by Christopher Jones, Vice President for Research, RPA
Monday's news was perhaps the most shocking yet for reeling markets and worried citizens. The U.S. House of Representatives sent the stock market tumbling by rejecting the $700 billion financial rescue package agreed to by Congressional leaders, the largest government intervention into the financial markets since the Great Depression. No one knows what, if any, plan will eventually be approved by Congress or if it will work, but the news gives those of us who live in New York, New Jersey and Connecticut the most compelling reasin yet to pursue an increasingly pressing question:
How will this unfolding global financial crisis affect us in the tri-state region centered around New York City?
The answer is unclear, but it is useful to remember that this is hardly the first time that New York City is at the heart of an international economic and political crisis. Most recently, terrorists attacked the World Trade Center as the symbol of global capitalism, unleashing a military and political response that is still evolving and exacerbating a recession that was already underway. There were widespread doubts that Lower Manhattan could survive as a financial center, and predictions that many financial operations would need to de-centralize to places entirely outside of the metropolitan area. The worst of those fears proved unfounded - or at least premature - as both Wall Street and the tri-state region recovered and thrived. An overheated housing market certainly provided the fuel, but the recovery affirmed New York's resiliency and sparked a boom of residential construction, mega-development projects and new infrastructure investments.
The current crisis is also rooted in New York's status as the center of the financial industry, but the parallels to 2001 only go so far. Seven years ago, New York was the victim of an attack that earned the world's sympathy and support. Now, Wall Street is the symbol for the greed that is blamed for bringing down the house of cards. And where economic repercussions were a corollary to the human tragedy and global political threats after September 11, today the crisis is fundamentally an economic one.
Once more, however, there are serious questions about how the city and the region will get through the hard times and what will be fundamentally changed in the process. The outlook is particularly cloudy this time because the nature and composition of the region's key industry - finance - is clearly changing. When the dust settles, most of the big name investment banks will be out of business, taken over or transformed into more diversified financial institutions. How the industry operates, how much of it stays here and how this will affect the rest of the economy is up in the air.
The immediate impacts will almost certainly be dramatic and grim. The rhetorical battle between "Wall Street" and "Main Street" in the national debate has less relevance in a region where Wall Street generates over a third of New York City's income and supports enough jobs throughout the region to send shock waves through New Jersey, Connecticut, Long Island and the Hudson Valley. As many as 50,000 jobs are expected to be lost in financial services alone, and an even more dramatic decline will be seen in the stratospheric bonuses that were fueling everything from state and city tax coffers to purchases at neighborhood restaurants and stores. As these losses work their way through the rest of the economy, everyone from waiters to construction workers to small business owners will suffer. To many, already reeling from mortgages they can't pay or rising gas and food prices they can't afford, the job and wage losses will be devastating. With credit frozen and demand dropping, major building projects like the Atlantic Yards in Brooklyn and the Hudson Yards on Manhattan's West Side could stall. And with tax revenues plummeting, funding for basic public services like transit and education are at risk.
How the restructuring of the finance industry will shape the region over the long term is much harder to predict. However, a few questions are worth exploring even before we know how far the downturn will go, since our response to the immediate crisis will affect these long-term trends. Perhaps the most fundamental is whether New York's status as a global financial center will be permanently diminished. In one sense, New York's status as the center of the financial universe has been eroding for some time. As capital has become more decentralized around the globe, cities from London to Shanghai have assumed a higher share of international banking, securities trading and other services. We've barely noticed this, however, as the volume and value of financial transactions have exploded and as New York-based firms maintained their edge as the leaders in deal-making and creating innovative financing instruments.
With investment banks like Merrill Lynch being swallowed up by more traditional banks headquartered elsewhere, and with the likelihood of new regulations restraining some of the highly leveraged transactions that drove recent Wall Street booms, New York's finance sector is likely to be smaller, less lucrative and less volatile for some time. Its claim to be the financial capital of the world may also become increasingly irrelevant. However, it would be shortsighted to bet against either the global demand for new financial services or the New York region's ability to provide them. While we may be entering a period of consolidation and needed regulatory reform, there will simply be too much new capital looking for investment opportunities to slow the growth of financial services for long. As long the region retains the core of its industry and remains a magnet for the talent that gives it its edge, it should have a large, dynamic finance sector that drives growth throughout the region.
A corollary question is whether the reshaping of the finance industry could finally lead to a more diversified, less bifurcated regional economy. The most likely answer is that, without some other major structural or policy changes, any diversification will be marginal. While a more constrained finance sector could free up real estate for other industries, it won't create the demand for them. In fact, many of the industries that have often been seen as prospects for greater diversification, such as technology or business services, have in fact been dependent on finance. Others, from science-based research and development to high-value manufacturing, will continue to face the same challenges for growth in the region that they have for some time. The most probable course is a gradual broadening of the region's economic base over time, with both policy choices and market demand affecting its pace.
And what of the region's physical development? The resurgence of downtowns and urban neighborhoods over the last 15 year and growing constraints on suburban growth - changing demographics, less available land, higher energy costs - all point to future growth that is more concentrated in cities and town centers. Would consolidation in the finance sector alter that pattern? This is a possibility, given that parts of the finance industry have been centered in urban locations, but on balance the forces leading toward greater urbanization are probably too strong to overcome. While a recession could hit the city harder than the suburbs over the next couple of years, the other parts of the region will take their share of losses as well. And in the past, as found in a study by Rutgers University for RPA, one of the most powerful predictors of economic growth in the suburbs has been the growth of financial services in New York City. Over the long run, the relative growth of cities and suburbs will be driven by their desirability as places to live, and their ability to reach a wide range of employment opportunities. As with the finance sector itself, all bets are off for the next few years, but even this financial crisis is unlikely to alter the long-term growth dynamics.
Monday's news was perhaps the most shocking yet for reeling markets and worried citizens. The U.S. House of Representatives sent the stock market tumbling by rejecting the $700 billion financial rescue package agreed to by Congressional leaders, the largest government intervention into the financial markets since the Great Depression. No one knows what, if any, plan will eventually be approved by Congress or if it will work, but the news gives those of us who live in New York, New Jersey and Connecticut the most compelling reasin yet to pursue an increasingly pressing question:
How will this unfolding global financial crisis affect us in the tri-state region centered around New York City?
The answer is unclear, but it is useful to remember that this is hardly the first time that New York City is at the heart of an international economic and political crisis. Most recently, terrorists attacked the World Trade Center as the symbol of global capitalism, unleashing a military and political response that is still evolving and exacerbating a recession that was already underway. There were widespread doubts that Lower Manhattan could survive as a financial center, and predictions that many financial operations would need to de-centralize to places entirely outside of the metropolitan area. The worst of those fears proved unfounded - or at least premature - as both Wall Street and the tri-state region recovered and thrived. An overheated housing market certainly provided the fuel, but the recovery affirmed New York's resiliency and sparked a boom of residential construction, mega-development projects and new infrastructure investments.
The current crisis is also rooted in New York's status as the center of the financial industry, but the parallels to 2001 only go so far. Seven years ago, New York was the victim of an attack that earned the world's sympathy and support. Now, Wall Street is the symbol for the greed that is blamed for bringing down the house of cards. And where economic repercussions were a corollary to the human tragedy and global political threats after September 11, today the crisis is fundamentally an economic one.
Once more, however, there are serious questions about how the city and the region will get through the hard times and what will be fundamentally changed in the process. The outlook is particularly cloudy this time because the nature and composition of the region's key industry - finance - is clearly changing. When the dust settles, most of the big name investment banks will be out of business, taken over or transformed into more diversified financial institutions. How the industry operates, how much of it stays here and how this will affect the rest of the economy is up in the air.
The immediate impacts will almost certainly be dramatic and grim. The rhetorical battle between "Wall Street" and "Main Street" in the national debate has less relevance in a region where Wall Street generates over a third of New York City's income and supports enough jobs throughout the region to send shock waves through New Jersey, Connecticut, Long Island and the Hudson Valley. As many as 50,000 jobs are expected to be lost in financial services alone, and an even more dramatic decline will be seen in the stratospheric bonuses that were fueling everything from state and city tax coffers to purchases at neighborhood restaurants and stores. As these losses work their way through the rest of the economy, everyone from waiters to construction workers to small business owners will suffer. To many, already reeling from mortgages they can't pay or rising gas and food prices they can't afford, the job and wage losses will be devastating. With credit frozen and demand dropping, major building projects like the Atlantic Yards in Brooklyn and the Hudson Yards on Manhattan's West Side could stall. And with tax revenues plummeting, funding for basic public services like transit and education are at risk.
How the restructuring of the finance industry will shape the region over the long term is much harder to predict. However, a few questions are worth exploring even before we know how far the downturn will go, since our response to the immediate crisis will affect these long-term trends. Perhaps the most fundamental is whether New York's status as a global financial center will be permanently diminished. In one sense, New York's status as the center of the financial universe has been eroding for some time. As capital has become more decentralized around the globe, cities from London to Shanghai have assumed a higher share of international banking, securities trading and other services. We've barely noticed this, however, as the volume and value of financial transactions have exploded and as New York-based firms maintained their edge as the leaders in deal-making and creating innovative financing instruments.
With investment banks like Merrill Lynch being swallowed up by more traditional banks headquartered elsewhere, and with the likelihood of new regulations restraining some of the highly leveraged transactions that drove recent Wall Street booms, New York's finance sector is likely to be smaller, less lucrative and less volatile for some time. Its claim to be the financial capital of the world may also become increasingly irrelevant. However, it would be shortsighted to bet against either the global demand for new financial services or the New York region's ability to provide them. While we may be entering a period of consolidation and needed regulatory reform, there will simply be too much new capital looking for investment opportunities to slow the growth of financial services for long. As long the region retains the core of its industry and remains a magnet for the talent that gives it its edge, it should have a large, dynamic finance sector that drives growth throughout the region.
A corollary question is whether the reshaping of the finance industry could finally lead to a more diversified, less bifurcated regional economy. The most likely answer is that, without some other major structural or policy changes, any diversification will be marginal. While a more constrained finance sector could free up real estate for other industries, it won't create the demand for them. In fact, many of the industries that have often been seen as prospects for greater diversification, such as technology or business services, have in fact been dependent on finance. Others, from science-based research and development to high-value manufacturing, will continue to face the same challenges for growth in the region that they have for some time. The most probable course is a gradual broadening of the region's economic base over time, with both policy choices and market demand affecting its pace.
And what of the region's physical development? The resurgence of downtowns and urban neighborhoods over the last 15 year and growing constraints on suburban growth - changing demographics, less available land, higher energy costs - all point to future growth that is more concentrated in cities and town centers. Would consolidation in the finance sector alter that pattern? This is a possibility, given that parts of the finance industry have been centered in urban locations, but on balance the forces leading toward greater urbanization are probably too strong to overcome. While a recession could hit the city harder than the suburbs over the next couple of years, the other parts of the region will take their share of losses as well. And in the past, as found in a study by Rutgers University for RPA, one of the most powerful predictors of economic growth in the suburbs has been the growth of financial services in New York City. Over the long run, the relative growth of cities and suburbs will be driven by their desirability as places to live, and their ability to reach a wide range of employment opportunities. As with the finance sector itself, all bets are off for the next few years, but even this financial crisis is unlikely to alter the long-term growth dynamics.
@RegionalPlan