As The Economic Meltdown Deepens...

The ongoing economic meltdown is terrifying, but at the same time many of us have no real idea of what’s rolling down the pike at us.

There are many aspects of the crisis and the coming recession which are impossible to predict. One impact though, will be unavoidable: crippling budget crises at the state and municipal levels, driven by falling real estate values, layoffs, business closings, increased borrowing costs and recession.

What Happens When the Banks Don’t Lend

To get a sense of what this could look like, it is instructive to look at what happened to New York City starting in 1975, when bank credit dried up and a fiscal crisis that lasted more than a decade kicked in. Remember that this was a budget crisis isolated to one city, rather than the generalized collapse of the banking system we are seeing now.

The immediate background is that by the early ‘70s, the City’s budget was deep in the red, kept going with fiscal jiggery-pokery especially in Mayor Lindsay’s second administration and under his successor, Mayor Beame. The back story is more complex of course, having much to do with federal policy since the Eisenhower administration which directed resources to suburbanization at the expense of city and country—money for interstates, not mass transit and railroads, subsidizing vast auto-dependent tracts of single houses on what had been farmland—you know the deal.

What plunged the City into crisis was the large banks refusing, collectively, in March, 1975 to extend credit to New York any longer, declining to roll over loans and boycotting the City’s bond auctions. The Beame administration moved to lay off 25,000 city workers and defer contractual raises for others, cut services, increase the transit fare and institute tuition in the City College of New York system.

For months there was a political war over how things would get resolved,, with highway workers, cops and other city employees staging militant demonstrations and threatening an October general strike. The NY State government stepped in with aid but the federal government refused until massive pressure from the financial industry was brought to bear.

With everyone staring into the abyss of bankruptcy (and the possibility of a judge writing off the bonds the banks still held or canceling union contracts), the municipal unions made a devil’s pact with the banks, the details of which I leave for another post.

"The Bronx Is Burning"

What I want to remind people of is what happened to NYC once the austerity, service cuts, layoffs, tighter credit, tax hikes and the rest of the bank-sponsored “rescue package” kicked in.

Garbage piled up in the streets, and law enforcement abandoned whole neighborhoods. The public education system, already jolted by the refusal in the ‘60s of Blacks and Latina/os to accept a two-tier, heavily segregated system, now faced serious cuts. Class sizes ballooned. “Non-essential” programs like art and music education and vocational training disappeared.

The Transit Authority adopted a policy of “deferred maintenance”—only fixing things when they broke down completely. One leader of the militant opposition within Transport Workers Union, Local 100 at the time, Arnold Cherry, pointed out whenever he spoke that every housewife knows that if you don’t empty the crumbs out of the toaster, eventually it stops working. Not TA management, though—the system veered toward total collapse in the early ‘80s.

Meanwhile, landlords in “bad neighborhoods” emulated the Transit Authority, milking their aging apartment buildings for every dime in rent they could collect while "deferring” maintenance, laying off supers, ignoring heating oil bills, and finally abandoning the buildings themselves rather than pay city taxes. Or, given a chance, burning them down to collect the insurance.

This was seared into the national consciousness in the famous blimp shot of a five alarm fire in the South Bronx during the 1977 World Series while Howard Cosell intoned, "There it is, ladies and gentlemen, the Bronx is burning." As much as 40% of the housing stock in the borough was destroyed during these years, increasing an impossible-to-ignore homeless population and pumping up rents for vacant apartments in surviving buildings. (The City, meanwhile, was closing firehouses as a money-saving measure.)

Huge cuts in the NYC medical system on top of deteriorating social conditions laid the ground work for what Nick Freudenberg and his co-authors identify as a deadly “syndemic”: the three interlinked epidemics of TB, murder and HIV infection.

Even after the emergency financial aid was paid back, and the City’s budget was balanced and the banks decided they would once again buy long term bonds issued by the city (1981) , the Emergency Financial Control Board kept austerity policies in place and the damage they did to millions of people reverberated through the decade and up to the present. To cite only one example, the City College system which had boasted free tuition for NYC residents before the crisis, now costs upwards of $2000 a semester.

What It Means

I could go on. There are a lot of particular lessons to learn from the New York City fiscal crisis, and how various social forces responded and what kinds of popular resistance developed and worked.

But lesson number one is that this kind of crisis is on the agenda right now, in cities around the country, and once it erupts, there is no quick bounceback. Start trying to size up the situation where you live and figure out who your allies are going to be in the coming years.

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Capitalism Can’t Help Showing Its Ass These Days

I hadn’t been to an AIDS demonstration so far this year (my bad) but the prerecorded announcement from the ACT-UP phone tree last night haunted my sleep and got me out of bed and headed for midtown this morning. The demo here in NYC was part of an international week of actions (including Arizona, Thailand, France, Switzerland and more) targetting pharmaceutical giant Roche. The demand was simple: Roche must negotiate with the South Korean government to lower prices on bulk orders of lifesaving AIDS drug Fuzeon for its national healthcare system.

What got me going was hearing the quote from Urs Fluekiger, marketing director for Roche Korea, who explained the company’s refusal to budge on their $22,000 price tag for one patient/year of this vital medication:

We do not do business for saving lives but for making money. Saving lives is none of our business.

I thought to myself, okay, that tears it. It’s getting harder and harder to find anyone saying a kind word about good old freemarket capitalism, what with the mounting wreckage that is the global economy these days and the hurt that will be put on everyday working people here in the US and around the world in order to rescue the bloodsuckers who have benefited from this system.

There’s every reason we should make a point of kicking ‘em while they’re down.

So I did my little bit today, leafleting at a characteristically lively and imaginative action by ACT-UP’s New York and Philly locals and other AIDS groups. Scores of people grabbed fliers as they rushed to work in the skyscraper housing LifeBrands, Inc., the ad agency that Roche employs to promote Fuzeon.

There’s plenty more detail to deepen your rage at Roche--how they bought out the company that was given the rights to this drug by the government, which sponsored the original research, how their executives have shut down all AIDS and HIV research, how their profits last year exceeded 30%. But that one quote tells the story, about Roche and about the whole system they have made themselves such a success in.

We do not do business for saving lives but for making money. Saving lives is none of our business.

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Bite Size Bad News 8--Housing Capital

As of June 30, housing prices in the US are down 15.8% from one year earlier. This is being reported as the destruction of $3.25 trillion worth of value.*

Well, sort of. The capital the business press says has been destroyed has both a fictitious and a real character.

The fictitious aspect has come to the fore because the legendary “newer sucker” of capitalist theory has failed to show up. As long as you could actually sell your house to someone for more than you paid for it, everything was copacetic. You didn’t even have to sell. You could borrow against that increased value and have real money in your bank account (and, alas, owe the lender real money too, plus real interest). Once you can only unload that house at a fire sale rate, if at all, it becomes clear that a lot of that “value” wasn’t very real at all.

But the destruction of very real concrete physical capital is ramping up, though it’s nowhere near $3 trillion worth yet, That’s actual houses which are being abandoned, and will fall into ruin and never be occupied again.

Some of this is hard to weep salt tears over, of course, like the ghastly exurban developments so recently marketed under banners like “affordable luxury.” Now they are being dubbed “ghost towns with granite countertops,” as rising oil prices have helped highlight the downside of living a long, long drive from work or even shopping. Many of those finished or nearly completed in the last year or so will never be inhabited.

Most of it, though, is houses people need to live in. Buffalo, NY is a good example. The city is among the local governments that have initiated lawsuits against big banks like Citicorp and Wells Fargo and other lenders who have foreclosed on properties or where mortgage holders have walked away, unable to afford their payments.

Buffalo sued in February for $2 million to cover not upkeep which had been neglected but the actual cost of demolishing 57 abandoned properties. 21 had already been torn down. And these are far from the only foreclosed houses standing empty in Buffalo. "It’s our first strike in a wave that would obviously focus on more,” said Alisa A. Lukasiewicz, Buffalo’s corporation counsel.

Demolition is a “lagging indicator” of the housing crisis. Houses can stand abandoned and decaying for a long time before anyone gets around to dealing with them.(or even figuring out who owns them with so many mortgages parceled up into CDOs)

And a lot of what’s been foreclosed on in the hardest hit states—fast growth areas like Florida, California and Nevada—was built relatively recently. And that’s more bad news.

These developments aren’t exactly built to last. Even the ugly but pricey new McMansions you see occupying nine tenths of a lot in wealthier suburbs are crap—nice-looking flooring laid over cheap plywood, paper-thin wood veneer on those pre-made kitchen cabinets, foam-core or hollow doors, drywall keeping the place upright as much as or more than the flimsy 24” o.c. frames.

They aren’t going to last the way old Iowa farmhouses or Philly row houses or even NYC tenements do. With no maintenance, never mind squatters, they’ll crumble fast.

And billions more in real capital will be destroyed, while those who created this mess—the predatory lenders, the executives at the big banks, the money market honchos, and the government economists who hailed it all—will not only make out just fine, but are already waiting to invest and profit when the housing market does finally bottom out.


*And that's not including the losses in value of the CDOs, the collateralized debt obligations whose collapse triggered the credit crisis (no one has any idea how much), or in the bear market in stocks which has resulted from the credit crisis ($2.3 trillion just in the U.S. S&P 100 so far).

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Bite Size Bad News 1--First Mortgages

[I've been reading the business press, including blogs, a lot lately. It's like watching a train wreck in slo-mo. That's where I got the oil strike story I posted yesterday. Since I lack both time and theoretical chops to write much in the way of long analyses of the unfolding economic crisis. I'm trying a new thing--occasional short pieces highlighting one or another tidbit that has caught my attention.]

The weekend edition of the Wall Street Journal provides one more reason the housing crisis isn't going anyplace soon. It's not just that the supply of houses for sale is up (to 2.3 million according to Bloomberg News), what with falling sales, foreclosures, overproduction of new units and rising fuel costs making the exurbs look much less attractive. The banks are acting snakebit:

Lenders are demanding higher credit scores, mandating private-mortgage insurance on many more loans, and requiring larger down payments. Fewer first-timers qualify for the house they want, or they're paying a larger monthly amount to own it.

In an interview with an 89-year-old financial historian (on the same page) we get a sense of what this exercise of caution on the part of banks and other mortgage lenders may really represent on a much larger scale:

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up.

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Take Five: "Jingle Mail" and the Language of Financial Crisis

[From time to time Fire on the Mountain features, on Fridays, Take Five--a list of five cool things in some particular category. It's not the top five or anything; the idea is you can chip in your own suggestions for the list in the comments sections below.]

As the US business press and government spokescritters set an example for us by clapping as hard as ever they can to keep the Tinkerbell that is the US economy fluttering bravely around, the outlook in more serious venues has more the flavor of Clint Eastwood squinting into the sun-fried desert and not much liking what he sees out there.

Lately I've taken to reading the economists of the blogosphere, like Bonddad and Mish, and taking an icy plunge into the Financial Times almost every day. From a standing start, this isn't the easiest leap for me, given that I finished with high school some time during the Coolidge administration and am math-challenged to boot. One thing that has helped me wade through the thickets of CDOs, SIVs, the ABCP market and other acronyms are the snappy new expressions the crisis has given rise to, largely in the form of gallows humor from within financial circles.

TAKE FIVE

Herewith, my current five favorite new coinages and catchphrases from the spreading credit crisis:

"Jingle mail"--My top favorite, and a nightmare to mortgage holders. Jingle mail refers to envelopes that banks are getting containing the keys to houses which flat-broke borrowers are walking away from, and, via synecdoche, to all of the people who are abandoning homes it no longer makes sense to pour money into.

"Underwater"--Why there's so much jingle mail. Falling house prices means that more and more people owe more on their mortgage than they could realize if they sold their house. A lot of people are underwater. A recent Moody's report estimates that 8.8 million homeowners today have zero or negative equity.

"We're all sub-prime now"--A rueful sumup in financial circles of the fact that the collapse in value of subprime mortgages has spread to all kinds of financial instruments, including ones based on credit card debt and other consumer loans as well as on stocks and bonds, creating massive and unpredictable risks of failure.

"The Great Unwind"--The next few years, probably. The super-complex and arcane nature of the fancy "investment opportunities" cooked up by the folks repackaging and selling various sorts of debt, combined with the fact that there's been almost no market in them since since way last fall ('cos who'd buy them), means that nobody has a clue how much shaky, highly-leveraged debt is out there or how much any of it is actually worth. (And it's a moving target to boot--if, say, home prices continue to crater or the rate of credit card default starts climbing rapidly, it's all worth less). All this stuff has to be unentangled and brought into the light of day, even as no individual CEO wants to acknowledge how badly his firm is suffering. That means it may take several years for the present mess to unwind itself via a start and stop process which will include the formal unpackaging of some of these financial instruments, massive bargain hunting and dog dumping in the financial markets, bankruptcies (and taxpayer-funded rescues of those deemed "to big to fail"), and, who knows, maybe even government investigations and hearings, leading to new regulations.

"Worst crisis since World War 2"--What the Great Unwind is pushing us into, according to both Alan Greenspan & Martin Feldstein, head of The National Bureau of Economic Research. In the same week, no less. I like this miniature exercise in smoke and mirror deployment, too. The Second World War was, of course a time of deep, broad and rapid economic expansion in the US. What this actually means is "since the Great Depression," the decade immediately preceding the war, but neither this pair, nor the talking heads who echo them, is about to utter the D-word in public.

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