27 February 2009

What's Left When the Financial Crisis Is Over?

A newspaper dies today (The Rocky Mountain News), an automobile manufacturing division's demises was announced earlier this month (Saturn), an investment bank went bankrupt late last year (Lehman Brothers), so did some major commercial banking institutions (Washington Mutual, Wachovia), as well as hosts of lesser known names, printing companies, home building companies, electronics chains (Circuit City), department shore locations, and franchise restaurants.

More businesses, for example, thousands of car dealerships, are simply biding time until their demise. Corporate giants like Citibank, General Motors, General Electric, the New York Times and Borders Group have seen their stockholders virtually wiped out, and their bondholders have grown insecure.

The business assets that remain are changing hands in a blur. In the garbage industry, collection company BFI was bought by Allied Waste, only to have Allied Waste acquired by Republic Services before the logos on the BFI operations were changed. After thift World Savings was bought by Wachovia, they continued putting up Wachovia signs weeks after Wachovia was gobbled up by Wells Fargo. Wild Oats has irrevocably vanished into the folds of Whole Foods, even though the judiciary, after the merger was a fait accompli, cried "oops!" the merger actually shouldn't have been permitted in light of FTC objections.

When the Great Recession finally bottoms out, we are almost certain to emerge with vast numbers of jobs eliminated, many business enterprises discontinued, reduced competition in most industries, and a major rearrangement of who owns which significant assets. Whole industries like subprime lending and independent investment banking, will virtually cease to exist. Many members of the superrich elites that emerged in the last generation will have seen their fortunes evaporate to the level of mere prosperous families just above the ranks of the upper middle class.

We will also have the legacy of legislation passed to address the current crisis. Some of it, like stimulus packages, will quickly be spent and leave only a precedent for lawmakers in some future crisis. Other legislation, like mortgage broker regulation, rejiggered foreclosure timelines, and a deduction for private mortgage insurance are likely to persist.

Companies that had the capacity to self-finance will likely have done far better than those reliant upon big banks and the financial markets for their operating funds, as will generally, less leveraged companies. Housing will be more affordable.

The percentage of people who have experiences with marred credit and experiences with unemployment payments and/or welfare, will soar. Even more will have run up consumer debts that they incurred to maintain a standard of living in hard economic times, and will need to pay before they can consume what they earn or invest significantly. Many people will have given up their homes and become renters. Millions will have been forced to change careers, usually to less well paying ones.

More closets will be full of thrift store goods, instead of designer clothes. Many people will have taken a shot at growing some of their own food in their backyards (a trend that will likely vanish as a recovery dawns). Distrust of the stock market will persist for a generation. People who started working when I did have not made a dime of nominal investment returns, and have lost a good share of our investments once taxes and inflation are considered. Prospective business owners, meanwhile, will be keen to avoid debt that could ruin them if the economy takes another downward turn.

Veterans who served in Iraq and Afghanistan will finish their terms and return to the U.S., finding themselves in a country that thanks rather than jeers them, but has few jobs to offer. Many of those veterans will be changed men and women as a result of their experiences, in ways that make returning to their families and to the civilian economy particularly hard.

There will probably be a baby bust for a few years.

The aftermath of the Great Recession will vary a lot regionally. The continued demise of the American automobile indusry will hit the rust belt with a stern blow that may finally cause the region to hit bottom with permanent deep contractions of the industrial economy there, but it isn't clear that the new factories in the American South attracted to lower labor costs and weaker pro-union sentiments have taken nearly so heavy a blow, they may recover. New Orleans, as a result of this financial crisis, is far less likely to ever really recover from Hurricane Katrina as some had hoped initially.

Areas that have seen major real estate bubble collapses, like California, Arizona, Nevada and Florida may take a decade or more to recover in the real estate and construction areas. But, increased affordability may restore some of the economic vitality that higher housing prices had sapped out of those economies.

New York City will take time to get back on its feet with the slippage in the financial industry that drives much of its economy -- the city's recently acquired cleaner and safer image may slip back to the darker days of its history. But, if we return to a boom state, this could turn around on a dime.

Other areas will be comparatively unscathed. Seattle, Portland, Boston and Denver have received only glancing blows compared to many regions in the United States.

The agricultural economy has been mostly spared, arrested sprawl has reduced disruption to rural areas at the urban fringe, and the New Energy Economy, with biofuels and wind power as two key components, will provide new revenue streams to many who previously relied only upon food and textile oriented agriculture.

Private sector unions come out much worse, despite that fact that the current administration will probably make many union favorable legal and regulatory changes. Hard economic times have forced almost every union shop in the country to come to the bargaining table at which labor has had to make concessions. Some of the industries shedding jobs, like the automobile industry and newspapers, have high unionization rates (although others, like the jobs lost in the financial sector and car sales, do not, and still others, like construction, are a mixed bag). There are existing indusries, like the service industry, in the private sector where union organizing will speed up. But, few people expect big job growth in the union dominanted private indusry industrial sector after we start to recover.

Relatively few job cuts have come in the public sector, although it hasn't been enitrely spared.

This will continue the long standing trend in which public sector unions make up a large and growing percentage of the total labor movement. This could move the union movement upscale socio-economically. Historically, Americans have tended to think about unions as working class institutions united against "capitalists." But, increasingly unions represent securely middle class workers from fickle and sometimes incompetent political masters. They buffer workers against public outrage. The working class are increasingly working in non-union shops, not infrequently stringing together several part-time jobs in the personal services and retail industries.

In the charitable sector, the collapse of market and real estate based wealth may make grass roots and volunteer based organizations increasingly important relative to long established endowment based grant writing institutions and "checkbook organizations" that have massive fundraising operations that use their funds to forward centralized, professionalized core organizations. Private colleges and universities that have relied upon endowments to subsidize operations will have to increase their tuition and reduce financial aid, even at the cost of reduced selectivity, a change that increased federal government support for higher education is likely to only partially offset.

I don't have a crystal ball, but not knowing everything doesn't mean that you don't know something. Better to start with what seems probable and likely and acknowledge that we aren't sure how it all fits together, than to speculate wildly and with no basis at all.


Anonymous said...

You've covered quite a bit of territory there, but just to focus in on one smaller bit : car dealerships waiting to die. I haven't bought a new car in nine years, and would sure like to avoid it now if I can. But I wonder, how are cars going to sold in the future? The surviving dealerships? Ordered off the internet from the manufacturers (whoever that's going to be)? Some whole new model?

Andrew Oh-Willeke said...

GM has announced that it plans to close about 40% of its dealerships. Chrysler also plans to close dealerships. The plan isn't a new business model, it is simply to have fewer dealers with larger territories instead of more dealers with smaller territories.

Dave Barnes said...

The biggest impediment to changing car sales are the "franchise laws" in every state that are designed to protect incumbent dealers.

Repeal of these 1930s relics would result in lower car prices and many (repeat many) dealers going out of business.

We need many different type of car stores to satisfy different types of customers. Today, we have one type.

Andrew Oh-Willeke said...

I agree with you Dave that there has been a serious legal impediment to reshaping the franchise system. I'm skeptical that the franchise law played a decisive part, because a lot of the problems would have probably arisen in negotiated contractors with franchise owners in any case. But, the time has come to cut the Gordian knot and free up the market for other retail car sales business models, something that has already come to the less regulated car repair and used car markets.

william said...
This comment has been removed by the author.
Anonymous said...

Your article strikes me as a pretty pessimistic one. Yes the car sales are dropping and the car dealerships are slowly vanishing but sooner or later the economy will get out of this crisis and people will be facing cheap new cars. Maybe it will cost few car manufacturers to disappear but at the end, those who will last will have a great number of sales waiting for them. I give it 4-5 years and the car industry will be back at a its feet.

Take care, Elli