Given my passion for the economic turmoil, it’d seem this blog is one of punditry… Sometimes, this is true. But it’s heart is solidly in the natural world, in wildernesses, and organic systems. (See web design.) There’re beauty and deeply instructive truth all around us, even in the things we create, if we have the courage to see them for what they are and not for what we think they are or want them to be or think we want them to be. We have to remember to listen—to more in this world than ourselves, or other people.

~

Forest Park, Portland, Oregon:

From Forest Park Snapshots

From Forest Park Snapshots

From Forest Park Snapshots

From Forest Park Snapshots

From Forest Park Snapshots

From Forest Park Snapshots

From Forest Park Snapshots

Generally I try not to repeat posts, but as more and more of the economy hits the crapper, more and more people are asking me to explain what’s been going on. This post, thrown up back in September, does a good job of explaining what’s happened so far. I’m also frighteningly impressed with my predictions of what to expect. I didn’t pull them out of my ass – I just didn’t expect to be as right as I was.

Shudder.

I am missing two basic concepts, though: Credit Default Swaps and Collateralized Debt Obligations. I’ll write about those – and the impacts those are having right now on our economic and municipal infrastructures tomorrow or Thursday.

In the meantime, I’m adding #0 below. Otherwise, the post is being presented as it was two months ago.

— bh

Considering all the shit/fan hitting going on right now, I thought it’d be helpful to organize what’s gone wrong, and what that means for everyone.

0. At the core of our economic crash is not home mortgages but our very understanding of economics. In the last generation, we’ve lost sight of what the economy really is – the exchange of goods and services between people within a community. Economists, particularly of the Free Market School of economic theory, have come to consider the economy as this mercurial machine through which money magically flows. Their focus has turned to profit over people, and has turned toward goading and twisting this machine so that it becomes ever-more profitable – for a clever few. They’ve forgotten that economies have existed without money for much, much more of our history than they have with it; they’ve forgotten that the healthy and fair exchange of goods and services are essential to maintaining solvent, healthy communities. In the economists’, CEOs’, and politicians’ pursuit of profit, they’ve ignored common sense, imposed a quasi-religious economic dogma on reality, and reacted to their dogma as if it were fact. The choices they made – from creating an ignorant ad-dominated consumer culture to globalization of resources to abundant cheap credit – have undermined the very foundation of our real economy – people – and fundamentally degraded the very stability of our culture.

1. The American economy, whose health is measured principally by consumer spending, has over the last 20+ years been increasingly fueled by debt – wages have not kept pace with spending, but debt has. Americans are over-leveraged, a credit bubble – bigger than the housing bubble – has emerged, and the question isn’t “Will it pop?” but “When?”

2. Part of the credit bubble, obviously, is the mortgage bubble. It clings to the side of the bigger bubble, and depending on how hard the mortgage bubble pops, the credit bubble may follow right on its heels or shortly thereafter. An unprecedented number of US mortgagees are defaulting on their mortgages. Some extimates suggest that 10% of US mortgagees are at least 3 months behind and/or in foreclosure. 10% seems like a small number on paper, but it represents billions of dollars of losses for banks and investors, not to mention millions of Americans who’ve lost their homes and their credit. Moreover, foreclosures aren’t done yet – not by a longshot. There are still many more people who will reach the ends of their interest only periods between now and 2011, and when those mortgage payments balloon accommodate principal, as we have seen, more people will default. The mortgage bubble is popping fast.

3. Investors in mortgage-backed securities are losing big, and will continue to lose big. What had been thought of as a sure, stable investment is now a very shaky bet indeed. Investors in these crap-bonds aren’t limited to investment banks – commercial banks, private investor groups, insurance companies, and even foreign countries have significant capital tied up in these investments. Losses in American home mortgages will send shocks through multiple industries the world over.

4. Investment banking is dead. Beginning with Bear-Sterns this spring, and ending with the restructuring of Goldman-Sachs and Merrill Lynch into bank holding companies two weeks ago, the financial era that brought such phenomenal wealth to so many – and put Wall Street on the map in gilded letters in the 1980s – is gone. Basically, these banks don’t have any cash. They repay and borrow money every single night to cover their transactions. They also manage and have a big stake in these crappy mortgage backed securities. Just like you and me, when a bank goes to borrow money from other banks, those banks extend credit to the investment banks based on what they think the banks can pay back. The riskier the banks’ assets, the less money they’re likely to be offered. And if an investment bank looks like its on shaky ground, its customers want to take their money elsewhere. These guys literally hemorrhaged money, and they failed so spectacularly fast because they didn’t have any real assets to shore themselves up. Smoke and mirrors. Casualties: Bear-Sterns, Lehman Bros., Merrill Lynch.

5. Home mortgage companies are burning out. For obvious reasons. Generally, they have a big steak in these securities, too – and they have a lot of mortgages on their books that haven’t been securitized yet, and that they won’t be able to securitize. The nice thing about securitizations is that all its investors shares the losses; if you’re the sole mortgage-holder of a mortgage that goes bad, you alone bare the loss. Casualties: Fannie and Freddie.

6. Shockwaves begin sweeping into other industries. AIG was the hardest hit, first. AIG had lots of money invested in mortgage-backed securities – in a lot of the same securities Lehman Brother’s had invested in. So, like Lehman, they were already screwed. But these securities, ideally, have value, so when you talk to investors about how much your company is worth, you add the value of these securities to your other assets and income, and that’s what you tell investors you’re worth. AIG valued its securities as 1.7x and sometimes 2x what Lehman valued those same – now worthless – securities. AIG significantly overstated its value to investors, and to its creditors.

7. The US Government panics and reacts. Seeing that the housing bubble is popping fast – and likely acknowledging that this is the beginning of a long, painful period – the Bush Administration, the Federal Reserve, and the Treasury act to, essentially, keep the bubble from bursting hard and causing wide-spread disaster in the broader economy. This means stemming the shockwaves’ spread into other industries, and the current idea is that you buy up all the crappy assets from key industries as or even before they feel the hit. It’s ill-advised on numerous fronts – if you bail out investment banks, consumer banks, and insurers, why not private investors and foreign countries who are involved in the same crappy assets as well? how can we socialize losses but allow gains to remain privatized? why should tax-payers – particularly tax payers who didn’t make these dumbfuck decisions – pay for the failures of the rich (who, by and large, don’t pay taxes)? doesn’t this set a dangerous precident that moves us away from capitalism toward socialism – without real public discussion? and, most importantly, how do we know at all that this is going to work?

8. The stock market freaks out. Up one day, down the next – investors are in a purely reactionary mode right now. What’s important here is that people are panicked and their confidences are shaken. People who are panicked and unconfident tend to make rash decisions…

9. WaMu fails. This is huge news. First, this is the biggest bank failure ever. Period. Second, this is a commercial bank that’s failed, which means that the crisis is spreading. What’s important here is that commercial banks have assets to cover their lending – cash deposits and such. Generally, banks should have on-hand $1 for every $12 they lend out. The recipe for WaMu’s disaster is pretty clear cut. (a) WaMu has a super shitty mortgage portfolio – they’re one of the biggest crappy mortgagors, they’re invested in these crappy securities, and they have even more mortgages on their books that they weren’t able to securitize. Things looked bad at the beginning of the week. (b) Depositors, fearing for their money, took their money out of WaMu. Maybe the put it in other banks. Maybe it went into mattresses or got stuffed into bras. Doesn’t matter. WaMu experiences significant withdrawls, it loses it’s cash on-hand, and doesn’t have sufficient liquidity to extend more credit and cover its losses. A run, sort of, brought this bank down.

So, what’s next?

First, expect the WaMu failure to send shockwaves through negotiations for the bail out, or even initiate talks for another kind of bailout. Basically, politicians, bank execs, and economists are going to want to find some way to keep depositors confident that, no matter what happens to their banks, their money will be a-okay, so, keep your money where it’s at. Or, officials will look for additional ways to shore up bank liquidity in the event that there’s a customer run on deposits. Like the $700Bn bailout, this will be illadvised.

Second, expect the Congress to have passed a bail-out package for the mortgage portion of the crisis by next Wednesday. The markets will rebound, things will look kind of peachy. Banks will promise restrictions on extentions of credit, effective immediately. Everyone will heave a sigh of relief. Unfortunately, this is when the credit bubble will quietly start to pop.

Third, third quarter financials will broadside the markets. Expect to see preliminary postings as early as the second week of October, and we’ll get updates on unemployment stats, consumer confidence, home prices, new construction, etc., as well about the same time. Expect even more mortgage defaults, a surge of other debt defaults (particularly with credit cards) – the credit pop is on! – more job losses, a sharp decline on home prices and on new construction, halted demand for US automobiles, and more-than-modest declines in consumer spending. More banks will annouce losses, and there may be more runs on commercial bank deposits. Stock values will fall significantly; corporations will announce job cuts to attempt to shore up capital and restore investor confidence. Investors may buy it, but not for long.

Third quarter financials will not account for any bail-out moneys injected into the economy.

Fourth, consumer spending will decrease markedly early in the fourth quarter – screw Christmas sales – as banks extend less credit, more Americans are out of jobs, and those Americans that do have money and little debt start looking for practical ways to save it. Expect an increasing number of non-financial industry businesses to file for bankruptcy in the fourth quarter. Basically, these will be the folks who are already highly leveraged by debt, not just for facilities, but for operational capital while these companies attempt aggressive expansion strategies. Decreasing customer sales will impair their abilities to pay their employees and their abilities to cover their monthly debt payments – let alone make a profit. The variable here is commercial banks. If the Congress passes some version of the currently proposed bailout, investors – including commercial banks – should see some stabilization. The questions here are, “How much?” and “For how long?” and “Will it be enough to keep customers from freaking out and yanking their deposits, creating more WaMus?” This is the fundamental problem with this $700Bn. Nobody knows.

Fifth, fourth quarter losses will be posted in early January. There will continue to be decreases in available credit and in consumer spending – bad timing, considering how reliant many businesses are on holiday purchasing. Expect to see more mortgage defaults, a lot more credit card and other debt defaults. Expect to see significant job loss, zero demand for new homes and automobiles and continued declines in home values. Businesses that rely on Christmas sales to support the bulk of their annual budget will be reeling from a season of bad sales, and will be filing for bankruptcy – particularly mom-and-pop establishments. Significant layoffs will immediately follow the close of the holiday shopping season. As the end-of-year dust settles, businesses will project significant reductions in overhead and staff in the first quarter. We’ll start have a clearer sense of what’s going on with commercial banking here after the bail-out’s cash has started to find its way into the system – I can’t fathom what that impact will be.

Sixth, beginning right before the new president takes office, a crisis significantly more massive than the current incarnation of the mortgage crisis will hit the American people and our economy: Unemployment. In the coming quarters, Americans will be out of jobs, unable to manage even the most basic essentials, let alone cover their enormous debts. More mortgages and debts will fail, and customer bank deposits will see significant reductions – commercial banks will be on shaky ground again, and many will not survive this second crisis. Bankruptcies will sharply incline, spending will plummet, more businesses will fail, markets will plunge. The depression is now in full swing, and it’s officially named as such.

Widlcards: International and diplomatic tensions could rise significantly as American assets lose their value, and, subsequently, as foreign investors lose their shirts. Of particular concern here are China, Japan, Russia, and the United Arab Emirates. Also, demand for foreign-produced goods will begin to drop, and sharp declines will become evident on the near horizon. China will be pissed. Outraged by American failings, it’s going to become a lot harder for American diplomatic efforts to coordinate international compatriots to reduce the spread of nuclear weapons, fight terror, advance democracy, etc., and a great number of our arguments based on notions of moral superiority may be undermined. This will be further complicated by the massive crisis of faith the Bush Administration’s philosophical and militaristic unilateralism as already invoked the world over, and in our allies. The world currency standard may move from the dollar to the euro. The value of the already shaky dollar would subsequently plummet.

Sorry, kids. This is exactly where we’re headed. I’m going to change focus in the coming weeks and start thinking about how to weather this mad thing. Hopefully I’ll have some good ideas.

More bad news today as we begin into the Christmas Shopping Season: Circuit City has filed for bankruptcy:

Last week, Circuit City said it would shutter 155 stores, open fewer new ones and renegotiate some leases. The company will lose about 20 percent of its work force through store closing and job cuts at its corporate offices.

My concern isn’t really for Circuit City shareholders – who’ve experienced a 90% decline in their shares’ value since January – it’s for that 20% that’s about to lose their jobs. The article didn’t state the size of Circuit City’s workforce, but Wikipedia states they have somewhere in the neighborhood of 46,000 employees – a little more than 9,000 of whom can expect to lose their jobs before Christmas.

Considering we’re a nation of hundreds of millions, this layoff number may seem small, but what we’re beginning to see is a snowballing effect: As we plummet into depression, the unemployment snowball collects more and more casualties, growing ever-larger. Who’s next? Hopefully not the employees of GM and Ford – yet they seem to be exactly who is on the chopping block next. Even with federal cash infusions to one or both auto manufacturers, expect both to shed jobs to cut costs to pad the bottom line and spare a penny or two of their value to shareholders.

~

Has anyone paused to consider the extraordinarily detrimental impact publicly traded stocks have had on corporate stewardship and on the economy? Particularly day-trading?

Expecting growth! growth! growth! as a vehicle for increasing share worth, investors and CEOs have taken a very narrow view of corporate and economic health – one that dwells only on narrow slices of time and does attempt to comprehend the big pictures of the corporations and the economy over periods of years.

~

Planet Money has a troubling story today on just how broadly the financial credit has spread. The article itself is worth reading, but I highly recommend listening to the full podcast.

What seemed to begin on Wall Street and we’re seeing now was happening all along on Main Street has had some deeply troubling consequences for the folks running Main Street as well – the city mayor and treasurer, your public works and school board.

Part of my confidence – and the confidence of others in governance and social criticism – in our ability as a nation to weather something like a “major recession” or “great depression” is the strength of our local infrastructure. If school boards are losing their shirts in bad CDO investments and municipalities can’t banks to back the bonds they want to issue – and the banks that backed already issued bonds are demanding faster repayment at higher interest rates – municipal infrastructure is going to be placed under considerable financial strain. Whether that impedes municipality’s ability to render services to depressed populaces when the need arises has yet to be seen.

~

Finally, I’m not the only person in the media who’s confident we’re headed on a depressing trajectory: The folks at This American Life have been dropping Depression-related hints for quite some time. The whole show is fantastic and utterly worth your time, but Studs Terkel’s 30 minute opening piece on the Depression is a must-listen. While the picture it paints of Depression-era living is bleak and miserable, Terkel has the courage to interview very different people and share their varied and insightful perspectives – on race, on work, on money and hunger, on fabulous thirties fashions and on the tragic reality of crushing poverty during the same decade – and of how one (the rich) insulated themselves from fully appreciating the plight of the other.

Something for you think about. I certainly am.

Pundits across the country for weeks have said and are saying today that this Election Day will be unlike any other – perhaps in history. That is a testament to the presidency of George W. Bush as much as to either of the candidates, though I believe a Hillary v. McCain race would not have so inspired and excited my fellow citizens.

JHW and I voted last week. Oregon’s process for voting was yet another gentle, modest reminder for us of this state’s common sense approach to citizenship. If Oregon has a philosophy, I imagine it reads, “It’s no big deal.” Oregonians aren’t flighty hippies who don’t grasp the weight of important things; they just see most things as they are: Important, but not big deals.

To say something is “No big deal” in our culture has almost always been a dismissal, largely because anything anyone considers a “big deal” is also something they take deeply personally. Gay acceptance is a great example. I think the best way to advance equality for gays in this country is to make being gay no big deal. It’s ordinary for me, something I rarely dwell on – I don’t obsessively remind myself that I’m attracted to men in the same way I know straight men don’t obsessively remind themselves that they’re attracted to women. It’s not a big deal to be straight, it’s not a big deal to be gay. That’s my take. But for people on opposite ends of the debate – NeoCon Christian Conservatives and Gay Rights Advocates – it’s a very big deal indeed. Both sides take the issue deeply personally – and doing so is in neither sides’ best interests. They obsess regularly about it, obsess about bringing the otherside around to their point of view, about vindicating their choices and judgments. When I try to explain to Christian Conservatives that being gay is nothing special, that it’s ordinary, they can’t and won’t hear it. This is not surprising to me: Though they consider themselves beacons of tolerance, only members of the Taliban’s leadership are more condemnatorily judgmental. As for my fellows in the queer advocacy community, they won’t hear it, either. Being gay is a very big deal to them – perhaps because they’re not secure in their sexuality, but more likely because they’re offended, outraged, and wounded that there are people in the world who want to damn them for simply being themselves. Yet being gay really is not a big deal, and most people who accept this – straight and gay – generally get along much, much better than those who fight to making a big deal of it. (Word to gay advocates: Christian Conservatives are crazy people. They won’t listen to reason, largely because they reject all forms of reason. The only way to win with them is to stop playing with them, and encourage others to stop playing with them as well.)

In Oregon, and particularly in Portland, “no big deal” isn’t a dismissal. It’s just a casual judgment. “Okay, this is important, but it’s not going to hurt me, hurt the people I love, so there’s no point shitting my pants and losing sleep over this. I’ll take care of it, and get on with my life.” They’re no less appreciative of important matters – from politics to conservation – than any impassioned activist I’ve known. Honestly, because they’re not so caught up in their anxious and angry advocacy, they appear to have a little more energy for appreciating important things. It’s an essential practicality that’s refreshing, enriching, and truly liberating. My fellow Americans – you’d do well to take note of it.

Post 167 was a bit bloated in terms of its reasoning, largely because I was working out the ideas as I wrote them. This weekend, I plan to rework and rewrite it for clarity and concision because I think its fundamental tenet – that the value of debt hangs in the balance and the very well-being of society as we know it hangs with it – is of vital contemporary importance.

Post 167’s argument hinged on one semantic: value. Today, I want to try to distinguish what I think value is, how it differs from worth, and why – as with understanding the distinction between ethics and morality – it’s important, particularly now, that we have a distinguished understanding of these concepts.

We tend to think that both these terms describe an inherent quality to objects, actions, and ideas – that these things, such as money and gold and food, have an quality to them independent from our engagement with them that makes them important and desirable to us. I do not believe this intrinsicality is so. Value and worth, to my mind, do not describe intrinsic qualities and desirabilities, but instead define the types of relationships we socially agree to have with these objects, actions, and ideas, and with each other, when relating to these objects, et al, in a broad and engaged social context.

Value and worth are not the same – though we frequently use the terms synonymously. Like mass and matter, and ethics and morality, value and worth approach a shared basic notion – in this case, how we socially agree to relate to a thing – from different vantages, and consequently bring us to differing understandings about the actuality of our relationship to the thing.

Worth, as I have come to understand it, describes a relationship where the thing in question, based on its transferable usefulness, defines the relationships we socially agree to have with it and around it, and those relationships are generally not capricious (which is to say that they are generally more resilient in instances of social attitudinal shift than value by comparison). This is largely based on what I call its transferable usefulness – an object that has worth is consistently useful in the same ways to more people than it is not. Worth does not frequently occur spontaneously, nor is it typically an imposed quality; it is one that evolves organically as we relate to a thing and determine the nature, degree, and transferability of its usefulness over time. It is also a quality that gains social traction and temporal durability the more tactile and concrete the object or concept in question exists as. Consequently, worth very frequently is broadly recognized over cultural boundaries. Food has worth. Raw materials have worth. Items that are uniformly useful such as homes, tools, and even exchangable currency (which is a confusing animal on the value/worth spectrum) have worth. We even say that people have worth, based largely on the quality and degree of their ethical and/or virtuous actions.

Conversely, I think value defines a relationship where desirability is imposed on a thing by society, and where we agree as a society how that thing is to be related to, and those agreements and relationships are fundamentally capricious in nature, and exist independent from the tactility and concreteness of the thing value is to being imposed onto. We can impose value on anything – especially socially institutionalized abstractions – regardless of its transferable usefulness. So long as social attitudes align agreeably to relate to a thing as valuable, it retains its value. Once society decides that thing no longer has value, that value ceases to exist. Values determine not only how we price and want certain things – like fashionable clothing, iPods, automobiles, soy vanilla lattes – but they also determine our attitudes toward popular and unpopular ideas, opinions, and ethical and moral actions, and other abstract mechanisms of behavioral organization, such as democracy, economics, and religion. Currency, as I’ve said, is a weird animal; currency has worth because it usefulness is almost always transferable, but the degree of it’s usefulness is determined by the capricious value society imposes on that currency on any given day. As I wrote yesterday, debt exists only as social abstraction we give value to and it has no intrinsic worth.

We could say, then, “Worth is discovered, value is imposed.”

As with ethics and morality, mass and matter, et al, these concepts of worth and value frequently overlap. We do impose value on things that have worth, and when values become so socially intrinsic as for us to lose awareness of their true natures as abstract social constructions, we come to believe that those values are based on or have inherent worth as well. Indeed, worth can be discovered in a thing that was first a value. The internet is a great example of thing; as it was initially evolving, it progressed from being a thing we related to as an exciting novelty (value) to a ubiquituous tool for social and commercial interraction whose usefulness is broadly transferrable (worth). Automobiles, computers, and telephones have arrived at worth via similar means as well. Here, society discovers that a manufactured good it had initially valued as novel has proven durable and transferably useful over many relatings, and so that valued-as-novel good comes to have genuine social worth.

Fads are a great way to look at value in action, and typically value that is independent from worth. Take the example of the Tamagochi in America during the late 90s. The tamagochi was a goofy little “virtual pet” (read: a lite artificial life simulation) housed in a palm-held “egg.” Using three interactive buttons, you took care of this abstract “animal,” and controlled its health and quality of life. The thrill about the thing was that it could “die.” It was extremely popular with school children and Wired magazine reading hipster technophiles. As a society, we agreed that this colorfully packaged videogame was extremely novel and charming, and we imposed certain values on it – such as a cache of coolness, urgent individual demand for it, and a $50 pricetag – but I don’t think that we ever fooled ourselves into thinking it had worth. When the fad had faded, tamagochis across this land lost their extraordinary value and we rediscovered what their actual worth was – which is, not very much at all.

When we talk about a “crisis of values,” what we’re describing is an unsettling instance wherein a significantly disproportionate and/or incongruous relationship exists between the value we assign to a thing and its actual worth. These distortions can be profound and cause deep social affliction due to widespread toxic actions informed by inaccurate presumptions. An example of a dangerously overvalued concept is American home values over the last 15 or so years, which have ballooned disproportionate to their actual worth. An example of a dangerously undervalued thing is our relationship to, understanding of, and attitude toward our planet – upon which and ourselves our overconsumptions have finally taken their toll.

Where I think ethics is a superior concept and approach to human interaction to morality, I do not make such distinctions between worth and value. I think both are very important concepts as they describe how we approach relating to things, and in understanding the natures of those relationships – their transferrability, their usefulness, and their capriciousness/durability. Socially agreed to values have just as much power and valid import in conditioning a healthy human reality as worth; indeed, without value, such concepts as ethics and morality both have no foundation from which to derive their meaning and power.