Creative Class

For the first time in over a decade, the DOW closed below 7,000. For a little history, the DOW was around 1,000 in 1982 and then steadily rose to 14,000 over the course of 25 years. We have now returned 50 percent of that and the future does not look very good for getting it back anytime soon. The Nikai in Japan fell from 30,000 in 1989 to just around 7,500, losing more than 75 percent of its value in 20 years.

What is happening is that we are at the end of an era. It is the end of highways, sprawl, cheap everything, and we are also at a the end of globalization as we knew it.

How to move forward is the $64,000 question. What is clear is that we are just thrashing around, like a whale beached on the shore. There is no one around to put us back in the water. Perhaps the best solution would be for someone to slay the whale. In the Farrow Islands, when a whale beaches they come out with knives, jump on its back, and hack it to death. They have a big dinner of whale meat. In California, they call out a team of doctors to examine it and then it dies anyway. No dinner!

The problem is that everyone (read: economists) studied the 1930s and how to get out of the depression. People forgot that what got us into the 1930s depression was the 1920s! What got us into this depression is the 2000s (leverage, borrowing, housing investment, deregulation) – they were just like the 1920s. One thing is clear, the best way to heal this event is perhaps just to wait it out and not spend trillions and trillions to try and save it. We will heal in due time.

My recent The Atlantic article and multiple covers, including one on my adopted hometown, pose the obvious question: What about Toronto?

Prompting me on this are stories at Torontoist and The Toronto Star. I recently had a nice dialogue on the same with David Olive as he reports, along with nice quotes from Fareed Zakaria who visited recently, in his Star column today:

Looking further ahead, Richard Florida, the urban economics guru, sees Toronto angling for the same global heft as Chicago and Tokyo. “I sense we are in great shape to move up in the global ranks,” says Florida, now based at the University of Toronto’s Rotman School of Management. Florida followed the example of his mentor, the late urbanologist Jane Jacobs, in relocating two years ago to Canada from his native U.S.

Like New York and London, Toronto is a finance, media and entertainment centre, forecast to be among the fastest-growing business sectors over the next generation. Unlike those cities, Toronto also has an abundance of technological research, and more social stability and ethnic diversity. And in recent years the city’s cultural amenities have expanded considerably.

Florida readily concedes that stubborn problems like income inequality and a deteriorating basic-industry sector have yet to be tackled. But in a cover-story essay in the current Atlantic magazine, the venerable U.S. public issues journal, Florida identifies Toronto among fast-growing “mega-regions” most ideally suited to rapid growth. Atlantic gave Florida’s article four covers, showing the skylines of North American cities with the best prospects for sustained prosperity – Toronto, New York, Chicago and San Francisco.

Yet Florida discourages U.S. comparisons. “Stop looking south for models,” says Florida, based for 17 years at Pittsburgh’s Carnegie Mellon University. “They ain’t there. The U.S. is in very deep crisis. It’s time for Toronto to break out and lead.”

The Atlantic piece was concerned with the situation in the States, especially New York, which has been hard hit by the financial crisis.

That said, I’ve been thinking a great deal in my work at the MPI about the opportunity space opened for Toronto, Ontario and Canada as a whole.

Crises are key times for nations and especially for cities and regions. They are the times when changes of position become likely and when nations, and in particular cities and mega-regions, can make their move.  My sense is that Canada as a whole and Toronto and its mega-region are as well-positioned as any place in the world to prosper and improve their relative positions in this transformative period.

First off, Canada has a substantial advantage in its stable banking system. Toronto is the center of that system. At the YPO event with Zakaria, Frank McKenna from TD Bank made a joke that went something like this: A couple months ago his bank wasn’t among, say, the top 20 largest banks, now they’re something like fifth or sixth. And then the punch line: In a couple more weeks, even if his bank would likely be, say, third or fourth, through little or no action of its own, RBC is even higher. The World Economic Forum recently ranked Canadian banks the most stable in the world. For these reasons, Toronto is well-positioned to move up in the ranks of global financial centers. No, it won’t topple NY or London, but with banks this big and this stable, it will gain ground. And with employment opportunities eroding in these centers, it can make a big move on top global talent.

Toronto has the opportunity to occupy a relatively unique space among global cities, still beneath the largest global centers, like NY and London, but gaining ground on them, and in a relatively unique and advantaged position as the most vibrant of the so-called “second cities.”

Toronto has a very advantageous economic structure, comparatively speaking. Our MPI team has been collecting, analyzing, and studying data on the industrial and occupational composition of Toronto versus other U.S. and Canadian cities and some other global cities. Led by Kevin Stolarick, our goal is to have matched data on the micro-functionings of the U.S. and Canadian cities and regions, in terms of industries and occupations for every metropolitan level jurisdiction and city across the two countries.

From what we can glean – and expect much more on this to come – Toronto has one of the very fastest metabolizing occupational and industrial metabolic structures of any city with strengths in media, entertainment, design, and creative industries as well as finance. These are the sectors that move at the highest velocity. And it has real technological capability in its orbit with Kitchener-Waterloo and RIM nearby.

Toronto is as diverse, if not more so, then NY, London, or even L.A. Plus, it has an unusually high degree of social cohesion. Add to that great universities that are moving up, great and improving music and arts scenes, and relatively affordable housing, at least by world comparative standards. And you get the picture – a city ready to move up the global ranks.

Yes, Toronto certainly has issues and problems to overcome. Inequality has grown a la David Hulchanski and company’s remarkable “Three Toronto’s” study report. Parts of the region’s older manufacturing economy is suffering and the region as a whole is more geographically segmented and spiky then before.

But the assets are considerable. Leadership “gets it” from the Premier to the Mayor, other political leaders across the region – mayors, legislators, councilors, and economic development officials, university leaders, the non-profit sector, the arts and culture community, labor, environmentalists, and key segments of the business community – all of them are literally moving in the same direction.

You can literally feel the momentum.

There’s only one thing left to do. Stop looking south for models. They ain’t there. The U.S. and its key cities are in deep crisis. Toronto has a golden opportunity to become a model and lead not just for Canada but for North America and the world.

Will we take it?

The crisis is having uneven effects on jobs. The table below from the Bureau of Labor Statistics (via Michael Mandel) shows the change in employment for 2008. Massive losses are concentrated in what Mandel calls the “tangible sector” – production, construction, and farming and fishing. Health care and education have help up reasonably well, along with management. The intangible sector and creative sector jobs – arts, design, and entertainment; architecture and engineering; computer science and mathematics; and life and physical sciences – are starting to register losses. I’d love to know where in terms of geography these losses are concentrated. But the bigger point is that if this continues the U.S. economy may start to look like the meds-and-eds dependent economies of old rustbelt city-regions. That said, the job losses in the creative or intangible sector are in range of 3-5 percent, while tangible sector losses are in the double digits.

At 93, he provides razor-sharp insights into the current crisis in this interview in Japan’s Asahi Shinbum (via Mark Thoma).

I think it is definitely the worst crisis since the 1929-1939 Great Depression, both in America and globally, and I think it was an unnecessary breakdown as there was no need for America to have a meltdown.

When George W. Bush became president in 2001, he inherited a country with quite sound (fundamentals) from President Bill Clinton with an overbalanced budget. … George Bush will go down in the history books as the worst president that America has had in more than 200 years. And, that couldn’t have happened if the voters had not moved to the right …

One is the Iraq war, which is a disaster. It’s as bad as the Vietnam War and the Vietnam War entangled four or five presidents and there was no victory. … But the other reason is because people on Main Street in America are hurting. The reason they’re hurting goes back to 1995 when Alan Greenspan, as the chairman of the Federal Reserve Board, made no efforts to curb the stock market bubble.

So the American electorate is very unhappy. Free trade and globalization add to world productivity. It also adds to the potential standard of living of many people, but unequally … The whole history of capitalism has had up-bubbles in real estate and down-bubbles after something different. This time the new fiendish Frankenstein monsters of financial engineering blinded the eyes and the minds of everybody.  The CEOs and the chief financial officers are the most surprised people. Nobody learned any lesson from Long-Term Capital Management. And what happens with this “new financial engineering” is an incredible “super over-leveraging” and you don’t even know you’re doing it. You know, it’s as if you’ve been blindfolded. And nobody learned any lesson from that. …  And this all could happen only because Bush, with his “compassionate capitalism” appointed incompetent people …

This is a new crisis because if you look at its bottom it says, “Made in America” (laughter). It’s not Thailand. It’s not Mexico. It’s not Argentina. It’s America. And, of course, it spread from there. Could you believe that the whole country of Iceland is bankrupt? Icelanders were the happiest people two years ago. They’re the unhappiest people today. …

Rome was not built in one day, and Franklin Roosevelt did not get full employment. It took about seven years. Now I don’t say it’ll take seven years this time, but it won’t be done with a balanced budget and it won’t be done with “inflation targeting” …

Spending in the direction of the poor part of the population (is important) because those are the people who are most likely to re-spend. If you primarily spend in the direction of your millionaires, that won’t make any difference.

The New York Times’ Hannah Seligson reports on how the crisis is causing some financial types to switch to more creative careers.

With Wall Street hemorrhaging jobs, bonuses disappearing and the financial sector going through a seismic shift, some bankers and lawyers are switching lanes to more creative career paths. They are putting down their Wall Street Journals and picking up Variety as they try their hands at comedy, filmmaking and writing.

Harry B. Weiner, a partner at On-Ramps, a recruiting and consulting firm that works with financial professionals, says the economic downturn is creating a new psychology of career transition. “People feel there’s nothing to lose in terms of taking a risk and pursuing a new direction, especially when you have a résumé that says ‘banking’ and no banks are hiring,” Mr. Weiner said.

That was certainly the calculus for Benjamin Cox, 33. After leaving his job as a vice president at Goldman Sachs in August, he immediately began incubating his plans to work on his screenplay — he calls it a cross between “Swingers” and “Annie Hall” — and start a production company. Mr. Cox said that with the upheaval on Wall Street, he feels relieved to have a backup plan. “I’m seeing a lot of people who never thought of an alternative to banking.”

Shaun Gatter, 38, left his position as a vice president and counsel at a large investment bank last year to work on his novel about a Jewish South African family, a story set against the backdrop of apartheid. Mr. Gatter says that the decision has meant a huge financial adjustment, but that the payback — having more mental energy for his book — has been worth it.  “It’s been euphoric to be able to think mainly about the book and less about equity derivatives and client risk.”

Greg Collett, 37, left his job as a director in the commodity exchange-traded fund business at Deutsche Bank in June to explore a career in stand-up comedy.  “I had this gnawing feeling that things were only going to get worse and that Wall Street was not the place to be,” Mr. Collett said, adding that it was easier to leave knowing that compensation packages were going to be a fraction of what they were a few years ago.

Richard Florida, author of “Who’s Your City?” and director of the Martin Prosperity Institute at the University of Toronto, sees the gravitational pull away from Wall Street and toward more creative industries as part of a necessary economic recalibration.  “The economy couldn’t survive on speculation and what really amounted to advanced financial alchemy,” he said. “We are now realizing it is our human creativity that is our real capital.  “The economic downturn is going to free up top talent to do other things that are going to change the metabolism of cities like New York in a very good way.”

While most bankers and lawyers who pursue careers in comedy, writing and filmmaking say they are somewhat anomalous, the situation could change quickly.  “Things look so bad in finance that if you think the difference in salary multiple isn’t as big as it used to be between doing what you are viscerally interested in versus a job that’s just about money, it puts a whole different spin on it,” Mr. Terry said.

Mr. Gatter said that many of his colleagues at the bank commended his choice to leave, telling him that they also nursed ambitions to be chefs, photographers, writers and artists. “Everyone seems to have something else they would rather be doing than their 9-to-5,” he said. “I think that people who are losing their jobs are being forced to pursue their dreams and, in a way, are being liberated from the golden handcuffs of Wall Street and venturing into something that might fulfill them.”

Over at the Financial Times, David Roche argues that current approaches prolong the inevitable because they fail to deal with its underlying cause.

In the U.S., about 90 percent of all the measures to deal with the credit crisis aim to prevent asset prices falling to market levels, at which they would clear… A substantial proportion of the fiscal measures enacted and planned, as well as the initiatives to restructure mortgages either through private sector banks or government-sponsored entities, are intended to bail out borrowers and prevent the repossession of houses. This will stop the ultimate cause of the crisis, lack of household thrift, being addressed rapidly. Such measures train the Pavlovian dog not to learn new ways when that is precisely what it needs to do…

It is a matter of simple arithmetic to work out that the new layers of state debt to deal with the credit crisis are not a substitute for private debt, but an addition to it. This is because the state debt does not extinguish the private debt, but merely finances it, so increasing the layering of leverage that lies at the heart of the credit crisis. Worse, bigger budget deficits and borrowing requirements will increase the U.S. and the UK need for foreign capital. The foreign funding may not be forthcoming, which could cause the dollar to crash. The increased role of the state will crowd out more productive uses of capital and create a bigger bureaucratic role in the economy.

Barry Eichengren links the current financial crisis to the repeal of the Glass-Steagall Act which separated commercial from investment banking. But as Alex Tabarrok shows the history of Glass-Steagall goes beyond economics and was the product of a titanic struggle between the Rockefellers and the House of Morgan.

Underneath the current crisis and response are similar struggles among real interests – banks, investment companies, the tech sector, oil and natural resources – but I can’t find anyone, anywhere providing commentary into these real interests. There is nothing even remotely similar to the hearings, reports, and exposes Tabarrock identifies during the 1930s to what is (or is not happening) today.

On Friday, the U.S. Treasury took some extraordinary, extraordinarily risky, and probably doomed to failure, steps to bailout the financial institutions and speculators that dominate the U.S. economy. As with the previous and ever more panicked bailouts, these were aimed at preserving liquidity at the largest financial firms at an incredible cost to the U.S. taxpayers.

When considering such complicated phenomenon, metaphors and analogies can help. I think of the situation as an ecosystem in collapse. In any ecosystem the peak organisms such as sharks and whales are dependent upon an entire food pyramid that extends ultimately down to the plants and plankton that fix energy (do work and create value). In the U.S., but also in the global economy, we are seeing the peak organisms in sectors such as the finance, insurance, and real estate in severe convulsions and even dying. Firms in whole sectors such as the investment banks are no longer viable. In response, the U.S. government is plying them with bailouts and other measures to keep them on life support. The U.S. Treasury is openly manipulating the economy’s fever chart, the stock market. In each and every case, this has provided temporary relief, but not addressed any of the crises. This is not surprising because the decisions are being made behind closed doors by a small group of insiders whose whole experience is in the peak organisms. They cannot accept that the model that made them wealthy and successful has ended up destroying the plankton. So their response in every one of these ever larger and more frequent bailouts has been to transfer from the plankton to the peak organisms.

A more creative way of thinking is to recognize that what must be recuperated is the plankton. This will have to be funded by dramatic increases in taxation of the wealthy and a carbon tax to reduce energy usage to be transferred to the poor and middle classes. It is not too early to begin thinking about programs such as a new environmentally oriented Civilian Conservation Corps that would install energy efficiency and solar energy devices on new homes. A Works Progress Administration would undertake similar programs for public buildings and transit – this could be combined with a public arts program. Given the shocking lack of educational attainment in the U.S., another program could be to educate America. These programs would be labor-intensive and funnel U.S. dollars into the U.S. rather than being spent on imports from abroad. Programs spent on assisting the plankton and, at least, partially paid for by those to which so much was given is a far more creative solution than one that only bailouts the banks.

I believe fashioning an affirmative and creative response to the current financial disorder requires understanding where the problems are located and fashioning responses that target those locations. So far, I have heard nothing from either of the two leading candidates that they have an inkling of profoundness of the situation.

I would be interested to hear what have you folks have been thinking about the current crisis?

Felix Salmon, who’s been generating some of very best reporting and commentary on the ever-unfolding financial crisis:

[I]f you think that financial reporters are frazzled right now, just imagine what it’s like for the people on the front lines. Stocks are going haywire, volatility’s soaring, counterparty risk is through the roof, regulators aren’t helping matters – and the upshot is shot nerves, hasty decision-making, and generalized chaos.

The same is true, of course, at Treasury, at the New York Fed, and at any other regulatory organization you can think of. And it’s a recipe for disaster. Just remember – if you can keep your head when all about you are losing theirs, it doesn’t matter, because they’re the people in charge.

This is why the speed at which things are falling apart is so worrying. Monster deals are being done and then forgotten about within hours: last night I was at a dinner party, talking about the crisis (natch) and listening to someone say “oh yes, AIG, I forgot about that one”.

I don’t think anybody’s capable of holding in their head all the vital information needed to get a grip on things right now – not in the wake of Lehman and Merrill and AIG and the liquidity injection and the TED spread and Morgan Stanley and the money-market funds and counterparty risk in the CDS market and bans on short-selling and WaMu and negative nominal interest rates on T-bills and the oil price and the dollar and why on earth that German bank wired $300 million to a bankrupt bank and on and on and on and on. We’ve been overwhelmed by the complexity of the system, and nobody knows anything.