Of Lending and Logging

Posted by Jeffrey St. Clair on November 6th, 2008 | Link

Observations on Forest and Finance
By Lance Olsen

Many of us don’t get very old at all before we learn it: forests come down so that our and others’ homes can go up. Because it is so widely understood as meeting economic and social need — including provision of many jobs all the way from the woods to the construction site – the log and build sequence has widespread political support, and can be benign. How ironic, then, that when a tree falls in the forest, the only sound that most of us might ever hear is the crash of home prices, banks, financial systems, and the cries of economic pain following any sudden destruction of jobs all the way from the woods to Wall Street.

What is going on here? Where has it happened? When has it happened? How has it happened? Why has it happened? And, last but very far from least, who has been involved in these transformations of economic need into widely damaging boom?

I started taking these six questions — questions well-praised by Kipling – when forests starting falling hard toward a 1980s construction boom. At that time, a simultaneous building boom in Japan and America was gobbling up forests on both sides of the North Pacific Ocean. The North Pacific was of special interest to me because I was a full time paid advocate for bears, and the landscapes extending from the shores of this ocean are home to six of the world’s eight existing bears.

Thanks to the recent financial crisis, somewhat an encore of a very similarly structured one that followed the transPacific lending, logging, building boom of the 1980s, and one with a lot of similarity the financial crises for Japan and America in the 1990s. I’ve been putting together a primer and field guide for anyone seeking answers to Kipling’s classic questions of what, when, where, why, how, and who.

The Economist once asked whether we make the same financial mistakes again and again, or is each unique? The answer in both cases, The Economist concluded, is yes. We make the same mistakes over and over again, and every encore is unique. I think that’s so. But I also think that the basic script, played out on stages on both sides of the North Pacific and beyond, is a persistently repeated and spectacle where the forests fall first, and the banks fall just later enough to make the connection from forest to finance extremely difficult for the casual observer to perceive.

This drama is escalated to boom scale by massive infusions of capital from the lending industry, and brings down banks galore. Knowing what I know or think I know about this drama after the past couple decades of watching and taking notes, I thinks it’s good enough for everyday discourse to say that the forests may as well fall directly on banks. But we all know that the crushing consequences have never stopped there. As became especially clear to Americans with the collapse of U.S. President George W. Bush’s much-touted “ownership society,” the forests may as well have also fallen directly on the dreams of millions of homebuyers, would-be retirees who knowingly or otherwise pinned their aspirations on the financial economy, and the millions ultimately forced to bail out fractured financial systems.

For some, the very idea of any important, potent connection from falling forests to failing banks will forever be preposterous. I’ve done no credible poll, but my strongest hunch is that logging industry chieftains will likely insist that they had no reason whatever to suspect that, first from 1981 through 1988, and then again circa 2001 through 2008, the wood they were selling was headed straight for a debt-financed construction binge, and that there were risks to the finances of nations lurking out there on the horizon. Now, a sawyer or feller-buncher out in the woods might have high credibility if denying guilty knowledge of home foreclosures and bank rescues coming down the road. Well, I wouldn’t be at all surprised if the crème de al crème in the elite corner offices of logging empires attempt the same confession of ignorance.

And it wouldn’t leave me shocked to find that, just like logging executives denying knowledge of trouble ahead for the banks, the crème de la crème of banking will be denying any knowledge of the previously demonstrated risks for forests and forest jobs. Although a recent ad by HSBC, a major bank said to have financed a heavy bout of logging in British Columbia, seems evidence of at least a little awareness that bankers may have had some role in the bust felt by sawyers, feller-bunchers and, for example, the likes of grizzly bears.

Again, I’ve done no poll, dug out no published research from the logging industry’s journals and reports, but I feel pretty sure that the masters of the construction universe are just likely to deny that they played any role by building too many houses, or too much house too many times over and over again.

Blame the bankers, the construction moguls will say. Blame the bankers, the logging powers will say.

As of 2008, many Americans are absolutely certain that the economic losses of the most recent crisis could and would have been reduced or prevented simply by some adult supervision of the all-too reckless lending industry. Well, yes. It’s true, because buildings can’t be built and bought at reckless levels without some reckless money to finance the spree. The lending industry was in this thing up to it’s eyebrows, and will be getting some earnest scolding, reform and more as the next months roll by.

But it makes just as much sense that the boom-scale transPacific FRECL of 1980-2008 demanded a lot of wood as much as it demanded a lot of money. Sure, a lot goes into a house besides wood. Still, knowing all that, to whatever extent the logging industry joined with the lending industry to bring on the eventual crash, the need of regulation and reform for one speaks loudly of needed regulation and reform for the others.

Alas, because lending, logging and the sprawl of real estate construction went so very lightly restrained in the past quarter century, the booming logging industry felled forests as freely as the booming finance industry lent money. It was a marvelous job machine, spinning off wages, salaries and bonuses all the way from the woods to the ‘burbs and beyond to Wall Street. Very, very few politicians have dared take a stand that would ruin such a wonderful party. But, almost at once, many wild spaces and species took hits as hard as those that would – later enough to make the connection difficult to perceive – also fall upon the financial systems in America, Japan, SE Asia, elsewhere.

And we Americans have lately been doing it all over again, ouching at the aftermath of a lending, logging, building boom that’s come with even deeper pain than in the aftermath of the lending, logging, and construction hoopla of what James Grant has called the “wild-haired” 1980s. It seems difficult to make a case that the likes of homebuyers or, for example, grizzly bears needed this widely damaging serial boom.

It should be even harder to make that case the next time around.

” A certain political and historical correctness
requires us to assign some measure of purpose,
of rationality, even where, all too obviously,
it does not exist.”

John Kenneth Galbraith,
A Journey Through Economic Time

© by Lance Olsen All rights reserved