Fools rush in where angels fear to tread by gimleteye

The tax buck never stops except at your door.

You are not alone, trying to make sense of the mess in the housing markets and the vulnerability of the US financial system to wild excesses in debt creation during the latest, greatest housing boom in history.

In Florida, the boom chewed up citizens’ rights, wetlands, quality of life and municipal budgets. It created political machines like the one that propelled eight years of Jeb Bush. It buffed public corporations like WCI Communities—a production home builder led by Bush loyalist and the former finance chair of the Republican National Committee, Al Hoffman. Champion of the housing bubble, WCI is seeking advice from Goldman Sachs on how to survive.

Florida is left with a property tax crisis of immense proportions as the costs of growth sailed far beyond the capacity of the state tax infrastructure to keep pace. Now, what?

Here, home values in some areas of Florida have increased so rapidly that property taxes are forcing out-migration of families and businesses. Today, the Republican-led Florida legislature is proposing to roll back property taxes and shift the burden to the counties to make up the difference.

Hank Fishkind, a leading economist, testified yesterday to the Florida legislature: between 1999 and 2005 Florida’s population increased 17 percent, while county budgets increased 68 percent.

Florida’s 67 counties, of course, are exactly the level of government where the dislocations of growth have been sold as communal assets.

At the bottom of the political food chain—the level of counties and municipalities—the production home builder lobby has been most successful in throttling dissent in order to advance zoning and permitting changes fomenting an incipient rebellion by citizens that the state legislature has spent the past several sessions trying to kill off.

Last year, under the guise of “protecting” the Florida Constitution, home builders supported a change to the constitution that will require future changes by petition referendum to be approved by 60 percent, instead of a simple majority, of voters.

This year, the Legislature is moving forward a new law to restrict where petition gathers can collect signatures. In Florida’s atomized suburban sprawl, the only places where people collect are shopping centers and malls and that is where petition-gatherers go: the Legislature is trying to give property owners the right to “decide” what kinds of petitions are suitable for signature collection.

The rebellion that the Legislature is trying to head off is called Florida Hometown Democracy, led by grass roots supporters, who want to give voters in each of the state’s counties the right to require major land use changes to be submitted to a popular vote BEFORE consideration by local legislatures.

There is a term to describe the Florida legislature trying to pass off the unabsorbed costs of growth to local legislatures while inhibiting citizens from stopping local legislatures from promoting unabsorbable costs of growth: it’s called legal white-collar crime.

In Florida, as in other frenzied markets, much of the growth during the building boom was fueled by speculators.

Speculators in land development, speculators in condo markets and speculators in lending markets. Speculation in property ownership is so rampant that there is no functional middle class in the United States today.

To the extent that there is class division in the United States today, it is defined by leverage. There is one class that has chosen not to borrow. They would be called fools. There is one class that is too poor to borrow. They would be called unfortunate. And there is one class that has greatly distanced itself from the other two by leveraging borowed assets. In rising markets they would be called, rich. In falling markets, they would be called unfortunate fools.

There is inherent instability in these inequities: that is what citizens are rebelling against, but they won’t quite know it until the blood is running thicker in the streets. It is starting.

The front page of the Wall Street Journal today reports that the nation’s second largest lender of subprime mortgages, New Century Financial, has stopped making loans and is on the verge of filing for bankruptcy, the latest casualty in the financial algae bloom choking the $1.36 trillion market.

The speculators of last resort are hedge funds, largely unregulated financial vehicles looking for wide-open spaces to roam free.

In downtown Miami, hedge funds are buying condo buildings nearing completion before developers lurch to bankruptcy.

This week, as one hedge fund operator, Greenlight’s founder David Einhorn withdrew from New Century, while another hedge fund operator, Citadel, bought another createring subprime lender, ResMAE.

But an underlying dispute is arising among hedge funds and their investors: how to price securities and risk.

It is the mirror image of the Florida legislature and local counties flailing at each other, how to price the costs of growth that everyone knows is out of control and no one wants to take responsibility for.

In Thursday’s Wall Street Journal, C2, a little sunshine peeks through the bramble: “Investors say that many hedge funds… complain about the difficulty of getting pricing information about complex securities… the problem actually is that hedge funds disagree with the value brokers are placing on their positions and are ‘shopping around’ for more bullish numbers.”

The point, transposed to the pricing of speculative growth in Florida’s communities, goes something like this: if you are selling growth—like the production home building lobby does—all growth is good, there is never a limit to the benefits derived from housing priced to be ‘affordable’.

But if you are a Florida legislator and you have to price the cost of growth that are out of control, you don’t want to raise taxes in Tallahassee (we’re Republican!), you want local legislators to do that work.

Whether you are a state or local legislator, you are still essentially the mechanical arm of private developers who above all, want voters to be uninformed about pricing risk that taxes will not come close to covering the costs of growth.

It should be surprise no one that the mismanagement of local and state budgets in Florida depends on mispricing economic activities. It is also the essential nature of derivative financial instruments: if investors all start asking at once—what are these things really worth? we will find out that they are not indexed to any form of reality, which we suppose is one definition of a financial bubble.

The Wall Street Journal continues, “Many of these complex securities appear to trade easily when the markets are going up. But when markets are in free-fall, they can quickly become much more difficult to trade. That leaves both dealers and their clients potentially assigning vastly different values to similar positions.”

Thanks, for that!