Smart Economy

The next debt crisis -commercal mortgage market set to collapse in North America in 2009-2010

Two weeks ago, I mentioned that about a dozen financial bubbles are about to burst.

Here's a good reliable leading economic proxy indicator that doesn't get enough credit. I can guess when any market has topped out and is set to collapse, when late night TV hucksters try to sucker in the next group of suckers, the unwitting general public to invest. Six months ago, it was the stock market and day trading. Now it's commercial real estate--a "safe security" and "a sure-fire bet", according to the commentator. How can an investor lose or go wrong?

A Yahoo story  on Friday & an earlier mention in the Washington Post notes the following risks and sequence of collapsing domino's:

• "Black Friday's retail shoppers hunting for holiday bargains (in the USA) won't be enough to stave off what's likely to become the next economic crisis."
• "Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market."
• "Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages."
• ... a report this week about delinquent payments on two high-profile loans -- one for a California shopping center and the other for two Westin resorts in Arizona and South Carolina -- stirred fears about whether an era of rosy business projections and loose lending standards will, like the residential market, give way to missed mortgage payments and a tough refinancing environment."  
• "That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit."We're probably in the first inning of the commercial mortgage problem."
• "that's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch."
• "In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system."
• "Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year (in the USA), covering everything from office and condo complexes to hotels and malls. The retail outlook is particularly bad.Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won't have the money. [...] Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

Which US States could go bankrupt?

"California,New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this:

"With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.

"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything." That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

"The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

"One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received. "He's created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."  

Full Yahoo story...here and in Washington Post

Related Post- Opportunity Recognition in Difficult Times

Walter Derzko

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises

This 123 page working paper adds some interesting insights to the current debate. People say with conviction that the government won't let the auto industry go bankrupt or the bigger issue- not let the economy collaspe. Why not ? It's happened regularly for 8 centuries (see chart below) -Most people end up suffering tremendously, but a small percent become fabulously wealthy, if the can anticipate it and act on that foresight.

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises

Carmen M. Reinhart  University of Maryland- School of Public Affairs; National Bureau of Economic Research (NBER)

Kenneth Rogoff  Harvard University- Department of Economics; National Bureau of Economic Research (NBER)

 

February 2008 NBER Working Paper No. W13882

Abstract:     
This paper offers a panoramic analysis of the history of financial crises dating from England's fourteenth-century default to the current  United Statessub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that this time is different among policymakers and investors. A recent example of the this time is different syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

Walter Derzko

The next technology boom? delayed by a decade or two?

The chart below shows that many of the key inventions that lead to new industries in the 20th century were actually discovered in the 1920's before the crash. Due to the liquidy squeeze from the depression they did not fully hit the market two decades till after the war.

Will the next technology boom (nanotech biotech cleantech smart tech) be delayed because of this current financial crunch? 

Realted post Opportunity Recognition in Difficult Times

Walter Derzko

Gastric bypass surgery cures Type 2 diabetes

CTV News reported yesterday that doctors in Hamilton OntarioCanada are curing Type 2 diabetes with gastric bypass surgery

“Doctors in Canadaare taking part in a study to see if a surgery used to treat severe obesity may also help people with Type 2 diabetes.

Doctors believe that gastric bypass surgery may be the single most important advancement in the treatment of the chronic disease since the discovery of insulin."

 Dr Mehran Anvari from McMaster Universityand a surgeon and St Joseph’s Healthcare Center in Hamilton has been performing the surgery and running the study

Walter Derzko

What could this depression look like? Look back 135 years

As I noted  last week, the media, political analysts and TV commentators have been quick to compare our current economic conditions with the last  “Great Depression” in the USA from 1929-1943 a time that is still in the vivid memory of many survivors...They make compelling interview guests on TV or in print. I had a sense that this was not a fair comparision, but didn't have the research to back up my convictions.

It's harder to get first hand information from 140 years ago Everyone from the Real Great Depression of the 1870's is all dead

The Good News...Opportunties in a Recession/Depression ( see here)

The Bad News....2 decade long recession/depression/...why?

Now, Scott Reynolds Nelson,  a historian who has studied the  19th century says that the better comparison is actually the Depression of 1873. Writing in the Chronical of Higher Education, Neslon says:  The depression of 1929 is the wrong model for the current economic crisis.

(N.B.."The problem with history is that everyone who knows anything about it first hand is dead !" --Dave Barry)

No one seems to be asking the key question.How much bailout money is enough?  (No one knows) What if national bailout programs don't work to stimulate consumer spending? In the USA the tax rebate had little effect on halting the recession.

Most ordinary Americans and Canadians, who depend on a "job"  and who don't anticipate the coming difficult times, and make contingencies, will be adversely affected.--Walter Derzko

Nelson writes: “As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany’s inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls “the real Great Depression.” She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europefaced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United Statesin the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads —the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, “economic organization crumbled with some primeval upheaval.” Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms “tramp” and “bum,” both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York’s Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania’s coal fields in 1875, when masked workmen exchanged gunfire with the “Coal and Iron Police,” a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.

In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in [Eastern Europe], Russia and in [Russian controlled ] Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.

The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.

If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and  Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)

The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.

In the end, the Panic of 1873 demonstrated that the center of gravity for the world’s credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read."

Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin’ Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

Source: The Chronicle of Higher Education

UPDATE:  Nov 29, 2008  This time is different-A Panoramic view of 8 centuries of financial crisis

December 17, 2009 What a 2010's depression might look like ? Part 3 One year update, multiple, bubble trouble  http://smarteconomy.typepad.com/smart_economy/2009/12/what-a-2010s-depression-might-look-like-part-3-one-year-update.html

December 06, 2008; What a 2010's depression might look like?     http://smarteconomy.typepad.com/smart_economy/2008/12/what-a-2010s-depression-might-look-like.html

December 08, 2008; What a 2010's depression might look like (part 2) 20 more events to watch out for http://smarteconomy.typepad.com/smart_economy/2008/12/what-a-2010s-depression-might-look-like-part-2-20-more-events-to-watch-out-for.html

Walter Derzko,

Author of the soon-to-be published book- Opportunity 45 Scenarios to Drive Your Business in Challenging Times, published by J. Wiley and Sons

ISBN13: 978-0-470-73761-3

ISBN10: 0-470-73761-1

Follow the money trail

Financial crisis often present once in a lifetime opportunities for opportunity savvy individuals. ..the trouble is that it’s often hard to follow the money trail

Middle East petro-dollars should be one target to focus on. Sovereign wealth funds in the Gulf ( Kuwait, Qatar, Dubai and Abu Dhabi) are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City (London) and on Wall Street.

Dubai International Capital (DIC) is concentrating on emerging markets and safer long term infrastructure projects. See Times in the UK

 

I’d also track individuals like Billionaire investor  George Soros, who has long warned the world of a coming depression. He's strategically investing in energy security related industries i.e 3d & 4^th generation biofuels (not corn ethanol) and that non-sexy but essential commodity for the USA--coal  George Soros and others -Citadel Investment Group LLC and T. Rowe Price Group Inc. are snapping up coal mining shares, taking advantage of the cheapest valuations in five years as demand for electricity rises.  Soros bought 2.9 million Arch Coal Inc. shares last quarter for a 2 percent stake in the second-largest U.S. coal producer, according to  filings with the Securities and Exchange Commission.

 

Walter Derzko

The perfect depression causing storm-4 intersecting / reinforcing long term trends converging over next 10 years

The Coming Great Depression: 4 Intersecting/Reinforcing Trends

Long time Smart Economy Blog readers will recognize that we've covered two of the four long term cycles listed by Charles Hugh Smith below in great detail-1) the Peak Oil Extraction/Depletion cycle and 2) the dozen or so credit bubbles that are yet to burst in the Credit Expansion/Contraction Cycle.

Smith proposes two more cycles that will add to the pain and length of this recession/depresion-3) the 80 year generation cycle that ends in war or conflict (corresponds nicely with the 22 year sun spot /global cooling cycle; also see video US government has 500,000 coffins on order)and 4) the +100  year price inflation/wage stagnation cyle (as we shift from a higher paying worker class economy to a generally lower paying service class)

Charles Hugh Smith offers the following justification for the current recession/depression on his blog today

1. Peak oil, or the depletion cycle/end-game of the global economy's complete dependence on inexpensive, readily available petroleum/fossil fuels.
2. The cycle of credit expansion and contraction (approximately 60-70 years), which is now beginning the transition from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression.
3. The generational cycle (4 generations or approximately 80 years) of American history which leads to nation-changing social, political and economic upheaval. (The American Revolution: 1781 +80 years = Civil War, 1861 +80 years = 1941, World War II + 80 years = 2021)
4. The 100+ year cycle of price inflation and stagnation of wages' purchasing-power which began around 1901 is now reaching the final stage of widespread turmoil, shortages, famine, war, conflict and crisis.

Spotting in-house innovators and helping them flourish- Four Seasons Hotel and Resorts

I was part of a group from the Martin Prosperity Institute (MPI) at the University of Toronto, that had the opportunity & pleasure to tour the head office and the Toronto flag ship hotel on Avenue Road of the Four Seasons Hotel and Resort chain. I always like to see how a business functions behind the scenes.

Four Seasons is rated as one of the best employers in Canada and it shows. Both the president and COO Kathleen Taylor and  VP Ellen Du Bellay, were quite open and candid about their challenges, mistakes (far and few in between) and successes (more numerous). It was stressed several times that they hire for attitude and train for skills. Rotations from hotel to hotel and country to country for middle managers are encouraged and this adds to the diversity of ideas and sharing of best practices from around the world. They have the lowest staff turnover rate in the hotel industry and the best break even-occupancy rates for luxury hotels. 

During our morning-long meetings with senior management, middle management and front line hotel staff, many people rattled off industry-first practices (best practices) that were invented and fostered at Four Seasons. One manager estimated that the return rate of guests for Toronto is about 30-40% , which should help Four Season’s weather the current financial slowdown better then other hotel chains.

In general, service class and creative class do better in downturns then the worker class that has fewer options, according to Richard Florida.

Just like Ford in Brazil, Four Seasons has a common cafeteria at head office where all employees eat and interact discussing ideas and challenges.

At the end of the hotel tour, when we were walking through housekeeping, one person in our group asked. What does housekeeping do with all the used soap and shampoos what are left in bathrooms every day? Without a moment of hesitation, one of the housekeeping staff who overheard  the question, proudly volunteered the answer…I can answer  that--we donate it to homeless shelters in Toronto  Kudos to Four Seasons for promoting a culture of innovation that includes all staff and not just managers

The current issue of Harvard Business Review has an article called How to spot innovators and help them flourish (hat tip to Gray Hammond for alerting us)

Corporate Americabemoans a lack of innovative talent, but it methodically smothers creative spark, say the leadership consultants who wrote this paper. "Even when stellar external talent comes in, it is frequently drawn into the same anti-innovation culture that has been squelching internal talent," they write. Their research at Reuters, Pitney Bowes, Visa and other companies that foster creativity well suggests ways to identify true innovators and nurture their genius

As our economy increases the proportion of creative class workers and service class workers, we have to pay attention to a new set of forward-looking anticipatory skills and not just hindsight skills such as problem solving. These include sense-making, opportunity recognition, and overtly teaching lateral and critical thinking skills.

Not your normal recession in the West -an ongoing Bailout Economy?

People have long assumed that it's just the developed world that always bails out  or lends aid to the developing world. Are we now seeing the start of a reversal ? (Think of all that money -all those trillions of petrodollars sloshing around in Sovereign Wealth Funds)

Local business people in Rochester Minnesota-the home of the world famed Mayo Clinic are pleased after the recent visit of the Saudi Royal family, who left an estimated $1.5 million in the  local economy. The Saudi Arabian King and his sisters were at the Mayo for a checkup and  treatment at the renowned medical clinic. ..( do I smell an opportunity window here--a Mayo Clinic franchise?)

It's also interesting  that at the end of the  Asia Pacific Economic Cooperation  (APEC) summit, the president of Peru predicted the the current world-wide slowdown/recession/depression will bottom out in 18 months ie in 2010. Most presidents and prime minsters have resisted to publicly state a timeline on the recession.

That may be good news for the laid-off auto worker in Windsor Ontario who on the news last night said that she is fully expecting to get her high paid job back at the local auto plant...(with benefits and pension -that are  much higher than Asian autoworkers get ) Now juxtapose that conviction with the sentiment of the USA auto consumer, who is thinking...."if I can afford a new car, which one will be cheaper in price and more reliable in the long run-a US built one or a foreign one?"

But Ben Stein, writing in the New York Times last Friday has a different take on the crisis and he asks -What if a Slowdown Is a Never-Ending Story? (in line with my scenario of a prolonged triple drop recession)

"I am endlessly charmed by chatter about when this slowdown/recession will end. Will it be late 2009? Maybe early 2010? Just a few days ago, a man stopped me at a party and asked: “Are we in the fifth inning? The fourth inning?” I am charmed by these comments and questions because they assume a fact not in evidence: that the slowdown/correction/recession will end within a short time — or even within a measurable time.

But this does not look like a typical recession.

A typical recession is brought on by Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.

Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus. That was because normal credit mechanisms were working.

 This time it’s different. Or, because that is a dangerous phrase, let me say that maybe this time it’s different.

The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.

 The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.

In this situation, the nation faces a real peril: we could reach a state of long-term equilibrium — as economists say — well below full employment. This condition had been thought by classical economists to be impossible to reach. But the Depression taught us that if there is enough fear in the economy, lenders will not lend and economic activity will continue indefinitely at a level consistent with serious recession or even depression.

[...]

We should be terrified by this prospect. It would mean real suffering for tens of millions of people in  America— maybe billions worldwide."

Is the West morphing into an economy of two polar extremes?  1) the Bail out economy,well at least until the government runs out of money defaulting on Treasury debt --bonds owned by foreigners or 2) at the other end, a society  where every person has to fend for themselves -creating the "company of one" economy- I keep wondering about that former autoworker and single mother of two  in Windsor and whether she will be able to cope in one camp or the other?

There is one question that the media is too naive to ask and the politicians to scared to answer-what happens  if the bail outs don't work? No-strings-attached bailouts can be misused--Christmas bonuses for Sr banking execs or for banks to continue to do currency speculation instead of lending the money to businesses and people who need it

Why is Ford & GM booming in Brazil & bankrupt in the USA?

Guess which county has the most advanced Ford assembly plant in the world?

 

.... USA? wrong;

 

.... Asia? Guess again;

 

....EU? Sorry wrong again.

 

According to the 2007 video below, it’s in Camacari, Brazil which opened in 2001.

 

It can produce 5 different vehical platforms on the same assmbly line. Most suppliers have their own sub-assembly lines inside the Ford plant. According to the Detroit News:

"Ford sources said it is the sort of plant the company wants in the United States, were it not for the United Auto Workers, which has historically opposed such extensive supplier integration on the factory floor."

All staff wear the same uniforms (managers and production line staff alike) and they all eat at the same cafeteria. Everyone is encouraged to discuss ideas and problems during lunch. The same sort of team spirit is fostered at Four Seasons Hotel and Resorts head office,  which I will visit on Monday  (more on innovations at Four Seasons Hotel in a future post)

 

I got this email that’s been circulating on the internet (hat tip to Marko Yanishevsky at NRC, Ottawa)

"This is a video of a new Ford plant in  Brazil. One look at this and you will be able to tell why there will probably never be another Ford assembly plant  built in the  USA. It will also point out why more assembly plants will go offshore. The UAW opposes the almost fully automated assembly plants because this would eliminate some jobs even though a better built and less costly car could be produced.

The UAW wages are the highest in the world. CNN reported last night that UAW Ford and GM assembly workers make an average of $73.00 US (full package). Honda and Toyota workers make $48.00 US. Between the UAW and the Big 3 executives, it's no wonder the US auto industry is in dire straight.....and…… pay attention to the last few words in the video.  It says a lot!"        

 

A must see video  and special report-why Ford and GM prospering in Brazil

Walter Derzko