Remember how the housing market collapse shocked the world? There we were, chugging along, seemingly ok until -- boom! Economic implosion.
In the first few years post-bomb most people were too busy cleaning up the carnage to figure out what the hell happened. Lucky for us, the author Michael Lewis was working behind the scenes to educate the American public on who we could blame, and why. His 2010 book, "The Big Short: Inside the Doomsday Machine", should be required reading for anyone with debt of any kind (so pretty much everybody). Not into reading about debt and finances? The 2015 movie -- starring Ryan Gosling, Steve Carell, Brad Pitt, and a host of other Hollywood A-listers -- is just as informative, and quite frankly entertaining (in the moments you forget this actually happened).
I have watched the movie no less than twenty times. Why? Is this some sort of revenge-seeking mission? Not exactly. True, I was laid off twice in two years as the economy spiraled downward, but I ultimately came out ok. I am digging less to identify who to blame than to understand the foundational cracks we ignored in the first place -- and the factors enabling that behavior.
Cracks in the mortgage foundation included things like risky lending practices, adjustable-rate mortgages, Collateralized Debt Obligations (CDO's), low-doc loans and other factors. An example of a factor enabling the ignorance of a nation includes the failure of ratings agencies such as Moody's to lower ratings on bonds they knew were junk. On the surface? The housing market looked great. But the foundation? The economy was built up on Jenga blocks waiting to tumble. (Ryan Gosling explains this in the movie.)
Enough about the past, right? We're doing phenomenally now: economic indicators say "go". Record low unemployment, a booming stock market -- even wages have begun to tick up. The economy appears steady, the horizon bright -- a gleaming productivity machine.
But something is very wrong here. While the market continues its golden roar, the states and municipalities that support us are running out of money.
A Wall Street Journal article titled "Many States are Likely Unprepared for Next Downturn" explains that revenues -- which are largely dependent on taxes -- haven’t fully recovered from the last recession, while pensions and Medicaid costs mount.
In fact, 21 states have reduced rainy day funds significantly since 2008. North Dakota, for instance, had only 1.5% of its expenditures set aside in 2017, down from 16.6% in 2008; New Jersey depleted its well in 2009 and has yet to begin refilling it.
What does this mean? Let's take New York as an example:
"Last week, New York State Comptroller Thomas DiNapoli warned that the state badly needed to replenish its reserves. New York will face budget shortfalls, reduced borrowing capacity and possible cuts to federal aid, he said in a report. 'Yet, there are no plans to add to our reserves, leaving the state with little cushion in the event of an economic downturn,' he said."
What is the plan to address money that simply isn't there?
"'It’s very important in our view that during the good times the states should be building up their fiscal resilience and that really stands out as an area that’s been lacking throughout this recovery,' said Gabriel Petek, managing director at S&P Global Ratings." (emphasis mine)
What will happen to the people when the economy takes a downturn? The answer is obvious: with no budget, no emergency fund, little hope of borrowing from a cash-strapped federal government, and -- perhaps most alarming of all -- no plan, it's time to bring out the hatchet. Unemployment and Medicaid claims will rise at the same time Boomers are retiring in droves, our consumer and student debt levels are at peak highs, and job automation kicks in, putting a strain on our systems it will take nothing short of a revolution to fix.
P.S. Could I find something more cheery to write about? Absolutely. But I am not in the business of building up hope on a faulty foundation. Let's accept the facts and make a better plan for the future.)