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Hammers hang in neat rows on Home Depot’s wide aisle, a shining promise of self-reliance that goes back centuries. The person who could wield a hammer with some skill and intelligence and not a little bravery had the potential to meet the world on equal terms and become a builder, someone whose work promised immortality. One of the most venerated of Norse Gods, Thor, wielded a hammer. Christ was a carpenter.
Hammers may seem boring to many people, but to the avid do-it-yourselfer, the more the better. A tool connoisseur will tell you that there is no such thing as a hammer; there are many hammers, each for a different purpose. For example, long-handled framing hammers have large, checkered faces constructed to drive nails as big as spikes into everything from 2×4′s to trusses used for spanning roofs. Framing hammers demand the heft of a sledgehammer coupled with the balance of a fly rod and the shock resistance of a shotgun stock. A good one sits in a tool belt like a gunfighter’s .45, hanging loose at the hip where it can be whipped out in an eye blink by someone clinging to a joist thirty feet above the ground. The claw end of a framing hammer is all business, as much an ax as a nail-puller. Wielded skillfully it sends chips flying as if they had been carved by a professional logger. Next to the framing hammers hang drywall hammers, odd-looking throwbacks to the frontier, and rapidly becoming so with the increased use of screws. Home Depot’s web page lists 33 hammers including rubber hammers, mason hammers, and, of course, the claw-shaped finishing hammers we picture when someone says, “Get me a hammer.”
Years ago some of these tools could only be found in hardware stores catering to professionals. Now they clog mall mega boxes whose main customers do most of their work when the pros are off fishing. Among the hammers, toilet flanges, and wiring cable staring at you in Home Depot lies a story of a deepening economic crisis and why Liberal America’s value of social and economic equality needs a hammer.
The Empty Boxes
Ranking right up there with “For Sale” signs as a manifestation of the Bush Depression are the empty stores of big box retailers such as Home Depot and Circuit City. The Circuit City press release announcing its intent to liquidate makes for sobering reading:
Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders to structure a going-concern transaction in the limited timeframe available, and so this is the only possible path for our company.
Home Depot will close Expo Design Centers, YardBIRDS, Design Centers and HD Bath, a bath remodeling business, with layoffs estimated to reach over 7,000.
Much like the bank closings during the Great Depression, the emails and rumors about store closings have spread so quickly through the ether that the Snopes.com site felt compelled to issue a report of which chains were actually closing stores and how many. Here is a partial list, for a full list check the Snopes web site:
Comp USA has closed most of its 103 outlets.
Dillards closed 21 outlets in 2o08 and will close more in 2009.
Foot Locker closed 274b outlets in 2007 and sixty more in 2008.
The Gap expects to close 115 outlets.
KB Toys filed for Chapter 11.
Levitz filed for Chapter 11.
Pep Boys closed 31 outlets.
Wickes furniture began liquidating a year ago.
Meanwhile the rumors keep flying, none of them helped by the fire-sale mentality that seems to lie behind the ad supplements in the Sunday papers. This year the annual Presidents Day sales have taken on added meaning as retailers struggle to recover their equilibrium after reeling from a Christmas that for many of them was far from Merry.
A Visit to Circuit City
Like many other Americans I traveled to Circuit City–in my case mostly out of curiosity because I neither want nor can afford a big screen television, new computer or home theater sound system. At the store I visited it appeared many others had the same idea, because a lot of people were merely browsing.
What they saw was a bizarre scene that looked like half burglary and half ware house. Aisles and shelves held conspicuous gaps where the bargain hunters had made their steals. On the floor stood unopened boxes, some with labels that told you what was inside and others you had to examine more closely to see what they held.
Only a few employees were left to keep watch over the dwindling merchandise, their demeanor looking a bit like pictures I had seen of farmers at auctions in the 1930s. All still wore their Circuit City “uniforms” as if by doing so they could somehow hold off the inevitable. Their whole world had been turned upside down, for the better they sold the more quickly the store would empty not only of merchandise but of employees. It would not be hard to imagine a Saturday Night Live skit from this with salespeople purposely discouraging people from buying anything so they could keep their jobs.
The prices on items I saw did little to discourage this impression. I had anticipated a fire sale with huge markdowns and bargains you couldn’t resist, but as I told the uniformed security officer guarding the exit door, I could find better prices on the Net or at a competitor down the road. If Circuit City was bankrupt you could not tell it by the prices.
At one point in my visit I found my statistical nature getting the better of me as I tried to make some sense of the mess, toting up what seemed to have gone first and what was still there. The entire cell phone aisle was empty. The digital camera section was down to a few lonely samples. Computers and accessories were pretty well cleaned out. On the other hand they still seemed to have plenty of wide screen televisions, which were hardly a bargain at 20% off.
If this admittedly random survey told any story is was that Americans were buying necessary luxuries like cell phones and turning away from big ticket, discretionary purchases such as plasma televisions. It was as if even in the middle of this liquidation sale, this retailer who had stocked up on the wrong goods could not get rid of them.
I judged at least a third of the showroom area was devoted to large screen televisions which seemed to me the Circuit City equivalent of our auto manufacturers overstocking and overpricing gas guzzlers. You wonder what Circuit City’s managers and buyers were thinking when they would load up so much of a store with an item that people do not rush out and buy on a yearly basis. Even people I know who have discretionary income in these tough times already have their big screen televisions and have no intention of buying a new one.
What Went Wrong
Something in the head of Circuit City’s managers had gone terribly wrong, as if they were watching too much of their own product and maybe smoking or drinking something while they did it. Even in lush economic times three-thousand dollar televisions do not rush off the shelf, but these executives seemed to believe they would. It was as if they were living in a different world–and maybe in the gated communities favored by some of them, they had no idea of how this crisis has hit ordinary Americans. But you had to have not watched the news or read the newspapers for at least two years to not recognize that for families struggling to hold on to their homes, a plasma television was about as ridiculous a purchase as they could make.
If those empty boxes signify the empty heads of some retail store executives, they also signify a larger mentality that is preventing the nation from squarely confronting this crisis. It is the same mentality that got us into it. The Bush Administration could be nicknamed the Plasma Television Administration, for they seemed to operate under an assumption that the economy operated from the top down rather than from the bottom up. So they lavished their largesse on the infamous tax cuts for the rich and hosted their own version of the Gilded Age’s Great Barbecue.
Circuit City’s overstock of big ticket items seems to grow from the same mentality, so this retail chain, whose locations have been cited as one of the reasons for its downfall, seemed to believe those people whose pockets were bulging with tax cuts money would come waltzing in the door. No one apparently entertained any notion that perhaps the market for big screen televisions would sooner or later hit a saturation point just as the Bush people did not seem to believe you could give the rich too much money which they weren’t going to spend at Circuit City anyway.
The Unknown Banking Crisis
There also is an even more troubling side to the stories of the box retailers. Circuit City closed because it could not get any more cash. Other retailers are doing the same–as are those in the auto industry. Retail sales depend on stores being able to float loans to buy some of their goods, which in turn they will sell at a profit in an apparent win-win situation. The only problem is this way of doing business became as lose-lose as subprime mortgages.
The side of the banking crisis that has not received the attention it is due is loans to retailers like Circuit City. Like some Ponzi scheme gone wrong, there was an element to retail sales that fed on questionable loans. Start with those ubiquitous credit cards we used to get deluged with in the mail. They enabled customers to walk in the door and walk out with a television worth as much as my car without anyone knowing if they could pay for it. Stores extended loans to customers who bought on time or credit.
As I wrote last year, the largest growing segment of the banking industry was due to a loophole in the now-universally decried Gramm-Leach-Bliley Act which repealed that crown jewel of the New Deal, the Glass-Steagall Act. That loophole pertained to so-called Industrial Loan corporations, of which GMAC is perhaps the most-well-known example. ILC’s are strange financial creatures in that they may be owned by nonfinancial institutions such as General Motors, but their biggest difference with regular banks is that they are state-chartered and not subject to federal regulation.
In 2007 testimony before the House Committee on Financial Services, Federal Reserve Vice Chairman Donald Kohn outlined the consequences of the loophole:
The ILC exception also creates an unlevel competitive playing field by allowing both financial and commercial firms to own an insured bank but avoid the prudential limitations, supervisory framework and restrictions on affiliations that apply to corporate owners of other insured banks.
Through the ILC loophole have poured a veritable cascade of new financial institutions. Kohn described what has occurred because of the loophole:
What was once an exception with limited and local reach has now become the avenue through which large national and international financial and commercial firms have acquired a federally insured bank and gained access to the federal safety net. Indeed, dramatic changes have occurred with ILCs in recent years that have made ILCs virtually indistinguishable from other commercial banks.
Kohn went on the cite statistics illustrating the growth of ILCs:
As a result of these and other changes, the aggregate amount of assets and deposits held by all ILCs operating under this exception increased substantially just in the nine years between 1997 and 2006, with assets increasing by more than 750 percent (from $25.1 billion to $212.8 billion) and deposits increasing by more than 1000 percent (from $11.7 billion to $146.7 billion). In fact, in 2006 alone, the assets and deposits of ILCs increased by $62.7 billion and $38.8 billion, respectively. The number of Utah-chartered ILCs also has doubled since 1997, while declining in the few other states permitted to charter exempt ILCs.
The Failure to Close the Loophole
ILC’s helped to fuel the retail financial crisis just as subprime loans helped to fuel the mortgage crisis. Largely unregulated and unwatched they could throw money around without inspiring even the cursory oversight that comes with mortgages. In the midst of Home Depot’s economic struggles is forgotten that the giant retailer proposed in 2006 that it acquire EnerBank USA, an Utah ILC.
President Obama promised on the campaign trail that he would close the ILC loophole but one of his close economic advisors–Lawrence Summers–was among those who helped to put it there. Interestingly, the new President has yet to close the loophole. You will find no mention of it in the so-called stimulus package.
Speaking of the stimulus package–which I will say more on in part two of this month’s cover story–you will see no bailouts for the likes of Circuit City. Apparently they are to be be left to the harsh rules of the market. There is little question the company’s executives made some bad decisions, but unlike the banks who DID receive bailout monies, the executives of Circuit City did not do anything unethical, stretch the law or operate illegally–something three banks who received bailout funds are still doing by controlling more than 1o% of the market. And–as I wrote in another piece last year–they did not engage in overt racial discrimination.
But just as he approved the loophole in Gramm-Leach-Bliley that allowed for companies like Circuit City to become caught up in the tentacles of ILC’s, Lawrence Summers approved of the infamous “too big to fail” clause in BLB that became the justification for rewarding the bad decisions and unethical behavior of the likes of Citigroup.
The Crazy Rules of Today’s Economy
There must be employees, shareholders and customers of Circuit City who wonder about the crazy rules of this economic crisis–rules which seem to reward the illegal and the unethical solely because they have managed to greedily grab so large a market share that we must bail them out– regardless of their behavior–while other firms who just made bad decisions end up in bankruptcy court. Size has always exerted undue pressure in the so-called free market–remember Jay Gould’s attempt to corner the gold market or the schemes of John D. Rockefeller and J.P. Morgan–but never has it been made a moral and legal principle as it was with Gramm-Leach-Bliley.
One of the supreme tests of the Obama Administration will be how it treats the size question. Both Woodrow Wilson and Franklin Roosevelt–and later John Kennedy–made it quite plain where they fell on the size issue. Barack Obama has issued a stinging rebuke of executive pay, but thus far he has remained silent about size.
That his economic team contains people like Summers and Timothy F. Geithner who played a role in the gutting of Glass-Steagall that has helped to produce this crisis leaves me a bit uneasy about the future. It was Summers, after all, who gave a ridiculous speech to those who should know better–the Kennedy School of Government–about the so-called “new economy” which he naively referred to as a “positive feedback” economy. I use the word naive quite purposefully, for Summers did not then understand system behavior–and has shown no indication since that he does. Otherwise he would not be throwing such terms around without knowing what they really mean.
I bring up Summers’ ignorance of positive and negative feedback and his casual tossing around of the terms because it is the symptom of something that lies behind all those empty boxes–hubris, a misguided belief that you know what is right. In this Summers is no different than those Circuit City executives who now sit on acres of big screen televisions because regardless of what the rest of the world was trying to tell them, they thought they knew the answer.
If America’s business and political leaders continue to behave that way we can expect to see a lot more empty boxes. Those rows of hammers in Home Depot, do speak of a morality tale, for those who truly know how to wield a hammer–and believe me as one who has pounded more than his share of nails building a few houses it is not that easy–know that hitting the nail on the head requires intense concentration, focus on the task at hand, not a little bit of skill, and an acknowledgement of reality.
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