We are in the middle of a Great Recession, but someday we will be out of it. It is very easy to focus on the losses, but what did we gain? James Surowiecki has a column where he says:
There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.
The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.
I think this is true. Look at the last boom, the internet one. A lot of people thought thinks like pets.com deserved a giant market share, and splurged accordingly. In the process, we got a lot of investment in broadband capabilities we are just now beginning to stress, as well as a workforce educated in programming and the web, as well as businesses now focused on the web. Employees out of that boom continued to innovate, producing new goods, and will continue to do so. These are good things, and will continue to provide value as we go forward.
I don’t think that is true now. People who were involved in the selling of mortgages, either at the local level or at the Wall Street level, aren’t any more trained, don’t have more productive human capital, than when they started. When people talk about the finance sector collapsing and unemployment being high, I think they tend to think of Wall Street MBAs – so they look at the graduate degree unemployment numbers. I think of some of the kids at my 10 year high school reunion 2 years ago, who started flipping commercial real estate contracts after completing a year or two of community college. It isn’t clear that they’ll have a lot of value added for the economy as a result of that 5-7 years of work. And that definitely aggregates up to the Wall Street kids who, in the words of a friend of Ezra Klein’s, spent “4-6 years driving CDO deals using someone else’s quant models.”
But what about the housing stock? What about it indeed. I want to show two things. A commenter on seekingalpha sent me this:
A video of two guys in Southern California look at some repossessed houses and show the huge damage previous people caused. That house they look at is only 18 months old and it is trashed. This is what I think of with The Exurbs as Nightmare which I mentioned in the previous post.
I also want to follow up with a This American Life episode Scenes From a Recession. It’s an excellent episode overall, but the first episode about the Chicago neighborhood Roger’s Park condo boom, and now bust, stands out.
They follow the plight of condo owners who moved into condo buildings as they were half sold, and the Realtor went bust or fled. So the empty units rot, their pipes freeze, animals and squatters life in the empty space, and they go unsold by the realtor but also unclaimed by the bank holding the lease (since they don’t want to pay the property taxes, they don’t challenge the owner). Orphan buildings. So the building rots, or to use the accountancy language depreciates, ruining the owner’s investment.
Rodger’s Park was not a very desirable place for people to live in the 2000s, if I remember. I knew a few hippies and artists who lived up there for the very cheap rent – people were insane if they thought they were going to flip that neighborhood. And if memory serves, I think about 5 people I knew up there had to move out of their apartments because they were being turned into condos in the ’04-’06 time frame.
Add to this the huge amounts of investment in housing where people will no longer want to live when oil prices come back (which it already is). A lot of capital, human and housing, has been wasted this past decade as a result of this financial crisis. I hope it can find a better use handling the upcoming health and energy problems we have on our hands…