If your immediate reaction to that idea is “Why would I? Isn’t $40 Mill enough?”, then you aren’t thinking like a company. So let’s throw another obstacle in your way. How about if you had to look after a gigantic extended family? Twenty people are relying on you to look after them – a small shareholder pool, but you can suspend your disbelief for a while. After all, this is Superhero movie season, so you may be used to doing this on a weekly basis.

You have your $40 Million, and you notice that there are five properties on your street up for sale, and another five that you know the owners are out of work. You talk to your local real estate agent, and he says that the interest rates are about to go up, so you snap up the 5 empty properties, and go and have a chat with the five unemployed owners. You offer to lend them money, if they need it, because you want to give some away, and they take it. You also tell them to stay in their houses because interest rates are going down. When rates rise, you call back your loan to these five familieis, and when they can’t make the payment, you start legal proceedings knowing that the only way they can give you anything is by selling their houses. You snap them up at a low price and you have manipulated this market to now own 11 properties on your street (including yours), and your extended family is happy. What was the distasteful part of that? Lying to home-owners that you know cannot afford much? Starting legal proceedings against them knowing it would lead to their being homeless? Looking after your shareholders? The choice is yours, but what you actually did was correctly predict what people would do in a certain situation. You now own 10 run down properties, but you own them at a point where their value is only going to go up, so sooner or later your shareholders will be selling them at a huge profit for you.

Back in the real world (or what passes for a real cyberworld in international debt-financing circles), this could certainly be achieved ignoring a couple of warning signs. If you can see that someone is going to buy debt from homeowners automatically because their debt earns your portfolio money, you are going to encourage them. Obviously, the only logical end to this is massive amounts of foreclosures, but when you are earning money, who cares about logic? There are more and more obscure, debt-laden investment vehicles around that are being traded at the speed of light by computers (and their operators) globally. Soon, these trades will purely be between computers, and they do not see the human cost at the end of the rainbow. President Bush is home shopping in Dallas, apparently, and that city’s foreclosure rate is about 25% of all residential properties, so he should have quite the choice.

If a large bank sees what the logical end will be, and has the money in the bank to buy several smaller banks, would it stop this lightning-fast financial impending auto crash, or would it say to it’s shareholders something like this:

“We can see this global ABCP trading process will not only make us money in the short term in trades, it would open up a situation where many properties are owned by small banks that would not survive a run. If we bet big now, knowing what the end product would be, we could see their demise as a positive for us. We buy them out, and we have inherited a couple of million residential homes, that we can afford to sell at a lower price now, and they will rise in value over the next 20 years”.

So, where is the wrongdoing here? Because major banks are using their knowledge to make money now, and later, or the fact that they are cutting down the amount of consumer choice in the future? Perhaps it is that they are simply fulfilling their shareholder’s expectations twice or three time over.

Mutual of Omaha did not do this. The shareholders that are making money did. It is us who are the dark shape in the background manipulating markets as a single voice. Our company stocks made this happen. The major stock holdings held by individuals in the World are those over 50 years of age. When they are retiring on their stock earnings, what will everyone else be living on? If you are looking for a bad guy, it’s probably you.

What is your house really worth?

What will your house be worth in 15 years?

Many of us are assuming that the equity we have in our homes will be used in part for retirement or upgrading to larger properties. In the current financial climate, it is worth checking exactly how much that actually is.

In August 2007, the ’sub-prime’ mortgage market imploded, leading to almost 10% of all North American residential properties either in foreclosure, or quickly getting there. What in the name of Martha Stewart happened?

It’s an example of how the investment industry has invented new and often inferior ways of selling exactly the same thing – stocks and bonds. Our Boom generation has so much money in invested in  other people’s invisible worth (including debt), that we often make decisions on how to make some money without looking at all of dangers that lurk inside transactions that trade computerized hands globally at the speed of light every minute of every day.

Asset Backed Commercial Paper (ABCP’s) are a symbol of the ever-increasingly complicated Investment industry. These are short-term notes backed by securitized loans (ranging from everyday auto loans to immigrant loans) and many more long term debt, like unleveraged CDO’s, and more letter collections that we haven’t heard of. It results in a ‘layer cake’ of debt, each strata being a different form of debt, that is sliced into manageable packages, and passed onto financial institutions to hold for short amount of time. Like any kind of rental, banks and savings and loans, earn profit on the debt for holding it before passing on their ’slice’ around the tea table to someone else.

Now, what happens when someone receiving a slice of cake says:” These are a little too much for me, I’ll pass.” Too much in this case being too much risk to hold at once. For that split second, some institution (And many think it was Saudi or Chinese in origin), decided that they had enough debt on their plates for that split second, and the entire line stopped. Plates can’t go forward or back, and everyone looks at their debt more closely. Here, they see that there is so much residential mortgage debt attributed to everyday folks, whose only standard for receiving a mortgage was that their heart was beating in their banker’s office at the time.

When the line stops, the debt comes back to it’s originator - large scale investment banks, and we all know what happened to one of these. Bear Stearns has gone, under a mountain of returned debt, and the US government had to step in to sell it at a fire-sale price.

Because house owners do not have a close relationship with the mortgager, they simply walk when they can’t afford to pay a mortgage. House prices plummet (and it has happened in the last year or so) and, as a result – yours is probably worth no more than last year, and possibly less.

In a future post, we can examine what effect this has on towns and cities, so if you have a comment, or more facts, let’s have them and we can include them.

This is not getting any better, it’s getting worse. Some pundits realise that this could be the tipping point that sends North America into a 10 – 15 year recession. That’s the next 15 years before your property is worth what it’s worth now.

So check your property price, and imagine living on that after 15 years of more everyday price rises; or look back to 1993, and see what your house was worth then, and how far would that get you today?

The World is changing, and you need a New Future in order to get over this, and other new realities. Let’s get ready for change.