By John Hines
Economist
The new economy ushered in by the nation’s financial crisis is developing a growing nation of haves and have-nots. Many of the have-nots are unemployed or under-employed. The foreclosure epidemic is delivering growth in homelessness as a side effect of the housing bust.
The homeless population is growing amid the wreckage of the financial crisis. Tent cities in dozens of communities stretch from Rhode Island across to California and nearly every major urban center in between. The crisis is getting so much local attention in the media that state governors are considering a special session to come up with solutions to deal with the problem.
The new economy that is emerging is more controlled and government regulated in efforts to contain the nature of unethical and corrupt practices in business markets that have been part of the fabric of the capitalistic system since its beginnings.
The wreckage left in the wake of the financial meltdown in 1873 has an eerie resemblance to the current meltdown. Giant Philadelphia banking empire Jay Cooke and Company went bankrupt. Nearly 100 railway companies expanding the country’s growth went bankrupt. The railroad boom provided the first major real estate boom in the nation’s history. Thousands of other banks failed and Main Street businesses closed in great numbers. The grinding recession eventually developed into panic and gross domestic production shrank for six years.
Historically the “New Economy” was an evolution of developed countries that grew from the industrial and manufacturing era into being a service based economy produced by globalization. Eventually investors looking for higher returns invested in U.S. based securities and the real estate boom of the 1990’s was born. The greed on Wall Street led to panic once again. History has a way of repeating itself.
After the war against stagflation was won in the 1980’s, a growing economy emerged with lower taxes. The growth fueled more consumer spending on everything from domestic goods to higher risk investments like stocks, bonds and real estate. Millions of investors or wannabe investors profited before the housing market crashed.
The new economy will not only be more heavily regulated than at any other time in our lifetimes, but it will hand out the highest penalties in history for those it catches swindling society. Insider traders on Wall Street will be handed multi-year sentences to serve in prison. Mortgage brokers who assist borrowers in defrauding lenders will not only lose their licenses but will be sent to prison on first offenses.
Home buyers will be increasingly required to support income, come up with larger and larger down payments and have stronger and stronger credit histories. The increased banking qualification standards will last until government regulators feel that markets are becoming more balanced, and then lower standards will apply. Real estate markets will be fired up again and appreciation will resume on a broad scale.
Policy makers in Washington, D.C. are in full realization that the system got out of control and everyone will eventually pay for the ills of a society gone manic in higher taxes.
The growth of smaller towns across the country is evidence enough that many people are sick and tired of higher crime in more urban areas and corruption in business. The excesses of CEO’s and corporate boards are forcing the government to take charge. The masses are afoot with Tea-parties, the first sign of citizens’ revolt.
Take Stowe, Vermont for example. Stowe is a small New England resort town, attracting vacation home buyers for its rich winter wonderland.
But even in small Stowe, population 4339, where winter tourists are drawn to the Stowe Mountain Ski area, the economy is reeling from the downturn in real estate. The population of haves and have-nots is abundantly clear in Stowe. The resort market depended on New York and Boston financial executives to fuel its booming resort market. Now foreclosures are climbing amid the economic turmoil with disastrous consequences for many of those who bought second homes. Hammered by the downturn on Wall Street and in housing, even many of the haves in Stowe are turning into have-nots.
John Hines is an Economist who works and writes for Housing Predictor.