Business Blog: Hoover’s Business Insight Zone

Recent months have seen the world turned upside-down for some sectors of the business world, especially the subprime mortgage market. The shocks there are spreading through the rest of the financial system and the wider economy, augmented by continuing weakness in real-estate markets across the country. But for all the headlines about the mortgage meltdown, plenty of mortgage lenders and banks are trundling along well enough, and there are pockets of real-estate sunshine amid the gloom — including my own hometown of Austin, which is growing so fast that house prices are still climbing.

Your own take on the “weather” in the business world depends, then, largely on where you are and what you’re focusing on. The Fed is convinced that the overall economy is sound — enough so that thus far it isn’t changing long-term interest rates — and plenty of companies and industries are going strong. In general it’s a good time to be in the solar-power business. It’s a good time to be Nintendo, Google, or Apple. It seems that it’s just about always a good time to be Berkshire Hathaway. (Berkshire’s boss, Warren Buffett, has said that he’s been shopping for bargains amid the chaos in the financial services industry.)

Looking back over the slow-evolving train wreck of the subprime market, I can’t help but think that too many of the decision makers within that industry made the mistake of confusing the “weather” they were operating in the early 2000s — that is, the specific but transient conditions that prevailed at the time — for the more durable “landscape” of financial and commercial realities that prevail not from one year to the next, but across the decades. It is always a bad idea to bet the farm that interest rates will stay at historically low levels for the indefinite future, as some of the worse-run subprime houses apparently did a few years ago. Looking back, it seems obvious that it made little sense to take borrowers with checkered credit history (that’s what makes them “subprime), give them large wads of money relative to their earning power, and then put them on an “exotic” (read: largely untested) variable-rate repayment plan that would (a) allow them to build little equity, but also (b) put them over a barrel when interest rates rose above historically low levels. It makes you want to go back in time, take these lenders by the hand, and tell them gently, “These rates are called ‘historically’ low not as a sales pitch, but because what we’re seeing is so rare. It’s senseless to think that the Fed will let this go on forever.”

Ahh, but there was too much money to be made, and if you were going to make it, the time to make it was now. So we end up with the spectacle of too many subprime houses that were established on shaky seasonal conditions — like sodbuster farms on the prairie that were started in wet years, but that couldn’t survive the occasional decade-long droughts that have always been a feature of the Great Plains. The weather turns, and the ill-founded enterprises fail.

At least the subprime fallout will miss many sectors of the US economy. But can its lesson be extended? There were some smart cats running those subprime shops; they would no doubt feel patronized by what I wrote above. (Let ‘em. They’ve made their own beds, and plenty of the top folks got rich doing it.) You and I are pretty smart, too — but what are we missing even now? What piece of economic or commercial weather are we mistaking for the landscape?

• Maybe Google isn’t unbeatable. As crazy as that sounds these days, Robert Scoble thinks the days of its dominance may be numbered. And some very smart entrepreneurs are getting into the search business even now, when Google seems to be at its peak. Toyota entered the US when General Motors was at its peak, too.
• Maybe the Chinese government will change its mind about buying so much US debt. It could diversify into Euro-based investments. I’m not saying they’d want to do that . . . but what if they did? A thousand important economic assumptions depend on China’s continued appetite for US debt; many of them would be thrown into a cocked hat based on a single decision from a committee in Beijing — an entity beyond the say-so of Hank Paulson, the Fed, or anyone. What if this happened . . . and a genuine trade war ensued?
• Staying in the arena of international affairs, what if Russia further dispossesses western oil companies of their holdings there? What if the “-Stans” follow suit? What if all of Nigeria’s oil production is shut off semi-permanently? If any of these things got bad enough, what would the US, UK, and allied governments do? Anything?
• What if the price of a barrel of oil goes to $110 and stays there?
• Given the recent slew of bad news for big newspaper companies, this one is less radical to propose: What if we’re only ten years from having no more than a dozen daily, printed newspapers in the US? What if the New York Times isn’t one of them? Will we notice? (Have we noticed the decline of the nightly news? Not much.)
• What if the decline of the newspaper business and the seeming incoherence of online advertising combine to take down one of the major globel advertising firms?
• What if the next President pushes through some sort of universal health insurance that covers all Americans? What would the fallout be for hospital companies, pharmaceutical makers, and others in the health care sector?

We could go on, but the point is clear: It’s silly to look at transient “weather” patterns in the business world, assume that they’re permanent, and operate as though they’re really parts of the “landscape.” Sometimes, even if it’s only once in a long while, the landscape changes, too. Earthquakes happen.

Do you feel any rumblings?