A look at America’s future – grim unless we get smart and pull together

The current generations of Americans were born to affluence (most of them, that is), and few have any idea how quickly it can all go away.  As it did for Latin America — rich after WWII, poor today.  Here are three articles foreshadowing a possible future for America.  All grim, all essential reading to understand what’s happening.

An excerpt is provided from the last of these, as it illustrates important dynamics of how we got here — and a way to a better future.  The situation looks bleak for Cleveland, but they are responding with resolution and adaptability.

  1. Wall Street on the Tundra“, Vanity Fair, Michael Lewis, April 2009 — about Iceland.  “The world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them.”
  2. Tough Times in Troubled Towns – America’s Municipal Meltdowns“, Nick Turse, posted at TomDispatch, 22 February 2009 — Main Streets closing down around America.
  3. Breaking the Banks – The Struggle to Feed America’s Nouveau Needy“, Nick Turse, TomDispatch, 8 March 2009
  4. All Boarded Up“, Alex Kotlowitz, New York Times Magazine, 8 March 2009 — About Cleveland, an example of municipal collapse hitting America’s cities.

Excerpt from “Tough times in Troubled Towns”

First, one source of their problems.

TONY BRANCATELLI, A CLEVELAND CITY COUNCILMAN, yearns for signs that something like normal life still exists in his ward.

… There was something else going on in the city that was even more destructive. Unlike fast-growing communities in Florida and California, Cleveland didn’t see housing prices rise through the stratosphere. But even moderately rising property values created the conditions for subprime lenders to exploit strapped homeowners. Cold-calling mortgage brokers offered refinancing deals that would let homeowners use the equity in their houses to pay off other debts. … Many of those deals were too good to be true, and interest rates ballooned after a short period of low payments. Suddenly burdened with debt, people began to lose homes they had owned free and clear.

As early as 2000, a handful of public officials led by the county treasurer, Jim Rokakis, went to the Federal Reserve Bank of Cleveland and pleaded with it to take some action. In 2002, the city passed an ordinance meant to discourage predatory lending by, among other things, requiring prospective borrowers to get premortgage counseling. In response, the banking industry threatened to stop making loans in the city and then lobbied state legislators to prohibit cities in Ohio from imposing local antipredatory lending laws.

… Now banks are selling properties at such low prices – many below what they sold for in the 1920s – you have to wonder why they bother to foreclose at all. (The F.D.I.C. estimates that each foreclosure costs a bank on average $50,000, more than if they were to do a loan modification.) All of this leaves Brancatelli in a constant state of exasperation. When asked how he’s doing, he often takes a breath and replies, “Another day in paradise.

… U.S. Bank, which owned the house, appealed a city condemnation order. “It’s the running joke,” Brancatelli told me. “The banks appeal the condemnations because they say they want more time to make repairs to put it on the market to sell. And I go to the hearings on a regular basis to say you shouldn’t get more time. Here, they owned it for more than six months and hadn’t made any repairs. They just want time to try to unload the property.”

Second, how they are coping.

BY MID-2007, IT BECAME CLEAR to Brancatelli that his was a city at the mercy of lenders and real estate wholesalers, who now owned thousands of abandoned properties in the city. Somehow, the city needed to hold these new land barons accountable for their vacant houses, so many of which were in utter disrepair.

Brancatelli and others looked to Raymond Pianka, the judge in the city’s lone housing court. In 1996, Pianka gave up his seat on the City Council to accept this judgeship. His judicial colleagues derisively refer to it as “rat court,” because its main function is to make sure that owners mow their lawns, trim their hedges, clean up their garbage, repair leaning porches or hanging gutters – in short, that they make their homes inhospitable for rats. No one foresaw that this lowliest of courts would become one of the most powerful instruments in the city’s fight for survival. “The court’s the only tool we have,” Brancatelli said. “When we get them into court, we can’t let them go.”

In 2001, when it became clear how Raymond Delacruz was wreaking havoc on city neighborhoods by flipping houses, it was Pianka who ran him out of town. The city’s building and housing department cited Delacruz for code violations on a house he hadn’t flipped fast enough. When he didn’t show up in court, Pianka had his chief bailiff stake out Delacruz at a doughnut shop. Pianka placed him on house arrest, ordering him to spend 30 days in the dilapidated structure he owned but had not maintained. Shortly after his sentence was up, Delacruz moved to Columbus, where he continued his flipping, and was eventually convicted for fraud that included swindling a bank vice president.

Housing codes, which were established in the mid-19th century, set minimum standards for housing quality. They traditionally help maintain both a city’s aesthetics and safety. In Cleveland today, they seem to be all that keeps the city from crumbling. In 2007, Pianka realized that the banks weren’t showing up in court after being cited for code violations. “They were thumbing their noses at the city,” he told me. “They were probably thinking, It’s Municipal Court. What can they do? And we thought, How loud can this mouse roar?” Pianka set up what he called his Clean Hands Docket. If a bank didn’t respond to a warrant, Pianka refused to order any evictions it requested.

Pianka’s staff also dug up a little-used 1953 statute that allowed for trials in absentia, and every other Monday afternoon for the last year and a half Pianka has held trials with a judge and a prosecutor but no defendant. The first case involved Destiny Ventures, a firm based in Oklahoma that buys foreclosed properties in bulk and then sells them. It was cited in 2007 for violations on one of its houses, but didn’t show up in court. The idea of a trial without a defendant was so unusual that when the prosecutor said he had no opening statement, Pianka prodded him. “You’re going to waive opening statement?” he asked. “Don’t you want to give the court a little road map about the strategy?” A housing inspector testified that Destiny Ventures had done nothing to correct the code violations on the vacant two-story clapboard house in question. The windows were punched out, the front door was wide open and roof shingles were missing. Pianka fined Destiny Ventures $40,000, and then had a collection agency sweep the company’s bank accounts for the money. Brancatelli celebrated by taping a copy of the check to his office wall. In a recent phone interview, an owner of Destiny Ventures, Steve Nodine, said, “It’s unconstitutional the way they fine people.” His firm now refuses to do business in Cleveland.

… Mayra Caraballo, a 39-year-old mother of two, appeared in court in response to code violations on her home. … She had left after receiving a foreclosure notice. The house was quickly stripped of everything but the furnace. Pianka asked a clerk to check into the house’s ownership; he suspected that the lender had withdrawn the foreclosure at the last minute, as is becoming more common. The clerk tracked down the trustee on the mortgage, Deutsche Bank, and confirmed that the foreclosure had indeed been withdrawn. Pianka calls these situations “toxic titles.” “You’re in limbo,” Pianka told a shocked Caraballo. “There’s no hope in your getting out of this property as a result of foreclosure. We’re seeing this more and more.”

Pianka sees these toxic titles as an effort by lenders to dodge responsibility for vacant houses. Later, I called Deutsche Bank to ask about Caraballo’s house. “We don’t own the property,” a spokesman told me. “We’re the owner of record, but the investors who bought the mortgage-backed securities own it.” Pianka chuckled when I told him of the bank’s response. “That’s their mantra: we don’t own it,” he said. “It’s handy for them to say, ‘Oh, it’s not us.’ It’s part of this big shell game they’re playing.”

… Over the last year and a half, the housing court has collected $1.6 million in fines from defendants who didn’t show up for their trials. Last April, Pianka fined Washington Mutual $100,000 for a vacant property on the city’s west side. Washington Mutual, now owned by JPMorgan Chase, appealed, and in December, the Eighth District Court of Appeals in Ohio ruled that trials in absentia were not permitted in misdemeanor cases, essentially putting an end to Pianka’s efforts. JPMorgan Chase disputes the code violations, but a spokeswoman said the bank was not planning to send a representative to court to respond to the city’s charges.

“We just have to figure out some other ways,” Pianka told me. He has suggested that the city could name corporate officers when prosecuting code violations. He told me that a Cleveland police officer was so angered by all the abandoned properties that he volunteered last month to serve warrants to bank officers should they ever be issued. In the meantime, early last year, Cleveland sued 21 lenders, arguing that their vacant houses created a public nuisance, virtually destroying some neighborhoods. Ten of those lenders have since gone under, been acquired or gone into bankruptcy. The case is slowly winding its way through federal court.

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Posts about the housing crisis:

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  3. Destroying houses in order to boost home prices, 16 December 2008
  4. The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009

Posts with forecasts and warnings:

  1. Consequences of a long, deep recession – part I, 18 June 2008
  2. Consequences of a serious US recession – part II, 19 June 2008
  3. Consequences of a long, deep recession – part III, 20 June 2008
  4. A look at the next phase of the crisis, as it hits the real economy, 31 October 2008
  5. A look at 2009 economy – some guesses, 28 December 2008

30 thoughts on “A look at America’s future – grim unless we get smart and pull together

  1. What a horrible but interesting article, thanks for posting it.

    I agree completely with your title, hopefully your optimism is warranted and the people of the US will finally realize just how deep a hole we are in and do something constructive about it before it is too late.

  2. For quite a long time I’ve been trying to make a simple point about China and trade, etc. The only way the US can come out of its crisis successfully is as follows: Within 3-4 years they need to make rapid progress in reducing import dependence. That has to start with changing the mad situation where the US needs to consume 80% of the world’s oil supplies just to maintain a 300+ million population.I find nuclear power plants to be a better and Obama’s windmills ideas to be on the Quixotic side.That’s not a support for John McCain, or the Reps at large.
    Doing this well gives a lot of freedom from external financing needs. Meanwhile, if the US doesn’t do anything warlike, the natural tendency of the Rest of the World is to plan for multiple reserve currencies. That should reduce the USD exchange rate quite a lot.
    Then they can plan to reduce dependence on Chinese electronics, etc.
    Think about this from an employment perspective; Setting up power plants, building plug in filling stations and manufacturing a new generation of electric cars to replace the old ones will all generate quite a lot of jobs, that can replace some of the current losses. Obviously I expect they’ll continue with their plans to refurbish the government and school buildings, etc.
    And the US can try to increase its construction equipment, aircraft, etc exports alongside.
    And, they need to steadily reduce the military expenditures and try to identify some areas where the military research output can be commercialized better.
    All this will be more than enough work on the plate for 3-4 years.
    Meanwhile allow EUR,RMB,Roubles, etc to become reserve currencies along with the dollars, and let the dollar weaken steadily.
    Then the next challenge – i.e. further reduce import dependence and further increase exports – can be met more easily.
    Till these things happen, any thoughts of doing without foreign financing, or having some kind of war with China, etc is unrealistic.
    Also, the US needs to urgently strike a deal with Russia and NATO over Afghanistan.And disband the new IMF Edwin M Truman dreams completely.
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    Fabius Maximus replies: I would be more interested in your very confident analysis and recommendations if they were not riddled with simple errors of fact. The world consumes roughly 84 million barrels of oil per day; the US consumes roughly 20 million b/day. That’s approx 1/4, not 80%.

  3. We’ve been reading these sob stories about one trick pony towns for at least 35 years now, since the 1973 oil shock and subsequent recession. And in fact the same pathologies go back to the devestating 1957 recession and the subsequent southern migration of industry from New England and the mid-atlantic states.

    Towns and states that are friendly to new business will overcome these economic patholigies as new industries move in and the business cycle begins anew. Ones that are not will become like upstate New York or western Massachusetts – areas of permenant economic depression and outmigration, totally disconnnected from the modern American economy except as a source of new labor and nearby farm products and summer homes.

    Most of the articles on this topic mention this as “the worst its been” since either 1991 or 1982. Well, those were the last two recessions of any significance for the country, and the 1991 recession was somewhat localized in California, New York, and a few other states.

    It seems that after 25 years of nearly non-stop economic growth, people have forgotten what recessions are like, and that the country formerly used to survive despite experiencing them once about every 4 years for the previous 80 years.

    Going back to Elkhart, the RV industry has been in trouble for over 18 months already, due to the credit crunch and gas price spike. See here – http://www.slate.com/id/2191492/
    http://www.early-retirement.org/forums/f27/downturn-in-rv-industry-35734.html

    What a shock that the northern Indiana RV industry and towns are in dire straits given such conditions.
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    Fabius Maximus replies: I don’t know what the point of this is. This recession is clearly one of the worst in the US since WWII, on par with the 1973-75 and 1980-82 periods — and the trends are still all down. It is already far worse by most metrics since the 1991 recession, which was by most metrics the 2nd lightest since WWII. In global terms it appears (the data is still coming in) probably the worst since WWII, although global data is scarce before the 1970’s.

  4. Indian Investor:

    “US needs to consume 80% of the world’s oil supplies”

    The Us consumes around 20 million barrels per day out of world production of 86 million. This is about twice the rate per capita of Europe.

    “I find nuclear power plants to be a better”

    Most US oil is used for transportation purposes. Nuclear power won’t fly planes, run trucks, or run cars anytime soon.

    In order to dramatically impact US oil demand, US transportation habits have to change dramatically. More goods need to move by rail, and more people need to move by rail and bus. Short distance air travel would need to be replaced by high speed rail and luxury bus. 45 and 60 minute auto commutes will have to come to an end. Unfortunately, since we didn’t bother to incentivize these changes during the past 25 fat years like Europe and Japan have, chosing instead to spend our money on pyramid building (i.e. “defense” expenditures), they now must occur during years of pain. Eventually, they will be forced very painfully by the oil market and the price of oil.

    Both political parties are playing ostrich about this. Republicans with the myth of domestic self-sufficiency, and Democrats with the myth of a wind power curing our oil habit.

  5. Actually, there’s a Chinese company hectically innovating on electric cars, and Warren Buffett, bang in the middle of the 2008 Great Depression which is now the 2009 Great Depression, bought a big slice of the company. The Obama stimulus package includes some sops for people who buy hybrid plug in vehicles. I know there are problems with car batteries but it’s not an insurmountable problem.
    The Don Quixote windmills are plainly a very bad idea. Solar panels are used quite a lot in Indian cities and we know exactly how it goes with solar power. Again, a bad idea.
    The real issue is that the oil companies are quite a powerful cartel; at least as much as the banks. Replacing the oil supplies with something else therefore needs to be done in a gradualist, cosmetic fashion.
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    Fabius Maximus replies: As ususal no links or details. You get away with this stuff on Setser’s blog, but this is a stricter environment.

    I don’t know what you mean by “the oil companies are a powerful cartel.” The world’s private oil companies already represent a minority of global production and own a tiny share of the world’s reserves. The dominant producers by all metrics are the governments which have nationalized oil production — represented by their “national oil companies” (which are not private business interests in any meaningful sense, just shells).

  6. Until an electric car can be charged in 5 minutes at a “fueling” station, it will not gain widespread acceptance.

    No electric car projected to be on the market any time in the next two decades will be very useful to drive my family to Florida for vacation, unlike my gas powered minivan.
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    Fabius Maximus replies: That may be too severe. Stats show many cars are used only for short-term travel (e.g., my wife’s), and could easily charge at night. This would be esp attractive if the electric utilities charged lower rates for off-peak usage.

  7. You can build pretty good autonomous vehicles now. Start with trucks running midnight to 5:00 A.M. at 40 miles per hour with flashing safety lights. Wind drag is the square of speed, so this is a big savings over highway speed. Then take advantage of the reduced braking and handling requirement and shift tire design for say, half the current rolling friction. With no driver, you aren’t wasting anyone’s time going slow and you can ignore the rough ride on your super hard, low friction tires. Drive small cars with diesel engines now, and blow big bucks on battery research. This all belongs in the stimulus bill. Where is it?

  8. From the NY Magazine article: “Pianka sees these toxic titles as an effort by lenders to dodge responsibility for vacant houses. Later, I called Deutsche Bank to ask about Caraballo’s house. “We don’t own the property,” a spokesman told me. “We’re the owner of record, but the investors who bought the mortgage-backed securities own it.” Pianka chuckled when I told him of the bank’s response. “That’s their mantra: we don’t own it,” he said. “It’s handy for them to say, ‘Oh, it’s not us.’ It’s part of this big shell game they’re playing.””

    Simply outrageous! These actions which will destroy a city. Steinbeck had it right — the bank is the monster.

    “…a Cleveland police officer was so angered by all the abandoned properties that he volunteered last month to serve warrants to bank officers should they ever be issued.”

    That’s the spirit. Letting properties become a nuisance like this is a crime against the community. If the owner is hiding, and is ignoring their duty as a property owner, the cities should have a the right to take the land back.

    “Now banks are selling properties at such low prices – many below what they sold for in the 1920s – you have to wonder why they bother to foreclose at all. (The F.D.I.C. estimates that each foreclosure costs a bank on average $50,000, more than if they were to do a loan modification.) All of this leaves Brancatelli in a constant state of exasperation. When asked how he’s doing, he often takes a breath and replies, “Another day in paradise.”

    My understanding is that credit default swaps remove from lenders any incentive to renegotiate. The swap makes them whole on a default, while a renegotiation comes out of the principal and doesn’t trigger a default.

    I found this site for a company that looks like it’s still trying to sell “Structured Mortgage Insurance” — interesting, I thought they couldn’t call it insurance, or they’d trigger insurance regulations.
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    Fabius Maximus replies: I agree, this is outrageous. But credit default swaps (a form of credit insurance) had (and have) a only a tiny role in the mortgage markets.

  9. @Fabius Maximus: I might have made a mistake with the oil consumption statistics. The crude prices have been rising and falling in a complete disconnect with the underlying fundamentals of demand and supply. Since Kissinger’s petrodollar recycling brainwave in the early 1970s, the oil exporter central banks and Sheikhs have been depositing their dollar proceeds with the New York and London money center banks. Everybody in the whole world knows about the private oil cartel. Exxon Mobil, Royal Dutch Shell, Cairn Energy plc, Chevron, British Petroleum, these are some of the big players in the oil cartel. No popularly elected leader can be expected to cope with a situation where a handful of people own the largest global banks, the global oil companies, the weapons contractors; these people control the Federal Reserve, the Energy Administration and the Pentagon for their selfish ends. The only reason people are depending on food stamps to this extent is that the country and its people are being held to ransom by these “open secret” cabals.
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    Fabius Maximus replies: That’s big of you to respond to a glaring error with “I might have made a mistake…” Just fess up, dude.

    The rest of your comment is gibberish, similarly contrary to fact. “Everybody” knows no such thing. The number one and two oil powers are Russia and Saudi Arabia, neither of which bows to any private oil cartel. The names you cite represent a small and declinging fraction of global oil reserves. Please do not make such comments on this site without some supporting evidence; they are just chaff.

    Nor have oil prices moved disconnected from fundamentals, esp in the past 5 years. Commodity prices fluctuate in response to small changes in the supply and demand balance, and we’ve had large changes. For more information see the articles listed on the Peak Oil and Energy reference page.

  10. More rah-rah gibberish from FM, as usual long on vacuous exhortations of stunningly nebulous generality, and short on facts and logic.

    Exactly how do we “get smart”? Invest in infrastructure to rebuild our blighted cities? That only makes things worse. Building more freeways and repairing existing freeways only encourages more businesses to locate themselves farther from workers’ home, forcing the population to burn even more high-priced gasoline whose cost per dollar will inevitably skyrocket.

    Do we invest in broadband and hi tech to revive our small towns? Why do you think all the main streets shut down and board up? Because everyone’s buying everything but non-groceries online. In the small town where I live, local stores try to charge 3x to 6x online prices. So I buy my eyeglasses online for $6 instead of the $200 the local optician charges, and he goes broke; I buy bicycle parts online for $9.95 instead of the $60 the local bike shop charges, and they go broke. The more hi-tech broadband infrastructure we build, the faster every Main Street will go broke and the more high-paid jobs America ships overseas to telecommute from India.

    Exactly how do we “pull together”? By compromising with the Republicans in a show of bipartisanship? How does bipartisanship work when the Republicans vow to filibuster all Obama’s judicial nominations en masse? How does compromise work when the Republican plan is “let all the banks and businesses in America fail” — should we let half the banks and businesses in America fail? Is that “compromise”?

    One political party is doing something about this crisis — maybe the wrong thing, but something — while the other is running around babbling lunacy. How do you compromise with lunatics? How does bipartisanship work when the other group is insane? How do we “pull together” under these circumstances? How do we “get smart” when our every move to rescue the economy just outsources America’s highest-paid jobs (engineering, math, materials science, robotics, programming, and increasingly medical care) to the third world for things like “medical tourism”?

    Please provide facts and logic to back up your vaporous claims, FM, or stand revealed as a crank gibbering drivel.
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    Fabius Maximus replies: This post is exhoration, or as you melodiously say “rah-rah.” Anyone familar with team-building — or the need to maintain social cohesion in times of crisis — would speak more respectfully of this function.

    Second, this post does provide factual material to support my “exhortation.” This post is 1800 words long, with excepts from 4 articles describing areas suffering from the downturn. You may consdier as “stunningly nebulous generality” descriptions of the decay in Cleveland, Iceland, and towns throughout America. To me people standing in line at food banks are as gritty and specific as it gets. You may consider such things as “short on facts and logic”; I believe that they are fact and logic.

    Third, your criticism is absurd. A post of a few thousand words can discuss only one aspect of the problem in detail. This one gives snapshots of municipal decay. You criticize it for not discussing a different subject. That is one of lamest complaints I have seen on this site. Esp since at the end is the section “For more information from the FM site”, which contains:

    * About the Financial crisis – what’s happening? how will this end? (see section 7 for solutions)

    If you follow the link, section seven lists 17 articles about solutions.

  11. @Fabius Maximus: According to me, it really doesn’t matter whether banks are bailed out, nationalized and privatized later, or allowed to fail. The easiest thing to do is bail them out. There’s a saying in my native language that a drowning man has already drowned when the water goes above his nose. It doesn’t matter whether the water is an inch above his nose, or a foot above. The US public debt is so large right now (totally $10 trillion, if you count intra-governmental holdings) – plus, this doesn’t include unfunded future liabilities already committed to – if they take on a few trillions more to get the financial system working again, it won’t make or break them.
    The American Empire has collapsed. The challenge is to ensure that the US can come out of this situation and become a ‘normal’ country WITHOUT having to go through a Sovereign default – which will make the situation horrible for the ordinary people. I worry that the Pentagon, the Federal Reserve, the IMF, the Energy Administration, etc – may not have the ability to communicate this situation to their stakeholders. And that their stakeholders may not be able to accept the reality of the Empire having collapsed.
    In the late 1980s, Gorbachev tried to extract the Soviet Union from a situation where the core Russian Federation states had over extended on military expenditure and foreign campaigns; and the local people had become dependent on imports from the periphery in Central Asia and Eastern Europe. This was constrained by the strong resistance offered by the military and intelligence communities, and the general failure of the wider establishment to accept the reality of the collapse of the Soviet Empire.
    The Pentagon today continues to resist the facts on the ground. It’s impossible for the US military to independently supply their troops in Afghanistan; Russia has successfully re claimed its near abroad. Afghanistan has to do with building natural gas and oil pipelines soouth from the South Caucasus.Not terrorism or women’s rights.
    The Pentagon and the Admiralty also refuse to accept that it’s impossible for the US Navy to blockade China’s Eastern Coastlines and sea channels of communication. The Chinese have built a successful system to hack and disable all electronic communications aboard ships in the Western Pacific. Without even a basic AWACs, it’s impossible for US Navy vessels to manouever in those seas. Beating their war drums at China, is therefore a face paint exercise rather than a real threat to China’s trade.

  12. The 1991 recession devestated certain states, especially California, New York, and Massachusetts (which is why we heard non-stop from the newsmedia about how terrible it was at the time). It was not as severe nationwide because much of the nation barely experienced a problem. A major trigger of the 1991 recession was the dislocation of defense workers and the downsizing of defense companies (and related technology companies) due to the end of the Cold War and its high defense spending, which also spun the typical cyclical industries into a tailspin.

    We can expect similar economic reactions if/when Obama follows his promise of chopping back the bloated defense budget and ending our overseas adventures.

    The NY Times had an interesting map of unemployment by county for the current recession recently which again shows how regional the actual recession/depression is.

    This recession has been absolutely devestating to California and Michigan, is severe in Arizona, Washington and Oregon, Indiana, Ohio, and Illinois, down the I75 auto corridor through Kentucky, Tennessee, and into the southern peidmont manufacturing areas of the Carolinas, and all through the southern Black Belt.

    On the other hand, the Great Plains, Rocky Mountain front range, the great Basin area of Utah and Idaho, the Virginias, the northeast east of the Appalachian continental divide, Iowa and Wisconsin, Hawaii, Lousiana and Arkansas, southern Mississippi, and Texas are all doing quite well, with many places still at full employment (under 5% unemployment). This is once again a regional recession, simply a particularly devestating one to certain industries and states (especially autos/steel, finance/housing and California and Michigan), which are undergoing a fullscale depression

    Yeah, it sucks right now to be in anything related to the auto industry and its ancilliary suppliers like the steel industry and parts manufacturers, but this will pass, and soon. 230 million American vehicles, even if 10% are surplus and unneeded, have to be replaced at an annual rate much higher than 6 million vehicles. That happening will cure a host of other ills.
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    Fabius Maximus replies: Your confidence matches consensus opinion, looking to the trough in the second half of 2009. Just as it did to the recovery in the 2nd half of 2008. And of course a severe recession was unlikely, as we were told in 2007. I suspect your happy outlook will shortly join these on the junk heap.

    Your focus on the auto industry is quite odd, given the extent of this recession. Construction and finance jobs seem unlikely to recover soon. Global trade is crashing. As for autos, it is possible that Americans will do with fewer and older cars, so dreams of massive replacement demand in the next few years might be disappointed.

  13. Well, there is no shortage of oil, or gasoline. But even if there were, two hundred nuclear reactors could supply all the oil we need, literally out of air! The shortage is in brainpower, and leadership.

  14. Boy oh boy, do these articles remind me of how nice it is to live in a place that’s relatively recession proof.

    Unfortunately, part of me feels that until things get worse, we won’t see any of that social cohesion we need. Adversity will need to spread to all sectors before we wake up and see what’s in front of our nose. Right now when I talk to people (very anecdotal, I know, but I think illustrative) their response is to blame the republicans, the democrats, the bankers, Wall Street, the regulators, big auto, Madoff, Stanford, social security or whatever their preferred villain is and all of them envision some kind of punishment, generally let them fail. Until we are confronted with the fact that letting ‘them’ fail actually means letting all of us fail, we may continue to mistake these articles for windows into other people’s problems.
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    Fabuis Maximus replies: Perhaps so. Or perhaps under increased stress social cohesion will decrease, a commonplace of history. This often ends badly.

  15. FM Note: While its always interesting to hear the latest weirdness from the Gamma Quadrent, the comment policy says 250 words max. This appears at the end of every post and in more detail here. A little over is fine, but 2x is not OK.

    @Fabius Maximus: This is regarding your analysis of past happy views and how they turned out to be bad. To be straight, your blog is the only one that has come perilously close to understanding the truth about this crisis, viz. your view that it’s caused by the end of the post WW II geopolitical regime. Rem acu tetigisti.
    But I wonder how much more you have realized about the crisis and geopolitics. I’ll make a brief comment here, adding a perspective that is controversial and perhaps even dangerous to propagate widely. The US Treasury has something called the Department of International Monetary Policy. You will understand the true objectives of US economic policies only when you understand their impact on foreign sovereign finances and their reserves. Consider, for instance, the Paul Volcker shock therapy in 1982. The 20% short term rate was in response to battling inflation, caused mainly by a crude price shock. Suddenly, the crude price collapsed. What was the impact on foreign countries? The crude prices are routinely rigged, and the objective of every oil shock followed by collapsing prices, and major fluctuations in US interest rates, was to disable and take over belligerent foreign sovereigns. In the past the oil shock game routinely succeeded against foreign oil exporters, e.g. the Mexico default after the Paul Volcker shock therapy.
    Think of it this way: when the US faces a geopolitical rebellion against its dollar hegemony, or needs to have US financial institutions take over foreign industries, it uses a combination of high oil prices and high US interest rates to drain forex reserves, cause a currency crisis abroad, and brings the IMF in with conditions related to FDI liberalization. {snip — too long, yet again}

  16. What does this mean: get smart and pull together? Last time I noticed anyone pulling together was Israel at war, but when they do politics they have 20 parties. Germany, Japan, SU, Italy et al they “pulled” together, or “pushed” together. Lousy results, no? So what do you mean? America’s population increased from 120 million in 1940 to 300 plus today, let’s call it 315 although we do not know, which says something important about our social ill-health. That’s pretty amazing. Do we have a consensus? Not clear to me. We had a consensus based on cheap energy, our prize for winning WW2, which we gave up when we accepted OPEC. Since then the political class has been buying off interest groups like snipers working overtime. Obama seems to be proposing a new consensus based on LBJ’s prescription. But we are not the country we were then. If he gets that program I believe we will default. Any consensus produced to create that program will dissolve. Is there a basis for a consensus short of his full National Socialism program. Hope there is and urge you focus on exploring what the elements of that might be.
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    Fabius Maximus replies: I find it odd that you find this concept so difficult to understand. We pulled together in the Great Depression, maintaining social cohension despite great stress. We pulled together in WWII.

    “But we are not the country we were then.”

    I dont’ know what you mean by this, but I have faith that we are just as strong as we were then. Time will prove who is correct.

  17. Funny, all these articles except the first are not about the big picture — the economy and how to fix it — but the little picture — what life is becoming like in communities affected by the Depression. But most of the commenters here, except CM, prefer to talk about the big picture. Some of us may discover, soon enough, that it’s more important to figure out how to form a food cooperative than talking about grand strategy on the internet.
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    Fabius Maximus replies: I agree, but these are (perhaps) foreshadowing the big picture. I strongly agree that survival for each of us — our household, our community — means thinking locally. But looking at other communities is a valuable source of knowledge. We can learn by what has happened, and from their attempts to cope.

    I absolutely disagree with the last line. Each of us is responsible for the whole. We’re not serfs — unless we decide to think like serfs — and so considering America’s grand strategy, or health care policy, or whatever, are valuable things to do. This is America’s forebrain in operation.

  18. Sorry to steal the thread as this doesn’t have anything to do with Cleveland but it has been mentioned in prior comments and FM responses:

    There are definite technological paths to using nuclear reactors to make synthetic gasoline and other transport fuels. The raw ingredients are heat from the reactors, coal for carbon and water for hydrogen. We will need to increase the pebble bed reactor exit temperatures about 10 to 20%, which looks do-able with some development dollars, choose a thermal hydrogen production cycle, then use the hydrogen to treat coal to make liquid hydrocarbons.

    If we really wanted a New Manhattan Project, this would be the project I’d recommend. We could have the first commercial production within 20 years and it would be carbon dioxide neutral compared to conventional petroleum. Maybe we could put the demonstration plant in Cleveland?

    Electric cars will forever be limited by the electrochemistry of known chemical elements. Hence, we’re not likely to see any substantial improvement over lithium batteries.

  19. FM: the current generations of Americans were born to affluence (most of them, that is), and few have any idea how quickly it can all go away. As it did for Latin America — rich after WWII, poor today.”

    Paul Krugman has stated that Bush policies had the overall effect of transforming the USA into a banana republic. FM seems to suggest that Obama very likely will do no better.

    Without getting bogged down in a largely spurious debate about Krugman or his overall theories, it would be useful – perhaps necessary – to consider that his prediction, if not necessarily his precise reasoning, is correct. While so doing, we might follow Aristotle’s Politics, which at a certain point considers that – while tyranny is the worst form of government – how one might make the best of things if tyranny nevertheless is what one must have.

    If, perforce, it should be given that the United States is to become a banana republic, how might it nevertheless be structured to be the best possible banana republic under all the facts and circumstances? Yes, this stinks; but that which is foul need not be putrid.
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    Fabius Maximus replies: I reject his drama-queen “America is a banana republic” – which was spoken by Krugman as Spiro Agnew (partisan attack dog), no relation to Krugman the economist. The comparison is absurd.

    While logical, personally I will not go even consider your recommendation. We will not go down that path.

  20. seneca: good point about the grand strategy–i don’t really know how this got on to nuclear power and oil consumption, but at the same time, if i need to form a food collective, i hope i am not on the internet debating how.

    in terms of pulling together, a country like China (that example again?) is a good example. remember how they all pulled together during the Olympic protests? Or during the Tibet violence? Most Chinese are pretty unified on several national goals–reunification with Taiwan, for example. This kind of consensus leads to broad policy action. It doesn’t mean their political and social apparatus is always moving in concert, but they certainly are doing ok on at least one important issue. And that’s 1.2 billion people. If China for all its complications can do it, it can be done with ~300 million people. When the general population realizes that pointing fingers and symbolic punishment of financial institutions does not fix a problem, there will be an end to state legislatures overruling the local wisdom of hard pressed municipalities. Maybe even Congress will get on board. I think for all of our perceived divisions, its not hard for us to be ‘that country’ again. But from what I’ve seen (little to be sure) I don’t think we’re there just yet.

  21. Re 18: again, this local-central dynamic seems to be the emerging fault line. Perhaps what will really be meant by ‘pulling together’ will involve local communities doing so, one by one. The same perhaps could be said for States many of whose fiscal crises are exacerbated by their ceding control of local currency and interest rate capability, macro policies being applied that are not helpful for local situations etc. etc. So pulling together properly might also involved a certain amount of separating sanely at the same time?

    I believe that human beings are ‘hardwired’ to project leadership in any collective, be it family or nation. In America, therefore, that impulse turns towards how ‘they in Washington’ govern ‘us’.

    I suspect the Founders envisaged a scenario in which the various States contributed to national initiatives but without establishing a large central administration to run major aspects of national affairs in perpetuity. A similar fault line runs through the EU of course as well.

    Your comment raises the question as to whether such central planning is the way to go; but if it isn’t, all of us ‘pulling together’ and/or effective repair of the current crisis might well prove impossible – for example that delaying systemic reform until the crisis is past will further prolong the national sense that we are all ‘behind the curve’, the criticism directed at Obama’s financial initiatives as so well articulated by friend Buffet in his MSNBC interview.
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    Fabius Maximus replies: In a large nation like America, civic action takes place on many levels. As individuals, our greatest impact comes from local action. Our history has many inspirational examples. One that I have often mentioned:

    … are extra-legal community actions, in the long (and checkered) tradition of American vigilantism. Most notable were the widespread “penny auctions” of farmers’ land and equipment at which his neighbors forcibly prevented competing bids. See this description, along with its famous photo. Strong communities find their own ways to cope. That most financial institutions are national — not local — will make these measures even easier today (local institutions often having more local knowledge and legitimacy than national institutions).

  22. FM:”Construction and finance jobs seem unlikely to recover soon. Global trade is crashing. As for autos, it is possible that Americans will do with fewer and older cars, so dreams of massive replacement demand in the next few years might be disappointed.”

    You know, boo-hoo. That world is dying, and it needs to get out of the way for the new thing to come. And what the new thing is for now will be an economy based on maintenance rather than manufacturing. Let the housing prices find their bottom, even if that’s zero and get people in them now. Those that still have fixed income or government work can have homes, and some of those who don’t will find jobs maintaining these homes and cars. It’s not going to be high-payed work, it’s going to be miserable and cheap and low-payed, eeking out an existence type work, but I think that’s what the survivors will adapt to.

    Watch ‘Roger and Me’ and pay attention to the ‘Rabbit Lady’ — she had quite a bit of this survivor spirit, living off of rabbit meat she sold to pet food stores. Later, Michael Moore did make a sequel, and in that film she seemed beaten down. I hope she’s okay now.

    The alternative, our current course, is much worse. Banks hold onto these buildings hoping for the economy to turn around. They decay, get bulldozed and people move to tent cities in the south for warmth. Unfortunately, one obstacle for the northeast is the cold. People need a minimum income to stay warm, or they just die. This next winter is not going to be pretty, I’m afraid. As the population becomes homeless, it triggers yet another negative spiral as desperate poverty destroys their health and ability to hold down a job. We could end up with a vast sea of homeless people, all huddled in tents dependent on aid, and worried about the next hurricane.

    Cheap housing in the rust belt could lower the cost of living in those areas. This is a good thing. Because if housing is cheap, a low wage becomes a livable wage and eventually make those workers competitive overseas again as the economy rebuilds. Towns can recover, I’ve seen some of that here in Northern California, but we have to stop the decay and destruction.

  23. A well – written article about this whole thing in terms of the national narrative: “Rethinking the American Dream“, David Camp, Vanity Fair, April 2008 — Excerpt:

    “The American Dream was now almost by definition unattainable, a moving target that eluded people’s grasp; nothing was ever enough. It compelled Americans to set unmeetable goals for themselves and then consider themselves failures when these goals, inevitably, went unmet. In examining why people were thinking this way, Easterbrook raised an important point. “For at least a century,” he wrote, “Western life has been dominated by a revolution of rising expectations: Each generation expected more than its antecedent.”

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    Fabius Maximus replies: And so it will be again. As George Bernard Shaw wrong in “Back to Methuselah”, future generations will read history much as we read “Lord of the Flies”, a world run by children. In this Shaw abandonded his utopian Fabian dreams, seeing real progress only when the human lifespan was extended to 300 years. At that point people achieved real wisdom.

    We’re going through a difficult patch and, like children, many assume that technological progress has ended. I doubt it.

  24. I found that Vanity Fair article thoroughly engrossing. Particularly a bit towards the end, comparing investment bankers to fishermen:

    “Why [are] fishermen are not wealthy, despite the fact that fishery resources of the sea are the richest and most indestructible available to man[?]” The problem is that, because the fish are everybody’s property, they are nobody’s property. Anyone can catch as many fish as they like, so they fish right up to the point where fishing becomes unprofitable—for everybody…”

    Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.
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    Fabius Maximus replies: A fine counter-example to the other comments on this site asserting that the free market always provides the optimum solution.

  25. Strabo: “To attain it, you need government intervention.”

    Or rather, you need to turn common property into private property via a government license, just as common land was turned to private land by the same methods.
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    Fabius Maximus replies: I don’t know what Andrew B means by this, but it seems like a reference to one of the classics: “The Tragedy of the Commons“, Garrett Hardin, Science, 13 December 1968.

  26. FM: “We’re going through a difficult patch and, like children, many assume that technological progress has ended. I doubt it.”

    There was nothing in the article quoted that suggested the above thought viz. technological innovation. It was discussing the history of the ‘American Dream’ thought – including citing the author who first articulated the notion back in the 30’s – and how that attitude has evolved over time. Nothing about technology per se at all.

    But that is an interesting theme/topic in itself: is ‘progress’ automatically a function of new ‘technology’? And more importantly underneath that: what is ‘progress’?
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    Fabius Maximus replies: You are correct; that was topic drift (free association) on my part. As for a definition of progress, that is a question asked by rich secure Americans. It’s obvious to most of humanity. Longer life, physical security, assured “basics” (food, shelter, quality medical care, safety net), opportunity. To quote from another Shaw play, Major Barbara:

    CUSINS. By the way, have you any religion?
    UNDERSHAFT. Yes.
    CUSINS. Anything out of the common?
    UNDERSHAFT. Only that there are two things necessary to Salvation.
    CUSINS [disappointed, but polite] Ah, the Church Catechism.
    UNDERSHAFT. The two things are–
    CUSINS. Baptism and–
    UNDERSHAFT. No. Money and gunpowder.
    CUSINS That is the general opinion of our governing classes. The novelty is in hearing any man confess it. Is there any place in your religion for honor, justice, truth, love, mercy and so forth?
    UNDERSHAFT. Yes: they are the graces and luxuries of a rich, strong, and safe life.
    CUSINS. Suppose one is forced to choose between them and money or gunpowder?
    UNDERSHAFT. Choose money and gunpowder; for without enough of both you cannot afford the others.

  27. FM: “It’s obvious to most of humanity. Longer life, physical security, assured “basics” (food, shelter, quality medical care, safety net), opportunity.”

    OK. But that is somewhat an individualist description. In order to have/enjoy such things requires favorable societal setups which is a sub-theme – at least – of your blog. So these could be described as the fruition of decent conditions. What is the ground, socially speaking? I think that until such a national conversation takes place that it will be very hard to pull through – let alone together – the current situation.

    Unless it is just a rather steep pullback/recession as some are now saying and as the financial elites, thanks to recent actions the past year or so, seem to believe is the case as witnessed by the eloquent and very clear presentation by the new NY Fed chief (link lost).

    You, FM, argue differently and yet also argue that it is not time to address reform, rather emergency triage. I am not so sure about that position.
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    Fabius Maximus replies: Agreed, these are ALL functions of a group — not an individual. As explained by the War Nerd in “Apocalypse Never“, 10 March 2009.

    But the social cohesion on which a group operates is IMO very seldom the result of a “national conversation”. These things are the result of a national history, with rare moments when drastic changes are possible. The revolution was such a point, but not in itself a crisis. They did not debate independence during the French and Indian War.

  28. I question the claim of social cohesion during the Great Depression. I would interpret the evidence as something more along the lines of a social fabric that had far more room to fall before it hit bottom than what we have today. My two elderly aunts went to New York City to train as nurses during the depression. They told me they thought nothing of walking through Central Park at night when going between work and their residences (in the 30s). Would that have been true anytime in the last 30/40 years?

    I suspect that the strength of our social fabric during the depression allowed us to survive a strain that perhaps couldn’t be managed in our much more diverse society of today. Even then, weren’t there a few close calls? How about the World War I veterans march on Washington? How about the fights President Roosevelt had with his own party over emasculating the Supreme Court? And for a forgotten conspiracy theory, how about Huey Long? Wasn’t his assassination awfully convenient? I see the Great Depression was a much riskier time for our country than is portrayed here, and I pray we are not now put to the same test. If forced to choose one or the other in times of great crisis, people have usually chosen security over freedom.
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    Fabius Maximus replies: I do not understand what you are saying. You question the “social cohesion during the Great Depression”, then recite your aunts story showing high social cohesion. What’s your point?

    As for “close calls”: The Great Depression was an economic downturn without precedent in our history. But the level of unrest during it was nothing unusual. The examples you cite have numerous precedents in other periods.

    To give just one of many comparisons, consider this List of race riots in the US. During the late 1960’s many inner cities burned, and were occupied by the National Guard to maintain order — violence met with military force on a scale beyond anything needed during the 1930’s.

  29. Support Fred K’s trenchant remarks. This is a concept that can only be tested by events. Not especially fun to view your life as part of a social experiment but even in “good” times it obviously is. If the admininstration succeeds in reflating the economy by 2110, possibly, the main event will commence in the following 18 months is my entirely instinctual sense. They will be particularly interesting times in my view.
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    Fabius Maximus replies: I agree. When can only hope, and wait to see.

  30. My point above as to social cohesion in the 30s, is that it was much stronger then, notwithstanding the depression, than it is now. Your follow-up comments seem to agree. My further point is that we as a nation with our weakened social fabric are far less ready to survive the stress of something like the great depression.

    It undermines my willingness to agree with your earlier comment that we are as strong (in the sense of our social fabric) as we were during the great depression. Your comment:

    “We pulled together in the Great Depression, maintaining social cohesion despite great stress. We pulled together in WWII.

    ‘But we are not the country we were then.’

    I don’t know what you mean by this, but I have faith that we are just as strong as we were then. Time will prove who is correct.”

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    Fabius Maximus replies: Thank you; now I understand. I am saying that your observations are correct, but I have faith that we will again pull through. That is, in essentials we are just as strong as in the past.

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