Why We Needed This Economic Reboot

It is impossible to watch the news or read the paper these days without feeling a sense of fear. Will I keep my job? My house? My investments? My car?

And I am with you. I feel the pain of everyone who has been laid off, bankrupt or currently fears for their job.

But this crisis which has terrible consequences is the reboot we need to get our systems running properly again.

When you run your computer, some applications can suck up memory and other resources and not release them, causing your computer to function incorrectly. Perhaps it stops responding to every key press or perhaps Excel and Quicken take up all the resources and Microsoft Word and PowerPoint are unresponsive. The only solution is to hit Ctl-Alt-Del. Similarly, some industries – mostly financial sucked up all the best talent and capital, making it difficult for other industries to function well. We are feeling the effects now of an economic reboot.

In the Norwalk, CT area where TMC has its headquarters we have seen home prices double or more before this crisis began meaning the typical office worker making $50,000/year  (used for example purposes) who could once purchase a home for about five times their salary would now have to spend twice as much or ten times their annual income.

Why? Well, not only did we have a run up in real estate as a consequence of the real estate bubble, but Fairfield County where TMC is located was home to about ten thousand hedge funds which are mostly new. The massive growth of this industry in part fueled by a series of bubbles was responsible for increasing commute times from 20 minutes to 90 minutes or more as a greater number of workers were forced to live further away from Fairfield County.

The financial, housing and mortgage bubbles were responsible for massive price increases throughout the tri-state area including New York, New Jersey and Connecticut and as this price inflation increased, it made it difficult for local businesses to hire. Obviously, California, Las Vegas, Florida, California and other parts of the country saw this growth as well.

All this is changing quite quickly around the world and as an example; one of the most affluent cities in this area, Greenwich has not seen a single house sold in many months. This is partly because hedge funds are closing in record numbers and financial jobs are scarcer than they have been in decades.

The economy is rebooting and although scary, it seems it was necessary.

In 1997-2000 we witnessed a massive tech and telecom bubble. When it burst I wanted to sell my house and wait for the ensuing housing bubble to burst to buy cheaper. After 9/11, I could not understand how housing prices continued their upward growth – I get it now. To the housing bubble we can add a mortgage bubble, credit bubble, retail bubble and commodity bubble. In fact this last decade our economy was benefitting from what Alan Greenspan called irrational exuberance about a decade ago. Except in this case the money left one industry and found its way into another and another.

And now the bubbles are burst and we are back to normal. In a way this is the best news of this crisis… The silver lining in the cloud. One immediate benefit of course is the lower price of oil.

Yes, there are jobs being lost and companies are implementing furloughs and other cost-cutting measures. But the flipside to this bad news is price reductions for virtually everything, including and most importantly housing. This deflation – especially in areas like Connecticut are needed.

In fact if we didn’t have fear and concern for the future it is tough to understand how we would have been able to get home prices back in line with typical salaries.

The obvious difference between this economic reboot and a reboot of a computer is with the computer you have a general idea that you will have a stable operating system which is under your control and you know it will happen in less than five minutes. This financial reboot hasn’t actually stopped… It’s been months of waiting for it to level out. But then again the complexity of the financial systems responsible for the problem took about a decade to create. Should we expect the reboot to be over far quicker? I realize this is a scary thought.

To the many potential homebuyers out there, this particular slowdown is an opportunity to purchase a house at a price they believe to be more reasonable. I personally think if the economy can stabilize at a point where an entry-level house is in the $250,000 range in Fairfield County, we can start over nicely and allow companies in this area to hire local talent without the need for massive commutes to get to work.

The second and perhaps most important silver lining to this crisis is the smartest and most ambitious minds who were once drawn almost exclusively to Wall Street may now look at other industries. This is great news for virtually every other industry out there.

To put this in perspective, Google alone employs about 20,000 people and was founded a decade ago. For the sake of argument (and I realize the giant leap of faith this example requires) if 1,000 other Googles were to be founded, they would hire 20 million more people.

I think it is obvious the reboot was needed – we just need to hope global governments can throw enough solutions at the problem to get things to stabilize at more reasonable price points. Then again, maybe they will on their own anyway.

Having run a company through the tech/telecom bubble of 2001, I can tell you the result of such bubbles bursting is the strongest and best-run companies make it through, meaning better and more stable companies remain as a result. This time will be no different.

  • Tom Keating
    March 9, 2009 at 9:27 pm

    Great article & nice analogy.
    Let’s hope the reboot of the economy is faster than a Windows reboot. 😉

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