In Michael Lewis’ disturbing but illuminating book unearthing the machinations behind the global financial crisis, The Big Short, one of the Wall Street investors enmeshed in creating the web of sub-prime mortgage-backed securities and related derivatives reports on how he knew the bubble was going to burst. It was when he (somehow!!) learned from a Las Vegas prostitute that she owned five homes, financed with sub-prime ARMs, ready to implode.
As Washington (hopefully) gets financial reform done to restrain the “animal spirits” (to borrow one of Alan Greenspan’s favorite phrases) of investors and borrowers alike, I was reminded of the economic havoc wreaked by this orgy of incestuous investing at a summit sponsored by Brookings and the Obama administration on the future of auto-impacted communities.
Local mayors, business, labor leaders, civic, and philanthropic leaders--along with governors and members of Congress from auto communities--took stock of the damage, their own and the administration’s efforts to repair it, and what needs to be done next to aid the metros of auto country to accelerate their recovery.
To say the hard-hit auto communities of Michigan, Ohio, Indiana and the rest of the industrial Midwest did less financial sleeping around than the real estate bubble communities of Vegas, Florida, and the coasts is an understatement. The workers in these communities were too busy furiously trying to retool their own skills and industries in the face of job loss and restructuring in autos and manufacturing than to try and finance five homes with bad loans. Then the global financial crisis hit them with a second punch to the gut—effectively destroying credit-dependent markets for the things they made (autos and the expensive parts that go into them).
The biggest tragedy is that these Wall Streets “markets” for synthetic mortgage-backed securities and credit-default swaps had absolutely nothing to do with what we want financial markets to do well—put money efficiently into economic growth generating investment: plants, equipment, new technologies, new goods and services. When credit markets “froze” thanks to the collapse of these financial “products”—it put a deep-freeze on the work of those in auto communities—trying to make and invent new real products.
At the summit I talked Sue Osborne, the mayor of my former hometown of Fenton, Michigan, a solidly blue collar bedroom community 15 miles south of Flint--a community which should be cheered by the announcement of a new federal plan to help clean up 90 former GM industrial sites, and position them for new development; including the massive and iconic Buick City complex in Flint.
Meanwhile though, auto suppliers and auto-related firms are still reeling from the effective freeze on lending by banks to anything auto-related--even to finance their move to clean energy components, medical devices, or other new product lines. Mayor Osborne told me Creative Foam, a Fenton auto supply firm, and a leading corporate citizen of 40 years, can’t get the loans to finance their retooling to make non-auto products—and was at risk of going out of business.
Larry Summers, head of the National Economic Council, noted in his remarks that loosening credit is one of the basic building blocks for a manufacturing revival and reiterated a call for Congress to pass a proposal modeled on a Michigan program to provide loan guarantees for manufacturers looking to diversify their product lines.
On the ground in Fenton, Flint, Kokomo, and Mansfield and the other communities represented at the summit the economic survival clock is ticking, like a real-life version of “24.” Let’s hope we can see more action, and a happy ending.