“We’re really going places.”
More than just an expression, “going places” is the American spirit in a shot glass, the single-barrel, straight bourbon whiskey of wide-open opportunity, better days ahead. Americans have a long history of knocking back that shot in one gulp — pulling up stakes, voting with their feet.
A vibrant economy helps: The prospect of living large turns employment mobility into a dance number with a killer groove. Wherever the music is loudest, the workforce follows, thronging toward that beat. Chasing dreams kicks up a lot of dust.
Right up until the music stops.
In September 2008, Lehman Brothers, the 157-year-old financial-services firm, filed for Chapter 11 protection, the largest bankruptcy in history.
Abruptly, the music stopped. The global financial system skidded, froze in place, and, one heartbeat later, unceremoniously slumped to the floor.
Six months on, awakening to the worst economic nightmare since the Great Depression, a lot of Americans are not “going places.”
For many recent homebuyers, the collapse of the housing bubble means that walking through their own front door brings home one aching realization: They’re stuck.
It’s a Dead Man’s Party
Well. it’s sugar for sugar
And salt for salt.
If you go down in the flood,
It’s gonna be your fault.
—”Crash on the Levee (Down in the Flood),” Bob Dylan (1967)
Barbara is not her real name. She is 28, single, and until recently the contented owner of a two-bedroom home in West Ashley. She asked not to be identified because she has a secret she’s keeping from her mortgage company.
To date, she hasn’t missed a single payment. Despite the seismic shifts in her finances lately, every month she’s scraped together that money. But like an increasing number of homeowners, she may soon hand over the keys to her home and simply walk away.
Her home loan is under water — she owes the bank much more than the current market value of her property. Laid off from her job in November, she feels in over her head and that she can’t hold her breath much longer. She never dreamed it would come to this.
These days, she mentally rehearses returning her keys the way she used to fantasize about having a place all her own. She’s trying to imagine herself carrying through what may be the only option left for her to get unstuck.
To her, the machinations on Wall Street feel very far removed from her own troubles. She thinks of all that as one big mess. Yet the sinking of global investment banks is the undertow dragging her down now, and in one way or another, it will haunt her financial future for some time to come. In this, of course, she’s not alone.
Think of the worldwide economy as an ecosystem — tightly woven together, interdependent, bound within certain definable, natural limits. As this complex adaptive system moves from its wide-open growth phase into consolidation, diverse opportunities constrict, fewer players dominate. Increasingly, the vigor of the system depends on the well-being of the few: they are deemed too big to fail. At that point, vulnerability to disruption creeps in. Mistakes cascade, local calamities bear destruction onward exponentially.
In September, as Lehman Brothers keeled over, other dominos in the financial system, unable to move but in lock step, shuddered. That shudder reached down to the roots of the feverish flow of money chasing money. It was disruption enough.
An overheated seam in the global financial system burst and a pyroclastic surge of bad paper — what came to be known as “toxic assets” — swept all before it. An entire community — the Wall Street high flyers Tom Wolfe once called “Masters of the Universe” — found themselves sputtering, convulsing.
Within days, as the dimensions of this mass extinction set in, then-Treasury Secretary Henry Paulson threw down before Congress a three-page demand for $700 billion to “return liquidity to the markets.” As a former Goldman Sachs chief executive himself, the ruined economic landscape before him must have looked like Pompeii after the Vesuvius eruption. In effect, he meant to pump some blood into the lifeless husk of the investment banking community, thump its empty chest with one massive cash-infused jolt, and pray for a pulse.
It didn’t quite work out. These extraordinary efforts at resuscitation stirred up another kind of mess.
In a normal sequence of events, a system collapse releases new energy and precedes a regeneration. But the system has been distorted, thrown out of phase by unnatural means.
On the hook for this financial voodoo rite, the taxpaying public has watched a ghastly scenario unfold. Freakishly returned to life — and seemingly oblivious to the fact that they’d been flat-lined, swept aside — the Masters of the Universe resumed their previous indulgences without a glance over their shoulders. They handed enormous bonus checks to one another, treated themselves to bailout financed junkets, boasted that their worst days were behind them. As a spectacle, this bizarre mass reanimation rivaled George Romero’s Night of the Living Dead.
But these have been the opening scenes of the present interregnum: the collapse that wasn’t. Wall Street’s undead roam free, gorging on Main Street. The life blood of the barely living feeds the spawn of a Mephistophelean deal.
Welcome to the Zombie Economy.
For Barbara, and thousands like her, this twilight world came out of nowhere.
Irrational Exuberance, The Home Game
You may ask yourself; ‘Well…
How did I get here?’
—”Once in a Lifetime,” Talking Heads (1980)
Just as the new guidelines of the Bush administration’s Troubled Asset Relief Program began to emerge, everything hit the fan all at once in Barbara’s world. Her company, with many regrets all around, downsized like a soufflé falling in on itself. Her primary job was gone and with it, her health insurance.
She put the word out to her circle only to find that plenty of them were suddenly in the job market themselves. She thought about waitressing or tending bar, but there was little movement on that front. Many of those jobs got locked up in a hiring freeze.
Even when the homeowner mortgage bailout was announced, she realized it wouldn’t do her much good. Without a job, she doesn’t qualify for assistance.
Recently, she managed to snag a bartending gig. For now, stuck with a pile of cold, hard choices mounting at the door, she hangs on.
Her biggest worry is that South Carolina’s unemployment rate is the highest it’s been since January 1983: reaching 11.4 percent in March, well above the 8.5 percent national average. Facing the likelihood that local job prospects will only erode even further, she’s out pounding the pavement nationwide via the internet. She has a lot of company.
“Today, people are casting a wide net in their job searches — across the entire U.S.,” says Kathleen Ellison, account manager at the Charlotte office of Aquent, an international placement firm specializing in marketing, design, and IT.
And while it used to be that key jobs, difficult to fill locally, prompted employers to extend relocation allowances as part of the hiring process, Ellison notes that, “Employers still offering relocation packages are very few and far between. Mostly, we’re hearing from people willing to relocate, entirely at their own expense, if positions open up.”
The economic downturn, she points out, has created some advantages for job seekers willing (and able) to pack up for a new job. “Because housing is down, relocation is cheaper now,” Ellison says. “And van lines’ prices are down as well.”
For Barbara and others hunting for new opportunities, a larger question remains.
“People want to know if there is any place in the U.S. that’s hiring. By and large, the answer is no. Larger markets will have more jobs available,” says Ellison, “but they’ll also have much larger pools of talent to draw from.”
In most cases, Ellison has offered the same advice: try to stay local first.
Given the current climate, that advice may be difficult to follow in South Carolina, particularly for folks like Barbara, who possess university degrees.
South Carolina, having positioned itself since the ’90s as a “low-tax, low service” state in order to lure manufacturing plants from higher-wage, heavily unionized regions, now faces difficulties unique to that positioning. The “just-in-time” business model of manufacturers allows them to shed excess inventory — and jobs — rapidly in a downturn. The state’s manufacturing sector has done precisely that over the last quarter.
In a recent article, economist Bruce Yandle, dean emeritus of Clemson University’s College of Business and Behavioral Science pointed to this larger issue: South Carolina’s economy is not poised to address “the rapidly expanding higher education economy that requires higher educated people.”
On average, the state retains about half of its college graduates. Those seeking careers in the so-called knowledge-based economy often find themselves drawn out of state by the greater number of opportunities available elsewhere.
One knowledge-based Charleston employer, Blackbaud, has been able to hire new employees from within South Carolina. Since the beginning of 2007, the software company has made 300 of its 360 new hires locally and the rest from other parts of the state. A key component of Blackbaud’s hiring strategy is their college recruiting program.
Blackbaud’s success drawing from the local employee pool may not be broadly indicative.
A spokesperson for Goose Creek employer Google offered this assessment of their local hiring practices:
“We are continuing to evaluate our personnel needs in Berkeley County, and we hire locally whenever possible. There are some positions, however, that require additional experience which call for a broader search. We are pleased with the number of local people who have applied (some of whom are now employed there) and with the number of existing Google staffers who have relocated to Berkeley County. As a matter of policy, Google does not disclose its exact number of hires. Worldwide, Google is still hiring but at a very reduced rate.”
Current job forecasts for South Carolina have the state reaching 14 percent unemployment, creating a tremendous burden on the
For the newly unemployed, a job loss frequently also means loss of medical insurance, creating another fracture in an already splintered economic picture.
Masters of the Universe: Gone Wild
Sometimes I live in the town.
Sometimes I get a great notion
To jump into the river an’ drown
—”Goodnight, Irene,” Huddie “Lead Belly” Ledbetter
It’s tempting to say, “This is a remix. Recessions are nothing new.” But the Zombie Economy is.
Yes, each of the past three decades has suffered through a recession, each one boasting distinctive severity, unintended consequences, and regulatory crisis management.
The present economic conflagration, however, merits its own life-size trophy in the Econ Hall of Shame. It’s like nothing people Barbara’s age have ever seen.
As Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond recently told the Charleston Metro Chamber of Commerce at their Economic Outlook Conference, “[Y]ou have not lived through an economic contraction this severe as an adult unless you came of age before disco.”
It was never supposed to have happened.
In 2005, barely 18 months shy of the real estate cliff edge, Ben Bernanke, then an adviser to President George W. Bush and now the Federal Reserve chairman, said, “We’ve never had a decline in housing prices on a nationwide basis.” Trouble is, we’re now in the midst of that decline, not just nationally but globally. Some predict that housing values may plunge by a third.
Americans used to think of their homes in simpler terms: four walls and a roof over their heads. Shelter. And for most people, their single largest asset and source of equity.
Although research indicates that owning a home can cost 35 percent more than renting, home ownership was thought to encourage some very prudent and socially redeeming activities. It promoted savings (by building equity), social stability (through community involvement), and civic pride (neat lawns and awesome block parties).
Even so, right up until the Baby Boom generation reached adulthood, less than half the country owned the four walls they lived in. And by the time home ownership rates peaked at 69 percent in 2004, something fundamental had already changed.
Beginning in the ’90s and gathering steam between 2002 and 2007, Americans fell in love with a new vision of real estate peddled by the financial industry: the idea that their home was a financial instrument. The idea bit like heroin plunged into a hungry vein.
Fed a steady fix of rapidly increasing real estate prices and increasingly loose financing requirements, Americans came to think of their homes as a piggy bank. Community stability shriveled as the average American home changed hands, not every nine years, but in as few as two years. Savings, in the form of home equity, flew out the door. With plentiful home equity loans, homeowners tugged handfuls of slow-growing equity in their homes out by the roots.
And the financial sector raked in the money, eventually accounting for 40 percent of all corporate profits in all industries, a historical first.
The Masters of the Universe climbed a ladder rung with deals: financing, insuring, packaging, splitting, reselling — conjuring ever more magically delicious sacks of tinier, sharper financial shards. Those little shards were inherently risky. And when the Masters got cut, everyone else bled right along with them.
The hemorrhage in Charleston and the Lowcountry began slowly and gathered momentum in an eye-blink, leaving many in shocked denial.
“I hear this a lot: ‘I’m going to wait until the market comes back’,” says Bryan K. Crabtree, president and chief executive of Weichert, Realtors Dean-Kelby; he’s closely tracking the Tri-County market. “There’s a big sentiment, in Charleston particularly, that the market is going to come back to ’06 or ’07 levels, but I think the best we have to hope for is somewhere around mid-’08 levels.”
And achieving that rebound, he says, may take three to five years. “As a realtor, I hate to say that.”
Local home sales showed a slight increase in January but drilling down through those numbers reveals listings — priced right, Crabtree insists — that went on the market as far back as October and November of last year.
Even in this market, he says, “Well-priced properties are turning fast,” with an average sale within 120 days.
That’s one part of the market. The other part of the market, what Crabtree calls “La-la-land” are listings on the 200-plus-day end of the scale: over-abundant, over-priced, and sitting there. He feels these unrealistically priced listings contribute toward stifling overall demand.
Complicating home sales further are the escalating numbers of properties in banks’ “shadow inventory” — properties in default or abandoned but not yet declared in foreclosure.
Some estimates put the tally of those properties at around 3,000. They have not yet gone on the market.
The local real estate market is fighting a pitched battle for stability. There are problems and plenty of suspects to go around. In an imaginary lineup, Crabtree is quick to single out the perps, the ones he feels are dragging their heels: the banking sector.
“We’re trying to get legislation out of Columbia,” he says, “that if a bank does business in South Carolina, it must respond to a request for a short sale within 30 days.”
That level of response would, he feels, give would-be homebuyers and sellers a fighting chance.
Past performance is no indication
You build it up, you wreck it down
You burn your mansion to the ground
There’s nothing left to keep you here,
But when you’re falling behind in this
Big blue world
You got to hold on
—”Hold On” Tom Waits (1999)
In a Zombie Economy, few things make much sense.
Banks take bailout funds, shunt them away from making the loans they were intended for, and, in the true zombie-style, use that money to buy other banks. It’s the kind of cannibalism that overpopulated the financial sector with too many companies that were too big to fail.
Ordinary citizens who bought up investment properties in the Lowcountry are exhibiting their own kind of moxie (or madness, depending on your point of view).
Crabtree says he knows of a number of cases where homeowners have allowed their property to go into foreclosure, packed up, moved on to a second property, halted there until the next forced sale, and moved on again. It’s a disciplined retreat along a path where no one is quite sure where to turn or how to move forward.
Previous attempts at tending the financial infrastructure aimed at repair, not thorough-going restructuring. At each crisis point, monetary policy sought to keep traffic moving by mending potholes; legislation looked to stem malfeasance and runaway speculation by erecting tollbooths along the way.
What draws the American public’s ire today, as they sit in their homes like Barbara does, weighing out dwindling options, is the emerging perception that at each previous traffic jam, financial wheeler-dealers sought out off-ramps, back roads, and by-ways which eventually left the potholes and tollbooths to taxpayers, the average investor and throngs of others simply commuting to work.
When systems collapse, something must yield for a new direction to open up.
Writing in a recent issue of The Atlantic, Simon Johnson, former chief economist of the International Monetary Fund, puts it this way:
“In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets … In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling … But there’s a deeper and more disturbing similarity: elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles … until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.”
Not surprisingly, Johnson’s assertions have raised hackles. A genuine restructuring involving the break up of the zombie megabanks, which he advocates, is not in the cards just yet. Even so, zombies really hate it when you call them out.
But when the pitchforks and torches assemble?
All bets are off.