Copyright Ozarkhomesteader 2009. See below for fair use.
In the fall of 2008, I kept reading over and over again, “We could not have predicted this downturn.” Even today, in the New York Times, financial planners said the same thing. Truth be told, I had been predicting this downturn since early 2006, if not earlier. I’d also moved my investments into guaranteed income tools, and I’d been alerting my students as we talked about past downturns. Of course, I suppose I could have been a Jeremiah, but as it turns out, I was not. I’m going to list here some of the major issues that concerned me—and why I’m still restricting my exposure to certain types of investment. Remember: I am not a financial planner or advisor; I’m a humble teacher and gardener. Remember too that this is not an exhaustive list of what I thought was wrong, but it’s a start.
First, housing prices and especially the second mortgages people were getting based on assumed increases in property values scared the squash out of me. In the 1920s, folks did something similar by buying stocks on the margin. The housing crisis of the 2000s was caused by the equivalent of buying on the margin in housing. It’s a dumb idea to assume that prices will keep going up, and it’s especially dumb when real estate advisors are saying that housing is overpriced. The solution is greater control over mortgages and particularly restricting re-sale of mortgages in bundles, since those sales to big, distant companies hid the problem for a long time.
Second, companies were underfunding pensions, and they were selling out to abandon retiree obligations. When you do that, you are underfunding the future. The solution is forcing companies that buy out other companies to stand by pensions first. The alternative is to move away from traditional pension models and toward non-profit, employee-controlled retirement savings like TIAA-CREF offers.
Third, industries all across the US were failing in the face of forced pricing from companies like Walmart. Under the old manufacturing model, companies told retailers what the wholesale price was for their products. In the past decade, though, Walmart and other retailers have told manufacturing companies what Walmart would pay—forcing manufacturing overseas. What does that do in the short term? Walmart shoppers get lower prices. In the long run, workers lose their jobs and consumers can no longer get products (like Black and Decker) fixed in the US, so they have to buy more products—but now there’s a cascade of job losses, so maybe they can no longer afford even the cheap stuff.
Fourth, some key industries have failed to keep up with the times. The auto industry is the most obvious case. Detroit produced good cars in three sizes: large, XL, and XXL. The auto makers kept adding on extras but couldn’t get real quality. Lines like Saturn’s original and wildly popular S-series that were small but also well engineered were abandoned in favor of big ticket items. Too bad Americans couldn’t afford those big ticket vehicles. (See my piece on the Chevy Volt and how I think they’re still missing the mark.)
Fifth, we’re in debt up to our eyeballs to other countries for our wars. In previous generations, wars were funded by Americans, who bought war bonds during the war and then spent like maniacs with savings when the war was over. Today, most of American debt is owned by China and Japan. And who reaps the profits? other countries. I’m not saying that federal debt is a bad thing any time. I think it’s crucial now to bolster and re-shape the economy, but we need to make sure that Americans have bigger incentives to invest in US bonds, so we’re paying back ourselves. We also need to think very, very hard about whether there are cheaper, more effective alternatives to nation building than battles, like building and funding schools for enough time for them to do so good, facilitating NGO’s* micro-grants to support women-owned businesses in countries where gender inequality increases political problems, etc.
This brings me to my sixth and most important point. Since 2000, the median American income has declined. At least two things have caused this decline. First, a bigger chunk of employee compensation has been going into health care. We have to fix that situation. An equally troubling trend has been the piece of the pie that the wealthiest Americans have. Income inequality has not been this pronounced in the United States since about 1907, back in the days of sweatshop factories when workers put in 14-hour days, 6 days a week. Yes, income inequality now is even worse than it was right before and during the Great Depression. Truth is, unless you fix this disparity, we’re all doomed.
*NGO= non-governmental organization
Copyright Ozarkhomesteader 2009. Fair use of this source includes very short excerpts with a clear link and direct non-link reference to Ozarkhomesteader at WordPress.
April 2010 addition; all rights still reserved:
Am I jumping back in the market in a serious way? Not as long as pension funds like those of the major automakers are still underfunded.