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Bail-Out, Coming Depression, California Budget Crisis, and more   (week of 11/27/08, 2008)

For more stimulating ideas, please visit the Of Two Minds blog.

I recently suggested to correspondent S.R., who works for the state of California, that our state could solve its fiscal crisis by simply reverting to the 2002 state budget adjusted for inflation (annual CPI), as the 2002 budget was $30 billion less than the current (unaffordable) budget. Here is his response--well worth reading, for what he says applies to much beyond California.


Sorry I haven't the time to wax on this topic. It deserves a fair response. But, yes, your idea is more than fair-ingenious really. Willy Brown suggested similar approach in his SF Chronicle column re: the budget impasse earlier in the year.

Just for the unofficial record, I am considered an eccentric in my office. I refuse to buy office supplies, fancy chairs, and the other Kapoc that state office denizens use to combat the ennui that goes with the territory. I work paperless as much as possible (though I admit my eyesight seems to suffer for it). Rather than drive needlessly in order to meet the 1000 mile quota for keeping a vehicle in the pool, I phone conference as much as possible and use my own car for short trips. Instead of claiming the ridiculous milage rate, I even the bill out in more creative ways. Consequently, my position's vehicle was withdrawn and I have to borrow from "the pool". Good riddance, I say.

If you are wondering what single element is responsible for the expansion of state bureaucracy, I could hazard a guess: poor performance evaluation. I don't mean of the individual worker per se. Rather, we might ask, "with all the money spent on resource management in the state, are the resources in better shape?" and "what metrics support the answer given?"

A quick inspection of the financial picture would show that most of the money is spent administering programs that amass planning and research information that is of little practical value. And, while planning and research is costly and important, plans do not make things happen. From a conservation standpoint, the only thing that matters is possession. If the state does not own it, the state cannot protect it. To distract everyone from the real issue, our powerlessness to protect, we then throw money in the air and see if it lands close to the problem or a solution.

The government tries to get it right. There are people who believe in public service and problem solving, at least in the resources agencies. But, the way things operate at the state, as we have seen of late in the financial sector, is a bastardization of the pottery barn rule: "if private industry breaks it, then the state will own it". The corollary to this rule is, if a resource has value due to some accident of husbandry, privatize it until it is broken, then hand it back to the state. It is nice to think that this is a cycle that can be managed, or at least anticipated, but the net cost is loss of diversity.

As usual, my analysis is from the perspective of natural resources. But, I think that perspective is valuable no matter which sectors of state government are at issue. My larger view is that it is the job of governments to manage public trust resources whether those resources are markets, health care, water supplies or elk populations.

Performance evaluation is what is missing. Are those resources maintaining their robustness and good condition as per our charge as public servants? If not, what factors are causing the depletions? In nearly every case, that depletion is caused by an exclusive disposition of public trust resources. In nearly every case that disposition of resources is abetted by potent advocacy for a small base of beneficiaries. In nearly every case, the stakes are high. In nearly every case, the public is robbed through depletion of the commons.

It is as if, the best measure of the condition of public trust resources is the size of government bureaucracies. A potent, private, extractive apparatus that begets a bloated regulatory apparatus is an indicator of adverse resource allocation. The inverse is probably also somewhat true in that over-regulation of resources can create potent extraction based adversaries.

But we all need to sober up and ask ourselves, on a planet with over 6 billion people, which case is most in need of relief: the extractors or the preservers? If there is the potential to err, on which side of the issue shall we err, over-protection or under-protection?

Sure we need to make government more efficient. I posit that the first step we take in doing so, after a temporary hiring freeze, is to re-charter government to act on the precautionary principle. The commons must be redefined by narrowing the conventional interpretation of exclusive rights in property. Then rededicate a huge chunk of the existing bureaucracy to monitoring and enforcement of the conservation of the public trust.

This is a tricky maneuver that I cannot cover in the limits of this outburst. Suffice to say, that your discussion of rights today only scratched the surface of the issue. Privilege is what the early American and French revolutionaries were seeking to remedy. The hungry may feel privileged to eat weavil ridden bread, just as I have felt privileged to be an American even though it pained me to accept George Bush as my President. True, we must earn our bread. But what I think you mean to critique is not so much undeserved bread, but undeserved power or, privilege.

Acting as a class, it may be that a population that does not work for its bread is enjoying a privilege. But I think we need to look deeper. What incredible miscarriage of natural order can produce such a precarious imbalance of energy and resources represented by American "affluence"?

I think you agree that we, as a class, are in a pathetic situation. Perhaps those who abetted the consumerist entitlement and benefitted handsomely from the pathological compulsions of the masses should not be blamed for their privilege? Such absolution might be warranted were the privileged the only victims of their compulsion to amass power and riches.

Are we all equally to blame? I will let God sort it out. Meanwhile, governments role is to protect all equally. To me, that means vigilance against lopsided distribution of privilege, as in access to resources, in the society. And that is all about property and the commons. And if that means we all are agents of the government, so be it! (There goes my pension-good riddance!)


My sense is the anger out there is increasing. I read a lot of blog comments to get the pulse - people not understanding why the company they work at is folding while Citi getting bailed out. Reich's blog had some interesting discussion on this - he says Fed and Treasury know banks, so they bail out banks. Main Street is of much less interest to them. Meanwhile, the little guy is waking up but it is definitely not morning in America!

Peter N.

Regarding your article about Great Depression 2, This Week's Theme: The Coming Great Depression (November 24, 2008) and your excerpt:

And then the mobs have to be controlled with a "whiff of grapeshot" (Napoleon) or they consume the crumbling bones of the empire piece by piece until nothing remains except resentments, unanswered demands, and eventually, either ruin or nostalgia.

I would also offer the below from the Roman poet Juvenal from the late 1st or early 2nd century A.D.:

... Already long ago, from when we sold our vote to no man,
the People have abdicated our duties; for the People who once upon a time
handed out military command, high civil office, legions everything, now
restrains itself and anxiously hopes for just two things:
bread and circuses.

Paul T.

Truly outstanding article:"The Coming Great Depression". You remove all the econometric hocus pocus and get down to the core issue: for an economy to progress it must produce a surplus. For decades we have imperially lived off the surplus of others, that is indeed now changing.

The US will of necessity have to transition from a consumer society to a producer society that focuses on the allocation of the produced surplus. This is something new for us because we never produced a surplus in recent decades, and never had to think about investing - hence the deterioration of our civil, transportation, energy infrastructure.

However, for many of us, the "Great Depression" will merely be a back to the future phenomenon. Not to long ago, only "businessmen" flew on planes (they were expensive), eating out was a luxury, homes were smaller (but no less happy), kids toys were simpler and fewer, etc.etc. etc. Depression is only relative, perhaps its nothing more than a return to normalcy.

Albert T.

I still think that we have not hit the wall yet. Yes the housing market is falling, yes equity/credit markets are also falling. Yes the economy is shrinking etc... The problem with all this is the following. People are still thinking hopefully, my guess we are about to enter the absolutely fun ride of recapitulation. In order for the market to cleanse the severity of decline has to be such that there is no preventive medicine just the finality of prior actions finally occurring as they should. Right now people are still hoping the gov't will fix it, "soon".

I on the other hand hope that the decline to come is severe and it doesn't pick up for some time. Fundamental change comes out of necessity, and if necessity is gone so is the chance of fundamental change. Pain makes people think in new ways, just like war acts as an accelerator of the minds to bring out the most destructive variables for the sake of survival so could this downfall in our economic environment.

A new energy source would revolutionize our way of life but we must be desperate in order to shake up the people on top or in competing industries into accepting it and pushing it ahead. National Ignition Facility (LLNL) (I am way more exited about this than the elections btw, voted for Bob Barr. Couldn't vote for either person whom voted for the bank giveaway.)

David C.

Well, since my last e-mail to you on Nov 18, which had a link to article about the $4 trillion the government was spending on the economic crisis, Bloomberg is reporting today that the government has pledged over $7 trillion to rescue the financial system. (1.) This is over half our nations GDP and more than the GDP of every other country on the planet. (2.)

I don't know a lot about economics and there's a lot about economics that I don't understand. But, I wonder where the Federal government is going to get all this money.

I guess they will just borrow it. I am surprised the Chinese, Japanese, British, and Arabs, etc., are dumb enough to keep on lending us money. Do they really think we will pay it all back?

The politicians and economists say some businesses are "Too Big to Fail," really, I thought small businesses provide most of the jobs in the United States. (3.) It looks to me that we are moving towards some form of communism if a big business won't be allowed to fail. If big business is too big to fail than they have an unfair advantage over small and medium size businesses which are allowed to fail.

I also wonder why I haven't heard about anybody in the banks, mortgage companies and other financial institutions and politicians and government officials being arrested or put on trial for all the fraud that was committed that caused this financial crisis. Where's the FBI?

Lastly, again I don't know a lot about economics but it seems to me there are a lot of people with high intelligence that are pretty stupid. The establishment , politicians and economists, say the problem is banks aren't lending and people aren't spending. Well, we have this problem because most of the people in the United States are in too much debt (4.) So it seems dumb to encourage people who are in too much debt to spend and go more in debt.

The establishment should be encouraging people to save. I've always saved my money, so when theres something I want to buy, I buy it because I'm not going into debt to buy it. I only things I can see would be O.K., if you have to, to go into debt to get are, Healthcare, Starting a business or buying a home, other than those three things I don't think people should go into debt for any other reason.







OK, I am probably retarded when it comes to high finance. But, if the government is going to give Citibank billions of dollars of our taxpayer money, then shouldn't they at least reduce the size of the debt that the people owe to them by the same amount? After all, it's our money, supposedly. And, wouldn't it stimulate the economy if the people were just bailed out of what they owe on their credit cards? Then, they could have some money to buy more stuff, like a car or whatever. The way it is, we give them our money and then still owe just as much? WTF?? And, on top of that, they just upped the interest rate on cards. I mean, I don't owe them anything anyway, but still.... Same thing with all the rest of it. If someone is going to be bailed out, why not the consumer? Or, provide medical care for those who can't afford it. Isn't this just a big pimp job? We are so screwed.

Jim Twamley ("RV Now" blog)

Here is an idea for proposed legislation: Make Social Security a Bank then it will qualify for the bailout funds.

Tom Peifer

I have long read excerpts of your work on LATOC and other sites, but only recently began to read your blog. A suggestion for your list of books on "what could happen"--Thomas Homer-Dixon, The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization

Personally, I'm relieved to be watching it all from a warm area with a fair amount of local food production and not far from the beach.

Trey S.

Thank you so much for your blog (I've seen some advertising on it so I hope it's becoming profitable, too), reading it is the first thing I do in the morning. I have two topics for you:

1) What influence do you think MAD/Cold War has on today's predicament? I can barely remember the Berlin Wall falling so it's all conjecture for me, but it seems as if the Baby Boomers grew up without worrying about tomorrow since tomorrow wasn't assured. Are they short sited by nature and are just shocked the world still exists? Anyhow, I talk with my parents and in-laws who are all educated and don't see how they'll ever retire and they're the upper middle class.

2) I read a blog by Jim Bianco that says the obligations of the financial crisis exceed the combined and inflation-adjusted costs of 1) Marshall Plan, 2) Korean War, 3) Vietname War, 4) Iraqi War (current), 5) The New Deal, 6) All NASA expenditures, 7) walking on the moon, 8) the Louisiana Purchase, and 9) the S&L Crisis. Does this theory hold water?

David C.

Great entry today, thanks!! The Coming Great Depression: Scapegoats and Exploitation (November 26, 2008)

I began reading The Shock Doctrine and I am convinced the 30 year decline in wages in the US is a purposeful coup of benevolent socialism by the powers that be. The boiling frog syndrome, cooking the middle classes.

I am horrified by the disappearances in the Southern Cone in the 70s which were backed by multinationals via the US government and CIA.

You are right, the lifeboats have already been launched.

Correspondent Eugenio M. and I have been discussing the housing bubble and bailout in terms of Cui Bono--to whose benefit? Here is his commentary on the topic:

Eugenio M.

I think that the question who benefitted from lowering the borrowing standards is a pretty complicated one. However, I would put politicians up there in pretty much at the top of the list. It is undoubtedly true that many IBK, "fixed income" traders, taders and their bosses as well as banks CEOs, CFOs, COOs, lawyers, accountants and professionals in general have largely benefitted from the business of selling, repackaging and trading this stuff, I believe that - to be honest with ourselves - the US at large, and possibly the world benefitted for some time from the US real estate bonanza. It just turned out to be a large Ponzi scheme, and eventually everybody is now suffering from it, and will suffer as a consequence. But was it nice while it lasted!

However, we should remember when this thing really started to take off -- I would say 2000. After the internet bubble blew off (also a little bit before that), but mainly after the stocks became a risky investment, people started to look for alternative means of investing money -- real estate was a pretty simple solution. Back then prices where growing moderatelly recovering from the 1987-1990 crash. I believe it started as a "conservative" investment for many people.

Then it grew.... prices went up people started trading up, price wars erupted, banks started competing for a piece of the actions, standards were lowered, people refinanced, equity loans became available to people who basically bought the house with little or no money down ... and basically everybody became leveraged up to their ears, without even realizing it. The dogma was home prices can only go up.

While everybody benefitted, directly or indirectly, a few fortunate one, benefitted esponentially more than others. Obviously, banks honchos were paid probably on aggregate billions of dollars (in equity and cash) for their "perfomance". But in the good times, nobody asked questions -- nobody asked what a CDO was, nobody cared. I don't remember Congress being particularly active, or the media asking too many questions. They were just the product of the financial ingenuity of US banks. It as too good to be true. Money made out of thin air.

Very few raised any issue when the average home price increased 20% year over year - for no apparent reason other than more people bought into the real estate hype. Noboody said that the growth was unsubstainable... what happen was, instead, the esponential growth of media based hype (as for the stock bubble of a couple of years earlier) for real estate.... they started with small shows on TV -- This Old House, Home Make OVer, Deam House, Flip that House, Flipping Out, Trading Spaces.... and they ended with a channel dedicated to the house HGTV. They hyped it. [I know that you think exactly the same about this topic]

Back to today....

It is interesting that the "cure" as indicated by the politicos is essentially to stop the slide in the value of real estate by providing more credit to buy real estate to borrowers. Basically borrowed moneyX3 --> (1) US borrows from foreign countries [or prints]; (2) banks borrow from US gov; (3) individual borrows from bank.

I have no MBA or PhD, but I think it is not going to work. Once people lose faith in something it takes a long time to convince them that it is a good idea to invest again. Additionally, the all plan does not take into consideration that the vast majority of people who wanted (feel obliged/feel a need) to buy a house, already did so in the last 5 years, when the renters where basically considered "losers" that did not understand how to invest in their future.

The question nobody is asking is, how many willing buyers that could afford to make a 20% (I would say a 30%) down payment are out there? Right now, I don't think that many -- most people that would like to buy a new home, might need to dispose of their old one first, and then trade down a couple of notches.

I think that a change that might be in the making is the end of non-recourse mortgages. My reasoning being, right now it is fair for a person to walk out of the door if the property that they "bought" no money (or little money, or some money) down lose value. This is the problem banks are facing right now -- too many people find it more convenient to just walk away from the property.

Banks, I believe, are thinking about this structure - and they will align themselves with practices carried out in other countries, where the mortgage is guaranteed personally by the buyer. It would still be possible for the buyer to walk away from the property, but it would basically would need to file for bankruptcy. I am not saying that the personal guarantee is a good thing, but I am pretty sure that many bankers are thinking about a system where they don't get stuck with the property too easily.

Thank you, readers, for such thoughtful contributions.

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