America’s Dark Ages - A View From the Edge of the Abyss

As we are all discovering and about to experience personally, our lack of focus and responsibility as a nation is pushing us to the edge of economic disaster. This casino economy of get rich quick and feel no pain strategies has really back-fired on us all. I have coined this the greatest economic transition in the last 100 years and the strongest test of capitalism in that same-span. This is the advent of the new “Inconvenient Economy.”

Instead of solutions we have buck-passing, even when the bucks are gone. Last week I heard the same Wall Street gurus who have whined for the last 40 years that Big Government needs to get out of the way, now blame this meltdown on a Big Dumb Government that did just that – letting Wall Street have its way. Wall Street cheerleaders, economists, and flaks want us to forget that it was their lobbyists who paid off Washington to reduce regulatory oversight and thereby allow the free market, by their account, to police its own problems.

Now the investment houses and banks are falling like dominoes. We do need a bailout – but not the one about to be implemented. Instead, we need one that is fair to the taxpayers, not just the moguls with the money to buy into a pricey game, bet big and sloppy, and then folded when they couldn’t meet the call.

The castigation of many economic pundits on this week’s talk shows has been directed not at the captains of the financial industry but the sailors below decks – the rest of us. American taxpayers bear culpability in the economic collapse. We did participate in this get-rich- quick easy credit disaster -- the lottery syndrome. Our inherent desire to make an easy buck and find a better life was unfairly exploited by multi-national money merchants and their misleading offers. And no one in government was there to stop them.

We are a society of laws – laws to protect consumers, laws to prevent malfeasance, laws to prevent the powerful, greedy and corrupt from preying upon the rest of society. For a decade we laid those laws on financial responsibility aside while the banking system pursued profits without restriction, without observation, without regulation.

I stood at my son’s school last week for parents and kids flag event and listened to the Pledge of Allegiance, wondering all the while how we as a nation indivisible, a nation of liberty and justice for all can endure if even a national economic crisis can’t shake politicians out of their petty partisan politics. We are in the midst of an economic firestorm rivaled only by the Great Depression, yet like Nero, our leaders only fiddle.

If the American economy goes up in flames, the world will feel the consequences. Americans fuel the global manufacturing engine – we consume 22% of the products sold worldwide. This unparalleled consumer market is what keeps foreign governments financing our mushrooming debt. If our consumerism falls precipitously as it will unavoidably do in an economic disaster, foreign nations’ support that stabilizes our economy, and their own, will crumble.

I call the result of this ruination, the New Dark Ages. The first Dark Ages were brutal times ushered in by the fall of the Western Roman Empire. Ruthless feudal warlords made land grabs and impressed innocent people into their liege service without regard for anything but the power and opulent lifestyle of the ruling class. Perhaps we are already under the spreading penumbra of the new Dark Ages? Certainly we are heading that way.

The Dark Ages were a time of institutionalized brutality. Roving horse-bound invaders charged around the countryside, pillaging and murdering. Religious wars were waged with brutal abandon - Muslims against Christians, Mongols against both. The populous was malnourished, uneducated, wasted by disease and highly exploited for the needs of an elite few. The Roman advances in culture, innovation, and international trade ground to a halt.

Can it happen it again? Our world is becoming, in its own way, no less dark than 1500 years ago. It is an isolating darkness, which afflicts each of us but brings none of us together. All the while those who reject their fiscal, national, community and family responsibilities continue to collaborate and dominate politics, education, and society. Our vaunted innovation, our melting pot of immigration and diversity and higher education is on the decline, our war-making, and religious intolerance on the rise. Without an engine of economic progress, America will fall back on modern day looting – exploiting its military supremacy to grab what its economic vitality can no longer win.

If Americans do not take back responsibility for our national future from our corrupt leaders and our corporations, we cannot begin rebuilding our nation. We can do it. John McCain and Barak Obama cannot. They haven’t the ideas to make the sea-changes our society requires such as true nation rebuilding, nor the will to enforce those changes upon a monetized special interest driven political system which supports them. It is only from our own efforts, that America can become again the best example of how to achieve individual dreams through freedom of opportunity, not by suppressing the rights and hopes of others.

But public trust must be re-established so that by doing so this opportunity for a turn around or work out will not be squandered or worse yet become just another scheme to make those same robber barons that set this up get even wealthier at our expense.

How to begin to restore that trust? Congressional intervention to restore fiscal stability to our financial markets must come with some very steep costs and painful lessons to those who set this in motion. As reported in the New York Times lately, Sweden turned around their credit crisis and saved their own failing banks in 1992. To do so required an investment of nearly 4% of their GDP. If that sounds extreme, consider that our proposed bail-out is going to top more than 5% of our own GDP.

The Swedish solution worked for them fifteen years ago. It can work for us right now. Banking institutions must write down their debts and refinance them at current real market values not inflated numbers from before the real estate bubble birth. Next, the banks must allow those debtors who can afford the lower payments to continue to make them. These write-offs would be absorbed by our government as stock warrants in those companies that can be sold later for a profit, as was the case in Sweden.

The proceeds from the government’s profits can later be used to invest in our next great wave of innovation– fostering the growth of the green energy technology revolution to break our addiction to fossil fuels, empower new manufacturing industries, and rebuilding our crumbling physical infrastructure and improving our homeland security systems. This is true economic nation building. It creates innovative new capacity for people to work and earn a living while creating economic prowess as a nation and acting sensibly to reduce and someday eliminate our addiction to fossil fuels.

By instituting a transactional fee on all stock sales and financial market transactions, as was done in the United Kingdom, we can curb excessive risk-taking on financial derivatives that are not based on sound opportunities. The proceeds of the transaction tax could be used to begin paying down our bloated national debt.

These two steps alone would do much to right our troubled economic ship without imposing significant tax increases on the working population. Our tax code is in need of significant real fixing, so that the rich and corporations pay their fair share. But to tax the working class to pay off Wall Street’s blunders would not only further alienate citizens from government, but further handicap those who can revive our economy.

Are we to take action, and require it of our leaders? Or are we to find ourselves the peons looking in on the gated communities of a wealthy class that believes, to paraphrase Twain, in welfare only when it is for the rich.

The road to a New Dark Age is being paved right now, bailing bad debts out of a sinking Wall Street ship and pouring the money right back in. If we don’t right size the ship of state, we are left to chant a new flag-saluting motto: - “I pledge allegiance to the flag of Un-united States of America, and unto the Republic for which it has been sold to special interests and foreign investors for favors, one nation under duress, with chaos and debt for all.”

But even that simple a eulogy is going to be hard to read in the dark.

Comments

[Don Holbrook]

Foreign Direct Investment (FDI) will lead the recovery:

The main beneficiaries of the real estate downturn in the U.S. are cash-rich offshore buyers, whom the report predicted will continue to take advantage of the weak dollar and will buy trophy properties in major 24-hour cities.

With the combination of a rather weak US dollar and hammered real estate values coupled with a vast and enormous economic resiliency reputation many cities will find that numerous new business investments will flow to their communities from abroad. The oil rich countries still see the US as a strategic and value oriented investment when compared to other less stable and/or less valuable real estate plays.

Americans will need to the foreign investment fears to fully enjoy the inflow of such major investments. FDI will prove to be a healthy cure for the economic flu infecting the US economy and consumer confidence right now. Expect many of our traditional manufacturing industries, retail centers, multi-family properties and entertainment destination properties and new projects in those categories to be part of the economic rebound. As I have often said, the energy costs of delivering products to our hinterland and from far abroad will drive and fuel a renewed investment into American, Canadian, and Mexican manufacturing facilities and capacity over the next decade from FDI.

One of the main issues to remember right now in this time of economic chaos is that not all industries are down and out. Last week, I participated in the IEDC Site Location Consultants forum, and noted to the audience that this current economy is red hot for tourism destination entertainment projects. During these times people stay closer to home and do what is referred to as "Staycations."

So tourism destination projects are recession resistant because they do well in either type economy (bear or bull). Understanding a communities brand value and unique opportunities should be the foremost focus of economic developers during these tough times.

[Don Holbrook]

This morning I read a follow-up to the recently released report by The Urban Land Institute. I thought a little more in depth commentary was greatly needed. Many of my clients and colleagues are befuddled about the recovery of our economy. No Surprise that most of the early recoveries at the local level will be in What Richard Florida would call, Creative Class Strongly positioned locales and those with the most robust and diverse economies. See the article below.

Real Estate Markets Most Likely to Rebound
By Dorothy Pomerantz, Forbes.com Nov 3rd, 2008

If you're a homeowner seeing property values plummet, look to the commercial real estate market for solace. It might tell you which areas will recover fastest--and which will likely remain weak.

The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, Realtors and Real Estate Investment Trust executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.

The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don't have a glut of condos or office space.

In Depth: Best and Worst Places for Real Estate Investors

These traits landed Seattle the No. 1 spot on the list. No city scored above a 6.15 on a scale of one to nine (one being an abysmal place to invest and nine being excellent).

Seattle is "a diversified market, has a good base of business and is becoming a 24-hour city," says Stephen Blank, senior resident fellow, finance, of the Urban Land Institute. "It's going to be in a good position to come back."

Although the city is suffering from the loss of Washington Mutual and the downsizing of Starbucks, Boeing and Microsoft are still relatively strong. Apartment vacancies are low and there aren't too many new buildings going up, meaning the market won't be oversupplied. The same is true in the retail space.

San Francisco comes in second with a 6.12. The City by the Bay learned from the tech crash of 2001 not to overbuild. There is a reasonable supply of office and apartment space, which should limit vacancies. San Francisco's port is also expected to help the city during the downturn as Americans continue to rely on Asian imports.

Washington, D.C., New York and Los Angeles round out the top five.

Of course, there's no guarantee that an improved commercial market will lead to an improved home market. However, investors have a better chance of seeing home prices rise in fundamentally strong markets like Seattle than in struggling cities like Detroit.

It landed at the bottom of the list, scoring a 2.24. Detroit has been reliant on the car industry, which is rapidly shrinking. Other businesses are unlikely to fill the void in the next few years, which means the city will be hit hard by further economic struggles.

New Orleans also lands near the bottom with a score of 3.33. The city has been losing businesses to Houston, Dallas and Atlanta since Hurricane Katrina hit in 2005.

The other cities at the bottom of the list-- Columbus, Ohio, Milwaukee, Wis., and Cleveland--suffer from dying industries and lack of tourist appeal.

Recent attempts to turn downtown Milwaukee into a thriving 24-hour city haven't been enough to protect it from the coming downturn. Increasingly picky investors are expected to favor higher-quality port cities over Midwest towns.

And while Columbus has the potential to become a major shipping hub for goods traveling cross-country, that revitalization may have to wait for a stronger economy and a government focused on improving the nation's roads.

For now, prospects are dim.

[Don Holbrook]

On Dec 11, 2008, at 7:06 AM, Jeffrey Finkle wrote:

IEDC will meet with Obama Treasury Department transition team officials on Monday. They are asking us what an economic stimulus should like and what the economic development community would like to see and what would work.

I could use your help with what types of activities that you think could assist in creating jobs the quickest. You can address that in any number of ways including: the creation of green jobs; shovel ready infrastructure projects; capital access; etc. This is not limited to programs at Treasury or limited to spending at any particular agency.

IEDC board member Wayne Schell, head of CALED, has one of his board members on the Treasury Transition team and he arranged for the meeting.

What are your suggestions?

I could use your insights by first thing Friday.

Thanks for your help.

Jeff

In response to this email, I offered IEDC Economic Transition Team the following comments:

Jeff

My beliefs are simple. Our country needs to focus the stimulus on creating jobs for Americans that are sustainable not shortsighted. The current automotive and other banking stimulus packages have not rebuilt consumer confidence. Our country needs to be focused on creating a new economic base that will be the leader in innovation especially in green technologies, retrofitting buildings and homes for better energy conservation and alternative energy systems. Of course the building of truly alternative energy platforms in the way of energy production, transportation options and general mobility, which consumes 83% of our energy consumption is critical. Much of these costs can be controlled by consumer choices and simple redevelopment strategies. In other words, create Green Collar jobs and they will create traditional jobs for the mass of blue collar workers whom possess the skills to build and deploy this new paradigm shift. This would be our equivalent of the New New Deal for America today. Creating a robust infrastructure program for roads, bridges, rail systems, wireless and wired infrastructure as well as creating a robust alternative energy infrastructure grid for consumer uses. This would also require that we focus on the expansion and modernization of our electric, gas and other traditional power distribution systems. We would focus on making our ports safe from the harm (air, sea and rail) and our borders secure. By focusing our energies on nation building (rebuilding) we would create jobs for the average American and thus restore consumer confidence in our system while building our competitiveness. The reason I feel homeland security is part of this equation is it would also give us the necessary peace of mind to know that by modernizing the infrastructure of our ports and their inspection processes we are creating a more secure homeland and thus not as vulnerable to terrorist attacks. This is especially important in the vein of pulling back and reducing on our armed presence in Iraq, which would reduce our economic strain. The American people need to feel secure physically and economically. Our last bastion of hope for the stimulus package is also the restoration of stability into the credit markets which has not occurred thus far. Consumers need to have the package aimed at rightsizing their upside down home values and thus their debt on those homes in a real value for their current situation. So if a bank has a note on a home that is worth more than the note that note is fine but should be locked in at a current fixed rate that should be affordable to most Americans during this workout. If the home is worth less than the note it should be adjusted to the real value, that would include righting off any second mortgages if they are above the new market value.

This would allow those Americans that can afford home ownership to have that stabilized and it would rightfully right off the debts against those that inflated our ability to borrow ourselves into this quagmire. These actions would create a massive amount of consumer confidence in the new leadership and the bailouts. The average American wants to know what part of the bailout will help me not just those corporations that designed this mess?

In the case of the automotive companies they should have to beat the CAFE standards of Europe and Japan by 2015 and Congress should allow any purchase of a hybrid plug in vehicle or other hybrid that achieves more than 30% greater CAFE standards of today with a non-sun setting $7500 tax credit for such purchases. Again energy touches everything and our consumer uses of energy is mostly due to home energy and transportation energy uses.

Sincerely,

Don A. Holbrook, CEcD, FM