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  • From Bush’s Cowboy to Obama’s Collusive Capitalism

    Race may be the thing that most obviously distinguishes President Barack Obama from his predecessors, but his biggest impact may be in transforming the nature of class relations — and economic life — in the United States.

    In basic terms, the president is overseeing a profound shift from cowboy to what may be best described as collusive capitalism. This form of capitalism rejects the essential free-market theology embraced by the cowboys, supplanting it with a more managed, highly centralized form of cohabitation between the government apparat and the economic elite.

    Never as pure as its promoters suggested, cowboy capitalism always depended on subsidies to businesses such as corporate farming, suburban development, pharmaceuticals, energy and aerospace. George W. Bush and the Republican majorities of the early 2000s simply drove this essential hypocrisy to a disastrous extreme by increasing deficits and allowing deregulated financial markets to run wild. In the process, they helped drive the world economy off the cliff.

    Not surprisingly, Obama and his backers see their mission to reverse the course. However, the path they are taking may prove no friendlier — and perhaps less so — to the interests of American democracy and the middle class than those of the now-deposed cowboy posse.

    The Obama policy of collusive capitalism is most evident in the financial bailout. He has placed his economic program in the hands of a man — Treasury Secretary Timothy Geithner — who can best be called, as analyst Susanne Trimbath puts it, a “lap dog of Wall Street.” A protégé of former Treasury Secretary and Citicorp board member Robert Rubin, Geithner played a pivotal role in the original Bush bailout of the Wall Street elite.

    Most recently, he proposed selling toxic assets to hedge funds and other financiers, a plan widely denounced by a host of liberal commentators, notably Paul Krugman and Joseph Stiglitz. The Geithner plan, Stiglitz noted this week in a New York Times op-ed, represents “the kind of Rube Goldberg device that Wall Street loves: clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.”

    The winners in the plan are the top guns of the financial industry, who would welcome further government-sponsored financial consolidation. For them, this would be vastly preferable to the more democratic alternative of selling the remaining assets of the failed large firms to dispersed, healthy, usually smaller, regional institutions.

    Largely missing from even these critiques is precisely why Obama has adopted this collusive approach while mostly avoiding anything smacking of populist anger. Perhaps one has to start with the very obvious fact that the president — despite occasional attacks on the greed of Wall Street — did not run against the financial markets but, rather, with their strong support. As early as the 2008 Democratic primaries, noted New York Times Wall Street maven Andrew Ross Sorkin, Obama had “nailed [down] the hedge fund vote.”

    This group includes the notorious currency speculator George Soros, a major backer of liberal groups in Washington who recently admitted to London’s Daily Mail that he was having “a nice crisis.” Whatever Geithner is doing seems to be working well for Soros and his ilk, although not so beneficently for the people who are losing their jobs and homes.

    I do not mean to suggest the shift to collusive capitalism represents a conspiracy; it simply reflects a changing of the guard among the American elite. The new hegemons include not only financial barons but also powerful interests such as the burgeoning green industry, the high-tech/venture capital complex, urban landowners and, at least in the category of useful idiots, Hollywood and much of the media.

    The new collusive capitalist class differs from the cowboys in its view of government. The collusive capitalists — notably, powerful IT companies and venture capitalists — now look to spur “green” technologies, which are seen as their next meal ticket.

    Others standing to benefit from the rise of collusive capitalism include the university and nonprofit research establishment. Universities have become critical linchpins for the new Democratic Party — providing student shock troops and professorial financial contributions as well as the basic ideological underpinnings and much of the key personnel.

    Are there any dangers for the administration from this approach? In the short run, they certainly have little to fear from the Republicans, whose strident claims about a lurch toward socialism have about as much credibility as their supposed born-again faith in fiscal conservatism.

    A potentially more dangerous threat lies from those parts of the non-gentry left, who fear that collusive capitalism will promote a dangerous further concentration of wealth and power. More immediately, it may also suffer from the limitations of a top-down, green-obsessed strategy that is unlikely to generate enough private-sector jobs, particularly for blue-collar workers.

    This large job creation deficit may take years to become evident but could have a long-term impact on middle-class voters and, perhaps most important, the generally pro-Obama millennial generation workers who are among the prime victims of the current economic malaise. Hopefully, before then, the president will recognize the limitations of collusive capitalism and set out on a broader, more democratic wealth-creating agenda.

    This article originally appeared at Politico.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • Move to Suburbs Continues in Western Europe

    Despite the assertions of some planners and urban boosters, urban core population loss has been the rule since mid-century throughout the metropolitan areas of Western Europe (see note below). For example, the ville de Paris lost a quarter of its population from 1954 to 1999, Copenhagen shrank 39 percent from 1950 to 1991, inner London (This includes the 13 inner boroughs and the “city” of London, which are roughly the former London County Council area) declined by a third from 1951 to 1991 while Milan‘s population declined by a quarter from 1971 to 2001.

    At the same time, widely ignored by many American observers, Western Europe has been suburbanizing strongly. Since 1965, virtually all major metropolitan area growth has been in the suburbs. Indeed the share of the metropolitan area population gains in the suburbs has been greater in Western Europe than in the United States.

    It is true, however, that there has been a generally modest turnaround in core population trends, with strong turnarounds in the “ancient” losers of Vienna (which peaked in 1911) and inner London (which peaked in 1901). It might be tempting to suggest – as is often done in the United States – that these reversals indicate that Europeans are moving back to the cities from the suburbs.

    To answer this question, we examined all of the available “components of population change” reported by the census authorities of Western European nations. Seven of the 17 (the European Union-15 plus Norway and Switzerland) produce such data at a geographical level that makes metropolitan analysis possible. A review of this data suggests that the new residents are largely international migrants and that the core cities generally continue to lose domestic migrants, while the suburban areas continue to perform better with respect to attracting domestic migrants. This parallels the experience in the United States.

    Vienna: Vienna illustrates the trend. The city of Vienna increased its population from 1,550,000 to 1,656,000 between 2002 and 2007. This 7.3 percent gain is impressive but over the same period, a net 11,000 residents left the city. Virtually all of the population increase was the result of international migration, which accounted for 113,000 new residents. On the other hand, the suburbs of Vienna added 32,000 new domestic migrants and also added 23,000 international migrants. Vienna’s population turnaround can be fully attributed to immigration.

    Inner London and England: Like Vienna, inner London’s gains have not been the result of people moving from the suburbs to the city. Between 2001 and 2007, a net 326,000 people moved from inner London to other parts of England and Wales. The domestic migration losses were even larger than the gain of 282,000 from international migration. The inner suburbs (the outer boroughs added to the city in the 1960s) also lost domestic migrants, but at a rate half that of inner London. The exurbs (the two rings of counties outside the Green Belt) added 126,000 domestic migrants and a somewhat larger number of international migrants.

    Overall, the London metropolitan region experienced a net domestic migration loss of more than 383,000 between 2001 and 2007. However, there were strong international migration gains, in every sector of the metropolitan area.

    Thus, the data indicates that the recent inner London population growth is not the result of suburbanites moving to the city. Inner London’s population growth is being driven by international migration and the natural increase in population (births minus deaths).

    As with inner London, the cores of Birmingham, Manchester, Liverpool, Newcastle and Leeds-Bradford all lost domestic migrants from 2001 to 2007. Thus, despite the improved population performance of the largest metropolitan areas in the United Kingdom, people continue to move out of the cores, while people are generally moving to suburban areas.

    Milan and Italy: The city of Milan, the core of Italy’s largest metropolitan area, has experienced one of Western Europe’s most significant population losses since the early 1970s. Yet, in the early years of the decade, Milan has experienced a turnaround, as the population has begun to grow. The pattern was much the same as seen in London, with a net 40,000 residents leaving Milan province to move to other parts of Italy. At the same time, there was a strong net international migration gain of 168,000. Suburban areas, on the other hand, attracted a net 119,000 domestic migrants as well as a strong component of international migration.

    A shorter data series is available for cities (communes) and shows net domestic migration losses in the central cities of Milan, Rome, Naples, Turin, Genoa, Palermo, Florence and Bologna. The suburbs, however, gained domestic migrants, with the exception of Naples. However, the Naples suburban losses were at a far lower rate than that of the city.

    It is thus evident that the core areas of the largest Italian metropolitan areas are not receiving net migration from their suburbs.

    Stockholm and Sweden: Similarly, the city of Stockholm’s recent gains have not been the result of migration from the suburbs. Between 2001 and 2007, the city lost a net 8,000 domestic migrants. This loss was more than made up by the international net migration of 29,000. At the same time, the suburbs and exurbs gained 15,000 domestic migrants.

    Sweden’s second largest metropolitan area, Gothenburg, was one of only two of the 19 cases in which there was net domestic migration to the core (which had been enlarged in the 1990s to include many suburban areas). The city gained 500 domestic migrants and 15,000 international migrants. However, the suburbs gained approximately 13 times as many domestic migrants than the city, again indicating no trend of movement from the suburbs to the city.

    Helsinki: Finland’s capital mirrors the general trend. The city of Helsinki lost 6,500 domestic migrants between 2002 and 2007, which was more than compensated for by an 11,800 net international migration gain. As in nearly all of the other cases, the suburbs and exurbs gained domestic migration, illustrating that there is not a movement from the suburbs to the city in Helsinki.

    Oslo: Norway’s capital was, with Gothenburg, the only core experiencing net domestic migration. Oslo County gained 5,400 domestic migrants. However, the suburbs and exurbs gained domestic migrants at a greater rate, adding 16,000. Thus, despite the core domestic migration gains, there is no evidence of a “return” from the suburbs and exurbs to the city in Oslo.

    Conclusion: The available data from national census authorities provides no evidence to suggest any sort of general movement of the population from suburban and exurban areas to the central cities of Western Europe. This mirrors the situation in the United States, where interests that hold the suburbs in contempt continue to declare their death, while the latest data continues to show the opposite – strong domestic migration losses in core areas and gains in the suburbs.

    There is one other key factor in the European case: the enlargement of the European Union in 2004, which increased the national membership from 15 to 25 (and subsequently to 27) and allowed for the mass migration of people from the east to the wealthier west. Whether the international financial crisis may reverse this trend, with many Eastern European residents moving back to their native countries, remains an open question.

    Note on European metropolitan areas: There is no European standard for determining metropolitan areas (which are labor markets). The European Audit’s “Larger Urban Zones” (LUZ) are the closest approximation, but are not consistently defined throughout the European Union. For example, the Naples LUZ includes only the core and inner suburbs, an area far smaller than the functional metropolitan area. Many other larger urban zones include suburban and exurban areas, consistent with the concept of a metropolitan area.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • Which are the places dominant in finance?

    The financial services sector (finance, insurance, real estate, management) lies at the heart of the economic crisis and recession. This is the sector that doubled in its share of the labor force over the last 30 years, creating vast but uneven wealth. It is instructive to see which American cities are most culpable in these excesses.

    New York dominates, as it has for centuries, especially if we include neighboring Fairfield county, CT (Bridgeport, Stamford, Greenwich), based on its very high share (20 %) of resident employees in finance. This does not include the very high share of incomes that financial services represents in the New York area, as discussed in our recent report on the city’s middle class.

    But Washington, DC has by far the highest share; there are also high shares in neighboring Baltimore and Richmond. These figures illustrate the rising relative power of center of government in the contemporary political economy. Los Angeles is roughly equivalent, but with a slightly lower share than New York. Chicago, the economic capital of the interior, tops off the big four centers of control.

    The next tier of five major regional capitals, all also Federal Reserve cities, are Dallas, Atlanta, Philadelphia, Boston and San Francisco, with Boston and San Francisco among places with the highest shares in finance. They are followed by four regional capitals on the path to financial stardom – if you can use that term today – including Miami, Houston and Seattle and Phoenix, as well as another federal reserve city, Minneapolis.

    Several major metropolitan areas are far less important in finance than in earlier times. These include the Rust Belt cities of Detroit, Cleveland, St. Louis, Pittsburgh and Cincinnati. These, in turn, are being challenged by the growing smaller metro areas and regional capitals of Denver, Portland, San Diego, Sacramento and Tampa-St. Petersburg.

    Finally smaller, often growing metropolises with high shares in finance include, most obviously Charlotte, but also Austin, Columbus, Madison, Raleigh, Des Moines and Olympia, WA, all state capitals and/or university towns. But the highest shares, after Bridgeport are located smaller areas in Florida, Palm Coast and Fort Walton Beach.

    Place
    Total Population (millions)
    Total labor force (millions)
    Number in Finance (thousands)
    % finance
    New York 18.8 9.9 1535 15.5
    Los Angeles 12.9 6.6 970 14.7
    Chicago 9.5 4.9 750 15.3
    Dallas 6.1 3.1 502 16.2
    Philadelphia 5.8 2.95 457 15.5
    Houston 5.6 2.7 383 14.2
    Miami 5.4 2.8 409 14.6
    Washington 5.3 3 645 21.5
    Atlanta 5.3 2.7 464 17.2
    Boston 4.5 2.5 440 17.6
    Detroit 4.5 2.15 299 13.9
    San Francisco 4.2 2.2 411 18.7
    Phoenix 4.2 2.1 305 14.5
    Riverside-SB 4.1 1.8 205 11.4
    Seattle 3.3 1.8 310 17.2
    Minneapolis 3.2 1.8 313 17.4
    San Diego 3 1.5 245 16.3
    St.Louis 2.8 1.4 202 14.4
    Tampa St. Pete 2.7 1.3 203 15.6
    Baltimore 2.7 1.4 235 16.8
    Denver 2.5 1.4 232 16.6
    Pittsburgh 2.4 1.2 158 13.2
    Portland 2.2 1.15 177 15.4
    Cincinnati 2.1 1.1 158 14.4
    Cleveland 2.1 1.06 139 13.1
    Sacramento 2.1 1 161 16.1
    Orlando 2 1.1 171 15.5
    Bridgeport 0.9 0.47 94 20
    Palm Coast 0.06 0.031 6 20
    Ft Walton 0.15 0.09 17 19
    San Jose 1.8 0.9 171 19
    Boulder 0.29 0.175 33 19
    Olympia 0.24 0.1 18 18
    Raleigh 1.05 0.55 96 17.4
    Des Moines 0.55 0.31 53 17
    Oxnard 0.8 0.43 73 17
    Manchester-Nash 0.4 0.2 34 17
    Charlotte 1.65 0.85 145 17
    Austin 1.6 0.86 142 16.5
    Tallahassee 0.35 0.19 32 16.6
    Columbus OH 1.75 0.95 152 16
    Richmond VA 1.21 0.68 110 16.2
    Anchorage 0.36 0.195 31 16
    Madison  WI 0.56 0.34 54 16

  • What About Carmen?

    The national conversation in the wake of President Obama’s introduction of a mortgage relief plan has centered on “fairness” and the conditions to qualify for a mortgage modification. This misses the point. The effects of “innovative” mortgage products were felt far more broadly than the relationship between a single buyer (responsible or not) and his particular mortgage broker (despicable or not). To illustrate the point, meet Mrs. Conservative And Responsible Mortgage Neighbor (“Carmen” for short).

    In 2003, Carmen bid on a home and took a 30 year fixed mortgage with 20 percent down.

    Fast forward to today. Carmen has enjoyed her home and made all of her payments to the bank on time. Unfortunately, her home has dropped in value to the point where it is now significantly underwater . Her investment portfolio has fared just as poorly, losing 40 percent of its value in the last 18 months. All the while, her mortgage obligation has slowly amortized lower.

    If Carmen were to turn to her investments to pay off the loan today, she would come up short. Worldwide deflation has resulted in every asset in our little vignette having fallen by 40 percent. Carmen’s debt burden, however, remains the same,, struck in yesterday’s dollars.

    How does the current mortgage relief plan – which certainly excludes all of the Carmens out there — make sense? The short answer is that it doesn’t. It is neither fair nor effective. It lacks boldness, universality and an understanding of the problem.

    A far better answer to the problem is one time across-the-board principal reductions to all primary residence mortgages originated in the last ten years. Such a plan avoids the piecemeal approach of subjective formulae and doesn’t make personal bankruptcy a precondition to the reduction of principal. It acknowledges that the nation’s housing stock was overvalued because of unintelligent home buyers, products that have been discredited, fairly widespread fraud and inexcusable encouragement by naive government officials. Following the principal reduction, each loan can be re-amortized over its remaining life, resulting in the stimulus of a reduced monthly payment for every American homeowner.

  • Chrysler: Detroit Loses Its Muscle

    With the clock finally running out for Chrysler, I was reminded of a theme that has run through most of my corporate work, namely that corporate culture is the element of any organization most resistant to change. As I have read (and written) many times, senior management and new management schemes come and go, but the prevalent attitude among the permanent work force is “this too shall pass.” The senior managers move on, and the culture reverts. It takes a “burning platform” to effect real change.

    When the corporate culture is aided and abetted by the national culture, as with the auto industry, the day of reckoning can be staved off indefinitely. Every time a structural threat to business as usual has arisen, the fix was in: Gas crisis? Whatever you do, don’t impose new fuel economy standards, and keep gas taxes low while you wait for oil prices to come back down again. Foreign competition? Import quotas. The political culture of Washington, regardless of who controlled the White House or Congress, was inseparable from the corporate culture of Detroit.

    This is unsurprising, since the car is so much a part of American culture. The romance of the car never dies, it just morphs into something else. What saved Chrysler when Lee Iacocca ran it? The minivan. Iacocca put a box on top of a passenger car frame just as baby boomers started their families. The ‘sixties VW bus, the counterculture’s vehicle of choice for magical mystery tours, was reincarnated for family life as the Dodge Caravan. New wealth in the ‘90s brought back the production muscle car, like a recessive gene that suddenly becomes manifest. Of course it never really went away.

    Woodstock has come and gone, but each summer suburban Detroit plays host to its own gathering of the tribes in a rite called American Iron. Loving owners and keepers of vintage GTOs, 442s (I confess, I talked my father into buying one of these when I was in high school, and he promptly sold it when he had to refill the gas tank about as often as Richard Nixon had to shave), and Corvettes park their cars on specific streets throughout the city, assigned according to make and model, where they throw open their hoods to reveal to their automotive kin lovingly restored and chromed vintage 7 liter engines. On schedule, the gentlemen will start their engines, shaking windows and rattling walls for miles around.

    I had one brief brush with Chrysler and Big 3 culture in the early 1990s when a PR firm hired me to fly to Detroit and write up a case study for its client, the consulting arm of accountants KPMG. KPMG was marketing a discipline it called Business Process Reengineering. Chrysler had applied this rigorous methodology to something they called the Wire-Housing Case. A wire housing is one of those brightly colored plastic sleeves with holes through which are threaded an assortment of wires, themselves wrapped in brightly colored plastic for easy color-coded connection to the appropriate circuitry.

    As I recall the numbers, each Chrysler vehicle contained seven wire housings, each of which was customized to particular electrical components of each model. Some would be used for only a couple of wires, and some many more. Each model had its own set of housings with its own specs written by dedicated teams of engineers, and produced by an extended family of suppliers.

    The KPMG BPR team had re-jiggered the design process to reduce the number of housings required for each vehicle from seven to only five, and in doing so realize savings to the company in the millions of dollars. Very impressive. The morning’s discussion was filled with the enormous gains that could accrue to the company if only it attacked each engineering problem with comparable rigor-for-hire courtesy of the firm’s consultants. When I asked the obvious questions, how long did it take to implement the change and how much money did they save in practice, the consultant and the accountant exchanged a look.

    In fact, they said, the change had never been implemented. Further questions elicited an impression that the automotive industry functioned internally with its own version of interest-group politics. Each system had its own web of constituencies—design teams, suppliers, brand managers, and so forth—and each thread needed to be appeased. There was no such thing as the greater good, any more than there is with health care reform, the F-22 fighter plane or, to use an example local to me, congestion pricing of traffic in New York City.

    The same tendency was on display more recently, and on a grander scale, after Chrysler was acquired by Daimler-Benz. The sages of Stuttgart had the bright idea that the company could save billions by mounting the American models on the frames and chassis of the Mercedes, and thus cut out redundant designers, engineers, and suppliers.

    This time, the Daimler engineers went into open revolt. Put those American pigs’ ears on our silk purses? Not on your life. And so another grand effort to rationalize the auto industry went by the boards. Daimler essentially sold the company to Cerberus Capital for parts.

    In the years since that visit to Detroit—I can easily place it in time because I also stopped in on an aunt in a nearby suburb who was glued to the O.J. Simpson trial—I have encountered a number of other consultants and their schemes to bring the automotive supply chain to heel. The companies would consolidate their supplier networks, sourcing more parts from fewer suppliers who would achieve economies of scale and provide lower unit costs in return for bigger orders. The suppliers, who simultaneously worked with the competition as well, would take over more of the basic engineering and design, usually with talent offloaded from the Big 3. Personnel and systems for both would be integrated into one another. Unlike the wire harness case, these changes were implemented. It’s not as though the Big Three have been doing nothing all these years, and still it’s not enough.

    Now Chrysler is being run by Bob Nardelli, once an also-ran at GE in the race to succeed Jack Welch, and then the overpaid, underachieving CEO of Home Depot. The New York Times March 16th profile of him is an oddly touching piece. Like Donald Rumsfeld and Ernest Hemingway, Nardelli works at his desk all day on his feet. He is pictured as a man on a mission, comparable to Iaccoca, who wants to rescue the whole cow, albeit a leaner version, not chops and steaks as had been expected when he took over. “It’s not about Bob… If I didn’t believe in [the rescue plan] I wouldn’t have put my name on it,” he told the Times. He has already cut 32,000 jobs, but even if it were possible to fix the wire harnesses or improve the fleet average all at once, he couldn’t sell the product, not in this market. On Monday, the Administration voted no confidence. Barring an 11th hour reprieve from Fiat, this is a death sentence.

    My aunt lives on the street that briefly each summer becomes known as Mustang Alley. She is anguished by the fate of her community, her immediate family, her friends and her business, all of which are suffering. Watching what is happening to New York as the banking crisis unfolds, I am just beginning to understand know how she feels. Her son-in-law is an engineer who worked for a supplier to the auto industry. On Sunday, he moved south to work for a company that builds windmills.

    Henry Ehrlich has written speeches as a freelancer for both the new, white-knight CEO of Fannie Mae and the former, disgraced CEO of Freddie Mac. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • Jimmy Durbin

  • Geithner’s Reforms: More Power to the Center May Appeal to Europeans, But Won’t Work for U.S.

    There will be much talk in London about global financial regulation, particularly from the Europeans. But don’t count on it ever coming into existence.

    At a House Financial Services Committee on March 26 Treasury Secretary Geithner testified that this particular subject “will be at the center of the agenda at the upcoming Leaders’ Summit of the G-20 in London on April 2.”

    Secretary Geithner presented a 61 page proposal dealing with financial companies that pose systemic risk. Let me paraphrase the main points:

    1. Create a Uni-regulator – This idea has been around a while; it won’t hurt. We tried to do this in the U.S. during the last round of sweeping financial reforms but couldn’t make it happen, primarily due to protectionist politics among the existing regulators (SEC, FRB, Treasury, FDIC, etc.). The UK and others have done it. It didn’t prevent the financial crisis from reaching them. Still, it wouldn’t hurt to have at least one adult in charge of the financial markets when things get messy.
    2. Make companies hold more cash to back up their riskier investments – The banks already have strict national and international capital requirements. It didn’t prevent them from needing a bailout, but the big banks are still standing while the rest of the financial companies are gone. This is probably a good idea.
    3. Set size limits on unregistered fund managers – I don’t think there should be any size limits: if you provide financial services you should register. Don’t plumbers have to be licensed? Why not bankers?
    4. Figure out how to regulate derivatives – We’ve known for a long time that this was a problem. If they haven’t figured it out by now, it’s unlikely they’ll get it right; the proposal is short on details. Geithner’s plan is to bring derivatives into the same centralized system now used for stocks and bonds – consolidating the risk rather than dispersing it – definitely a bad idea. The existing U.S. centralized system has, as of December 31, 2007, only $4.9 billion to back up $5.8 billion in off-balance-sheet obligations.
    5. Have the SEC set requirements for money market fund risk management – I’m not sure why on earth anyone would want the SEC to assume this responsibility. The SEC has failed miserably at protecting investors from basic short selling schemes and even more blatant schemes like Madoff’s Ponzi. Risk management at financial institutions should be the job of the central bank – that means the Federal Reserve, not the SEC.
    6. Let the government nationalize “too big to fail” companies – They just did this with AIG. In essence, the proposed legislation would codify and make permanent authority for the government to lather, rinse and repeat. Government ownership of financial institutions inevitably leads to inefficiency and worse.

    We’ve tried creating “revolutionary” financial laws before: the Depository Institutions Deregulation and Monetary Control Act of 1980 set the stage for the Savings and Loan Crisis; the Financial Services Modernization Act of 1999 helped get us where we are now. Better laws come about in “evolutionary” ways. It starts with a generally accepted good business practice, which all market participants follow. Eventually, one or more participants find a way to advance their position by cheating, by not following that good practice. When they get caught, new laws are created to codify the original “good business practice” and some punishment is put in place for those who don’t. What was once considered just a good way to conduct business now becomes a legal business requirement.

    Geithner’s proposed legislation is law by revolution – an attempt to toss aside all previous practices. The legislation was drafted at Davis, Polk & Wardwell, the New York lawyers for the Federal Reserve Bank and advisors to Fed and Treasury on AIG, not the kind of experience I’d want on my resume this year. There is an embedded comment on page four in the pdf-document: “Can Congress write a federal statute trumping a State Constitution?” I’m not sure what frightens me more: that they want to take power away from the states or that they don’t know if they can get away with it! Now is the time to give more authority to the states, not less. By their own admission, federal authorities have proven themselves incapable of protecting investors: Treasury Secretary Geithner told the House, “our system failed in basic fundamental ways.”

    Worse yet is the idea of proposing a global financial regulator, which will be high on the agenda at the G-20 Leaders’ Summit. Designing one regulatory framework for financial services to serve the capital markets in every country is akin to looking for people in every country to “cheat” the same way. Capital markets can work anywhere in the world, but the social and cultural foundations of the system that supports these markets may be quite different. The laws and regulations will need to be quite different, too. When it comes to developing the financial institutions that provide the infrastructure for robust capital markets, there is no “one size fits all”.

    “Stable financial markets through reform” has been the theme of innumerable conferences, conventions and meetings of the leaders and finance ministers of country groups from G8 to the United Nations. Two decades of experience with the “Washington Consensus” tells us that global regulation will not work any better than concentrating all power in Washington.

    Here’s the primary problem with trying to design one set of financial reforms that will serve many nations: Financial services are global not multi-national. Most other products and services sold around the world are multinational, but not global. For example, salt is a multinational product. The salt sold in Cairo is basically the same product as salt sold in Paris or London. Perhaps the label contains the word “salt” in a different language; maybe the Danes use more salt than the Swedes and the Japanese combine it with sugar. But a package of salt contains the same product and is used for the same purpose – one product, used the same way in many nations.

    Financial services are different. A share of stock in Paris has different rights, a different meaning, than a share of stock issued in Buenos Aries. Bondholders play a prominent role in restructuring companies in bankruptcy in the US; in France, debtors are protected from bondholders completely. Yet anyone anywhere can buy a share of a French company or the bond of a US company – many products, used for different investments in one world. For reasons like this, there is no one solution for regulating the banks, brokers and stock exchanges in every country.

    Economists have known for a long time that global financial regulation – or even ”sweeping” national changes – won’t work. Perhaps the lesson from the current financial crisis will be that national regulation must be supplemented with more oversight in the States. Given Geithner’s plan and his penchant for ever more consolidation of authority over financial services, it’s unlikely we’ll get the chance to find out.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Design New Haven

  • London Calling: Bad News For Home Buyers

    The demand for housing in London has outstripped supply since the post-war period, making housing unaffordable to a majority of the city’s low and middle-income families. And although the house price growth of the last two decades has reversed itself recently, it is far from clear that London’s housing problems are in any way diminished. The opportunities for first-time buyers to get into the game may be worse than at any time in recent decades.

    In some ways, the London housing market is unique. The buy-to-let market is almost entirely dominated by private individuals, rather than by big investment funds. For instance, in 2006, two-thirds of the buyers of new private homes in the city were mostly small investors, and the remaining were owner-occupiers. Over half of the buyers are UK-nationals; the rest are of foreign origin. Overseas buyers have been attracted by the idea of holding investments in Sterling, a currency historically seen as stable and appreciating. For instance, South Africans have been enthusiastic investors in London housing as a hedge against the Rand. The city is made up of 3 million dwellings, most of which were built before the 2nd World War, and so the market is almost entirely for second-hand property . In fact, newly built housing in any year constitutes less than half a percent of total stock in London.

    The city is also unusual in that most Londoners are 20 to 39 year-olds. The city’s in-migrants tend to be young, while out-migrants are likely to be older. As a result, not only has the number of households been growing faster than the overall population, but the average size of the household has been falling. The supply of three or more bedroom-flats has shrunk rapidly as a proportion of total supply; it fell to 14% in 2007-08, less than half the level 10 years ago. The supply of new one and two bedroom flats, however, has mushroomed over the same period. This trend is set to continue: of the 570,000 to 710,000 additional households that London will have by 2026, three quarters will be single person households.

    Initial evidence that sub-prime mortgages were defaulting in greater and greater numbers in the United States in February’07 did not seem to have an impact on the UK housing market up until November of that year. The following months witnessed the crash of house prices, which continued their free fall into the final quarter of 2008. According to the Department of Communities and Local Government, properties in the UK lost a record 11.5% of their value over the year ending January’09, although the rate of house price deflation eased slightly in the last quarter. In London, house prices fell by 16% over the same period (the average house price in Greater London is 53% above the UK average).

    Prior to that, the United Kingdom enjoyed a major house price boom for a decade. Growth was fueled primarily by low interest rates, which kept the costs of mortgage finance low, and by shortages in the property market. Financial deregulation and the entry of banks into the mortgage market in the 1980s and 90s meant increased competition and easy availability of mortgage finance. Add to this stable and growing employment in the city, rising incomes and expectations that interest rates would remain low, and the house price boom was hardly surprising. The boom meant that housing became increasingly unaffordable for Londoners.

    But even the recent recession-related fall in house prices and the slump in sales have not necessarily translated into better opportunities to get a foot on to the housing ladder. On the contrary, the current credit crunch is compounding the problem. Falls in house prices in recent months have been accompanied by tightening of mortgage access criteria. Even if a mortgage can be obtained, average deposits and payments remain much higher than average incomes. The average first-time buyer needed to borrow 3.27 times their average income (joint or individual) in 2008, as compared to an income multiplier of 2.42 in 2000, or 2.31 in 1990. Research also shows that Londoners are increasingly dependent on help from family, since deposits can be prohibitive.

    Recent analysis by the Royal Institute of Chartered Surveyors concludes that despite falling prices, London has seen the largest deterioration in housing market accessibility of any region, as would-be-buyers struggle to find deposits or secure affordable mortgages. Indeed, the volume of first-time buyers was 55% lower in August’08 as compared to a year ago, and it seems that in recent months they have been shut out of the housing market in growing numbers. A quarter fewer first time buyers are accessing the market now than at the bottom of the housing market crisis in the early 1990s, and levels are at their lowest for 30 years.

    Although 80% of the housing in the UK is sold on the private market, the government plays an important role by intervening in the market through the provision of social housing, provided through housing associations or registered social landlords. There has been a dramatic surge in the demand for social housing as the recession has started to bite: the housing waiting lists have grown. According to the National Housing Federation, an additional 80,000 are expected to lack a home owing to recession-related repossessions and unemployment.

    However, there are a few encouraging signs. According to government figures published in December’08, the number of new homes being constructed in London did not fall as much as one might have expected as a result of the credit crunch. This is heartening, seeing that house builders have been hit by lower prices, restricted demand, severe problems accessing credit and rising construction costs.

    And surprisingly, according to primelocation.com, house prices in four of the five prime areas in London actually rose in February’09. Central London (3.24%) and West/South-West London (2.84%) saw the highest increase, although prices for property outside of London continued to free fall. The reasons for the rise could be a recent jump in sales. The investor interest pick up might be the result of yields on property rental looking attractive compared to record-low interest rates.

    Rising rents, falling house prices and a potential glut of unsold new market homes can also provide an improved investment opportunity to larger institutions. In his Economic Recovery Plan, announced in December’08, the Mayor of London, Boris Johnson, put aside GBP 5 billion to be channeled into increasing the stock of affordable housing. The funds are also targeted at Londoners who are threatened with repossession, and to help would-be first-time buyers become home owners.

    For the time being, the private rental sector has absorbed the re-directed demand from the housing market, as more people delay buying a home in the current climate of uncertainty. Rents in London have been strong, in some cases even rising over the last few months, especially in the face of diminishing supply of buy-to-let housing. And although the change in average price from Feb-March’09 for central boroughs in London was positive, some of the outlying London boroughs continued to experience falling house prices. Since movements in house prices in London tend to anticipate those across the United Kingdom, these changes provide an indication of what the rest of the country may expect very soon.

    Megha Mukim is currently reading for a PhD at the London School of Economics. Prior to this she was a visiting fellow at the MacMillan Center for International and Area Studies at Yale University.

  • Is Texas Really on the Brink?

    I recently recieved this this link to a short essay and some stats titled “March 31, 2009