The Willful Ignorance of Bubbles

    As in finance, political bubbles are characterized by willful ignorance followed by excess, a painful burst, and broad recognition that we should have seen it coming. (We pundits often claim that we did, but in doing so, it is hard to not sound like one of Sprio Agnew's "nattering nabobs of negativity". ) The real estate burst of the 00's is a classic example - everybody gained by believing that you could bundle thousands of junk mortgages together to create gold - until you couldn't. Sometimes, but not always, the financial and political are intertwined. Let's briefly take federal, state, and local examples.

    The Federal. Who really believes that trillions of dollars of budget deficits and unfunded entitlement commitments don't matter? Barack Obama may actually believe, with his Svengali, Paul Krugman, yelling in his ear, that he can repeal the laws of economics. The public may choose to ignore Paul Ryan and the clamor of the populist Tea Party types. The dollar's "reserve currency" status, backed by the immense power of the American economy, may allow us to ignore the problem for a very long time. The politics of ethnic, gender, class, and age divide may allow a gifted public speaker to focus the public's attention elsewhere. The only question is whether the politics will change before or after the pain associated with the inevitable bursting of the bubble.

    The State of California. Happy times are here again. The people have found a governor who is fiscally responsible on the small stuff and given him the highest tax rates in the country - a top 13.3% personal income tax rate; a 7.5% sales tax (plus up to 1.5% locally); a combined 68.9 cents per gallon gas tax; an 8.84 % corporate tax (9th in the nation); and $1,458 per capita property taxes (15th in the nation, kept down by Proposition 13). With total control of the state the Democrats can do as they wish, pension reform is not on the agenda, and the outflow of high tax payers will accelerate a bit. Out here the equivalent of Wall Street's "mortgage backed securities" is the high speed rail project.

    The basic premise is Too Big To Fail. If we begin with the $10 billion dollars approved by California voters in 2008, and add in $3.6 billion federal dollars approved by the Pelosi Congress, we will be so far along that nobody will be willing to pull the plug. Never mind that nobody believes that the current $68 billion price tag is realistic, that the requirement that there will be no operating subsidies will be met, or that the path won't be impeded by numerous politically-required intermediate stops between Los Angeles and San Francisco.

    Funding is predicated on the assumption that there will be tens of billions of additional federal money (read Democratic control of the House, Senate, and Presidency - and a "thank you" shout out to you readers outside of California) and there will be a "public-private" partnership with wealthy corporations who are not interested in making money. So, what will really happen? For decades the priority for transportation spending in California will be High Speed Rail for the wealthy business people and tourists who do not want to fly between Los Angeles and San Francisco. Forget the millions of blue collar workers who need buses to get from one side of town to the other for their jobs; forget the millions of middle class commuters who need their cars or light rail to get into the city to work. Eventually the voters will notice that the "all in" emotionally satisfying smaller carbon footprint of the few wipes out the good of the many.     

    The City of San Francisco. Happy times are here too. Financial constraint is unnecessary as Silicon Valley is booming (the banks are here, and the nightlife is better so the kids reverse commute), and the strength of the Chinese economy ripples onto our coast, so our politicians are geniuses. But one party rule breeds excess which is most evident at City College of San Francisco.

    Picture a system with nine main campuses and some 90,000 students in a city of 812,000 people. Add a voter population which believes in the mission of providing an affordable feeder system for California's four year colleges and training for careers such as nursing, culinary work, and information technology.  How could this be a Too Big To Fail bubble? Well, add a school board comprised of Democratic machine politicians; turn over management decisions to a council dominated by the administrator, teacher, and student unions; expand the mission so that a large part of funding goes to free  "community enrichment" courses such as memoir writing and cultural self discovery; provide socially fair staff compensation such as full health care and retirement benefits for part time teachers; eliminate any effort to measure costs of the various facilities; and on and on. Eventually, even in California, the state may well pull the school's accreditation - after eight years of warnings, after a stern "this time we really mean it" ultimatum, after the imposition of temporary outside chief administrators. Maybe.    

    So, the quandry for good hearted people who want to work for a better world, and who do not want to be part of the willful ignorance: do you try to provide a warning? do you wait for the bubbles to burst? or do you just try to help the homeless guy on the corner? Illigitimi non carborundum.

                                            ------

   This week's video , compliments of a friend from Connecticut, captures a poignant moment in New York after 9/11/01.

bill bowen - 2/15/2013  

 

Comments

[DickG]

REACTION TO THE REACTION BY THE CHINESE (opting for 'no mas' in Treasuries). Who gets to market first ? Don't the Chinese have to DUMP Treasuries before the rest of the World does; or take a loss ?
Now the US may have to come back with an 'interest rate' increase like Greece or step up the 'presses'. 27% might be only the start of it.
Addressing this 4 years ago would have been helpful. So what's the AGENDA ; more federal hiring ,union federal pension increases, or maybe "shovel ready stuff"? How about more AMMO for 'Big Sis' at Homeland Security; while she mulls over "Gun Control"?

[Bill McCormick]

START THE PRESSES: World currency wars heat up as the UK pound hits a 2 1/2 year low against the dollar. Japan continues to push the Yen lower. Is this retribution for the currency printing of the US? How much printing has this FED done under Obama?

In 2008 the money supply (M0) was $800 Billion. Today the money supply is $2,700 Billion up 350%. Compare that to the money supply 33 years ago in 1980 of $200 Billion. So we go almost on a straight line from $200B to $800B over 33 years --a rate of increase of $18B a year. In 4 years the Fed increases the money in circulation to $2.7 trillion or a rate of $475 Billion a year. Interestingly the historical rate of increase of $18B/year is an average inflation rate of 3.6%. $475 Billion A YEAR IS AN INFLATION RATE OF 27% a year. Or in another way of looking at it a DEFLATION of your currency of 71%. How do fixed income people feel now?

It would be interesting to know where all that money is? I certainly don't have any of it.

[Bill McCormick]

HOUSING,DEBT and the economy: Yesterday 4th quarter figures on late credit card payments came out: late payments up 9%. Today we saw housing starts down 8%. Last months figures revised down nearly 10%. Toll Brothers missed their numbers today and announced theya re going to increase their focus on the RENTAL market. Real estate gains are the result of the retirement areas and investment firms buying up properties for rent. The economy? We have payroll tax increases , late tax refunds, Obamacare implementation, higher gas prices, higher tax rates on higher income people all combining to work against small and middle size employers.

[Bill McCormick]

GASOLINE: contiues the climb. Up 51 cents in 30 days.But,much of it comes from overseas exports contributing to the lower balance of payments deficit. If we can export gasoline, a very critical economic component, then why does the administration oppose liquification of NG and export?

[DickG]

IS THE PRINTING "BUBBLE" CHASING THE BUDGET 'BASELINE' "BUBBLE" ?
More and more requiring more and more. Federal spending from '09 thru 2012 increased at an average of 5% and hitting up against the maximum 7% allowed increases over 'BASELINE'. Is it any wonder The Administration and Senate smother the 'Lawfully Required Budget'?
SIMPLE SABOTAGE ! The ACRU needs to challenge this Administration in Court.
The Adminstration should be thankful we haven't gone Global. The G20 members at the Currency Meeting would have had them arrested.

[Bill McCormick]

THE PRINTING BUBBLE: It appears that all our problems in world economies will go away if we all just print money. And, the world leaders (less Germany and Russia perhaps),like Lemmings, follow our Fed's Pied Piper. It appears that the "we faced the crisis and won" excuse will justify this method of staying out of recession and growing government forever. If this works so well then why not just give California, Illinois,New York,Michigan and the other Blue States a printing press? Oh yes, they don't need one they have a printing proxy in the White House doing it for them.

In the end who is paying the price? All of us, but mostly the poor,low income and fixed budget people who have now decided that voting Democratic is the way to go. Forget that the DOW is almost back to 2007 levels. Those are devalued dollars. And, besides the Union pension funds what poor persion has much of the DOW anyway?
The poor have the food,rent and gas bills to pay. Food: well 41 million of them are using food stamps to supplement their food costs and the cost of food is sky rocketing. Corn up from $2/bu to $9 a bu as a base. Ignore the inflation, voters, appreciate the food stamps. Rent: the foreclosure of poor peoples homes combined with cheap mortgages has created a huge opportunity for REITs (not owned by poor people)to both scoop up single family homes and rent them back but also to fund a bubble in multifamily housing based on low mortgages. This will allow the "home for everyone bubble of the poor" of yester year displaced Democratic voters to have a place to park while awaiting the next promise of the American dream: $9/hr and a green card. GAS: Thank God for Republican and a few sensible Democratic states that they have allowed the exploitation of our oil shale reserves despite the "Executive Order" driven EPA. Bad enough gas is at $3.75 up for $1.85. think of what it would be without these states?Did you hear the President talk of the expansion of leases on public lands? Huh? Let's run that one by Sarah Palin. Did you hear the President talk of natural gas for our trucks and buses? He has ignored the pleas of his own party on that one for 5 years--why else would NG be at $2 in the USA and $16 in China? So, in the name of helping poor Democratic voters by printing money we are creating inflation that puts more and more of them on food stamps. It is a winning strategy, however,as the Democratic majority contiues to grow. When the bubble finally bursts and the middle class finally joins the poor who will be around to pay for all the printed money used to pay government workers, dependent people and the taxes?

[DickG]

LET ME ELLABORATE THIS 20's HISTORY A BIT. Going back to 1920; the Country sank into a severe 'deflationary' Recession following WWI.
Wilson was sick and focused on more 'Progressive' policies. Harding came in with Coolidge as his VP. They immediately went to work on downsizing government and austerity which allowed tax reductions to enhance the 'business climate'. Huge amounts of funding became available in the 'private sector'. The recovery was almost immediate. With Harding's sudden death in 1923, Coolidge took over and continued the policies. The Economy succeeded,almost too well.
Coolidge surrendered office in 1928 and Hoover,the engineer; who had been credited with saving Russia from starvation in the early 20's, took the helm. Unfortunately, he allowed the Fed Reserve to persist in exactly what they are persuing today. Overly stimulating 'The Market' with printed money. Between 1927 and 1929 the 'Market' doubled in value as the 'BUBBLE BURST'.
If this President had any understanding of what was required by the BUSINESS MIND regards CONFIDENCE; he would have taken more appropriate measures. (1)Allowed financial monitoring agencies to remove people who were at the source of the high risk banking policies. (2) Instituted appropriate prosecutions and 'claw backs' from these same people. (3)Appointed Treasury people who would protect the consumer 1st,wrather than the Bank executives(4)Institute emergency surgical budget reductions and massive penalties for fraudulent government appropriations.(5)Reduction in Corp Taxation to the recommended level of 25% and an amnesty of all foreign banked corporate funds.(6)Focused on Mortgage Foreclosure reviews and mortgage 'RESETS'. The 'RESETS' would be in part at the major bank's expense. Plus several other confidence restoring policies; but not to assign the very people at the heart of the problem. Then he sets out on a huge expensive undiscussed social monolith. SABOTAGE !

[harrycat]

Sorry DickG. What is your point?

[DickG]

'THEE BUBBLE'; 1927 - 1940. In January 1927 under Calvin Coolidge; (3-4 yrs of Austerity and Tax cuts and out of a serious Recession) the Country was at 3.3 % Unemployment and a Dow of 155. Going into October of 1929 under Hoover (1st yr); we were at 5.0% U/E and a DOW (Bubbling over)of 343. In October 1933, FDR's 1st year, we reached 22.9% U/E and a DOW of 93. Following 10 years of "STIMULUS" under the 'progressive' efforts of FDR; we arrived into 1940 with 14.6% U/E and the DOW at 151.
Following which, a World War and 5 years of massive forced production finally yielded an Economy. Heloooooooo Ben ?????