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Politics of Atomization, Local retail, Financial Haiku, housing bubble popping, subprime meltdown, gov't bailout, stock manipulation and more   (week of 12/10/07)

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The "politics" of atomization is an interesting way of framing this topic.

This frenzied lifestyle reminds me of "on the beach" - a cold war era short story about a sub commander that takes a post-apocalyptic trip down under to be with the last humans alive. The towns people he ultimately encounters all react differently to the sands draining out of the hour glass. Some retreat, some freak out.

I think the befuddled masses are going to be "shocked and awed". They are going to go through the stages of grief and get stuck on anger, and I am afraid, become suseptable to demagogery and authoritarianism. Ursula Hegi in Stones from the River depicts in fine detail the short slide the german people took the very instant they struck the bargain that "we" will be OK, because they are only after the communists, gypsies, Jews, etc. Hegi's point is that once you accept the incarceration of one among you, you yourself have already surrendered.

And here I am writing to you, because you can't bring this up at the proverbial water cooler without being chastised for being either a downer, or a crackpot. In the land of the blind, the one eyed man is not king, he is noise interfering with the signal of cognitive dissonance, No?

Charles Ė another excellent, albeit sadly true essay.

"Self-reliance is a major American value, as is "the buck stops here" acceptance of responsibility. Great stuff, these values."

Iíve always been on board with this sentiment Ė maybe even to the point of being a bit of a scold. But this time I have to admit things got beyond the limits of simple self restraint. My analogy has been that lenders have simply thrown money into the air and encouraged people to bid up the price of housing, perhaps even with the tacit understanding that large scale fraud was being committed.

So whatís the result? Young families with kids see themselves forever priced out of the market unless they make a deal with the devil. My heart aches to think of the spiral of destruction that lays ahead for these families. I can already picture the angry exchanges, the divorces Ė children not only losing their home, but their family as well. It always gives my heart a twinge when I see a swingset or sandbox in the yard of a foreclosure. What did that family go through before they were forced to move?

So what to do? Well I think the 80/20 rule applies here. The lenders are culpable for at least 80 percent of the mess, so they deserve to clean up after the elephants in this parade. But these are just words - how about some action? Hereís what Iím doing.

Iím assisting someone fairly typical: a multi-hour commute between a job and a stucco box on a postage stamp lot some distance away. They bought at the peak of the market, their loan is due to reset in January, and short sales are popping up around them for half their loan balance. These folks didnít buy flatscreens and Hummers Ė theyíre being eating alive by childcare expenses so both parents can work, gas, food, and onerous property taxes and mortgage payments so their kids can have a home.

Well into the last downturn (1994), I was astounded at the willingness of lenders to modify the terms of their loans. Iím not talking about tinkering with the interest rate. They wrote down the balance by hundreds of thousands of dollars and basically said "OK this is what you now owe us, hereís your new payment". They absolutely did not want anymore property back. I donít know if the lenders are quite at that point yet, but unless they are in complete denial of the firestorm that is about to hit them, they will be soon.

Virtually all the articles and posts Iíve seen assumes the only options are foreclosure or wait for a government bailout. No - pick up the phone, call the loan servicer and tell them to get a loan modification package in the mail - NOW. Make them bear some of the cost of the obscene profits they made over the last few years, just as though they strip-mined the land and now must clean it up.

If it might be useful to your readers, I found this contact list for the Loss Mitigation departments of various lenders. I donít know about the accuracy of it, but here is:



Itís a strange coincidence that I woke up at 4:30 this morning and told my wife I as having reservations about how Iím spending my time (continuing education) because of the time it takes away from my quickly growing kids. She reminded me I took them to soccer games, but I pointed out that standing on the sidelines is not really spending time, and how long itís been since weíve used the bikes. And Iíve said for the last 3 years I plan to take a marital arts class with my daughter. Then one of the first things I read this morning is your essay.

Thanks again for your efforts and insights.

Lloyd L.

You have raised a number of valid points in Feedback Loops of Doom III: Retail, Downtowns and Cash-Strapped Cities (December 13, 2007). However, I suggest that:

--- Try to "reform" our ingrained institutions of local government control to become more cooperative is on the whole a futile task. To expect government to welcome private investment and for-profit operations without continuous suspicious scrutiny is unwise. There are serious philosophical differences at work here.

--- Sad as it may be, the caliber of our millions of public employees is not always up to the challenge. With limited analytical skills, limited time to resolve issues and with political pressures to face, being negative or less innovative regarding growth is generally far easier than taking a positive approach. Permit processing for almost any activity will remain a painful experience in most communities.

There is, however, a potential, partial fix that goes to the online retailing picture and local attitudes. I suggest that ALL online retailing be taxed at a uniform national rate (thus preventing wholesale border disputes and chaos about receipts). The proceeds should be then distributed on a zip code basis to the various state governments, and thence back to local jurisdictions via typical programs in effect. Proceeds would be allocated on the basis of "origination" -- that is, based on the BUYER'S zip code (not where the vendors are located !!!!).

This would prevent inequitable distributions to a large extent (such as per capita allocation), and reward those areas that produce more online sales tax collections for whatever reasons. In essence, one would electronically "buy locally".

The quid pro quo for this system would be the nationwide ELIMINATION of almost all sales tax or similar collections from brick-and-mortar stores. Perhaps the typical "local share" (about 1% of 7-8% in California) could remain. At one stroke, this would (1) even the ongoing retailing playing field between real stores and electronic vendors, (2) encourage those outlets that sell immediate need and other not-suitable-for online goods to continue to invest in the local communities, and (3) reduce the pressures of some communities to add inappropriate types of commercial development simply in the hunger for sales tax proceeds (destroying downtown merchants to get a new mega-store is the image).

Hopefully in the process, local control of commerce would become more friendly, and less obstructive, as the local share of taxes would still be worth outreach to the private sector. (And yes, I am smiling as I write this)

Any "tax sharing" concept is vigorously fought by interests who view it as yet another wealth transfer from have to have-nots. In 1971, I participated in a pioneer fashioning of the nation's only major such continuing program -- the Twin Cities regional sharing setup, where about half of all revenue from new commercial/industrial activity is pooled and shared on the basis of "need" mutually agreed upon. This sharing includes property taxes (which in California, we already share -- imperfectly-- at the county and state levels).

The fact that such programs have not multiplied could be partially dealt with by a general reform of the sales tax system -- which in the process of facing the challenges of online retailing, might also improve the general patterns of commercial activity we have at present.

Michael Goodfellow

I think the internet retailers are just a continuation of a trend. The "downtown department stores" you were talking about were Phase 1. They concentrated the equivalent of many small shops and eliminated a lot of labor. The Macys and Sears also had economies of scale when purchasing. I'm sure local merchants complained about it too, back when they first appeared.

Phase 2 were the malls, which again concentrated shopping even more, at the expense of old downtown retail districts. Their big advantage wasn't reduced labor costs. Instead, it was free parking and a nicer shopping environment (esp. in places with bad weather.) The malls could have been developed downtown, where there was easier access, but as you point out, many cities have been snowing merchants under with taxes and regulations for a long time. The suburbs just were easier, cheaper places to build.

Phase 3 were the "big box" retailers, also known as "category killers." The idea was that if you wanted office products, you would find absolutely anything you needed at an Office Depot. The selection was far better than at any small retailer. The same was true of lots of other categories, from hardware to bedroom and bath. Even books were not immune. Before small bookstores were complaining about the internet, they were complaining about super-sized chain bookstores like Borders or Barnes and Noble.

The internet is another step towards more efficient retailing. As you point out yourself, it's more convenient, frequently cheaper, and with unbeatable selection. Amazon.com is not going away. Unless you want to buy some recent bestseller (and pay more), there's absolutely no reason to go to a bookstore anymore. With sample pages and recommendation software, you can browse pretty effectively online too.

As for your recommendations, I think fewer regulations would be good all around, especially for big cities. It should never be easier and cheaper to build in the sticks, starting from scratch, than build in a city. But unless there's some revolution in urban planning departments all over the country, that's not going to change. Look at Santa Cruz, which is steadily driving business away, continues to moan about tax shortages (even during the boom), and has no intention of changing.

I doubt that taxing the online consumers is the way to go. If communities are taking in the same tax from online transactions as they do from local retail, it will hurt retail, not help it. The local government won't have to pay for any fire or police or roads for the online business, so financially, they should prefer online to local retail. Just keep a few touristy shops and some local farmer's markets, and let the bookstores, etc. go. This is what you see more and more in the little coastal communities like Santa Cruz or Carmel.

As for street vendors, I doubt it matters enough economically to sway any local city planners. They get complaints from retailers with buildings about vendors who they think are free-riding. And the local health department probably does feel liable if someone gets food poisoning from a vendor. Plus I think city planners have a bias against anything so mobile and independent. If you can't come in and shake them down over the height of their fire extinguishers or something, how can you control them?

You may feel that it's not a "real" community without a thriving retail sector, but a lot of suburbs already have concentrated their retail into a few strip malls. Residents don't want businesses anywhere near their houses. If they can get along with less retail, that's the direction they'll go in. A park or a small strip mall with a coffee shop will do just fine as a "community center". After all, being in close contact with your neighbors is not really what suburbs are all about.

P.S. According to the Census Bureau, the number of books sold continues to grow. And anyone who is an internet addict like me reads many, many pages of material a day. More than I ever read from a print newspaper.

Jed H.

House prices seen falling 30 pct

This is a first ever "realistic" report re: 2005 Housing Bubble , projections on both % price drops ( from the top ), the time frames, and the regions of USA -- still a LOT of PAIN, yet to be let!! Just maybe this ..."Muddling Malaise" as you put it (viz, STAGFLATION), winds up as the USDollar weakening (i.e. INFLATION), but Collapsing House Prices & owners' equity (i.e. DEFLATION), and other factors will provide "Offsets" -- more of same, & "Peddle Sideways" ??

My analogy is the CAPT of a "Hot Air Balloon", merrily sailing along in the winds;, but seeing a Storm ahead, and having only limited gas to "REFLATE" Balloon must make a crucial decision: Deflate the Balloon, for a "Crash Landing" on the rocks ahead of the Storm; OR, Reflate his Balloon to the MAX, trying to ride, steer his Balloon either over or around the Storm?? Either is very risky, & could "Crash" to his death (i.e. economic Depression, a la either 1930 in USA or German Weimar Republic, worthless DMarks).

Given the sorry state of the US economy & global political problems, I send you the following Haiku (s) (A) a prior & (B) is NEW:

House of Cards, Quaking
Foundations Cracked & Sinking
Three Black Swans, circle

The CHINA Syndrome
CHERNOBYL Credit Melt Down

As do you, Charles, I sense that there is "SOMETHING" in the American economic & global village which portends a "Major Cataclysm" about to unfold.


I've been thinking a lot about problems with government bailouts, etc. and have come to the conclusion that the American homeowner needs protection from deflating house prices and the that the US government shouldn't be providing that protection. I've decided the answer may be some sort of 'Gap Insurance' for houses, much like for cars that have negative equity.

The way I see it,there are three causes of foreclosure: 1) unforseen changes in owner's finances (death of spouse, etc.), 2) unforseen changes to the owner's neighborhood (housing bubble pops/foreclosure next door), and 3) foreseeable financial mis-management.

Unforseen cause #1 has insurance (life insurance, disability) so why shouldn't unforseen cause #2? Give it a couple years and the American homeowner will be so paranoid about falling home prices they'll love the idea and, if the service providers are honest, they'll actuall get what they want: home equity security. Plus, in 2010, home prices will probably fall less than what the homeowner has come to expect so it should be profitable.

From a PR perspective, I also think this is a good idea; government bailouts would seem non-sensical. Tramatic injury aside, no on talks about government bail outs or super funds for people whose cars were destroyed by acts of God. Instead, they say 'Why didn't you have car insurance.' Same could work for losing housing equity.

Harun I.

Jim Cramer Interview (YouTube video)

If your readers understand what Cramer is saying in this 11 minute interview then yesterday's post (Trends and Countertrends) would resonate more deeply. The manipulation hasn't changed since the days of Jessie Livermore.

Here Cramer is being honest. Many people will be outraged but they should thank him. The folks running the game can fake everything except price. The markets were never designed to be benevolent, if one enters this jungle he must decide whether to be the hunter or the hunted.

Cheryl A.

Moneycentral has a simple, but informative presentation on technical analysis. I thought you might want to pass it along to your readers.

Technical Analysis

Thank you, readers, for such thoughtful contributions.

For more on this subject and a wide array of other topics, please visit my weblog.


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