Saturday, February 07, 2009

What This Recession is About

In a prescient state of the state address in 2007, Governor Linda Lingle warned that the economy of Hawaii could not continue to be based on real estate speculation and land development -- but had to diversify into other industries and expertise. That speech was delivered at the very height of real estate speculation and land development and so that warning fell on deaf ears. Nobody could or wanted to believe that the days of flipping real estate could ever end -- or that the fantastic windfalls created from such deals, should be directed to develop other promising industries -- which Hawaii might be naturally positioned to take the lead in developing those technologies.

Nobody wanted to hear that the days of rapid wealth through real estate speculation and land development could ever end -- and if anything, one could parlay those profits into other even more highly leveraged equities on the world’s markets -- the institutions which provided the machinery for such profiteering in financing these deals.

So at first the actual deals started to slow because financing became tougher to pencil out at the higher levels of speculative profits -- and then the institutions that underwrote all the financings, collapsed on the weight of all that leverage built upon the belief that it could never end. But then, abruptly in September of 2008, it all became impossible to ignore, and the market values of the major financial institutions, evaporated along with the profits of their financing. All the speculative excesses had run their course -- and there was no more money to be made from the next, greater fool. The game was over and done.

All the other industries that had become subsidiary to the support of that primary speculation then no longer had a demand. The price of oil fell from a high of nearly $150 a barrel last summer, to the present $40, which is a decline of 75% for the basic material the world is made with.

Those most affected, were those who formerly profited greatly from this real estate speculation and land development, and their supportive industries. Those who were less involved in these speculations and enrichments suffered much less -- just as in the previous great speculation into investments of the new technology companies of the ‘90s ending in the bubble-bursting crash at the beginning of this century, known as the dot.com boom and bust.

But it was thought that by those who did not participate and profit from them that it should have been obvious that such speculations were not real -- because they were not into the realities of real estate, land development, and energy -- that were real and thus, could rightly and properly, only go up indefinitely. But that too would end -- exposing those who felt that their reality, was the only real one, and not like every other, only an illusion of the wishful thinking popular at that moment.

And so too, it predictably had to end -- and values had to be readjusted and recalibrated, and the new ones discovered and appreciated until one day they too would reach the next speculative excess.

The magnitude of this disruption and change in values, goes even deeper than simply real estate speculation and land development, because the lesser calamities are the passing also of the legacy institutions that have been supplanted from the previous great wave of technological development being fully realized, most notable of which has been the publishing industry and its media passing from the control of a few powerful and rich, to virtually anybody who learns the rudimentary skills to avail themselves of those formidable capacities.

That certainly must be an emerging theme -- of how great enterprises that have been incubating, refining and redefining for the first decade of the new millennium, are ready to challenge the old for the primacy of these times. It has become evermore and more obviously, a world of information and connectivity that makes many of the old values and limitations obsolete and moot. The old ways of doing things, are no longer necessary, and have also passed, along with the more obvious collapse of the old standards of value.

Quite obviously, despite all the talk about declines, disruptions and failures, society still largely works. Stores still sell just about anything one wants to buy, and the banking system still faithfully and accurately records and processes those transactions. So while the economy and society is stressed, there is no critical and widespread breakdown, no great riots and mass tortures and exterminations. If anything, the means for spreading such propaganda and hysteria, are being dismantled, while more people have direct access to the sources of information rather than being the exclusive province of only a few -- the rich and the powerful of old.

So one has to feel fairly optimistic of the future unfolding. The world is simply changing again and we have to readjust to those new realities.