Wednesday, January 20, 2010 1 comments ++[ CLICK TO COMMENT ]++

Consequences of the subprime mortgage bust

When wokers are laid off, it's very painful but, if you are a capitalist, you should accept it as an important element of capitalism. One of the beauties of a capitalist system is that the free market destroys useless and uneconomic industries and, hopefully, replaces them with more productive ones. This is not limited to uneconomic industries subsidized by short-term factors (such as government spending, fads in clothing, hype over some unknown useless product, and the like); this also means that established industries that used to thrive once may need to be done away with. It's painful for anyone caught in the cross-hairs but that's the reality and society is better off in the long run.

A lot of people on the left—I consider myself left-leaning—don't understand this. They see companies laying off people and think it is some greedy executive or owner trying to make more money. Well, in many cases, the capitalists themselves are losing a fortune and it comes down to survival versus bankruptcy.

Such is the case with many financial services and real estate jobs in USA. Some booming industries, such as subprime mortgage lending, will decline and not recover to prior levels for decades. I ran across a story in The Wall Street Journal, describing the suffering of some workers who depended on those industries:

Tony Redman used to earn $100,000 a year from his sales and technology job at a Goldman Sachs Group Inc. subprime-loan unit called Senderra Funding LLC. But he hasn't had a steady paycheck since being laid off in June, and a shrinking savings account will force him to swallow his pride if he doesn't land a new job soon.

"You enter this job market and you get slapped upside the head," says Mr. Redman, 37 years old. Earlier this month, he drove to an unemployment office from the townhouse where he lives with his wife and two children, but couldn't bring himself to collect benefits from the government. "In a month, I'll stand in line," he says.

The downsized ambitions and desperate job hunting that grip some former Goldman employees here are a sharp contrast to the company's expected announcement Thursday of record-high profits for 2009. That means big bonuses for most traders, investment bankers and other workers at Goldman, traditionally among the highest-paid on Wall Street.

Fort Mill, S.C., officials had hoped the mortgage industry could replace lost textile jobs. But subprime job cuts contributed to a shortfall in property and sales taxes that is forcing local leaders to make painful sacrifices, including the delay of a new middle-school opening. Above, Massey, a stalled subdivision, in Fort Mill.

In Fort Mill, a city of 10,000 residents about 20 miles south of Charlotte, N.C., local leaders saw the subprime-mortgage industry as a way to help retool the economy from its withered roots in the textile industry. But more than 700 jobs at Senderra, HSBC Holdings PLC and other mortgage operations that popped up during the housing bubble have since disappeared or moved away.

Unemployment in Lancaster County, where Senderra got a tax break as a job-creation incentive, hit 18% in November, the latest month for which figures are available. The U.S. unemployment rate was 10% in December.

First of all, I would tell Tony Redman to go and collect unemployment insurance. The reason we have these plans is to help out people in situations like this. Redman also needs to realize that this has little to do with pride. This is an insurance system and he paid into the system so it's high right to collect it if he is eligible. I can see someone being reluctant with welfare but unemployment is a completely different thing. The fact that he earned a lot of money ($100k+) doesn't matter. He paid into it and if he wants, he should go and get it, especially since he has kids and the unemployment rate in that region is higher than national average.
Industries collapse and whether you are a worker or an investor, you need to accept it. It's like a (natural) forest fire that cleans out the dead trees. Fort Mill seems to have transitioned from a textiles into sub-prime mortgages and the lost mortgage-related jobs likely aren't coming back.
New jobs will have to be created and although my ideal scenario is not what is quoted below, it, nevertheless, shows how people adapt:

The same day, former Senderra executive Todd Knight scrambled to add more franchisees to his company that cleans retail stores and day-care centers. His new areas of expertise include stripping and waxing, restroom supplies and construction cleanup. Mr. Knight, 45, says he makes about $180,000 a year, or half his peak earnings during a 15-year mortgage career.

"I drive a pickup truck that says 'cleaning' on the side," says Mr. Knight, who left Senderra as its subprime business was slowing. "There were several months where I said: 'I'm cleaning toilets. I used to run 120 people in sales. What have I done here?'"

Running a cleaning company may not be what everyone wants to do but earning $180k in a likely low-cost-of-living region near Charlotte, South Carolina, sounds pretty good to me.

This example also shows the new reality for many: pay cuts. Tood Knight, the owner of the cleaning company, says he is making half what he used to make and that kind of shows what can happen. This is nothing new and workers in former-bubble industries should expect that. People who were in the tehcnology industry in the late 90's and early 2000's saw huge paycuts after the dot-com bust.

Let's face it. Not only did the subprime mortgage industry not help America but I'm not sure if those skills were really worth $100k+ (senior sales, I could see, but not sure about others.) I'm not trying to be mean or single out anyone but America is probably better off if people earning $100k+ were in some other industry. Yes, even the cleaning company is a better idea because it may actually lower costs or improve productivity for those surviving companies that use it!

The suffering of these human faces have an impact on their society. In particular, tax revenue will decline and this will severely strain their governments:

The job cuts contributed to a shortfall in property and sales taxes that is forcing local leaders to make painful sacrifices, including the delay of a new middle-school opening. "Everybody is suffering," says Fort Mill school superintendent Keith Callicutt. Mayor Danny P. Funderburk's office gets phone calls from residents asking if he can do anything to restart heat that has been shut off because they couldn't pay the bills.

Anyone following real-estate-oriented blogs like Calculated Risk would be familiar with what is described above. No one thinks about it but the declining tax collections can negatively impact public schools. In some cases, it is also possible that things like road maintenance, snow cleaning, garbage collection, and so on, may be cut.

The biggest economic story of my younger life (ignoring personal events) will be the subprime mortgage bust. Canada has been spared any real estate problems but it is kind of sad to see Americans down south suffer. The story quoted above illustrates the consequences of the subprime bust on the workers and society at large.


1 Response to Consequences of the subprime mortgage bust

January 21, 2010 at 9:43 AM


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