How can the state with the largest contribution to the US GDP, an amount that would put it 9th in the world if it were a nation unto itself, be on the verge of financial collapse? My view of it is simple. We did it to ourselves.
As popular culture as it may be, the economic disaster of California can't be blamed solely on Wall Street's investment bankers. Derivatives and synthetics may have wreaked havoc in Washington and elsewhere but for years I watched and complained that those bad habits were fueled by California real estate speculation gone wild. Do you know what the single most important thing to do in setting up the collateral pool for a mortgage-backed security (MBS) is? It's getting the percentage of California loans in the master pool below 50 percent. That need is what drove up prices in other parts of the country because some fool mathematician theorized that geographic diversification was a solution to reckless speculative risk. That theory, as the facts have borne out, was a load of hooey. It took a duality of Western speculation amplified by Eastern opportunism to create the house of cards that now strains the economic foundations of coastal North America. This, for all my friends in the middle of the country, is the answer to your question "What's the hubbub about?" It's the DNA for genetically engineering a "Black Swan".
I was fortunate enough to begin living in the California before the Bi-Centennial when gas was 25 cents a gallon and a young person graduating from a public high school could go on to study at the University of California. I began to work in a California where the workforce actually manufactured things. There was an even bigger industry that made parts of things. It was a place that not only invented new products, it invented new industries. Annually! We made bombers and Barbie's and cars. My first job while still in college introduced me to a then infant concept called motion picture computer graphics. My next one introduced me to the seven sisters of aerospace most of which lived in California. We not only grew things, we invented things that grew better. California was a beehive so vibrant that its core industries were able to support mind boggling logistics and services industries. People came from everywhere to live and work here. We could afford to provide our citizens with a quality of life that was the envy of the world. Everyone we knew that didn't live here came to visit and tourism became such a big industry we eventually lost the most important unit of currency in our State, the E ticket.
Economists clearly understand that a healthy world is built like a layer cake. The foundation layer that has to be strongest is the industrial base. Core industries enable everything else to sit on top of them thus creating a long term sustainable quality of life. Sadly California has become a hollow shell. Manufacturing, agriculture and mining is a mere 12 percent of the State's GDP. Vast amounts of assembly and parts manufacturing have long since been outsourced elsewhere. The trade, transportation, utility, professional and information industries that arrange the deck chairs are around three times larger than the core industries sector. Using a conservative 1-to-1 rule of thumb, this means that at least 2/3rds of our State's service economy is linked to the health of non-CA economic zones. We are deeply dependent on the rest of the world for the lifestyle we have become accustomed to. This tenuous co-dependency supports a real estate and social services infrastructure amounting to well over half of the State's remainder of GDP. Our esteemed visionaries however forgot that worldwide economic booms do not last forever and as the cycle turns the de-levering exposes as much as one-half of our real estate and social services sector to stresses we have little ability to mitigate on our own. It strikes me as unhealthy that as a State we do not more actively ask why our economy is so out of balance with sustainable fundamentals.
Hey I'm not saying that California shouldn't embrace the global economy. Quite the contrary! We are the ninth largest economy on the planet. We are tightly integrated into the global economy. Indeed the old adage about as California goes, so goes the nation has great meaning at the dawn of the 21st Century. What I am saying is that we Californians aren't acting like the 9th wonder of the world as we should be if we are to play our role in helping bring about the future prosperity of the entire Unites States. Other major economic powers know all too well that paying close attention to their sustainable base is mission critical. We are over leveraged and we either need to shrink back to a sustainable point - a move that would reverberate badly around the entire planet -- or begin to grow our industrial core to regain our balance.
There is a way out of this. The "invest local" notion has been around as a "common sense" idea for some time. I've seen it dismissed as the grumbling of Neanderthals who are merely in the way of outsourcing everything to the lowest possible just-in-time starting point to maximize shareholder value. But I happened to believe this "common sense" instinct is on solid ground particularly with respect to the long term conservation of economies. Most recently, I've seen this thought energized with new voice by things like the Move Your Money.
A shifting in how the resources of the banking system are used is a step towards this notion becoming reality. People do have the power to create systemic pressure that opens pathways to put energy back into revitalizing the sustainable core of the California economy. I think it's a worthy use of the people's collective voice to make such a demand on the system as a whole. So far that voice starts by individuals moving money into suitable institutions that focus on the local. But ultimately it will change the focus of government and banking to recognize and adopt the principles of "investing in sustainability" as a national priority. To make it work, this is a case where the People need to lead so the system "has" to follow.
This is the first of a series of articles where I hope to illustrate in plain spoken and hopefully entertaining language how the tools of banking, finance and policy can be harnessed to turn thought into reality. Stay tuned.