Friday, February 29, 2008

The Upcoming Economic Collapse

By Ed Smallwood

In my life, there have been moments where I have been demonstrably wrong. When Yugoslavia broke apart I believed at the time that the father of the current President Bush should recognize Bosnia as an independent country. I went along with the conventional wisdom, and did not see that Serbia would invade and cause so much misery and death.

However, there are times when I am right. Usually this happens when I have good information. An example is with the current situation in Iraq. I believed before we got into Iraq it would be a disaster to do so. I heard from people who had been weapons inspectors in Iraq that there were definitely no weapons of mass destruction there. I read voraciously and discovered that there was no link between Saddam Hussein and al Queda. In fact, you wouldn’t even say that Saddam and Osama even liked each other if you were well informed at the time right before the invasion.

This is one of those times in my life that I really hope I’m wrong. Unfortunately, I don’t think so. I feel like I’m pretty well informed on this topic.

Here is the situation we are facing right now. For most of my life, we have been exporting our jobs. In the ‘70s and ‘80s, we exported many of our manufacturing jobs to countries like Japan. The theory was that these jobs would be replaced with high-tech jobs. This did happen to some extent. Then starting in the ‘90s, we started “outsourcing” our tech jobs. There really isn’t any reason these jobs have to be done in the U.S. when you can transmit the result of that work anywhere in the world in seconds using email. It makes good business sense to have the work done in the cheapest market possible, at least in theory.

If you follow unemployment figures you wouldn’t realize what’s been happening. This is because many of the people who lost their high paying high-tech jobs went into the service industry in some way, canceling out the lost job but not the lost wages. I’m a good example. I used to be a Quality Assurance Analyst (hardware and software) at a small high-tech company. When I was laid off a month after 9/11 I had enough saved up to stay out of the workforce for a year. I got a job at a local movie theater as a projectionist. I’ve worked my way up to House Manager, but I’m still not making as much as I was when I was laid off at the high-tech company. Nobody I’ve kept contact with that was laid off from the same company went back into high-tech. None. Many of the projectionists that I worked with when I first started at the theater were from the same background as me. I was working with hardware engineers, software engineers, sysadmins, and others. People that have a lot of valuable knowledge. One of them got back into high-tech. The others are either still working at the theater, or went on to other service industry jobs.

For those people who have stayed in the high-tech industry or other well paying jobs requiring a degree, they now have to compete with people coming into this country with H1-b visas. I’m going to be blunt: There is only one reason to have these visas--to increase competition for jobs and decrease wages in this country. You cannot convince me that there aren’t enough engineers in this country to fill job vacancies. I know too many of them personally.

So, the first element of our looming financial disaster is a real-world reduction of income, even though people are working. Our workers cannot keep the economy afloat with a decreasing income.

So if our workers aren’t making enough to keep the economy afloat, how about if they spend the money that they’ve saved? I did that between the time I was laid off from high-tech until I started working at the theater. I was very lucky to make it as long as I did. The reality at this point is that people’s savings rates in this country are at rock bottom. They haven’t been this low since the Great Depression.

Okay, income is out, savings are out. How about credit? Can we spend our way out of the coming financial disaster with credit? Oh, heck no. That’s actually the big problem right now. The Housing Bubble collapse is all about this. In addition to being a House Manager at a movie theater, I’m also a Real Estate Agent and REALTOR®, so I have a fair amount of knowledge about this. Through much of this decade, people were able to borrow against the equity of their homes. This allowed them to continue spending money and keep the economy afloat. As long as housing prices kept going up, this could continue.

However, nothing lasts forever. In the last 18 months, people started to realize that the low, introductory rates on their mortgages were going to go up, and they would be expected to make payments they couldn’t afford. At the same time, people stopped buying homes, forcing home prices to stagnate or start to drop. Those facing higher mortgage payments couldn’t or can’t refinance their way out of it. As these people fall behind in their mortgage payments, their credit scores start to drop like a brick, and they lose the ability to borrow money through their credit cards. This brings their spending to a screeching halt, and hurts the economy in the process. If their home is finally foreclosed on their credit scores will be nailed to a low level for the next ten years.

Okay, so a few people will have bad credit for the next decade. Who cares? Well, according to my sources, as many as two out of three homes in the Stockton/Sacramento area of California are expected to be foreclosed on in the next 18 months. Also, as much as 90% of the homes for sale in the Los Angeles basin are hoping to be sold short. In my section of San Jose, about 35% of homes listed are short-sale hopefuls as of a few minutes ago. In case you don’t know what a short sale is, it’s when the bank agrees to allow the owner to sell the house for less than they owe and consider the loan paid for anyway. This saves the borrower’s credit score, and keeps the bank from having to go through the expense of foreclosure. Not a bad deal, if it works, which is hardly guaranteed.

Either way, the lender isn’t going to get back what they loaned out. The borrower is out of their house, probably with no savings whatsoever and less than stellar credit.

So we can’t spend our personal funds to stimulate the economy, because we don’t have it. How about the government? Can they prime the economy?

Not really. We’re spending trillions to stay in Iraq and lose in Afghanistan. With the tax cuts for the rich that we’ve had, and the administration’s insistence on keeping them, we have nothing on the federal level to spend. Unless we borrow and put the country even more in debt, which will cause interest rates to climb, and inflation to take an even larger bite out of your now lower paycheck.

This is why the stock markets have been so jittery lately. International economists are really worried right now, because much of the world’s economy is based on the idea that other countries make stuff that the United States buys. They are rightly worried that their economies are going to suffer when this cycle of goods and cash flow is interrupted.

Now, throw in the fact that we are probably past peak oil production and fuel and plastics are likely to go up in price from now on, and you can see just how bad things are getting.

So, what are we going to do? Right now, in the short term, absolutely nothing to prevent this mess or make it less painful. We’ll have to wait until after it is clear who won the Presidential Election to see if anything will be done to reduce the severity. Until then, the current administration has made it very clear that they will only make those changes that will put off the coming financial disaster until after the inauguration in January.

What do we need to do? To some extent, we’re going to have to prepare ourselves for what is likely to be a huge financial disaster. I’m guessing that in the next 18 months we may actually be in an Honest to God Depression, unless there are some major changes in this country. With almost no source of capital in this economy I do not see any way to avoid some kind of economic disaster. There are changes that can be made to change course and make this a Recession instead, but these are huge changes and I’m not certain if there is the political will in Washington to do this. Here’s what I see as being the best course of actions:

Reduce the pool of job applicants. We can’t keep paying people less and expect them to buy more. It simply won’t work. There are many ways to reduce the applicant pool, including:

1. Eliminating the H1-b visa. We need to pay our best educated citizens better now. The H1-b visa is used by corporations to pay less than the going rate for well-educated people, not to fill vacancies that can’t be filled. It’s a total scam for corporations.

2. Kick illegal immigrants out of the country and keep them from coming back unless they want to play by the rules. Stop talking about amnesty. There should be no advantage to those who are here illegally over those who didn’t. Border defense is not in vogue in Washington right now, but it better come back into fashion quickly. After all, illegal immigrants don’t vote (at least, they aren’t supposed to.) And don’t tell me I’m anti-immigrant. If you overstayed your visa and didn’t follow any of the accepted methods for staying here legally, or entered this country without documentation of any kind, you’ve broken the law. If you still don’t understand that, I’m not going to waste time explaining it to you. Perhaps if we redefined these people as job-thieves we could get this message across better.

3. Decreasing college tuition costs and college textbook costs, or alternately, reducing interest rates on college loans. Increasing the number of students will reduce the number of people applying for jobs, while training our work force better, making this a two-fer. A better trained workforce is a greater asset to our corporations, and to our country as a whole.

4. Increase the pay and benefits for enlisted personnel in the Armed Services. We need more people in the armed forces right now, so let’s make it more attractive to young people to join. Besides, we ask these people to do a darn tough job and risk their lives doing it; we should pay them in accordance.

5. Give wage earners a large tax deduction for a stay-at-home parent, enough to cover their potentially lost wages. Having a parent stay at home to raise children will help them to be better students and more stabile adults. This is my favorite family value.

The non-exclusive alternative to decreasing the applicant pool is to start actually backing Labor Unions, and also expecting the heads of those unions to act like the leaders of labor unions. I remember when I was a kid a strike by a labor union could bring the whole country to its knees. The Teamsters strike and the Hotel Workers strike come to mind immediately. These days, it barely makes the local news, unless it’s the Writer’s Union, which means we’re just going to watch more UnReality TV. It’s time for Labor Unions to stop being defensive, and start actually recruiting members and expanding their reach.

Immediately increase government revenue. Sorry, this means tax hikes. There is no way around it. If you continue to spend more than you are taking in, eventually you will either have to pay it back or file for bankruptcy. This is the basis for Fiscal Responsibility, something the Republicans used to claim as their own. In fact, the Republicans in power for most of the last 10 years have been doing their best to ignore this fact. You can’t ignore it much longer. We can’t simply pull out of Iraq, unless you want a huge mess in the Middle East, so we’re committed there. We have to start paying for it, and that means the rich are finally going to start paying their fair share. I strongly recommend:

1. Restructuring the Alternative Minimum Tax so that it affects only those people making at least $150,000 yearly as the first step, and I’m not counting phantom bonuses from short-selling a home, I mean actual income that can be used to buy things or invest.

2. Bringing back the Death Benefit tax as it was would also be a good step.

3. We absolutely will have to increase corporate taxes, even with their effects on consumer prices. That is simply unavoidable if we want to keep interest rates in check while stimulating the economy. The best and most important way would involve eliminating the tax advantage of offshoring Corporate Headquarters to tax haven countries such as the Caymen Islands. We also need to remove tax advantages of offshoring American jobs. This never made sense to me.

Fix and improve the national infrastructure. Our Highways are not in great shape. Our electrical grid is in even worse shape. Airports are clogged chronically. If we don’t tackle these problems now we limit our ability to climb out of an economic problem, regardless of the severity.

Invest in new technologies. We haven’t made this as a priority in years in this country. I don’t just mean on the Government level or just the corporate level. I mean both. We need to increase our Government spending on basic research. This is the kind of research that may not pay off for decades, but eventually could lead to a big payoff. It’s the kind of research that no corporation is likely to invest in. But to stay competitive, we need to increase spending in research that is likely to pay off soon. The best way to do this is through corporate grants or corporate sponsored research centers. Giving corporations tax breaks for doing research makes much more sense to me than giving them money to figure out new ways to send American jobs overseas.

Fix the problem with people’s credit after foreclosure. I’m not sure how this should be done. If I were in Congress, I would be asking the three credit reporting bureaus, TransUnion, Experion, and Equifax, to remove foreclosures from a person’s credit history after a much shorter period of time automatically, especially if that is there only major problem. In addition, I would ask them to remove it if an adequate reason for the foreclosure could be given, such as a ridiculously high foreclosure rate in the same area, or the closing of a major factory. Giving millions of people a 10 year time-out from participating in the economy isn’t going to help anyone if in fact they can buy things and stimulate the economy. If the credit reporting agencies aren’t willing to do this, legislation may be in order.

It’s clear that the next several years are going to be difficult. We’re just now starting to wake up from one heck of a party, and the hangover is going to be huge. Unfortunately there is no one solution to a problem this vast. These suggestions are just my ideas after analyzing this vast economic situation. I’m sure I haven’t covered everything, and would love to hear your ideas, anecdotes, or analysis of what is happening. Please feel free to comment.

*Addendum 3/1/2008-There has been an interesting news article posted at Yahoo News about an activist group in Cleveland that is taking on predatory lenders.

Folks on Humphrey Hill Drive were still waking up on the icy Saturday morning the shark hunters came to town. They rounded the suburban traffic circle in a pair of rented school buses after a half-hour ride from far more modest neighborhoods, rumbling to a stop at the Garmone family's driveway. Forty-two caffeinated Clevelanders piled out, their leaders carrying bullhorns.

Their quarry, Mike Garmone — a regional vice president at Countrywide Financial Corp., the nation's largest mortgage lender — didn't answer his door. So they deployed, ringing bells at the big homes with three-car garages, handing out accusatory fliers and lambasting Garmone and his company's loans. Before departing, they left their calling card — thousands of 2 1/2-inch plastic sharks — flung across Garmone's frozen flower beds, up into the gutters, littering the doorstep.

The commotion was the work of an in-your-face activist group called the East Side Organizing Project, with a paid staff then of just two, mobilized to battle Cleveland's mortgage "loan sharks." Years before the rest of the country was rocked by the fallout from aggressive lending, their neighborhoods were already home to the nation's highest concentration of foreclosures — and they were fed up.

This is the kind of activity that may be needed to wake up lenders. You can't foreclose on millions of homes in the U.S. without affecting the economy-and your own bottom line. Either they will begin to understand this, or like Countrywide, they'll have to merge with stronger lenders, or just go out of business.

You can find the whole article at Yahoo News.

* Addendum -3/3/2008, 1:15 AM - Two interesting articles over at Yahoo this evening.

The first one is about the financial literacy of the average American-or lack thereof.

Americans don't understand debt, which may be one reason that they have too much of it, according to a survey released Tuesday.

The survey presented 1,000 people with a hypothetical scenario about credit card debt and asked them to compute how long it would take to pay it off. Only 35.9% of the 1,000 respondents could figure out how many years it would take for the amount they owe on their credit cards to double.

Full article over at Yahoo Personal Finance.

The other article is how Asian markets are tanking on fears of an American Recession.

Most Asian markets tumbled Monday as investors reacted nervously to a steep decline on Wall Street Friday after disappointing economic and corporate news reawakened worries about a U.S. recession.

Japan's benchmark Nikkei 225 index plunged 4.5 percent to close at 12,992.18. Markets in Hong Kong, South Korea, India and Australia also fell sharply. However, shares in mainland China advanced.

Full article over at Yahoo News.

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