The trading floor of Chicago's Volatility Index.Iain Marlow/The Globe and Mail
This is where America comes to profit from fear.
One storey above Chicago's main financial strip, beneath three towering screens of ever-shifting neon green financial data, 60 people gather every day to helm the "fear index."
The Volatility Index, as it's formally known, launched in 1993 at the Chicago Board Options Exchange. It quickly established itself as the global barometer of just how frightened investors are – of the uncertainty rippling across the Earth's financial and social surface. When people get scared, the index rises; when they feel safe, it drops.
It peaked after Lehman Brothers collapsed during the financial devastation of 2008. And it is seeing a lot of action again because what was supposed to be a gradual recovery has turned into a remarkably unpredictable future. Global stock markets are yo-yoing, Europe is desperately trying to confront a crippling debt crisis, and the United States' credit rating has just been downgraded for the first time in modern history. Across America, houses are still being foreclosed on; the situation for workers, even as business picks up, is bleaker than it has been in generations; and Washington is sunk in intractable partisanship.
For the first time in its 115-year history, the Dow Jones Industrial Average has undergone swings of more than 400 points for four consecutive days. And the sheer volume of trading on the Volatility Index has soared to breathtaking highs in the past week, breaking several records.
The VIX reflects what America is now coming to grips with: That this – the modern era's most punishing downturn – isn't over yet; that turbulence has entered a state of permanence. "A lot of large institutional investors, like banks, use [VIX]as insurance when the markets start going crazy," a Chicago Board Options Exchange employee says. Referring to the day the U.S. debt was downgraded, he adds: "[Last]Friday was our busiest day – ever."
Broken boulevards
It is only a short drive out of Chicago's beautiful forest of skyscrapers before the lingering devastation of the 2008 recession comes into full view. First, the shuttered stores and boarded-up, foreclosed houses, home to squatters and dogfights. Then the disintegrating bridges, roads and other infrastructure. It is depressing evidence of the shift from the crippling private debt of the American housing crisis to a broader, unsustainable spending pattern within the global public sector. Some neighbourhoods here are almost entirely boarded up, as average Americans defaulted on mortgage debts in a manner not dissimilar to what is now happening to their governments.
A good metaphor for the quiet transfer of private to public debt in Chicago are the yellow "boots," as locals call them, that lock ticketed cars to the potholed pavement outside their owners' dilapidated houses – a sad tug of war that leaves one confused over just who needs the money more.
This is the United States of Ixchell Johnson.
The 35-year-old mother of four lives in a house on the west side of Chicago that she is embarrassed to be seen in, with two nephews that her sister is not legally allowed to be with alone. Her husband – who beat her and cheated on her – died of a neurological disease in 2006.
For her, the societal and economic malaise underpinning the recession did not begin in 2008, with Lehman's collapse, and it is unending now; talk of President Barack Obama's hope and recovery brings laughter. "It's so much worse, it's like, the people that have money, well, they're still going to continue to have money. People that have a little money, they're not going to have it for very long. And the people that have no money, well, they're just …," Ms. Johnson says over lunch on her way to a job interview.
Although she doesn't own her home, she has been paying rent to a slumlord who has not paid the mortgage that holds the crumbling roof over her head. The house is now in foreclosure. After multiple moves, dragging kids behind her, she faces eviction any day now. She says she can't bear to be homeless again, or have her kids sleep in a shelter. But she has enough saved up for only two days in a hotel before things get really bad. This is the state of Ms. Johnson's certainty: "I'm sitting here now talking to you. Someone could be at home putting my kids' things out."
Yet, as an orphan who didn't see her mom until she was 17 – and even then, behind bars – Ms. Johnson didn't actually grow up in the ghetto: She was instead shuffled around homes in some of the nicer suburbs, which put ideas into her head about the future she wants for her own children.
Consequently, she doesn't speak like, dress like, or fit in with many African-Americans on the west side of Chicago, she says. She knows her life has been hard, but thinks God will help her in the end, since she has made it this far without succumbing to the lure of prostitution or drugs, or dying. When one of her nephews showed up at school with a dead mouse in his book bag, she threw out all his clothes and bought him new ones, starting from scratch.
Her durable American dream has been tempered by modern times; it is almost depressingly up-to-date, yet at the same time also incredibly resilient.
"You're going to be old and grey before you'll see anything good," she says. "Everything's gone bad for me, but for my kids, there's hope." She suggests that her story could inspire others – and that is before she finds out she has been offered the job she was interviewing for, where she will work with children. She is set to graduate from a certificate program in two months. She walks away, smiling.
Jobs, jobs, jobs
On a side street off North Pulaski, up a stairwell in a two-storey, brown-brick factory that employs 60 people, Bob Laystrom is turning away a job-seeker. He has to do that a lot these days, as the U.S. employment outlook darkens. "We're not accepting applications right now," he says as a Hispanic man thanks him and shuffles down the stairs. It's not that business isn't good here. Despite downsizing and reducing wages during the recession, Laystrom Manufacturing Company – which was founded in 1951 by Mr. Laystrom's grandfather and run by his father until the latter's death in 1987 – has seen business pick back up for its small moulded metal products, which go into everything from musical instruments to cellular antennas.
The company has just ordered a $500,000 piece of machinery from Japan, because orders are picking up, and Mr. Laystrom says he is planning to start a second shift, which is positive both for his balance sheet and the community. But when he posted a single job opening for a quality-assurance technician in mid-June, he was flooded with nearly 500 applications encompassing a worryingly broad cross-section of U.S. society – from people who were dramatically overqualified, with PhDs in health sciences, to those who were starkly unqualified. Normally, he would only see about 100 applications.
"These weren't people looking to trade up, these people are treading water," Mr. Laystrom says in his sparse boardroom. "The issue that exists out there is the viability of people to make a living. I'd say we have a long way to go to get out of this."
His view hews close to the most recent data out of the U.S. Labour Department, which revealed that for every job opening in America there were 4.5 people looking for work. Seven per cent of the labour force has given up looking for work altogether. Some people are now talking about a double-dip recession; others expect to see full-blown Depression-era unemployment.
Friedman v. Keynes
Chicago's unemployment rate of 10.2 per cent is marginally higher than the national average, but this city is nevertheless situated at the centre of the country's problems – both geographically and intellectually. To many, it was a more radical version of the Chicago school of thought championed by economist Milton Friedman and his University of Chicago colleagues that led to the most recent financial collapse.
A laissez-faire attitude toward deregulation and a vehement rejection of Keynesian government intervention defined Mr. Friedman's thinking, which famously advocated that Federal Reserve tinkering could have staved off the Great Depression. There were those who thought the response to the crisis of 2008 forced the Chicago school into full intellectual collapse – that we were all Keynesians in an era of $10-trillion bailouts.
Yet with riots in the streets of Athens over the Greek government's austerity measures and concerns about how, and how fast, to slay the U.S. budget deficit, the tension between Mr. Friedman and the interventionism of his historic rival, John Maynard Keynes, is still vibrant.
Dan Swinney, who heads the Chicago Manufacturing Renaissance Council, argues that this free-market ideal is nothing but a sham, and that obsession over short-term investor gain since the 1970s has destroyed American manufacturing and eroded the middle class. "You have this malaise," he says. "Within 10 years, we'll be pushed to the margins of the global economy – we don't have a tax base to fund these social programs."
Mr. Swinney lost his manufacturing job in the 1970s and now works to promote advanced manufacturing across the country, starting in Chicago at Austin Polytechnic, a school on the west side that certifies kids in the trades. President Obama praised his efforts there on the campaign trail in 2008, declaring that the school was bringing "hope back into the community."
Mr. Swinney says the first Chicago school of thought, Mr. Friedman's, "played a hugely destructive role in the global economy." Of his own approach, he adds: "We represent a new Chicago school of economic development."
Tea time
The city also happens to be home to yet another new school, one that some – including Bob Laystrom – blame for the polarized deadlock in Washington. It was here in Chicago, on Feb. 19, 2009, that CNBC's Rick Santelli took to the floor of the Mercantile Exchange and railed against excessive government spending to hoots and whistles from the floor traders. He yelled on-air that the founding fathers were rolling in their graves and called for a new Tea Party movement in Chicago.
Steve Stevlic was one of the thousands who answered. The clean-cut resident of Chicago's western suburbs walked out on his lunch break eight days later for the first ever Tea Party rally, it was his first act of protest on American soil and he did it in a suit and tie. He finds it absurd that the U.S. government has $14-trillion in debt, and is adamant that if the numbers were spoken of in denominations common to a household budget, no American would stand for it.
Eventually, through speechifying and participating in various public debates, he became director of Chicago's Tea Party organization. The movement has since flourished nationally. American progressives blame the Tea Party's growing influence on the political intransigence that many feel poisoned the debt debate in Washington and led to Standard & Poor's downgrade of U.S. credit that sent global markets crashing.
But Mr. Stevlic , who does not fit the Tea Party stereotype of "toothless hillbillies," as he puts it, disagrees profoundly with that analysis. He also says the Tea Party claims no victory in its recent influencing of the national debate. "Blaming the Tea Party for the debt downgrade is like blaming Paul Revere for the British coming – it's scapegoating," he says over Diet Cokes in a suburban Chili's restaurant.
For Mr. Stevlic – who lost his job as an education consultant in the health-care sector partly because of what he calls pre-emptive downsizing in response to reduced revenue forecasts under "Obamacare" – true victory is defeating the Obama administration outright. And he is passionate about this task, putting his family life under strain by working on Tea Party business for as much as 18 to 20 hours a day, or trading e-mails at 3 a.m. He says his father was imprisoned by the communist regime in the former Yugoslavia, listened to Voice of America in his cell, and fled the country in order to establish his life here. "America is an experiment," he says. "Getting involved with the Tea Party was the least I could do for my children."
In the pit
Back in the boisterous VIX pit, a momentary silence is punctured by an explosion. "Idiot!" somebody yells as a trader carries a fizzing Sprite bottle to safety.
At the bottom of the pit, Michael Palmer, a square-jawed employee of Chicago's Group One Trading, stands surrounded by of computer screens. The past week has been busy. "You started to see some real panic," he says.
The latter half of the week saw the VIX's peak drop off a bit. Is the index registering hope? Not really. "It's a worrisome time, and that's what the VIX is telling you," says Robert Whaley, a finance professor at Nashville's Vanderbilt University.
Of late, Prof. Whaley has been watching the index closely, at least in part because he is the man who invented it. A member of the Chicago school who has worked with its numerous Nobel laureates, he created the Volatility Index in France on a six-month leave with his family in 1992. The result is simultaneously a gauge of the world's fear and an imaginative source of insurance against exactly what the world is fearing.
"You're willing to pay for more insurance when you know doom is heading your way," Prof. Whaley says. "When we see a changing of volume to this degree, it points toward one thing – the degree of [future]catastrophe."
Global investors indeed face a formidable array of risks: There is debt contagion in the Euro zone; political instability in Washington; woeful American employment numbers; and stagnation in China – the country that was supposed to be leading a charge of emerging markets to save the global financial order, but is instead staring down the barrel of a potential housing bubble.
Yet America continues to innovate and attract the ideas and people it needs to climb out of this hole. Prof. Whaley is himself an example. Despite being a member of the Chicago school, he happens to be Canadian.
Iain Marlow is a reporter for Report on Business.