Subprime by Mike “Beeple” Winkelmann

via

- Anne

National Recessions and Regional Depression

Last year, we asked about the geography of what we called “The Depression of 2009”. This year, in February, The Economist provided a brief article pointing out the differences in regional economies in the US – Montana still growing at over 4% versus Michigan’s economy, contracting at over 7%. Now in March the New York Times provides a map by county of the rate of change in the official unemployment rate compared to March 2008, noting, “Job losses have been most severe in the areas that experienced a big boom in housing, those that depend on manufacturing and those that already had the highest unemployment rates.”

Referring to “The Great Recession of 2008” it notes that layoffs affect men more than women construction workers, hotel workers, retail workers and others without a four-year degree, homeowners and investors more than renters or those on Social Security and Latinos more than other ethnic groups.  It is no satisfaction to see that Depression terminology entering the discourse of the media:

If the Great Recession, as some have called it, has a capital city, it is El Centro, Calif., due east of San Diego, in the desert of California’s Inland Valley. El Centro has the highest unemployment rate in the nation, a depression like 22.6 percent. …hit by the brutal combination of a drought, a housing bust and a falling peso, which cuts into the buying power of Mexicans who cross the border to shop.

Locatable Assets and Non-Geography
There is a more fundamental geography of the economy. This is a geophysics of property and specifiable, locatable assets. On this material basis avatars and representations for these objects can be constructed and through this, trust can be maintained at a distance. As a system of signs grounded in valued locations and valued assets, the economy is not those assets per se but the signs of those assets.

In an interview with Don Cato for the Vancouver Sun, Hernando de Soto, the Peruvian economist of the global poor points out that economic havoc ensues when the system of signs and locatable assets breaks down:

The way we document property rights and record every change of hands — not just our land titles, but cars and equipment and stocks and bonds — is the basis of the trust on which strangers can do business. Only documented assets give strangers the confidence to give us credit cards and lines to credit, mortgages to start new businesses, cellphone contracts and apartment leases. Without the trusted record-keeping that enables due diligence, both individuals and businesses would be limited — as is most of the world — to cash transactions, or paltry credit from family or usurious loan sharks.

This is the situation that has bedeviled the most impoverished countries. Without stable institutions of property, trust is at risk.

And the reason we trust each other is paper. It tells each other what we own. It gives us credit records. We can track people down. We can infer from the information on paper, if we trust it, what’s going on. From the land, to the house, to your car, to boats, to your ships, to your investments, to your rights over intellectual property and patents — is recorded. There’s only one asset you Northerners haven’t recorded. Derivatives. Worse, investments with known risks have been bundled with those whose future value is anybody’s guess, and sold to people who don’t know how much they hold of what. … You don’t know who has them. And, when you don’t know who has them, you don’t know who you can lend to. That’s what’s causing the credit contraction. … The root of the problem is that the money was available to lend [to people with no assets but over-valued homes] because it was derived from paper that has no location. You can’t find it. You can’t evaluate it. … But it’s not only money that can be debased, it’s also paper. And far more credit is based on paper than on cash. … If you talk about cash in the world — all the Canadian dollars, U.S. dollars, Euros, Renminbi — there’s probably something in the order of $13 trillion. But if you talk about derivatives, there’s $600 trillion. According to some, it’s closer to one quadrillion…”

The key point is the lack of location. What is completely immaterial or virtual has no physical substance and so has no spatiality or locatedness in place, on in time, like a memory of a great party that once was. Some derivatives, such as futures, operate exactly in this manner: they are a contract to buy at a present price at a given time (ie. later). That is, at a future time, they will be converted into specific material assets. The mistake of non-asset backed paper derivatives is to leave open the maturation date, allowing them to be traded infinitely and also to become difficult to re-associate with the material aspects they originally stood in for, acting virtually, as if they were those things. Futures do not have this ‘as if’ quality in themselves until new instruments were created which could then stand in for the futures instead. Syndicated risks in the insurance market are also different – they are fundamentally probabilities – but once one creates a second order of instruments which are presented ‘as if’ they were insurance policies, then one is again dealing in virtualities, a place-less, non-geographic set of entities.

- Rob

Carmakers around the world are cutting production as inventories build up to unprecedented levels. Storage areas and docksides are now packed with vast expanses of unsold cars as demand slumps.”

“Unsold cars at Avonmouth Docks near Bristol, UK.”

“Newly imported cars fill the 150-acre site at the Toyota distribution centre in Long Beach, California.”

“New cars jam the dockside in the port of Valencia in Spain.”

(via)

In its 11th hour, the Bush Administration has authorized a new US Arctic Policy (National Security Presidential Directive 66), which will serve as a continuing, broad policy guideline to government agencies until replaced. That is, it has effect until the next Arctic policy (which can take years to produce). It governs seven broad areas of the American approach to the Arctic: national security and homeland security, international governance, extended continental shelf and boundary issues, promotion of international scientific cooperation, maritime transportation, economic issues, including energy resources, and environmental protection and conservation of natural resources.

Although there is sceptical acceptance of ‘the effects of climate change and increasing human activity in the Arctic region’ the main focus is access to oil and gas reserves on the extended continental shelf, beyond current territorial waters north of Alaska. These reserves are technically recoverable and would be easier to control.

One intended audience is the US Senate, where as the Guardian summarizes: ‘One of the main obstacles to staking a [American] claim on the Arctic seafloor [ie. the extended continental shelf] has been opposition in the Senate to ratification of the United Nations’ 1982 Law of the Sea Convention’

In concert with this policy, US News and World Report mentions that in one ‘midnight regulation‘ by which the outgoing President is attempting to tie the hands of incoming US President Barack Obama,, the Administration recently eliminated an important provision in the US Endangered Species Act requiring “independent scientific reviews” before construction or drilling can occur in an endangered species’ habitat – such as polar bears.

Another major focus is on the right to over-fly and also to freely navigate the Arctic – which will be contested by Canada should the Northwest Passage routes across its Arctic Archipelago become ice-free enough to transit. China’s Xinghua News Agency quotes Bush saying:

Preserving the rights and duties relating to navigation and over flight in the Arctic region supports our ability to exercise these rights throughout the world, including through strategic straits.

The document ignores the signing of the Ilulisat Declaration by all Arctic coastal states, claiming ‘aggressive moves by other countries’. This raises fear without providing facts, as Gunnar Sander notes in a comment to a Wall Street Journal article. Although commentators do not appreciate it, one key audience of this policy is likely to be China, which plans its own voyage to the pole in 2010 and anticipates that a shortcut route over the pole to Europe will become its main shipping route for goods if the polar cap melts.

Ironically, anticipating that melting ice will make access to hydrocarbon and other resources easier is rather ghoulish: give the extra absorption of solar energy by dark-coloured ocean compared to the white ice (the albedo effect) this implies that the planet will have been heating up at a faster than anticipated rate with sea-level rise affecting major capitals: New York, London, Tokyo, Los Angeles, Vancouver, Mumbai, all of Bangladesh, the Yucatan, the San Francisco Bay Area and so on. Perhaps the extra fuel will be needed for the lifeboats or for constructing dikes.

(Followup: Google this)

-Rob

At the 2005 summit at Gleneagles in Scotland, former Canadian Prime Minister Paul Martin recalls that ‘the emerging countries were invited to lunch, then dismissed’:

University of Toronto G8 Research Centre’s Director, John Kirton, quoted in the same article.  HE comments that Bush has ‘basically admitted that the G8 could not do the job.’

The President of the United States comes over to a meeting of finance ministers chaired by a Brazilian and says, ‘I need your help.;  You see a very important structural shift.

For the U.S. to suddenly realize that in fact the major emerging economies have to be at the table is a major, major step forard…  You cannot say that the Chinese are a major part of the solution but, by the way, when we sit down to discuss these things, you won’t be there.

As Ed Yardeni, a market strategist explains in the article:

If Abu Dhabi or Shanghai sets up a financial centre that allows everybody to skirt these regulations, we’ll still have all these excesses.

That these centres, which are not at the epicentre of global capital and information flows, to be understood as having the potential for independent action, indicates the sort of shift in perceptions that adds up to a new understanding amongst financial elites of the globally inter-knit nature of economies, and the networked, rather than simply hierarchical possibility of agency.  No one is able to insist that the financial world is solely the White House and a few New York and London trading floors.  Whether or not this world network of many centres is able to consolidate its status, a tectonic shift has taken place in the spatialization of world finance.  It is not surprising that Canadian Broadcasting Corporation (CBC) resorts to an interactive map to present the recent turmoil in financial markets.

A networked topology to global finance has long been a reality, as suggested in the diagram above of relationships between financial centres (each city is abbreviated as a pair of letters) from Peter Taylor’s book World City Network but it was governed hierarchically from a very few dominant centres, as if from the top of a pyramid.  This centre-periphery topology reinforced the power of the dominant centres and States.  However a more egalitarian network form would raise the importance of multilateral, transnational institutions capable of coordinating flows across the network, for example to mitigate the transmission of shocks or panics across the net.  Where some have argued that States have returned with a vengeance as major global actors, this vision suggests that these States will have to work together, muting their power and independence.

- Rob

The government of Iceland promised to repay Icelandic depositors in the island country’s failed banks. They did not extend the guarantee to non-Icelandic depositors. Partly they simply didn’t have the cash, but partly the view has been that taking care of one’s own takes priority. Countries do not want to bail out foreigners, and different governments do not want to assume the liabilities of other nations. The nature of political solutions is always that politicians respond to their own constituencies, not to people who can’t vote for them (www.stratfor.com)

The result was that other, nationalized, Icelandic banks such as Kaupthing’s funds were frozen in the UK under emergency measures contained in recent Anti-Terrorism legislation and assets immediately sold off to the Danish bank ING. While individuals were protected, up to 20 UK councils and numerous charities could lose millions.

This is where the blood flows: Disappointed that European and western allies failed to provide support, and that it had been made a scapegoat by UK politicians Iceland accepted a loan from Russia of about 4 Billion Euros. In effect, the lack of clarity and guarantees were used as a excuse to push the Icelandic financial sector and the economy into ruin.

However the spectacle of an overleaveraged Icelandic krona against a small island economy and population of only about 313000 suggests to some that other nations might be similarly overleaveraged. In an online discussion, a user ‘Truth Conquers’ speculated,

Actually, we might be just as broke as Iceland is. No one knows how big the CDS “House of Cards” really is. But I have seen estimates of at least 5 trillion. And estimates usually under guess these sort of things. And that does not include foreign banks, credit card debt, car loan debt, companies needing short term loans and FDIC coverage of banks. You get the idea.

Via such rumours, no country is immune from appearing virtually bankrupt, regardless of the actual state of its economy.  Here I mean the virtual in a bookish, philosopher’s sense of not an imagined abstraction but a real thing that nevertheless can’t be seen or touched, for example a brand, nation or community.  Trust may be a real ‘thing’ but it is intangible and can be manipulated. Historically one important way of controlling such real-but-intangibles or ‘virtualities’ is through ritual – think witch hunts, sacrifice and scapegoating. These are the ultimate terror.  Indeed, John Raulston Saul commented that this is a worry for Canada as an supplier of ‘dirty oil’ facing the United States and Europe who may want to rebuild their financial relationship and power. Iceland was sacrificed.  It was made a virtual scapegoat regardless of the actual nature of Iceland and of actual cost to British local taxpayers and its implication for UK urban infrastructure, volunteer services and agencies.

This is a geopolitical coup for Russia and (despite chaos in its markets) a reversal of its position: 20 years ago it was in economic collapse. Wall Street Journal’s online ‘Marketwatch’ said ‘The world has gone upside down’. In a sense, we need to turn our globes upside down too.  What does it mean to say that iceland is at the centre of the financial crisis this week?  This is a metaphor for the way that a new geopolitics – and a whole re-spatialisation of where we assume the centre of our maps – is an outcome of the current financial crisis, which as of today is widely being called a ‘crash’.

In the 20^th century, the significance of Iceland was in relation to fish and Atlantic sea lanes – and this continues, perhaps in relation to the ability to monitor submarine tracks? In the 21^st century the significance is its relation to oil, gas and Arctic sea lanes which will emerge as polar ice melts. In effect, Russia moves towards enhancing its position amongst nations involved in the Arctic.  Iceland may offer a point from which power can be projectied into what is becoming open ocean north of Iceland and Greenland.

-Rob

This is not the end of capitalism, as some wildly claim; there is no intellectual, social or political challenge to a market system based on respect for private property rights, even by the Chinese Communist party. Rather, it is a crisis of a particular capitalism that has set aside respect for trust, integrity and fairness as fuddy-duddy obstacles to ‘wealth generation’. What we are relearning is that without trust and fairness, capitalism risks its own sustainability, even while it unleashes forces that undermine those self-same values. London’s money markets froze because of a trust collapse; banks simply don’t believe each other when they say their businesses are sound and will not default on their obligations. Trust matters.

‘Trust’ is not an abstraction, nor a metaphysical object, nor something that can be used to hold up a table.  It is a virtuality – a real but intangible thing – and the economy has long been understood to be founded on exactly such virtualities.  Another example is ‘virtue’, a word which shares the same root.  Like virtue or character, virtualities generally relate to latent outcomes or potential.  They are entirely different from risk, which is related to calculations of what is probable, or to danger, when a risk is actualized as a material presence.

Hutton notes that opponents have ‘no alternative proposal about how to restore trust once it has gone. Trust is a reciprocal relationship, dependent upon a desire to be considered decent and honourable.’  Rather than focusing on the dollars of the bailout, the virtual question of reputation is much more difficult to restore.  It relates to the future – to the anticipation of continuity.  This requires repair in the virtual.  In simple terms, this means not rhetoric (which might repair representations) but rituals of closure of the crisis.  These rituals are likely to take the form of establishing watershed moments which set the period of leveraged capitalism behind us globally.  Expect shamans who lead us through the process and sacrificial figures (individuals, animals, corporations), liminal stages and zones with changes in location, and figures of rebirth.

-Rob

Shaun Springer, chief executive of Napier Scott , the financial headhunter based in the City [of London], said he was hoping to pick up a bit of business over the next few weeks as staff at Lehman and other troubled banks looked for new berths; but he knows that the golden age of the City is over.

‘What we are living through now will reverberate through the rest of the century in the same way the Great Depression did last century. We are witnessing a very real power shift. Money is moving eastwards – while they’re creating wealth, we’re losing it hand over fist. Where it ends no one knows.

‘London has enjoyed an unprecedented decade of global dominance. Let’s hope people took lots of photos to look back on in the years to come’

This makes part in sense because surely the United States government requires its own bankers and bond holders who will underwrite the cost of their nationalization of significant parts of the financial sector which is now underway.  Where are the geographers commenting on this?  (Feel free to add links via Comments).

-Rob