I've had to restart this piece several times; worried that my personal involvement will taint either its readability and/or its veracity for the reader. The subject for me is not abstract or relegated to sympathy alone. For me, the impact of the nation's severest recession (for some a depression) came only as an after shock to the 'big event', the housing market collapse.
From a view, shared by relatively few, and by culling through the muck of information and media analysis I could early on spot the miscreants who were acutely responsible. While the media confused the issue of where the blame lay, their obfuscation was not so much intentional as it was a lack of perspective and good analysis, or the product of self indulgent partisan spin. That is a matter that sorely needs to be addressed, and will be, but it is not the subject here.
More than two years later, and a turn over in the federal administration, my antipathy for those most responsible is now being rivaled by an anger towards a government so clueless as to the origin of this economic debacle, dubbed 'The Great Recession.' The media pundits, 'left' and 'right', have failed to grasp the domino structure of the events or provide constructive critical analysis. It it were a board game requiring logical thinking, they all would have lost.
We are now in the third year of The Great Recession, its official birth recorded as December, 2007. As the recession grew in magnitude in 2008, the major news stories of those years were not about the damage that was done by the housing bubble and bust to the underpinnings of our economy. Instead, most of the year's economic reporting was a retread of 2007, focusing only on sympathetic stories of short lived homeowners who lost a recently purchased house to foreclosure. That the depth of the story stopped there, left unexplained why so many of those situations had come to be, leaving the why to speculation and political spin which only added to the misdirection to come later.
Not reported on, from late 2007 and on, were the catastrophic effects from the housing crash. Utterly ignored was the crumbling of a large sector of the economy, the millions of American workers (and thus consumers) who made a living in the residential construction industry and all of its peripheral dependents were now sidelined. Millions no longer had work, or their prospects for continued work were greatly diminished.
The building site developers, masons, framers, roofers, electricians, plumbers, HVAC people, security system installers, exterior siding and trim workers, insulation installers, drywall workers, window and door installers, flooring and cabinet installers, trimmers, painters, landscapers, suppliers of cabinets, doors, windows, flooring, masonry, building products, garage doors, appliances, bath fixtures, lighting fixtures, fire places, real estate professionals, movers, and many other professions whose incomes were derived totally or principally from steady work in the home building sector.
Beginning in the foreclosure hot spots, then spreading across the country, trips to Walmart, Target, Best Buy and a multitude of other retailers ceased for these millions of Americans. In 2007, lost sales triggered smaller retailers and service providers to reduce their staffs, adding to the growing unemployment. By the first of 2008, the big retailers and service providers added to this trend of staff reductions furthering the snowball effect. This led to reduced buying from wholesalers and other middlemen who provide the retail sector with products and supplies, and soon began impacting manufacturers and beyond.
The U.S. unemployment rate climbed from 4.3% in May 2007 to 6.1% by August 2008. Separating out the cyclical and transient unemployment which is nominally pegged at 3%, effective unemployment had climbed from 1.3% to 3.1%. In absolute numbers this translates to a net of over 3,500,000 Americans having lost work over a 15 month period ending in August, 2008.
By September 2, 2008, and before the highly dramatized liquidity crisis of the banks, the Dow Jones Industrial Average had dropped 2,873 points from October, 2007,
a 20% drop. Yet these trends did not spark the media to highlight the catastrophe that had befell this large chunk of our economy, which made up a whopping 5% of the gross domestic product. This 'non-coverage' of the housing sector collapse and its impact upon the national economy is still plaguing us today, as it has totally obliterated any understanding of the economic problem.
The snowball continued into late 2008, but the media became preoccupied, if not thrilled, with the glitz and drama of the bank liquidity crisis in September and thus once again the true story went unreported. The much over hyped story of the liquidity crisis triggered a net 2300 point fall on the DJIA by late November. And then, of course, the rapid nature of that fall was more delightful drama for the news media, and resulted in a national paranoia that further reduced consumer spending.
While the stock market fallout of the highly spun liquidity crisis was real it could not have translated into further unemployment for some months afterward, and yet the unemployment rate had already climbed to 7.1% in December, on its way to 8.5% by the end of January. Thus, virtually all of the nation's unemployment has stemmed from the abrupt rise and then crash of housing demand, and the tremors it sent up the economic chain.
Unfortunately, the banks' liquidity 'crisis' of September 2008 is pegged as the beginning of our economic problems by virtually all of the pundits, those same men and women who sat by for almost four years without a word out of them, much less demands for Congressional investigations, about the ominous rise in housing demand; ominous because it wasn't justified by any sound fundamentals. And thus, it is little surprising that the public is so misinformed on the mechanics of the economic downfall. As bad as all of that was and is, it got worse.
It was the malpractice and malfeasance of the banks that produced the housing bubble and bust, which is the very ground zero of this recession/depression. Then, shockingly enough, as if they had been the victims instead of the culprits, the federal government was manipulated by fear mongering to shore up and thus save those very banks, who had shot themselves in the foot while in the process of robbing most of America.
The failure of our media and economists to highlight the real injuries to our economy, immediately after the housing collapse in 2007, explains why Americans are clueless about how to fix it. Sadly, it is also why Washington has failed. We weren't focused on the structural damage which the 'big event' caused to our economy, and have since been throwing money out the window with no real understanding of what it will, and what it won't, do.
While the sub-prime mortgage scandal was heavily covered in the media, it was limited to primarily three effects. By far and away the story was about the 'moving' emotional hardships of people losing their homes, and the bubble effect on the nation's home prices, and then, once the banking crisis story broke, that it had produced the 'toxic' assets beleaguering the banks. What else was left to report? [he wrote sarcastically]
In the summer of 2007, the surge of home foreclosures swamped the housing market. The surge, like a hidden tsunami that surfaces only just before it lands ashore, drowned all but the luckiest souls along the beach and coast. The media took little notice of the collapse in the home construction industry, unless it was laced with derision towards builders,
wrongly portraying them as one of the culprits in the housing bubble. If not identified explicitly, home builders were indicted implicitly with repeated references to 'over' building or 'speculation.'
I should note that I sympathize with those who lost their homes; they too are victims, having been used by the bankers to generate revenue at any costs to others. Derision is due those in the media and government who presented such a narrow and shallow view of the sub-prime scandal's fallout. The media only reported on those who'd lost what had been their house of a few years, and perhaps a little equity, if they had put any money down, yet there in the same neighborhood was a greater victim of the sub-prime scandal, the construction worker who now had no work, no income.
The real tragedy of the sub-prime scandal was that it set up the housing market for a devastating crash which brought the home construction industry to a halt, an industry that has been traditionally one of the major employment sectors of our economy. A sharp rise in home sales from 2002-2006 was generated by fraudulent lending in the mortgage banking industry. That increase in demand, though a national phenomenon, appeared every where simply as a localized spurt in home sales.
Local builders built to meet demand, a normal, desirable and very important free market function.
'Over' building only exists when supply well exceeds demand. During this period, that wasn't the case, at all. The fact that home prices continued to rise right up until the collapse indicates that builders were barely meeting demand, and had they not built, prices would have risen more sharply. The
over supply of homes that arose, once the
fraudulent demand had eroded through mortgage defaults, was very wrongly described in the media as 'over' building. And from that very poor analysis, victims were labeled as perpetrators.
Another misconception, fostered by the media, has resulted from the very subjective use of the word 'speculation.' The term 'spec' house was once a common means to differentiate from the once predominate activity of building commissioned houses. Imagine today the inability, short of building your own house, to have the option of buying a newly constructed house.
In the U.S., population growth, the obsolescence of older homes and the mid-20th century entry by the government to provide a measured means for securing long term financing, all brought about an industry that produced homes more quickly and cost effectively than through the process of individually commissioned and custom homes. Virtually every new home built in the U.S. over the last half century has been a 'spec' house. Today, the 'spec' house is the norm and expected means of new housing in the U.S. and it is not a term alleging risky or imprudent business activity.
Of course, the attribution of speculation was meant as an accusation, implying a greediness worthy of contempt, and it worked well in the climate of the moment where pundits were given to blaming everyone so that their own shortcomings were not as readily apparent. As commented above,
given a market where demand is not being manipulated fraudulently, home building is neither more or less economically risky than any other business.
It's impossible for this writer not to point out the hypocrisy of crying "speculation!" Virtually every business venture is speculation, and,
most certainly, investing in a stock position, which pays no dividends, and has a precarious p/e ratio, is the epitome of risky speculation. Who among those casting stones at residential housing construction, an industry with a very sound and conservative business plan, can deny having invested in the stock market, the world's largest speculative bubble, where one speculates not on the fundamentals but on the actions of other speculators?
The defensiveness is partly personal, but also meant to remove the tinted shades that may have prevented some clear vision. It was clear to me in late 2007 and early 2008 that the A-bomb that had been dropped on the home/residential construction industry was going to ripple through the economy. How could it not? We'd just managed to un-employ hundreds of thousands of workers in each and every state in a short time frame.
And, in fact, that's exactly what happened; consumer spending took a big hit, even as early as December, 2007, economic indicators showed its effects. It soon trickled up the chain to the wholesalers, and then to the manufacturers, and then to their suppliers. And as each one of them was hit, they cut back their work forces, deepening the effects.
The economic structural damage which underlies this recession is the collapse of one of its major employment sectors, the home construction industry. When the President and the Democrats pushed through a so called 'stimulus' package, it was also clear to me that it was not going to either aid the hardest hit Americans or provide a solid fix for the economy. Yes, you heard them say it was going to be used for 'shovel' ready projects. Well, girls and boys, the President needs to take a course in construction. The projects for which the money was intended are primarily public projects, most often transportation projects.
Institutional type construction, which includes most government projects, is performed by a unique industry. Road builders do not employ framers, or roofers, or plumbers, etc. And, too, it is an industry that was amongst the last to feel any effects of the ill economy, as its primary client, government, was also the last to feel any effects, if any at all.
Thus an industry who was among the least impacted of all industries was given an enormous gift, a windfall of job contracts. And most likely the skew created in the demand/supply triggered a significant price increase for the road and bridge work that resulted. If you already have over a year's worth of work contracted, you're likely either not going to bid on the next contract let or you'll bid high. You're certainly not going to go out and purchase highly expensive equipment to create new work teams, because the windfall isn't going to last.
It is unlikely that there was any significant cross over of labor from one industry to the other. To have added any great numbers of unskilled labor would have meant finding additional skilled supervisors and managers and, as mentioned above, incurring capital outlays for new equipment. Most likely a company simply distributed their work over a longer schedule, and scheduled on weekends, as I observed several times, likely paying overtime to workers who were never unemployed, while the true victims of the recession go without work.
That analysis appears to have been spot on, reading today's assessment of the stimulus results (a year later); a sample of which is this excerpt from an AP story of January 11, 2010:
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Even within the construction industry, which stood to benefit most from transportation money, the AP's analysis found there was nearly no connection between stimulus money and the number of construction workers hired or fired since Congress passed the recovery program. The effect was so small, one economist compared it to trying to move the Empire State Building by pushing against it.
"As a policy tool for creating jobs, this doesn't seem to have much bite," said Emory University economist Thomas Smith, who supported the stimulus and reviewed AP's analysis. "In terms of creating jobs, it doesn't seem like it's created very many. It may well be employing lots of people but those two things are very different."
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I didn't watch the President's 'State of the Union' address; I only perused the text of the speech and glanced at some of the headlines of news stories. From the coverage, it seems it lacked anything that could be called news. I had no reason to believe the speech would reveal a new awareness by the President.
My pessimistic tone might indicate a pre-election leaning against Mr. Obama, quite the opposite is true. In fact, I had significant expectations for the new administration to be able to grasp the economic Rubic's cube and take appropriate measures, my only real concern was how quickly and how directly.
Borrowing on the 1992 campaign jab , "It's the economy, stupid," I want to shout out my window, "It's the home construction industry collapse, stu . . . , I mean, Mr. President."
-RLee
