Monday, November 24, 2008

Incubating Youth Metamorphosis

The American Prospect recently ran an article about tapping into Obama's Youth Movement. It was a series of 2-3 paragraph snippets by different political type people.

I'd like to share my own response on the issue. Naturally I'm probably going to come across as a bit bitchy because I don't think it is Obama that got me involved in this election. Mostly, it was me that got me involved in the election. So, here's what I have to say:

Liken the present, and all the problems that the present day entails to a grain of sand. Now imagine that grain of sand at the edge of the Ocean. That Ocean is the future. The future cannot be integrated into the present - rather the present is always steadily drifting into the future.

Similarly, it is not the youth movement that needs to be absorbed into the greater sphere of democratic or liberal politics. Rather, it is the connections, the resources, the wisdom, and the experience of older Americans that should be absorbed into the youth movement. Young leadership is the way of the future. Supporting young leaders in positions of creative independence ensures that the convictions they currently hold will develop into a rich and enchanting ideology, capable of guiding us in the future. Current leaders should focus on their legacy. That is - after all - the mark of greatness...

One thing I admired about Obama's campaign were his efforts to make politics fun. Although much of it was transparent marketing - such as the flurry of emails with donate links - some of it was mildly revolutionary. Obama had a feature where people could organize parties to watch debates or speeches he was giving on television. This is a wonderful tool but it need not be limited to television, and it is more than just another way to entice volunteering, voting, and donations. It need not be constrained to a small aspect of the campaign.

Instead of scrounging for donations, the Democrats of the future should boldly offer services for every dollar given. Dollars and volunteering should aggregate together. Memberships should put holders into social groups that are organized by level of involvement, by geographic region, and by interest. Even so, the Democratic party should boldly reach out to those who disagree, and stress the power of reason by disavowing all clannish mentalities. Limited edition and special gifts should be readily available and marketed. Every single event or issue can have its own mascot drawn by local artists and feature local performances, creating a rich and interesting current history. Rather than being dependent on advertising content and the media, Democrats should be hosting advertising, earning referral bonuses, and generating press. A transformation of social mores must begin, where we once again invite strangers into our homes, where we don't judge people by how they vote (excluding elected officials of course), and where each and every member is a free and equal part of the party as a whole.

Democrats should work to get all people of a liberal persuasion networking. There are so many lonely, politically minded, young men and women out there who would willingly dedicate themselves to political causes just for the chance to meet people. Party leaders should create free lectures, roundtable discussions, content-oriented contests, small scholarships and anything else that can bring young people together to make friends. This strategy is a patient one, in line with Obama's managerial philosophy. If implemented, such an approach will build untold party loyalty and create a new generation of sterling political leaders.

Wednesday, November 12, 2008

Housing and Stock value: My analysis

Though it is possible to use very tricky and controversial theories in addressing what has been going on in the US economy for the past year or so, I have yet to see a thorough, straightforward analysis that is based on simple, orthodox thinking in real estate, finance, and economics. The general debate revolves around crackpot theories dealing with big oil, lack of available cash, and points of policy such as tax incentives or various regulatory schemes having been repealed. I'm sensing a trend toward scapegoating: Lenders, Builders, Wall Street Execs, and now Unions. Each of these ideas may have a grain of truth to it, but the proponents of the theories do not seem to have a grasp of the relative magnitude of their pet issue. There is also very little thought being directed toward integrating the pieces into the whole.

It is certainly true that the crisis is not the result of a single cause, but rather several events, trends, and policies appear to be interacting. If only a single thing were to go awry, even a major one, it would be easy to fix. It would also, rather than "dragging everything down with it", tend to be counterbalanced by the vibrancy of other parts of the economy, and immediately reverse from ruin, trending toward a stable level. An orthodox, straightforward, simple analysis should provide some good guidelines for estimating the magnitude of each smaller crisis, and how the total situation can be modeled. With a little luck, the model may even be predictive in the short term, providing a general trend for happenings in the next year or so. This analysis can also serve as a meter to which alternatives can be compared.

I'm going to start with a reference to the great depression. I'll outline what I believe caused it, and then I'll start comparing our situation in the great depression to what we face today.

The great depression began with the stock market crash of 1929. The market dropped, at first precipitously, losing 40% of its value between September and October of 1929, then sinking more slowly before reaching its minimum in 1932, having just over 10% of its 1929 peak value. The cause seems to be two things. First, there was a large downturn in factory production earlier that year. In a well known relationship, this brought down the sale, and building, of new homes. Secondly, the stock market itself was filled with leveraged investments that had the quality of magnifying any upturns or downturns according to what was effectively a geometric series.

It is also worth noting that other elements of the economy were weak during that time. Agriculture was an industry of poverty with mounting ecological problems (such as the dust bowl) and persistent surpluses. Britain chose to return in 1925 to the Gold standard at a level that is generally agreed was too high relative to the value of the dollar. This decision, made by Winston Churchill during his time as Chancellor of the Exchequer, was criticized by Keynes, who - prophetically - foretold that it would cause a world depression. The speculative frenzy of the 1920s was also financed largely by debt, leaving banks vulnerable. New wealth created in the United States during the decades prior to the great depression was concentrated in the pockets of the rich, a condition that some argue causes instability. New technologies, such as automobiles, proliferated. People began to live in cities more and in farms and villages less, bringing new challenges for urban planning. These conditions, together, probably all had some effect on the depression that followed, mostly by undermining whatever self-corrective forces normally exist in the market.

In our modern situation, we have a serious drop in the stock market. From the peak of over 13,800 in December of last year we've reached a low of 7,800 in early October of this year. The "crash" is best described as the period of steep decline from 11000 that started at the beginning of October. The 1 year drop corresponds to a 43% decline; the 1 month drop corresponds to a 29% decline.

Our crisis was also being "led" by a loss of manufacturing jobs in America, beginning in 2000 and continuing to the present day. GDP has not followed that trend, proving unremarkable and unresponsive, with 2.8% growth followed by -0.3% growth in the past two quarters. So, it appears that even though manufacturing jobs are being lost similarly to the lead up to the great depression, the reported level of actual production has not declined. This may be because the reporting is faulty, but part of what is going on is probably that we are more dependent than before on intangibles, services, and high tech products.

The decline in housing in the United States has nicely mirrored the decline in home building prior to the great depression. In our case, we have a general decline in economic prospects. This decline plays out in a magnified, clustered fashion, since local exports are literally the backbone of a local economy. Nation-wide statistics are merely the compilation of discrete events, therefore the continued decline of a national economy will produce an effect located in clusters where the industries affected physically reside. Each cluster will magnify the economic problems for the local region, which not only discourages new building but also undermines property values. This is not, however, the whole story of the housing market. There is certainly something to be said for the use of Option-ARM mortgages and the associated speculative excesses of banks, but these tools are really just a lending scam that wouldn't have had such a detrimental effect on the economy if not for falling housing prices. A mortgage is at much greater risk of default when the property value of the associated property declines. Furthermore, the demographic trend in the US right now is a away from the urban lifestyle in which much of our mortgage debt is locked. Data shows that condominium prices have increased dramatically over the same period and in the same regions where home prices have stagnated or fallen, and survey results show that Gen-Xers and my generation are more inclined to live in the city. Combining our changes in taste with projected increases in fuel prices means that home prices will have to fall dramatically in order to entice us to stay in the suburbs. My own feelings on the matter are that no price will entice me to live in the suburbs. If sufficient numbers of young people share this sentiment, then our economy is going to experience a painful transition through which suburban slums replace inner city ones.

The most immediate aspect of the mortgage crisis is its effect on the flow of money. The difficulty is not in any type of psychological problem. Some have argued that there is a sort of herd mentality situation, or that there is a perception of a crash that is sending people panicking and creating a self-fulfilling prophecy. I must reject these explanations because the work that bankers do is very much tied to the real economy and factors that are not under the sway of herd psychology. The flow of money problem is pretty simple really. Banks must have inflows of money in order to loan money out. Similarly, when loans expire, banks must have new loans or other attractive investments in order to preserve their income flow. Banks also keep stores of money to account for and manage the risks associated with the assets they own. In our current crisis, the banks have an extensive network of inter-institutional borrowing. This is a type of leveraging that allows banks to magnify profits. On the other hand, when a bank starts doing poorly the attitude is not to "ride it out" but to call the loans due, in part because of the concept of priority that determines the order in which debts are settled during court proceedings. This does not magnify problems - it quarantines them. However, many institutions have been revealed to have fewer assets than their balance sheets might have indicated. This is not all due to cooked books - a fair amount of it is tied to problems elsewhere in the economy. The mortgage debt that has more or less been treated as a safe and long term commodity is turning out to be just the opposite, leaving banks reeling.

Leveraging has also reared its ugly head in our current financial straits. We have hedge funds, bundled securities, leveraged buyouts, margins and all of the other instruments that got us into trouble during the 1920s. The banks are leveraged in two directions right now, and both are doing poorly. They are of course tied up in stocks that are in decline. They are also the owners of "bad mortgage debt" which represents houses that are on the market and cannot be sold except at a loss. Portfolios that might have been considered diversified or safe, including 401(k) funds, have been hit very hard because even safe stocks such as GM and safe mortgage debts such as those sold by Fannie Mae and Freddy Mac have declined. This is oddly similar to the great depression, where bank failures similarly ensured that economic losses on wall street hit main street.

The ill-fated setting of $4.86:£1 by Churchill brought inflation in the United States. Similarly, in the past few years, Bush has been ordering his stooges in the Federal Reserve to continue cutting interest rates and bringing the dollar value down on foreign exchanges. Skyrocketing Oil has also impacted Americans and represents a significant inflationary factor. America has been languishing in a state of serious wealth inequality since the 1990s. We are also living in an age of new technology that is driving serious frictional shifts in our economy, mostly due to the development of the internet. These factors, together, are all very similar to what existed in the 1920s for Americans. I expect that in any of these respects, our crisis will be similar to the great depression. Our currency has already increased relative to other currencies, and oil prices have already plummeted since the crash.

In a few respects, our situation is more dire. We are facing agricultural crises, but they are quiet catastrophes that will affect us only when we are on the brink of ruin. We have the death of honeybees in colony collapse disorder that has been attributed to the use of unsafe pesticides (specifically nicotinoids). We have mounting water shortages. We have saltification of the central valley in California. We have the death of marine ecosystems. We are facing natural resource shortages that will necessitate a whole new way of life. What will we do when the world supply of copper is exhausted in 2060, when there is no more natural gas, when the Oil runs out? These are not part of the crisis itself, but then again, it was World War II that so suddenly interrupted our languishing malaise, reminding us that Economics is really nothing more than "What, and for whom?"

"When there's a will, there's a way."

My prediction is that we will see a tiny deflation of the dollar over the next year or two. This is because our balance of trade will decline, and so our currency will increase relative to that of other nations. It also seems to be the case right now that vast amounts of wealth are disappearing from the housing market. As long as that continues to happen, the amount of wealth that the vast majority of Americans have will go down, since most of us are as wealthy as our house is valuable. Naturally, we will ask for and expect less for a while, and that means lower prices. I'm not about to proclaim and end of materialism, but as long as we remain in this jaded state, the effect will be felt on consumption patterns and prices will drop to entice inventory flow. Incidentally, companies have trended toward low inventory levels and rapid restocking over the past few years, and that probably helps. However, it means that consumer prices are a lot more stable and rather than functioning as a buffer against price deflation, businesses simply pass along changes. Prospects of deflation are also going to be affected by Government choices, but at this time I don't see much that would inflate the dollar. Lowering interest rates might actually allow home prices to slip faster, and so we might see some serious problems. A return to a stable, slow inflating dollar should not happen until home prices stabilize. I may be wrong about this, but at least I'm sticking my neck out.

Monday, November 3, 2008

Political Campaign is coming to an end

Well, I've worked hard for the past two months for the Matthews Campaign. Greg is such a great guy. I expect him to win. As my campaign strategist said "He's a great fucking candidate". It is all coming down to the results tomorrow night. I'll be down at the convention center in Portland, watching results roll in.

Of course, the results for Oregon House District 50 are petty compared to the epic clash between Obama and McCain. I'll be holding my breath for that one. Even though all the polls say it is an easy win for Obama at this point, I just can't believe it. I'll have to see him being sworn in before I'll believe that the Bush nightmare is truly in the past.

The challenges that the next generation of leaders face will be dire. I don't have faith that the base for democrats will produce enough of the change that we need if we just leave the forces within it to themselves, to stew. There is a kind of leadership, that I hope will be plentiful during the next four years, where men of vision brush away old ideology. In the space that these leaders would so carefully clear, the new generation grows, bathed in the participatory power it needs. Such intergenerationalism ensures that democracy can flourish. Furthermore, if we are too conformist, if we have too little variety in friends, too few sources of information, we will always be susceptible to corrupt leadership. Greed on the part of our leaders ought never again be tolerated. I will not stand for it. Those among us who are ignorant, wrong, foolish, providential, or petty cannot be allowed to shape our discourse. We must have leaders that stand tall and pure, casting aside conventional wisdom and leaving our ears buzzing with talk of solutions. It will be the most necessary of all tasks.