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October 27
, 2008


A weblog about the politics and affairs of the old and glorious City of Albany, New York, USA. Articles written and disseminated from Albany's beautiful and historic South End by Daniel Van Riper. If you wish to make a response, have anything to add or would like to make an empty threat, please contact me.

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October 27, 2008

Watching The Financial Crisis

Here in the South End, the looming global recession
doesn’t look all that bad

I have to admit that this “worldwide financial meltdown” does not terrify me much.  For one thing, I don’t recall ever having engaged in trading derivatives or bad mortgages on the unregulated international corporate scam network, nor am I beholden to anyone who does.  More importantly, I don’t have any stocks.  Not one share, I’ll have you know.

You see, around fifteen years ago I managed to talk The Wife into cashing in our piddling 401ks filled with stocks, using the cash to invest in our South End neighborhood’s under priced real estate.  This, of course, was contrary to the advice of countless Experts Wearing Ties who were already proclaiming that the stock market was poised to go up forever and ever.  And more than a few people rolled their eyes and told me that we were crazy to buy property in a run-down undesirable urban neighborhood like our own.

Well, it took fifteen years but I ‘vet been proven right.  Our nation’s real and actual tangible wealth has been systematically sucked dry by the unregulated invisible international scammers.  The past month or so the somewhat regulated visible stock market is beginning to reflect this fact.  Meanwhile, my undesirable urban neighborhood has begun to look better and better to middle class suburbanites tired of working to maintain their SUVs.

Since too many people around me are affected by the collapse of the big money scams, I’ve been trying not to laugh or act obnoxious.  After all, my insulation from the fallout may turn out to be temporary.  Tomorrow I could be picking through dumpsters.

Despite my high mindedness, a few weeks ago while buying groceries at Honest Weight Coop on Central Avenue in Albany, I couldn’t help but act like a silly ass about the whole crisis.  I picked up a copy of the Daily Gazette which was blaring a scary headline:


I held the paper at chest level and walked up to various employees and regulars singing, “La la la, I don’t own any stocks, la, la, la...”  Honest Weight was the right place to behave like this.  Everyone I bothered smiled broadly.  It was also the right time, those folks in the store who owned piddling 401ks of their own had not yet received their quarterly statements. 

The South End of Albany has been experiencing a financial meltdown for years.  If you don’t believe me, then I suggest that you get into your car and drive around our backstreets between Morton and Second Avenues, and consider what you see outside your windshield.  While you observe the desolation, you should know that things have actually greatly improved in our part of town over the past year.

Take this much talked about sub-prime mortgage crisis, for example.  Decent working people didn’t suddenly start losing their homes this past September when the corporate media finally took notice.  Local and national banks have been pushing these loans onto the homeowners of the South End for years.  And the banks been taking homes away from honest working people for years.

Look at these two houses on a street off Second Avenue in the South End, for example:

Two houses on Second Avenue

Not too bad looking, right?  According to Second Avenue Neighborhood Association president Steve Winter, who lives around the corner, both of these houses are vacant due to foreclosure.  Both had separate owners who had subprime loans imposed upon them, and both properties are suspended in legal limbo.

“They’ve both had a lot put into them over the years,” Steve told me.  “But I’m worried, how long can they sit there like that before they become uninhabitable?  After a certain point everyone knows they’re vacant, and then they go downhill fast.”

Steve tells me that he recently counted 47 vacant houses on Second Avenue.  And, he also told me, almost everything along the Avenue is for sale, but no one is buying.  This sounds exactly like Morton Avenue during the 1990s, which is where and when The Wife and I bought our bargain priced properties.

What separates the working class from middle class people like me is the lack of a safety net.  Working people dominate the South End, when they lose their jobs or their health or make a financial mistake they’re homeless out on the street poor.  Our middle class safety nets may have become tenuous and full of holes, but at least we still have someplace to land.

It doesn’t look to me that the big financial crisis has made my South End neighbors any poorer, or made them lose their homes any faster.  What’s new is that I’m seeing my middle class friends are getting hurt.  They are not likely to go hungry, but their wallets have suddenly gotten a lot lighter.  And they have become very worried.

The Book
The Book

My friends Brad and Janet (I’m not using real names here) who live in Guilderland (yes, I have suburbanite friends) are followers of the financial advice of Vicki Robin and the late Joe Dominguez. The method is basically to slash unneccesary expenses and to invest the money instead, all the while maintaining the same standard of living. The plan worked fabulously for them and they were able to retire from their jobs when they were around 40 years old.

Janet told me the other day that their stock portfolio had lost about 40 percent of it’s value in the last month or so!  “We’re not worried,” Janet said.  Most of their assets, she said, are in federal T-bills, which lately yield crap but are as solid and as guaranteed of an investment as you can get.  So far.

Or my friend Alvin (another fictitious name) who lives in Albany and runs a small contracting business.  For years he’s been telling me how tired he is of working for a living, and how he’s going to make a killing in the stock market.  Well, at the beginning of this year he cleaned out his by now substantial bank account and took the plunge.

Talk about bad timing.  Alvin’s a smart guy, but when is the right time to gamble?  Today, tomorrow, yesterday?  For most of this year he closely monitored the daily ups and downs of the Dow Jones, it was practically all he ever wanted to talk about.  I admit that I learned from him quite a bit about how the stock market works, but his conversation had become, shall we say, predictable.

A few days after the first big stock market free-fall earlier this month, I asked him how his stocks were doing.  “Lousy,” he declared.  “I’m getting killed.”  He then found another topic of conversation.  He still tells me about his investments if I ask, but now he has other things to say.

Wielding the super power of hindsight, we can say that Alvin could have figured out ahead of time that his investment timing was bad by looking at the long term trends.  Check out this graph of the Dow Jones average over the last ten years:

Dow Jones

The graph starts on the left with October 1998 and ends on the right with the present day.  Note the big lump that starts in the middle of 2006, sorta kinda levels off and then suddenly drops like a rock in October of 2008.  That lump would be your infamous “housing bubble,” the bogus financial boom caused by the “deregulation” (decriminalization) of financial scamming.

Doesn’t that lump look kinda unnatural?  Alvin cleaned out his bank account and rolled the dice right about where the lump, the housing bubble, is about to drop.  But hey, why not?  All the Experts Wearing Ties in the corporate media were proclaiming this housing bubble a permanent condition.  Unending wealth creation!  Caused by finagling!  Thanks to decriminalization!

Our “rich friend” Betty (one more nom de plume) from Niskayuna came by our house the other night, a woman who could more properly be called upper middle class.  She and her family live quite well but relatively modestly. Some years ago she was fortunate to have come into a couple of sizable inheritances.  (Sure wish that would happen to me.)  Over the years she has carefully managed her assets and we’ve always considered her to be a minor millionaire.

Apartment Interior, Morton Avenue
Apartment Interior, Morton Avenue

Because of impending health problems among members of her family, she decided last year that she needed cash to prepare for the worst.  Since she did not want to sell her stocks, which would have been totally foolish, she engaged in some legal finagling.  Basically she gave herself some loans using her stocks as collateral, which is called raising cash “on margin.”  Her plan has been to pay these loans back to herself like any bank loan, thus preserving her principal.

This margin stuff is what caused the Great Depression 79 years ago, and it’s what is causing this current meltdown.  It means that people are creating money out of thin air, based on collateral that in turn was itself created out of thin air.  After a while there is so much thin air posing as money that nobody bothers to sweat and make real money any more. 

The real problems start when the collateral loses value, i.e. the stocks go down.  Then everybody who took out loans on margin has to find some real money to make up for the sudden disappearance of their collateral.  Unfortunately, there doesn’t seem to be enough real money to go around for these gamblers.

That’s why Franklin Roosevelt and the Democratic Congress of 1933 outlawed trading on margin of more than 5 per cent.  Any more became considered a form of fraud.  As a result, for many decades since then we have had only mild and short economic downturns.  That is, until buying on large margin was decriminalized in 1998.

Betty sat at our dining room table with The Wife’s laptop and studied her assets.  Eventually she let us know that she was close to running out of collateral to back her loans.  She was, she added, no longer a millionaire. If the stock market continues to drop in the coming weeks, she said, her portfolio may be completely wiped out.

None of these middle class friends that I’ve just mentioned are going to end up standing in line at the food pantry and be forced to listen to Jesus sermons at the mission in exchange for a bed.  That fate is reserved for some of my working class South End neighbors.  Happens to them all the time, during good times and bad.

But I am saddened and somewhat astonished at how many otherwise intelligent people, my middle class friends taking losses included, who don’t seem to understand the nature of wealth, what it is and where it comes from.  I’m not talking esoteric knowledge or rocket science here.  I’m talking common sense.

Wealth is created by work.  Someone has to grow food, extract minerals, cut trees and harvest fish.  Someone else has to take these resources and add value, that is, build houses, assemble computers or create art.  If somebody or other didn’t take the time and effort to do these things, then every one of us would be sitting around naked staring at rocks and eating grubs.

That Numbskull Milton Friedman
That Numbskull Milton Friedman

Pick an economist, any economist.  Adam Smith, Karl Marx, John Maynard Keynes, even that numbskull Milton Friedman.  Spend your precious days pawing through their writings and sooner or later you will find this obvious truth.  Of course you will, how could someone call him or her self an economist and not admit that work is the source of wealth?

Yet somehow we’ve come to replace our traditional wealth-creating work ethic with the bizarre notion that the only way to get rich is to finagle existing wealth.  In other words, the only way to add value is to shift wealth around, which somehow magically creates new wealth out of... nothing.  Thin air.  

That, folks, is the reason why The Wife and I cashed in our crummy 401ks in the early 1990s and used the cash for downpayments on undesirable properties along Morton Avenue.  At the time, Morton was considered one of the worst streets in the City.  For a number of reasons a lot has changed for the better along our street since then.  I’m happy to say that I’ve done my part to help.

Every once in a while I look around my neighborhood and admire my work.  There’s always so much more to do.  But I can honestly say, with my own two hands, by making these fine old run down buildings into decent places to live again, I’ve added value to my neighborhood.  I’ve created real and tangible wealth.

Upper Morton Avenue, Early Spring
Upper Morton Avenue, Early Spring

Now I’m hearing that Second Avenue is falling to ruin exactly like Morton Avenue was in the 1990s.  But all Second Avenue needs is few working people willing to buy up property along the avenue and create wealth with their own hands.  After all, the demand for housing in downtown Albany is wicked tremendous right now, and likely to get more intense.

So where are these few working people that Second Avenue needs so badly?  Is everybody sitting on their fat butts waiting for their investments to get big? Is everyone playing the stock market, waiting for someone else to do the real work?

There must be someone out there willing to create wealth in the South End.  There’s plenty of opportunity.  All you gotta do is work.

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Posted by: alfrednewman
Posted on: 10/29/2008

Great post. You nailed it right on the head. Its the creation of wealth.

Posted by: Common Sense
Posted on: 10/30/2008
Agreed, great post and good work.

There was one thing that all of your examples of people who've lost money in the financial markets have in common: they made rash moves without doing their homework.

Your friend in Niskayuna in particular absolutely amazed me -- and is a textbook example of why people who hit lotto jackpots and other windfalls often end up destitute. Honestly, anyone who isn't a Wall St. criminal with the ability to extort the US government who thinks that it's a good idea to live off of margin loans is an idiot. Period.

Unfortunately, I have some physical limitations that would make it difficult for me to do "hands on" work maintaining real property. (Mowing the lawn is unfortunately close to my limit) So my only option for growing my wealth is the financial markets.

Now I'm no Warren Buffet, but I have successfully managed a growing investment portfolio since approximately 1990. It involves real work -- I probably spend between 5-8 hours of serious research on the markets every week. By doing that, I managed to reduce my exposure to telecom and internet companies during the dot-com bust and the toxic financial sector today. This year, I expect to lose about 6-8%. But last year, I gained about 14%. My average return over 18 years is about 8%.

That said, I wish there were more people doing what you are doing, and congratulations on your success thus far.

Posted by: Dan Van Riper
Posted on: 10/31/2008

Thanks Common Sense, but I'm not willing to outright condemn folks who made mistakes which seemed reasonable at the time, but look foolish in retrospect.

My friend Betty has always managed her assets well. She made her mistake, as I pointed out in the article, because she was pushed by circumstance.

As for Alvin, I can assure you did his homework. His mistake was to follow the advice of the very people in the corporate media who wanted to steal his assets. I argued with him a lot. But who the hell am I, what do I know?

As for Brad and Janet, you will note that they covered their butts by having a conservative portfolio.

Posted by: Pasi Tartuaari
Posted on: 11/02/2008
Am I the only person who sees Albany actually benefiting from this financial crisis. Think about it from the eyes of a 27 year old recently married healthcare worker in NYC who grew up in Albany. I can't afford to live as well as most of my friends. Even worse are our friends who lost their jobs. We really have no place to go yet most of us have a background in healthcare and science, the two fields that actually have potential to grow.

Thing is why would I want to live in NYC, I mean I am expecting a kid in the future and I want to be able to give him/her the best of both worlds, an urban environment filled with diversity mixed without paying all of my money in rent in the upper east side.

Recently I brought a group of my friends up to Albany for a wedding. They were curious and drove around the area and were shocked at the layout of the city. I told them that they could easily buy a property here for under 200,000 a year and they would be the masters of their domain. I mentioned how a friend of mine bought an old brownstone in Troy ten years ago for 40,000 dollars and made it into a mansion of sorts for under 200,000. I also mentioned my friend is a civil servant making about $40,000 a year.

They thought about their future in the larger city and realized that living there meant no future. They realized that with the economy the way it is, most will never have these million dollar a year jobs and with the cost of living they were more or less paying for the privledge of having a roof over their head and eating raman noodles.

I think time will tell and with the right leadership in Albany and an open environment to newcomers to the urban areas things can change for the better even in times like this. Thing is, I think the culture of Albany's neighborhoods need to change. People fear educated liberal people be them black of white since we represent gentrification. In reality we're no more wealthier then anyone and feel a need to live in cities since we like them and feel that we aide cities in rebirth.

I don't know, think about what I am saying and consider the state of affairs in the larger regional cities coupled with the economy as a driving force that could change the face of neighborhoods like Arbor Hill and the South End by brining it families who want to build a community for their children while at the same time being able to afford to live.

Pasi Tartuaari

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