How the Crash Will Reshape America

While Richard Florida -- author of The Rise of the Creative Class, among other books -- is a controversial fellow among some of my friends and colleagues, his new piece in The Atlantic is worth reading.

Essentially Florida argues the following:

1. Many of the hardest-hit formerly industrial (e.g., Detroit, St. Louis, etc.) cities over the last few decades will be hit even harder
2. Sun-belt fake cities, like Phoenix and Las Vegas, will pay the price for their nonsensical existence
3. Mega-regions will rise higher
4. Exurbs will become like the abandoned settlements of the Anasazi.

Here is an excerpt:

Sadly and unjustly, the places likely to suffer most from the crash—especially in the long run—are the ones least associated with high finance. While the crisis may have begun in New York, it will likely find its fullest bloom in the interior of the country—in older, manufacturing regions whose heydays are long past and in newer, shallow-rooted Sun Belt communities whose recent booms have been fueled in part by real-estate speculation, overdevelopment, and fictitious housing wealth. These typically less affluent places are likely to become less wealthy still in the coming years, and will continue to struggle long after the mega-regional hubs and creative cities have put the crisis behind them.

The Rust Belt in particular looks likely to shed vast numbers of jobs, and some of its cities and towns, from Cleveland to St. Louis to Buffalo to Detroit, will have a hard time recovering. Since 1950, the manufacturing sector has shrunk from 32 percent of nonfarm employment to just 10 percent. This decline is the result of long-term trends—increasing foreign competition and, especially, the relentless replacement of people with machines—that look unlikely to abate. But the job losses themselves have proceeded not steadily, but rather in sharp bursts, as recessions have killed off older plants and resulted in mass layoffs that are never fully reversed during subsequent upswings.

More here.

Comments

[Spartacuss:]

Ahh! Isn't it fascinating how everyone wants to post on this?

Well, if you are reading this you must be a fanatic looking for a light in the tunnel. Am I the one to provide it? Let's see.

First, and foremost I challenge the issue. The issue being one of economics.

If we go back a few years and look at the accumulation of balance of trade deficit, the strangling of corporations by congress' need to tax corporations directly instead of the shareholders who were the owners, to spare the tax burden on all income earners equally. After all, corporations cannnot vote. Then came Nixon's normalization program with China. After all, a car built by a Chinese worker for fifty cents an hour with no benies was exactly the same car as built in Detroit for thirty dollars an hour with benies.

Now we all know that you cannot keep up the charade forever. The same goes for the no doc's loan, and one hundred percent financing at teaser rates. Come on folks, this is at best larceny at large.

So, now the wizard of OZ has been exposed, the curtain pulled aside. So what now is really the problem? Can't we get more free lunch somehow?

Oh yes, we can. With Obamanomics, all is possible. Just crank up the money printing machines and by hook and by crook we can return to easy money. Really?

Well, already a lot of damage has been done. Restoration will depend on a great many things now. Like getting the UAW to make serious concessions like fifty cents and hour. Huh? Really. No way.

My point in all this is that Americans cannot, and will not take the big backward step that is ultimately needed. Our problems transcend the economic. We have other problems: water, power, oil, infrastructure, and most of all while the world is watching, credibility. The whole of capitalism is at stake. We are now faced with a stark reality; nationalism, socialism, statism, whatever handle you want to put on it, we are faced with a dismal reality that is much larger than a simple recessionary experience, we are faced with a fundamental transcendency to centrism and all its evils.

God help us poor fools.

Feb 14 07:43 PM

[Rolling Wave:]

Hmm, a decade long experiment in shifting a larger share of national income to the corporate sector from government and workers has not worked, as rent seekers from finance to housing got greedy then abusive exploiting their market power. The challenge in restoring demand and growth is not to let another interest group tilt any new framework in their direction. This latest pitch by Florida is very remniscent of Faith Popcorn and others from the 90's about how the new economy will generate high paying idea jobs - but most of these wonderful scenario's seem to include government ensuring these idea jobs are publicly supported.

The entire thesis risks turning into a self-interested money grab by intellectuals who aspire to live off public money to guide this 'new growth'. There is agreement with Florida's conclusions about many of the likely losers, particularly in the exurbs, manufacturing and services with higher transport inputs. But failing to address the very large number of service jobs dependent upon protected markets and artificially high input costs that hobble business in North America misses the key point about whether any of these new idea jobs will be sustainable in a globalized information age.

The reality is higher paid idea or service jobs in both America and Canada are now at risk, so long as our economies impose not only high priced jobs, but also high priced business inputs on the job-generating private sector. A steadily growing protected market of idea jobs is not sustainable, whether in health care or mega city development - when the latest technologies are globalized and ubiqutous with a younger generation from Boston to Beijing to Bangalore, or Toronto to Taipei to Mumbai, all capable of providing the needed ideas. A software program, a policy paper even a development plan from government or academia, all are increasingly competitive when sourced in Bangalore or Shanghai rather than Harvard or the University of Toronto.

Without a recommitment to a competitive domestic policy framework and system that enables productive growth by business, the long term result of the Florida utopia is an ever larger government directed sharing of the public pot to maintain mega-cities with high priced professionals needing government transfers to maintain their standard of living. That experiment has not worked from socialist Sweden to communism in Russia and China (having lived and worked in all three) - the past century is a clear demonstration that for all its faults, markets are the superior vehicle to any bureaucratic or politically directed alternative in allocating and adjusting resources to respond to opportunity and eliminating bad ideas and misdirected public subsidies.

The mega cities, like the craft towns of renaissance Italy, do generate innovation, but if that innovation does not go to market, it becomes like all those wonderful Chinese inventions which were instead commercialized by European and then American companies. The health of new North American megacities will be dependent upon sharing in the global response to the demands generated by the 2 billion middle class consumers emerging in China and India over the next two - three decades. Dr. Florida has identified the critical importance of adjustment out of uncompetitive sectors and urban or rural areas, but he has omitted the even more fundamental requirement for a competitive environment for limited liability enterprises to operate and grow by providing what the growth markets of the 21 st century demand - not what some bureaucrat deems is a wise choice.

Those high priced jobs will survive in competitive growing firms, with a smart regulatory framework which ensures special interest groups can not extract too large a share of national income to service their "perceived needs", but instead shapes competitive input prices so our business sector can afford high wage jobs. From North America's exorbitant business taxes near the top of the OECD, (in contrast to the low business tax Nordics), to among the highest rates in the OECD for data transfer, cell telephone, cable, and a range of other business inputs, governments have mandated North American cost model that is not globally competitive nor sustainable.

Florida's proposals for systemic change need to incorporate clear standards based on market outcomes, to ensure our future economy can adjust away (i.e. eliminate through competition) from uneconomic protected service jobs, as quickly as he proposes to adjust away from uneconomic regions into denser mega cities.

Feb 14 08:09 PM

[PROXIMO:]

"Sun-belt fake cities like Phoenix and Las Vegas, will pay the price for their nonsensical existence." Nonsensical---As opposed to, say, Washington DC, with the likes of Chris Dodd, Barney Frank, Paulsen, Geithner, Bernanke, Fannie, Freddie, the SEC, Nancy Pelosi and their legions of on-the-take corrupt politicians screwing the taxpayer 24/7, if not intentionally, then very definitely through outright incompetence -take your pick. Not that any of those fine people have motives any less pure than wind driven snow.

Feb 14 08:35 PM

[billp37:]

"The Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania, tells C-Span how the world economy almost collapsed in a matter of hours.

At 2 minutes, 20 seconds into this C-Span video clip, Kanjorski reports on a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occured over the period of an hour or two.

Kanjorski: "The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

"It would have been the end of our political system and our economic systems as we know it." "


www.boingboing.net/200...

Feb 14 08:38 PM

[Rafael Grillo:]

Socialism is a term that is being used very loosely these days. Socialism should not be confused with social justice and is certainly not regulation. Socialism refers to the ownership of the production assets by the State. Stricter, sensible regulation does not equate to socialism, nor do policies that promote a more just distribution of wealth. Frankly, we've been taught to irrationaly fear anything that even suggests socialism as fundamentally opposed to the political and economic freedom in which America is based. It is a remnant of Cold War rethoric. The terms was used during the political campaign as an emotional weapon against Obama (the same way Obama used an undefined "change" in his favor), and the fear stuck. Now, we can not even have a rational discussion about much needed up to date regulation or how to achieve a more just society without somebody wielding the term, thus closing the debate just based on emotional irrationality. The absence of regulation is anarchy, and the absence of social justice is the law of the jungle. The free market system, unchecked, leads to the type of crisis we are in. No Democratic governmet has been entirely liberal, the same way no Republican Government has been entirely conservative. Any attempt at being purist in that sense wouild lead to failure. Actually, the conflictive application of misunderstood dogmatic principles during the last administration (the conservative approach of reducing taxes at the same time that followed the very anti-conservative path of dramatically increasing the size of the Government) is one of the drivers of the current crisis. Let's please stop wrongly labeling initiatives just to dismiss them right away, and let's start having serious national debates about the right way (without labels) to comee out of this crisis as a stronger, mire just and viable society.

Feb 14 10:37 PM

[hilly7:]

Tip of the iceberg. We are in the beginning of a Depression. Yea, they say Recession, but just began using the term, even though now they acknowledge it has been here for a while.

My grandmother lived through the great Depression, it will not be a walk in the park. It still brings tears to her eyes, it wasn't a time of bonding, it was a time of hunger, fear, and strife. Seeing people these days, perhaps that is what we need. The again, people are very different these days...it will be worse.

Problem, Reaction, Solution.

Feb 14 11:51 PM

[Alan von Al...:]

I agree with hilly7, it will be far worse. Violent crime will be the only growth industry and public safety services shortchanged and ineffective.

Feb 15 02:42 AM

[Dan N:]

Many say that the US will lose its world influence after this crisis. I disagree. They say we have nothing to produce anymore. But when has the wealthier man been the producer? People must realize that this crisis will be bad, but not the end all be all.

However, this article is right in that those cities that were producers (Detroit) may never bounce back. But the capital of our nation (NY) will always be the world's powerhouse.

Feb 15 08:19 AM

[equitelligent:]

Economies are extremely dynamic situations, though the basic essences are quite simple. The better ones achieve and maintain a particular balance, while the poor ones do not; or become overblown or lopsided. Unfortunately, without care, good ones can quickly transform into bad, but fortunately the reverse also holds true. The outcome depends heavily on the mindset of the human citizens and whether or not they can quickly recognize and correct shortcomings and flaws. Given that humanity has proven that they are just as capable of doing something utterly stupid as they are of doing something quite brilliant, the jury is still out on which way things will go.

Speaking to the aforementioned balance that is critical to a robust economy, and in particular to two specific dynamics; production and consumption, our society has lost sight of the delicate relationship that exist between the two. The production side entails that which is being produce for later sale and consumption or utilization, balanced by the human souls being compensated for producing them; labor.
Recently technology has reduced the human workers role in the equation. Often overlooked is; that while machines are efficient low cost producers, they make lousy customers as they don't buy products.

In contrast, the compensation from a human-based labor force will later be used to by the products being made and thereby keeping manufacturers in business and the equilibrium remains intact. Technology, on one side of the coin, has enabled producers to manufacture much more production with less labor or expenses and thereby giving rise to the much touted efficiency. But ignored are the effects that this is having on the consumption/utilizatio... side of the equation. Those laid off workers are compromised consumers and the economy suffers greatly because of this trend.

Now I am not ignoring all of the greater benefits that technologies can offer, but as a society we must find ways to integrate technology into our social fabric without disrupting the necessary balance of our economy. Nor should we sacrifice our long term prosperity for the quick buck. In the long run it will be far more expensive to correct these imbalances as the recent events are showing.

Feb 15 08:55 AM

[biomedlives:]

Which political party was in control of the White House for the last eight years and Congress for six of the eight?


On Feb 14 06:36 AM NITRAM wrote:

> We are not, and never will be again, the financial capitol of the
> world. Our GREED and the largest group of LIERS AND CHEATS in our
> government. One of our enemies will be the new financial capitol
> of the world. Obama , Pelosi and the other court jesters will destroy
> we from within
>
>
> On Feb 14 05:32 AM Dave Wrixon wrote:

Feb 15 09:25 AM

[Maximus:]

Rolling Wave,

This is a great counterpoint to Florida's view and thank you for sharing it in such detail.

I have to say I find his piece far too simplistic and I agree with you that the US -- in spite of our pro-business culture -- needs to become more business friendly from a fiscal and regulatory standpoint (upcoming regulation on financial innovation notwithstanding).

It is a great weakness that he does not address the way the internet and communications technologies will affect economic output, urban development and migration patterns.

For example, I can't help but wonder if the new Madison Avenue will be the one in downtown Toledo, Ohio once some advertising and media companies realize that they produce content and service more cheaply there than they can from New York with abundant, cheap, fluent English speakers.

I also agree with another commenter -- in spite of all the doom and gloom and perhaps there will be spikes in crime, etc. -- the US is still well positioned in the global economy going forward.

We have a culture that encourages entrepreneurship and innovation, customer service and rule of law/respect of property rights, a combination hard to find in any other parts of the world.

Once one spends time abroad, you realize that one of our key competitive advantages is our culture to begin with.



On Feb 14 08:09 PM Rolling Wave wrote:

> Hmm, a decade long experiment in shifting a larger share of national
> income to the corporate sector from government and workers has not
> worked, as rent seekers from finance to housing got greedy then abusive
> exploiting their market power. The challenge in restoring demand
> and growth is not to let another interest group tilt any new framework
> in their direction. This latest pitch by Florida is very remniscent
> of Faith Popcorn and others from the 90's about how the new economy
> will generate high paying idea jobs - but most of these wonderful
> scenario's seem to include government ensuring these idea jobs are
> publicly supported.
>
> The entire thesis risks turning into a self-interested money grab
> by intellectuals who aspire to live off public money to guide this
> 'new growth'. There is agreement with Florida's conclusions about
> many of the likely losers, particularly in the exurbs, manufacturing
> and services with higher transport inputs. But failing to address
> the very large number of service jobs dependent upon protected markets
> and artificially high input costs that hobble business in North America
> misses the key point about whether any of these new idea jobs will
> be sustainable in a globalized information age.
>
> The reality is higher paid idea or service jobs in both America and
> Canada are now at risk, so long as our economies impose not only
> high priced jobs, but also high priced business inputs on the job-generating
> private sector. A steadily growing protected market of idea jobs
> is not sustainable, whether in health care or mega city development
> - when the latest technologies are globalized and ubiqutous with
> a younger generation from Boston to Beijing to Bangalore, or Toronto
> to Taipei to Mumbai, all capable of providing the needed ideas.
> A software program, a policy paper even a development plan from government
> or academia, all are increasingly competitive when sourced in Bangalore
> or Shanghai rather than Harvard or the University of Toronto. <br/>
>
> Without a recommitment to a competitive domestic policy framework
> and system that enables productive growth by business, the long term
> result of the Florida utopia is an ever larger government directed
> sharing of the public pot to maintain mega-cities with high priced
> professionals needing government transfers to maintain their standard
> of living. That experiment has not worked from socialist Sweden
> to communism in Russia and China (having lived and worked in all
> three) - the past century is a clear demonstration that for all its
> faults, markets are the superior vehicle to any bureaucratic or politically
> directed alternative in allocating and adjusting resources to respond
> to opportunity and eliminating bad ideas and misdirected public subsidies.
>
>
> The mega cities, like the craft towns of renaissance Italy, do generate
> innovation, but if that innovation does not go to market, it becomes
> like all those wonderful Chinese inventions which were instead commercialized
> by European and then American companies. The health of new North
> American megacities will be dependent upon sharing in the global
> response to the demands generated by the 2 billion middle class consumers
> emerging in China and India over the next two - three decades. Dr.
> Florida has identified the critical importance of adjustment out
> of uncompetitive sectors and urban or rural areas, but he has omitted
> the even more fundamental requirement for a competitive environment
> for limited liability enterprises to operate and grow by providing
> what the growth markets of the 21 st century demand - not what some
> bureaucrat deems is a wise choice.
>
> Those high priced jobs will survive in competitive growing firms,
> with a smart regulatory framework which ensures special interest
> groups can not extract too large a share of national income to service
> their "perceived needs", but instead shapes competitive input prices
> so our business sector can afford high wage jobs. From North America's
> exorbitant business taxes near the top of the OECD, (in contrast
> to the low business tax Nordics), to among the highest rates in the
> OECD for data transfer, cell telephone, cable, and a range of other
> business inputs, governments have mandated North American cost model
> that is not globally competitive nor sustainable.
>
> Florida's proposals for systemic change need to incorporate clear
> standards based on market outcomes, to ensure our future economy
> can adjust away (i.e. eliminate through competition) from uneconomic
> protected service jobs, as quickly as he proposes to adjust away
> from uneconomic regions into denser mega cities.

Feb 15 10:15 AM

[Danny Newton:]

As long as labor is the biggest cost component in manufacturing, the cost of labor will be a target of innovation. The same thing has happened in the construction industry. I was trained by engineers that experienced construction as an effort that was 30% labor and 70% materials cost. These percentages are reversed. The same is true for manufacturing. The dollar amount of manufactured goods is still rising every year but is slightly and chronically below the inflation rate. In Tennessee the number of government workers will exceed, possibly this year, the number of industrial workers. The BEA revised the definition of manufacturing in 2000 to make it easier to qualify as a manufacturing worker. Comparisons with 1950 are only approximate.

I think the trend to lesser manufacturing employment will end when manufacturing wages are equal to working in retail or wholesale distribution. It may take high tech people to fix or install the new equipment but the trend is to make it simpler and simpler to operate. Some of it can be operated by a chimp already. Foreign labor from Mexico has proven there are plenty of jobs that a person can do with an eighth grade education in a foreign language plus a home country suffering from corruption and economic failure.

.

Feb 15 10:58 AM

[raising4dau...:]

Hah! The rise of DC is nothing but reverse Robin Hood in practice. The parasites in DC are killing this country, not helping it.


On Feb 14 10:43 AM Doug Poretz wrote:

> The strongest economy in the nation is the Greater Washington DC
> area -- and it has consistently been the strongest economy in the
> nation for years except when some other region has enjoyed an aberrant
> spike that is not long-lasting. It is a strong economy for a number
> of reasons, not the least of which is attributable to the presence
> of the federal government, which will grow with the Obama administration.
> A few months ago there was a conference in Washington projecting
> how the region will change with the combination of Obama and the
> economic crisis -- you can see a video of the conference, including
> David Rubenstein of Carlyle Group, at tinyurl.com/cvfve5.
>
>
> However, there is another reason why Washington has prospered: it
> is a pure play on the knowledge economy. The region's biggest manufacturing
> business since forever has been printing. Richard Florida knows this
> region well and he acknowledges it as a major center for what he
> calls "the creative class."

Feb 15 03:14 PM

[CrapDetector46:]

..will destroy WE from within? Not to be a fuddy-dud about spelling accuracy, but why can't anyone write or speak proper English anymore?



On Feb 14 06:36 AM NITRAM wrote:

> We are not, and never will be again, the financial capitol of the
> world. Our GREED and the largest group of LIERS AND CHEATS in our
> government. One of our enemies will be the new financial capitol
> of the world. Obama , Pelosi and the other court jesters will destroy
> we from within

Feb 15 09:35 PM

[E Nuff Sed:]

Schrumpter's creative destruction in action.

I am confident that America will rise stronger than ever after this crisis.

I think the administration is doing the right thing by slowing the deflation of the balloon. A sudden bang might be more fun (and profitable for the short's) but can wreak havoc with society - while a slow leak would give society time to adjust to the new realities.

Feb 15 09:38 PM

[Grendeth:]

I would agree on one thing, American society has been living on debt for way too long. Buying everything non essential like their 2nd and 3rd home on the debt & fictional value of their 1st mortaged house. Owning multiple vehicles when no more than 2 is sufficient.

Little or non existant savings & large government borrowing from Asian countries. It has finally caught up. All this debt has caught up. No more free credits.

People's spending expectation and lifestyle just have to change. Not everyone needs to have a car and an expensive SUV one especially. Improved public transportation & a more moderate lifestyle is needed. Maybe this is not what corporate wants to hear, they want spend spend spend but rather than have uncontrollable growth base on debt, how about a sustainable growth for a change.

I see 2 faults here, yes we blame the banks and government for creating this false credit environment but don't forget the consumer who mortaged everything to own his jet skis and boats and expensive travels. Spend what you earned not what you can get on debt.

Feb 15 11:29 PM

[Hmm?!:]

Loeb, I do not agree with NITRAM, bit it was Democrats in congress that stopped oversight of Fannie and Freddie in 2003 (including Obama). Now those individuals have even more power so I understand his frustration.

America has more of a problem with integrity and ethics than anything else. And it is not Democrats that are really the problem. The media is just not interested in honestly going after poor integrity until it is too late.

These two statements say it all, unless someone can not do simple math (from Mortgage Liquidity Du Jour by Credit Suisse, March 2007)

"low/no documentation loans increased from just 18% of purchase originations in 2001 to 49% in 2006"

"sampling 100 stated income loans found that 60% of borrowers had "exaggerated" their income by MORE than 50%"

The above would be fraud. So now we know the criminal element is really Wall Street, Congress and more often than not the homeowners themselves. Most of them could never pay in the first place. So other than a mere handful there really isn't anything to save.


On Feb 14 11:29 AM Loeb wrote:

> whoah! that was nasty. let me say that NITRAM appears to be unable
> to make distinctions between those who caused the calamity and those
> who are trying to fix it. the true cause was application of a philosophy
> that allowed people to run wild. humans are prone to greed, and if
> you allow it to take root it multiplies. for 28 years we encouraged
> greed under a philosophy of letting the market do what it wanted
> to do. I experienced this myself while working at EPA in a program
> that was attempting to protect the public from the scourge of gasoline
> lead additive. you can't protect infants from a persistent toxic
> substance by letting the market do what it wants to do, but that's
> what the Reagan folks were trying to accomplish. it was a terrible,
> irrational idea that was defeated by public opinion (then the Reagan
> folks took credit for the success of the program, though they had
> fought it and were defeated by reasoning people). likewise, you can't
> keep people from trying to make mountains of cash if you take away
> the constraints on risks by deregulating large banks and investment
> houses and trading rules such as the uptick rule, but that also is
> what people have tried to do over the last generation. ultimately
> a completely laissez-faire market will always fail, and we were approaching
> that. so let's not tarnish an administration that has been in power
> for -- what?, three weeks? -- with the sins of an irrational philosophy
> that caused this to happen. overall, if people can't even understand
> cause and effect when the evidence is right in front of them there
> is little chance we can again become a great economic power. irrationality,
> like inefficiency, is ultimately punished in the market.

Feb 16 11:27 AM

[Yohei:]

Just finished the "The Atlantic" piece. Most definitely written from a New York City perspective. I would call it insular and parochial. Reminds me of why I disliked New York City so and why I have never regretted leaving.

I recollect looking at the Manhattan skyline from Brooklyn in 1968 and thinking that across the river was the most target rich place imaginable. I remember musing over the possibility of some disaffected small group using an airliner in just the way we saw the Trade Center destroyed.

Not America, not at all.

Feb 17 02:44 AM

[TomF75:]

Actually, everything I'm reading says that Gen Y will be the generation that moves back into the cities. They are looking for a less ostentatious lifestyle than their spoiled boomer parents, and want the benefits of living close to the city center. Urban gentrification in many small to mid size cities will probably be the next wave in the real estate boom. As a person living in the Exurbs of NYC, I'm actually a little scared that 20 years from this place will be a ghost town...be it high gas prices, lower real estate in the city...whatever the catalyst will be, doing a 50-60 mile commute at some point just becomes ridiculous.


On Feb 14 12:22 PM henarl wrote:

> The current generations will not easily give up their suburban McMansions
> and fancy automobiles as they have grown up with the belief that
> such material wealth is the badge of success and self esteem. It
> will take a lot of pain and several generations for a new less ostentatious
> lifestyle to become acceptable, let alone desireable, to the majority
> of adult Americans.

Feb 17 11:42 AM

[ClydeDNA:]

On Dec 13 12:21 PM Loeb wrote:

"hey, didn't the failure of AIG to put up funding by a certain date trigger a conversion to equity, and doesn't that mean that the U.S. now owns a large marjority of AIG? if we own it and we're putting money in, that is money we are paying to ourselves, perhaps simply buying GM is the way to go."

On Feb 14 11:29 AM Loeb wrote:

"whoah! [NITRAM] that was nasty. let me say that NITRAM appears to be unable to make distinctions between those who caused the calamity and those who are trying to fix it."

Loeb, I think the same goes for the banks!

You will love these movies! The first is the most important 47 min you or Nitram will ever spend. It was made several years ago, long before the present crisis. The second is a 7 min update.

video.google.com/video...

paulgrignon.netfirms.c...

The question at the end of the second 7 min video is a tough one!

As Paul Kedrosky points out with these quotes -- the situation is dire. I think the Government needs to take on the "toxic" assets (mortgages etc.), but DO NOT buy them. Buy the banks instead. The number one problem is that buying the toxic assets will just create more toxic assets.

It seems to me that there are three categories of banks, lending organizations etc.:

(Group one) These guys are doing fine, they have good balance sheets, they didn't take on a lot a bad debt, their stock price is high, they don't need any cash infusion, and they don't want to be run by Uncle Sam. I'll bet the new plan will leave these guys basically alone and their stockholders might have some value left next year.

(Group two) A second group is way underwater and being taken over by the FDIC. The shareholders lose everything; their assets (good n' toxic) are added to the more stable banks..

(Group three) Then there is group three (Citi, BoA, Wells, Morgan, and maybe even GS) . "Nationalizing"? Maybe that's a bad connotation. Many of these banks made a lot of bad choices, but others have adsorbed the bad banks at the behest of the Government. Some, through no fault of their own, were doing just what the Government and Fed wanted them to do, are they are now in trouble.

It's like some are in a Congo line, the FDIC and Fed deciding which halfway strong bank gets to go home with the next clunker coming down the line. I can hear the groans from here. At this point these guys are "too big to fail", but unfortunately they already have, not to a small degree because of Uncle Sam. He got a lot of these banks in trouble.

The market cap of these "Group three" banks has been crushed. The long-term stockholders and mutual funds that like bank stocks have already lost most everything. The infrastructures of these banks are huge, but their near term and likely future profits are dismal, thus their market cap now sucks big time since investors have fled. The specter of Uncle Sam's cash infusion, and recapitalization comes with a big price. What's left of those Bank's adoring investors stock holdings will unfortunately go to zero. Uncle Sam will have bought the "Group three" banks for exactly what they are worth, NADA. The mortgages and other "toxic" assets that the banks willingly bought for way too much mooola, will now be owned by the kind old screw-up named "Uncle Sam". But he's probably the best landlord there is right now. Let him buy the banks and take over the toxic assets -- BUT DO NOT BUY THEM!

Everyone keeps saying that they were so disappointed with Mr. Geithner last week. Think about this. Maybe he wanted to talk about a plan like this to the American people that day. Everyone was primed to hear the new great idea! Uncle Sam's PR types would have made him try out his speech on a "focus group". If that group contained the nice folks that do not understand anything about where money comes from and where it goes. They probably ran out of the room screaming hysterically -- with good reason. We need to understand where money comes from in order to understand how an idea like this might work out.

I think there is a chance the American people can save the world's economy, but we have to think this through a lot better.

Feb 17 05:16 PM