"I believe in America. America has made my fortune"
As I've watched the unfolding financial crisis come to the forefront of our world, I, like many have attempted to grasp its impact and look beyond the loss of a staggering amount of accumulated wealth. In doing so I could not help but think of Amerigo Bonasera. the funeral director from the Godfather. An Italian immigrant in 1940's New York, his opening remarks to the Godfather made it clear of his standing, his belief system and that he embodied the American dream. With all Americans, immigrant or otherwise, our country has been defined by our belief and embrace of the democratic form of capitalism that our country has practiced since before its founding. Beyond demonstrating a definitive confidence in our country and its system, Bonasera also makes it very clear to Don Corleone that he achieved the desired outcome of a belief in America - "my fortune".
So as I have watched Paulson and the various talking heads on tv over the past couple of days, I could not help but think about whether or not I still believed in America and the dream that this belief defines. Sadly, if the American dream is the ideology that has created a system solely focused on providing the opportunity to make my fortune, then I must say that I no longer believe. In saying that, I don't mean that we don't have the opportunity to make a fortune and to create wealth, because we will. What I am saying is that the underlying ideology of capitalism that has defined the American dream is dead because it can no longer support our current definition.
What began as a crawl towards government activism when Bear Stearns imploded became a full sprint towards a nationalized financial system when Paulson announced the bailout plan and the decision to take ownership in banks. In announcing this plan, the administration didn't just commit taxpayers dollars to fixing a clearly broken system, they also committed to a fundamental change in America's ideology of capitalism.
After thirty years of allowing the financial sector to scale the heights of deregulated capitalism and reap the apparently limitless profits it provided, the sector reached the top of the mountain. When the climb finally stopped the government and the financial Gods on Wall St. realized there were only two ways down. It could follow its ideology and find a way back itself no matter how ugly or painful that might be or it could call for a lifeline. Assessing the options available they blinked and quickly abandoned their ideology of deregulated free markets. Apparently, an unyielding commitment to an ideology is not an American trait when it has an actual cost.
By choosing the survival of certain financial institutions rather than staying true to the principals that have governed our financing philosophy our country has effectively consented to fundamental changes in how risk is quantified and collateralized. Changes in this ideology will most definitely lead to an over correction in lending standards. This will impact every aspect of our country as cheap risk has allowed us to leverage ourselves into a nation of borrowers who consumed far above rational levels.
By providing a bailout that appears to partially nationalize our financial system, our government has concluded that the financial sector can no longer be the winner. Deleveraging of the American consumer and by extension American business must occur. This can only be realized by changing the lending paradigm from one that worshiped at the altar of OPM to one where the extension of credit is once again a privilege. Consequently, the tolerance of risk, a core element of how the American dream has been financed and collateralized will be substantially altered.
The impact of what we are witnessing and experiencing will be nothing short of a fundamental shift in our society. What we don't currently know is what is the extent of the social change and how will it impact the American Dream? As I consider this question, I am obligated to think of it in the context of Bonasera as this may be where the answer lies. The definition of the American Dream has evolved quite a bit since the days of Bonasera as the self made man. What has also changed is the manner in which that dream is achieved.
In Bonasera's day and probably the days before his, the American Dream was achieved when one had a reasonable level of financial independence. Perhaps this meant ownership of a home or other property but most likely meant that you did not live paycheck to paycheck and had the cash to acquire desired goods and services. The American Dream today requires the ownership of at least one home, two cars, big screen TVs', and the credit/cash flow to ensure that you have the ability to dine out virtually any night and travel across the globe. For Bonasera, his success in achieving and maintaining the American Dream was likely financed by his own capacity for hard work and saving/sacrifice or by family and friends that were confident in him. Conversely, our American Dream has been financed by a dizzying array of financial institutions who were more than happy to encourage and provide the leverage to finance whatever our hearts have desired.
For individuals and businesses alike, the American Dream today is the pinnacle of consumerism. What happens when the system that has driven the mechanics of our quest for more and better can no longer support blatant consumerism? Mr. Jones, meet Mr. Bonasera. Now, in making this observation I am not implying that we are going to go back that far - we can't put the consumer genie back in the bottle. But, I believe that American consumerism will be more reflective of Bonasera's American Dream than the one I have grown up with.
So, if I am to look forward three or five years, what do I envision? Here are some thoughts that I believe will occur:
Amerigo Bonasera
The Godfather
The Godfather
As I've watched the unfolding financial crisis come to the forefront of our world, I, like many have attempted to grasp its impact and look beyond the loss of a staggering amount of accumulated wealth. In doing so I could not help but think of Amerigo Bonasera. the funeral director from the Godfather. An Italian immigrant in 1940's New York, his opening remarks to the Godfather made it clear of his standing, his belief system and that he embodied the American dream. With all Americans, immigrant or otherwise, our country has been defined by our belief and embrace of the democratic form of capitalism that our country has practiced since before its founding. Beyond demonstrating a definitive confidence in our country and its system, Bonasera also makes it very clear to Don Corleone that he achieved the desired outcome of a belief in America - "my fortune".
So as I have watched Paulson and the various talking heads on tv over the past couple of days, I could not help but think about whether or not I still believed in America and the dream that this belief defines. Sadly, if the American dream is the ideology that has created a system solely focused on providing the opportunity to make my fortune, then I must say that I no longer believe. In saying that, I don't mean that we don't have the opportunity to make a fortune and to create wealth, because we will. What I am saying is that the underlying ideology of capitalism that has defined the American dream is dead because it can no longer support our current definition.
What began as a crawl towards government activism when Bear Stearns imploded became a full sprint towards a nationalized financial system when Paulson announced the bailout plan and the decision to take ownership in banks. In announcing this plan, the administration didn't just commit taxpayers dollars to fixing a clearly broken system, they also committed to a fundamental change in America's ideology of capitalism.
After thirty years of allowing the financial sector to scale the heights of deregulated capitalism and reap the apparently limitless profits it provided, the sector reached the top of the mountain. When the climb finally stopped the government and the financial Gods on Wall St. realized there were only two ways down. It could follow its ideology and find a way back itself no matter how ugly or painful that might be or it could call for a lifeline. Assessing the options available they blinked and quickly abandoned their ideology of deregulated free markets. Apparently, an unyielding commitment to an ideology is not an American trait when it has an actual cost.
By choosing the survival of certain financial institutions rather than staying true to the principals that have governed our financing philosophy our country has effectively consented to fundamental changes in how risk is quantified and collateralized. Changes in this ideology will most definitely lead to an over correction in lending standards. This will impact every aspect of our country as cheap risk has allowed us to leverage ourselves into a nation of borrowers who consumed far above rational levels.
By providing a bailout that appears to partially nationalize our financial system, our government has concluded that the financial sector can no longer be the winner. Deleveraging of the American consumer and by extension American business must occur. This can only be realized by changing the lending paradigm from one that worshiped at the altar of OPM to one where the extension of credit is once again a privilege. Consequently, the tolerance of risk, a core element of how the American dream has been financed and collateralized will be substantially altered.
The impact of what we are witnessing and experiencing will be nothing short of a fundamental shift in our society. What we don't currently know is what is the extent of the social change and how will it impact the American Dream? As I consider this question, I am obligated to think of it in the context of Bonasera as this may be where the answer lies. The definition of the American Dream has evolved quite a bit since the days of Bonasera as the self made man. What has also changed is the manner in which that dream is achieved.
In Bonasera's day and probably the days before his, the American Dream was achieved when one had a reasonable level of financial independence. Perhaps this meant ownership of a home or other property but most likely meant that you did not live paycheck to paycheck and had the cash to acquire desired goods and services. The American Dream today requires the ownership of at least one home, two cars, big screen TVs', and the credit/cash flow to ensure that you have the ability to dine out virtually any night and travel across the globe. For Bonasera, his success in achieving and maintaining the American Dream was likely financed by his own capacity for hard work and saving/sacrifice or by family and friends that were confident in him. Conversely, our American Dream has been financed by a dizzying array of financial institutions who were more than happy to encourage and provide the leverage to finance whatever our hearts have desired.
For individuals and businesses alike, the American Dream today is the pinnacle of consumerism. What happens when the system that has driven the mechanics of our quest for more and better can no longer support blatant consumerism? Mr. Jones, meet Mr. Bonasera. Now, in making this observation I am not implying that we are going to go back that far - we can't put the consumer genie back in the bottle. But, I believe that American consumerism will be more reflective of Bonasera's American Dream than the one I have grown up with.
So, if I am to look forward three or five years, what do I envision? Here are some thoughts that I believe will occur:
- Home ownership will no longer be practical for everyone. Buying a house will once again require a good chunk of cash in and it won't be realistic for most Americans to have $60,000 - $100,000 in cash to put into a home.
- A continual decline in housing prices with eventual appreciation being relatively modest. The return on investment just won't be there and the general costs of ownership will make renting more attractive.
- The return of the lay-away desk at your local Wal-Mart, Target and Kohl's. Credit cards will still be available, but credit will be focused towards those with the means to maintain zero or low balances. Retailers that cater to the poor and the lower spectrum of the middle class will need to adapt to reflect the change in credit.
- As access to cash becomes more critical to running our daily lives, the savings rate will likely increase which will provide stability and soundness to the economy.
- The reemergence of the community bank and the credit union. While lending will continue to become more and more transactional, local institutions that focus their activities on all of the Five C's of lending will find an audience and market from companies and individuals who have been shut out of the larger system.
- The formalization of peer lending. With tighter access credits cards, start ups and early stage businesses and individuals will need to look to their family, friends and fools to secure the initial capital to finance their business dreams. However whereas in the past this was a loosely monitored and under-managed segment of lending, technology will allow for this to become more sophisticated and pervasive.
- Consumer driven industries that provide luxuries or convenience will be significantly impacted. Dining out will not be as prevalent and home entertainment options will become far more competitive and desirable for a society that cannot finance every trip to Applebees with a Visa.
- As consumerism is down-scaled, the world will need to get used to slower growth. Investing in the stock market will be impacted, because the earnings growth will not be there to drive appreciation of the stock price.
- With lower market returns, the country will need to reconsider its commitment to the entitlement society that we have created. The sizable baby boom generation that is just beginning its retirements will look to the government to subsidize their market losses. The generations behind them will revolt which will create an interesting dynamic among three or four generations that may be living in one house.
- Smart people and businesses that have good businesses and concepts that work hard and can successfully function within the time-tested fundamentals of business and finance will continue to thrive.
I recognize that this is a rather lengthy post and I still haven't answered the question I have posed to myself - "do I believe in America"? As I ponder all that I have written and all I thought about I can only conclude that I do believe. Despite the current circumstances and the challenges ahead that I see I still believe that here is where I will make my fortune because as screwed up as it is, its still the most conducive country for wealth creation. And, while it may not be the fortune I and my generation had defined for ourselves, I can sleep well tonight knowing that above all it will still be mine.
