Tuesday, November 11, 2008

The National Economic Crisis

America and the world are undergoing the worst economic crisis in most of our lifetimes. Rather than scuttling plans for a national personal transit system, it seems to me that it is even more imperative to begin as soon as possible. The current crisis has been blamed on falling real estate prices but that is only the tip of the iceberg. The fact that many borrowers got loans based on an inflated value of their assets, with little regard toward their cash flow situation, only begins to tell the story. On top of that you have financial institutions making the loans then immediately "selling" the loan to a third party, frequently another financial institution. This gives the originator of the loan little incentive to make sure that any payments are made after the first ones, they will have their money and whoever bought the loan has to deal with any consequences. Then you have derivitives, complicated investing devices based on the assets of whatever the derivitive is being written for, in the case under discussion real estate and they are known as credit default swaps. Other sources describe derivitives and credit default swaps far better and in more detail than I could ever hope to so I won't go into them any further than to state that they essentially allow leveraging of investments, an important concept to consider here. What leveraging does is allow you to buy more of something for less money (similar but not to be confused with a loan) by requiring less money up front to acquire it. Many leveraging schemes will allow 10% or less of the price to be actually put up in the initial transaction, meaning you are 90% or more "leveraged". This is almost identical to the situation in 1929 when most of the banks were leveraged to the point that they had no way of paying off their depositors once the market started crashing, causing a run on the banks for people to get money. A lot of people lost money then but there was no FDIC or SEC, which may still not help us out now, but at least there is someone to assign the problem to. Nobody seems to know the worth of all the derivitives out there, much less the ones related to credit default swaps, but the estimates I have seen are in the $500 trillion range. That is more than 10 times the worlds annual GDP in one financial instrument. I am not intending this to be a complete economic evaluation of our financial institutions but only to point out that the sector is in deep doodoo even if real estate prices and investment pick up soon and the former values have been nearly recovered. This is not the sole component to our current situation.
Converging with the bad economy, is a situation where demand for resources, especially petroleum, is threatening to outstrip our ability to produce them, driving up prices. I am very surprised this hasn't caused a higher rate of inflation than it has, but the pressure is there. Additionally, it is becoming apparent that fossil fuel use must be curbed for other reasons as well (i.e. environment). Resource demand also creates a situation where national leaders have decided that use of the military is imperative to ensure supply. The military has long been the poster child for wasteful spending and manages to dispose of around a trillion dollars of our wealth every year, more than all other countries in the world combined spend on theirs. Not only that but subcontractors are hired for exhorbitant prices to do most of the work that isn't actual fighting. One sector of the economy that is not hurting is the military supply part, only problem is that military funding is not a net gain for the economy of the average person. I wonder what would benefit our economy more, a war in Iraq or a national personal transit system?
Now we come to the third reason the economy is tanking, it is overly tied to the motorized vehicle. Far and away the biggest manufacturing component of the economy has been historically automobile and related industries. This in itself is not a bad thing. What is bad, is the fact that automobiles are very destructive both environmentally and socially (you can read entire rants about this on other threads) and show no sign of going away anytime soon. However, when the cost of gas goes up and credit tightens it almost guarantees people buying fewer new cars and traveling less, not good for stimulating the economy or very predictable. Right now the car manufacturers are asking for a bailout to keep producing dinosaurs. While this might help in the short term, I believe it to only be prolonging the problem for some future greater collapse.
How will a national personal transit system solve any of these problems, especially when it requires significant investment on its own? Let me make the case for the auto industry first, since it is the most straightforward. If the industry is not to be nationalized, one or more manufacturers will be chosen to build vehicles uniformly to exact specifications for the system, rather than every car being "different". This will likely eventually leave some car manufacturers finding another line of work (how many different companies do you need making the same exact car) as a result of efficiency of scale. The same efficiency of scale will apply to mechanics, road construction workers and many others. These effects will not be noticable until the system has started operation on more than a small scale and begins to have widespread use, about 5 years or so at least for the timeline I would like to see. This sounds like a drastic change but the reality is that it will happen anyway as fewer and fewer people can afford to drive and support for road improvements dwindles. The difference is that if we do it in the fashion I advocate people will have a chance to retrain and adjust before they lose their livelihood and we will end up with a better system besides. If we shift resources from the military to build our transit system, we will have essentially "leveraged our investment". What I mean is that instead of a dubious return for each dollar invested in the military, you will have solid benefit from a better transit system ( I can see those with vested interest in the military rolling their eyes now). In addition the transit system will pay for itself whereas the military does not. As for the financial system, I am not even sure they can or should be bailed out but it looks like our elected reps will try their hardest to do so. At any rate, it seems like it sould be easier and more likely to get money back from a transit system than from the banks. Near as I can tell the only thing the banks will do anyway is keep track of the transactions (they certainly don't have the money to loan us). The biggest problem will be getting started before those financial institutions lose the rest of our money (that we don't really have anyway).

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