Rust Belt Blues

Jane and I, about a week ago, were having a disagreement about the year our house in Rochester’s 19th Ward had been built.  We bought the house–our first–for $48,000 in 1984 and sold it for around $52,000 in 1989.  So we hopped on to Zillo and discovered the house was built in 1912.  More incredibly, we discovered it would currently sell for $55,000.  Thirty years with almost no appreciation of value.

When we got to Rochester in 1984, Kodak employed almost 200,000 people.  When we left eight years later to move to North Carolina, Kodak employed slightly over 50,000 people in the city.  This, mind you, is before the digital camera revolution that Kodak allegedly missed and which is usually cited for its demise.

But the real story, I am convinced, of the destruction of Kodak has to do with the hostile takeover efforts against the company in the 1986-1987 years.  I have just finished reading Ron Chernow’s House of Morgan, a history of the 150 years of the Morgan financial companies, a history that ends in 1992.  Chernow is especially good on the rise of finance capital in the 1970s and 80s.  It’s a tragic tale with multiple villains to blame.  Certainly, the oil crisis and the inevitable (?) end of post-World War II American economic dominance are key factors.  But so is the failure of regulation to keep up with shifting banking practices.  By 1980, the banks had learned how to skirt the rail-guards put in place during the Depression.  Or maybe it would be more accurate to say that the banks and investment firms devised strategies and financial instruments that would allow them to create unregulated markets.  The novelties created would not be regulated because the regulations had been crafted to deal with a differently structured financial landscape.

Chief among the “innovations” was the leveraged buyout.  Those who succeeded in their hostile take-over would come into their new ownership saddled with debt.  Or the targeted firm, in fighting off the hostile bid, also had a huge new debt load.  In either case, corporations in the periods after these attempted or successful take-overs were in nine cases out of ten in worse economic condition than before hand.  The only winners were the banks that collected huge fees for crafting these “deals” and, in some cases, shareholders (if they had the sense to dump those shares almost immediately after the deal was done).  But the companies themselves were stripped of assets to ward off the take-over or to pay the costs of it, with the result of harming their ability to actually do business–or, of course, to actually employ people and make a product to bring to market.

Kodak was on life support by 1992.  Again, this is well before the digital camera revolution.

M&A (mergers and acquisitions) remains the hottest game on Wall Street some thirty years later.  Admittedly, the housing bubble (with its repackaged mortgage securities) of the 2000s was not driven by stock raids.  But it was a similar case of inflating value for short-term gains while inviting investors (especially institutional investors like mutual funds and pension funds) to put their money on stocks or bonds very unlikely to retain any value in the medium to long range.

Could America’s blue collar jobs have been saved by reining in the excesses of financial capital?  I am afraid that I don’t think so.  Automation and global competition, along with bad strategic thinking, are more to blame. (Germany provides an example of better strategic thinking; but we must remember that Germany secured the continued health of its manufacturing sector by forcing workers to take pay cuts in the early 2000s, and by exploiting the EU to secure a market for its goods.  The resulting imbalances in the EU have not proved sustainable–or, at least to date, fixable.)

America actually produces almost as many manufactured goods in 2016 as it did in 1980.  It just requires far fewer workers to produce those goods.  But that still doesn’t mean that America’s workers–and the companies that employed them–should have been stripped of all their assets as they became obsolete.  America’s rust belt was robbed blind, and nobody much noticed and, certainly, no one did anything to halt the thieves.

Now, of course, we are told that the victims of this crime are the ones who have put Trump in the White House.  But Wall Street’s response to his election has been very clear: they fully expect him to license exactly the kind of robbery that has been at the core of financial capital for the past 40 years.  We will have scandal and grift galore for the next five years, with a crash inevitably following in the next four to seven years.

Republicans always run the economy into the ground–or precipitate a Wall Street crisis.  We had the savings and loan disaster under Reagan and the first Bush, and the housing bubble under the second Bush, while the Republicans presided over the madness of the 1920s.  Only Eisenhower is an exception to this rule.

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