Business Devours its Young: Lessons from the Great Depression: Part V: Destroyin
Posted by: admin in Real Estate and HousingThe deflation versus inflation debate is a hotly tester. If we’re to look at the Consumer Price Index as our guide to inflation, we have the capability to see that yes by this measure inflation is increasing. Yet if we are to look at wages and housing prices, deflation is occurring. What gives? Well the narrow definition of inflation is an increase in the money supply. Looking at momentary measures we don’t have inflation. But looking at the current news cycle and what is going on, we’re approaching Great Depression like scenarios. In this two-piece article, we’ll first discuss the current assault on today’s market with job declines and wage decreases followed by a disturbing article posted in 1933 examining the new business climate that emerged during the Great Depression. General Motors is offering buyouts to many longtime workers to replace them with new younger workers for half the hourly wage. The say of California is putting hiring and income freezes and laying off workers. Do these things sound inflationary? Take a look at the GM plan:
“DEARBORN, Mich. (AP) - About a quarter of General Motors Corp.’s hourly work force represented by the United Auto Workers could leave the company under a new round of buyout and early retirement offers, the UAW president stated Thursday.
President Ron Gettelfinger estimated that 15,000 to 20,000 GM workers could take the packages, but said they all must be replaced under terms of the UAW contract deal reached with the company last year.
GM is offering buyout or early retirement packages to all 74,000 of its UAW-represented workers.
Most of the replacement workers, he stated, will do non-assembly jobs and be paid at a lower wage scale, which is about half the $28 per hour that average hourly workers now make.
GM has about 46,000 hourly workers eligible for retirement incentives, but Gettelfinger stated that economic uncertainty could hold down the number of workers leaving.
Many of those who have taken a previous buyout have found that it didn’t meet their expectations, Gettelfinger stated, while others have found leaving very beneficial.
“I just think that it’s dependent on each person’s situation,” he stated. “If you just look at the economy overall, everybody’s concerned about right now whether we’re headed into a recession. You’ve got the subprime issues. You’ve got tight money markets out there. So a lot of things have changed in people’s lives.”
The actual package looks to be about $100,000:
“Chrysler is trying to cut up to 21,000 of its 45,000 U.S. manufacturing jobs, giving workers on temporary or indefinite layoff up to $100,000 to sever ties with the company.”
After taxes this $100,000 comes out to be about $60,000. Now as you know, the economy of Michigan isn’t doing so well and a family can blow through $60,000 in one year. If you’ve many more years to work and have a mortgage, you’re stuck since some homes have been on the market for as long as two years. The say of California isn’t doing so well either as the Los Angeles Times is reporting:
“The Long Beach school board voted to shut an elementary school this week. The Rialto Unified School District, in what is believed to be the first such action in the state this year, sent notices to 305 employees including instructors, informing them that they might not have a job next fall. The San Francisco school district might take city “rainy day” money to help balance its budget.
School districts across California have begun trimming services and preparing to lay off teachers in response to Gov. Arnold Schwarzenegger’s proposed budget, which could cut about $4.8 billion in education funding this year and next year. Educators state it’s the worst financial crisis they’ve the ability to remember.”
What this means is more unemployment, a smaller tax base, and less consumer spending. What really amazes me is the general disregard for manufacturing. We’ve allowed our entire manufacturing base to be off-shored and many try to show blue collar workers in a negative light as milking the system. My father was a blue collar worker and I have the ability to attest as I’m sure many of you can, that blue collar labor isn’t an simple lifestyle and many do earn each and each penny. My amazement is in how society has no problem with a mortgage broker pushing papers and making $100,000 with a GED while a GM worker assembling vehicles all day with overtime making $100,000 is somewhat living on the gravy train. How can we as a nation have lost perspective on the value of actual work? Did we somehow think that flipping homes was going to prove to be the highlight of our economic prowess? The banking and real estate industries are fighting with all their might for each single kind of bailout imaginable. Now in an astonishing sense of irony, a group of banks are rumored to offer a bailout to the monoline insurers:
“Ambac Financial Group Inc., the bond insurer facing a crippling credit-rating downgrade, might get $3 billion in new capital as part of a rescue agreement with banks, according to a person with knowledge of the discussions.
An announcement might come early next week, stated the person, who declined to be named because no details have been set. The New York-based company rose 16 percent in New York Stock Exchange trading yesterday after CNBC TV said Ambac and its banks were preparing a deal.
A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guarantees would help banks and municipal debt investors avoid losses on securities it insures. Banks stood to lose as much as $70 billion if the top- rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.”
The market desperate for good news reversed a triple digit loss in the last hour to end higher by 90+ points. Consider how insane the above proposition is. This is like you getting into a automobile accident, calling your insurance company, and having them tell you that you need to loan them some money in order for them to help you out. It is absurd and I don’t see how the above gets going without splitting the company up and allowing muni-bonds to work on their own. What this means is that they still will collapse because absurd CDO involvement and subprime Wonderland investing. In a sign that even the muni side might have problems, we have our first city in California looking at a potential bankruptcy:
“As Vallejo gains the dubious distinction as one of California’s few municipalities to take into account bankruptcy, the city’s fiscal plight is gaining widespread, even national attention.
City bankruptcy attorney Marc Levinson, Orrick, Herrington & Sutcliffe, stated many cities face dire financial conditions, and are watching Vallejo closely.
If the city does file for bankruptcy, Levinson said Vallejo could be a first to seek protection due to revenues being unable to keep up with expenses.
“This would be one of the first where there’s a systemic problem - where there’s no revenues to cover the expenses,” Levinson stated.
“That’s why people are following this. It could be a first,” Levinson stated. “There’s simply not enough money to go around.”
City and union negotiators have been involved in marathon talks, which are expected to continue over the weekend. Mayor Osby Davis stated Friday afternoon that the two sides have “an agreement to concur,” but provided no specifics. (See related story on A1.)
The city is grappling with a $6 million shortfall in its $91 million general fund. Though Vallejo started the fiscal year in the black, expenses have outpaced revenues by $10 million and each penny of the $4 million in reserves.”
Not enough money to go around is correct. Apparently cities are taking a note from our federal government spending more than they earn.
Lessons from the Great Depression
With all this news, I encountered another ominous article from Harper’s Magazine called “Business Devours its Young” talking about the new business psychology that permeated the market in 1933. This article offers a minor glimpse to where we are heading and given our large overspending for a decade, there’s simply no way of avoiding a correction. This issue of Lessons from the Great Depression is Part V in our ongoing series:
*A story from a lawyers perspective highlighting the societal impacts of foreclosures. Many things are eerily similar to what we’re currently entering into.
2. Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.
*With the current corruption on Wall Street and shady rogue traders, you’ve to wonder when are good bankers going to step up to the plate?
3. Florida Housing 1920s Redux: History repeating in Florida and Lessons from the Roaring 20s.
*Looking four years into the future from the infamous 1929 stock market crash. Mortgage bailout plans look very similar to things we did almost a century ago.
Business Devours Its Young
“As I was walking up the street from my office the other evening, young Norcross fell into step with me. Norcross is a minor executive in the local office of a large manufacturing concern. From my causal acquaintance with him I had considered him generally good-natured; but tonight he was clearly in a black mood.
“I’m sore,” he burst out, nearly before I had time to greet him. “I’m good and sore. I’ve just had my third salary cut in three years.”
Thereupon, as if under an overpowering compulsion to unburden himself to the first sympathetic listener, Norcross poured forth his story. He’d been engaged by his company in 1924, at a salary which seemed to him very low, but which he was willing to accept in view of the company’s assurance that it was merely provisional and that if he did satisfactory work he would be “in line for an early raise.” He did satisfactory work; the proof of this, he told me, lay in the fact that his duties and responsibilities were steadily and rapidly enlarged. The promised increase in salary, however, was long deferred; there were always reasons, it seemed, why a change in the budget of his department was “impracticable at the moment.” He was given a small raise in 1927 and another in 1929, but by no means what he’d been led to expect. Meanwhile he’d slaved hard, working till six or seven night after night and taking work home with him; he had not simply done the duties which were set for him, but had genuinely devoted himself to the company’s interests. Again and again he and the other employees had been told that if they redoubled their efforts “they all would prosper”; and always he had felt that a substantially bigger salary was just over the top of the next hill. “They stated there was a promising future for me there, and I was easy enough to believe them.”
Then came the depression and three big salary cuts - though the company was still managing to pay its dividends. “Now I’m getting twelve per cent less than when I started in 1924,” exploded Norcross, “though I’m doing nearly twice as much work as I did then, and I know I’m worth three times as much. And at that,” he added savagely, “I suppose I’m luck to be there at all - they’ve thrown three whole departments out the window in the past eighteen months.
“Don’ misunderstand me. It’s not being hard up that gripes me, though I’ve had to borrow to pay my insurance premium this month, and that’s no fun. What really hurts is realizing that I’ve been played for a sucker, right from the start. That stuff about loyalty to the company was just so much applesauce - and I swallowed it. I kept on swallowing it even when my raise was held off with lame excuses. I guess you would have, too, if you’d heard old Thompson talk in our pep-meetings. Now I see it all for what it was - a skin game. I’ve been gypped. It’s perfectly clear to me now what the policy of pretty almost each company is: Hire them cheap, keep them in line with soft speak, tell them they’re partners in a great enterprise, and then when the enterprise needs a little cash and you’ve them at your mercy, forget all the partnership stuff and soak them. Of course Thompson has me by the short hair now, because he knows I don’t dare get out, jobs being as scarce as they are this winter. But what wouldn’t I give to wade right into his oak-paneled office and tell him what I think of him! Believe me, it would singe the hair off his head.”
Couple of things here. What we’re seeing with GM is only one example of the above company tightening and protection of dividends at the sake of workers. There is a great divide in this country. From the top 5 percent and the other 95 percent. I remember a pep-talk in our real estate office and how a running tally was kept on a white erase board. Everyone thought the office had loyalty to them and now, as they’re cutting back many now find themselves finding other work. In fact, this is a great gig for those receiving monthly membership dues. Many broker offices hire agents and don’t pay them a nickel since they run absolutely on commission. They split the profit with you. All those signs “of prices always go up!” and “sell them fast!” can make someone leave swiftly if they don’t believe the hype. Where are all those touting real estate as the place to make millions overnight? They’re fad sellers and how many of those were out there touting the housing market and now are hidden in the shadows? No apologies for creating the new assembly line of the century; a fleet of brokers, agents, Wall Street banks, and builders that invested this entire belief that housing was somehow the way to eternal wealth. Now we’ve sold out our manufacturing base and even our gambling in houses is coming to an end and we are faced with the reality that we need to retool our economy or face having foreign nations purchase up our banks and most important national interests. The article continues:
“Even during the boom years there were many storms upon the seas of business, and men and women who had tied up their hopes with corporations which employed them were constantly being betrayed by harsh circumstances. But not until the depression was there a wholesale breakdown of the structure of faith. During the past three years the number of Norcrosses and Smiths has multiplied many times.
Since 1929 they - and executives too - have had to face, however unwillingly, a hard fact: that as business is now generally organized, when earnings fall off the employees are the first to suffer. The president of the Gadget Manufacturing Corporation sees that the estimated earnings of his company for the month are sixty thousand dollars less than in the corresponding month of the last year; and whatever he might think about the personal fortunes of Norcross and Smith, his cold business sense tells him that, according to the principles now accepted in the business world, his first duty is tot protect the return on the company’s bonded indebtedness and its position with the banks, his second duty is to protect its preferred dividends, his third duty is to protect its common dividends, and not until all these duties have been discharged might the men and women in the office or the factory be taken into consideration. Unless he is a particularly conscientious executive, he’s activated also by a natural selfish motive: the motive to “make a good showing” and thus maintain his own reputation as a canny business manager. If he shows his directors a statement of declining earnings, they might begin to wonder if he’s awake to the emergency. They’ll want to see the missing sixty thousand dollars made up.”
We need only look at the current CEOs and titans of industry and their severance packages to see how well we compensate people that push financial products that have financially crippled our economy and have diverted resources from more productive measures. What are these measures? Well I’m certain we’ve the ability to find something more useful then selling each other houses ad infinitum. Yet the above shows that massive disconnect from Wall Street to Main Street. Even now with the current bailout speaks, they are not looking out for homeowners in middle America who have lost their jobs and are falling behind on modest mortgages but want to bailout the religion of housing greed with those who took out jumbo mortgages on the pretense that housing always goes up. There is no money to be made on helping someone that’s behind on a $90,000 mortgage. But someone with a $1 million mortgage? The current housing oversight arm OFHEO has such a small and pittance budget that of course they’re setup to fail. Now these hands-off banks want corporate welfare from the government in bailing out their stupid decade long investments. Then we call up Washington. For all those that think somehow government regulation at its most basic level is socialism, these red herrings were thrown out in the 1930s as well:
“I have heard it predicted that this embitterment will drive disappointed employees into the ranks of the communist and socialists; that they’ll resolve that “the capitalists must be kicked off the back of labor,” and off the backs, as well, of the lesser executives and other office workers. So far there’s no sign of such a change, and there seems to be tiny immediate prospect of it. An observant employer whose company was forced to put through three drastic economy measures in 1931 - slicing salaries and twice dropping considerable bodies of employees - told me that each of these measures visibly hurt the morale of the office for a week or ten days, but that after an interval the staff appeared to work with as keen an eye for the company’s advantage as before. “The capacity for loyalty and for hope is so strong in most of us,” this employer told me, “that it will survive almost any number of shocks. I’ll wager that even your friend Smith, if he gets a new job and business picks up, will pretty soon forget everything he said about refusing to have his leg pulled; he’ll be putting his back into his work as if the success of the company were the most important thing in life to him.”
The important consideration is that we’ll manage with the credit crunch. The problem we are facing is one of conspicuous consumption. Many Americans being addicted to credit for their lifetimes have a fear of cutting down because an unknown world awaits them. We have survived embattled times. In fact, after the Great Depression the greatest generation emerged. Will this greatest generation step up and usher in a path for the younger generations to have a chance for the future or will they only look out for themselves? This question will come up in the next few years and we might begin seeing the tinge of generational warfare taking seed. Unless younger workers perceive a fair shake in the future they will resent what is going on. How can it be that a young professional couple cannot afford a home when only a few decades ago one blue collar wage earner was able to buy a modest home? How can it be that younger professionals pay a higher percentage into Social Security and are being told it won’t be there for them when they retire? The buck is now stopping and we’ve hard choices to make. No longer can we push aside these issues simply because they are third rails in politics. These issues will force many hard decisions. Let us now look at the final portion of the article:
“The moral argument is as strong as the economic. Let us consider the man who is being paid a $5,000 salary by his employers as representing a human investment of $100,000 earning a five per cent return. Balance this man, his hopes and fears, his family, his responsibilities, his children’s education, his position in the community, against a common-stock investment in the company of $100,000, likewise earning a five per cent return. Suppose we’ve to decide which of these investments shall be penalized by reducing its return from five per cent to four, or to zero. Can there be any doubt that the investment in flesh and blood should be allowed to remain intact, that the social damage done by penalizing it is likely to be far greater than that done by penalizing the paper holding in common stock? Which investment is apt to be of paramount importance, financially, or spiritually, to the holder? Remember that it is the general practice among owners of common stock to diversify their holdings, and that usually they have other resources than their common stock, whereas in a majority of cases the employee’s whole career and all it represents to him are involved in his job, and the loss of it might immediately bring him and his wife and children to grips with poverty. I believe that in ninety-nine cases out of a hundred any fair-minded person who knew personally both the holder of common stock and the employee whose fate hung in the balance, and was able tot foresee just what the effect of an adverse decision would be upon each of them, would vote to let the stock-holder carry the immediate loss.”
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Related Posts:
■There will be Housing: How we’ve Returned to Selective Market Ignorance.
■The Menace of Mortgage Debts: Lessons from the Great Depression Series: Part IV: Where do we go After the Housing Crash?
Via [doctorhousingbubble.com] & [bloggingstocks.com]
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