Fed chief Bernanke edges closer, but no one claims the stinking mess, by gimleteye

The writer Naomi Klein calls it "disaster capitalism"—how special interests have seized natural and man-made disasters, like Hurricane Katrina and the war in Iraq, to facilitate a vast transfer of wealth from public to private hands. But the revealing outlines of the housing collapse show a different order of disaster capitalism: this one is underwritten by Wall Street.

Corporate America touts the achievements of suburbia as the gratification of “what the market wants.” In a more innocent time after World War II, the suburbs did indeed deliver a version of the American dream.

But at some point, the scale of suburban sprawl reached a tipping point. It coincided with the Wall Street invention of securitized mortgages in the 1980's. Today’s crashing housing markets have called into question the entire arrangement of financial derivatives that tie together mortgages in unfathomably complex webs of debt ownership.

While most Americans think of stock markets and Wall Street in the same breath, it is really the arcane, complex world of debt that generates wealth for financial institutions and Wall Street bankers.

If there is any positive benefit from the recession now rippling into the United States economy, it will come from a careful analysis and adjustment of governmental policies to the single bright fact: that the sheer scale of suburban sprawl grinds corporate accountability to dust and also brings down governmental accountability like tall trees falling in a forest.

Foreigners visiting the United States have long puzzled over the homogeneity of suburbs: is this fractured mosaic of strip-malls, chicken buckets, and point-of-purchase discounters the best result of the world’s greatest experiment in democracy and social mobility?

Foreigners who pay close attention to American politics (and there are many), pose the question another way: where’s the value for “values voters” who live in America’s fastest growing regions like California, the American Southwest, Texas and Florida? Their landscapes are interchangeable: a hundred thousand planned communities that look the same, that have the identical malls, big box retailers, fast food opportunities servicing tract home pods, gated communities, and highway interchanges.

To understand how it happened, it is important to tie back today’s crisis in world credit markets back to local zoning councils and legislatures all pointed in the direction of creating the excesses now manifest in the collapse of housing markets in the fastest growing regions of the nation.

The single aspect most overlooked is how suburbia is the triumph not of urban planners, but rather of financial engineers who discovered in the 1980’s how to securitize individual mortgages into packages, or pools. It is overlooked, no more.

The dollar is collapsing. As the pain mounts—spreading from Wall Street to Main Street, it may yet be possible for a long-overdue conversation with the American public how to pull back our democracy, and economy, from the brink of disaster capitalism.

In fact, the battle against the atomized culture of suburban sprawl, of tract housing carpeting hillsides, valleys, wetlands, has been unsuccessfully waged by battalions of environmentalists, civic activists, mass transit advocates and new urbanists.

This struggle is neither well-publicized nor acknowledged in the mainstream press. When the press does speak out about sprawl, the argument is framed as one of aesthetic concerns—that beauty is in the eye of the beholder, or that the positive result of the free market, or that ecosystems are in peril. There is always a search for a positive and optimistic balance: that, for instance, the economy and the environment go hand-in-hand.

In places like Florida’s Everglades, it is a platitude so abused as to be worthless for any but government agency spin doctors.

And so unreported skirmishes take place in zoning councils, on blue-ribbon panels, and in committees of local and state legislatures dominated by special interests. The battles also manifest themselves in chambers far from public view at the federal level, where lobbyists and big engineering firms work out the budgets for transportation and the details of infrastructure investments, all oriented in one direction. Against such long odds and arrayed economic interests, conservation groups act like roosters caged in a pen.

Over the course of decades, dissenters and resisters have been branded as elitists, socialist or worse without a glimmer of insight by the media.

The reality is exactly the opposite: the elitists are the Wall Street captains of financial engineering who turned the lowly mortgage, once the dismal godforsaken province of savings and loan associations that could not even sell checking accounts, into a tool that created a whole new class of wealth. The socialists, it turns out, are the chieftains and their financial institutions –paragons of capitalism to their brethren.

In 2003, scarcely four years ago, the chairman of WCI Communities Al Hoffman crowed to the Washington Post that suburban growth was “an unstoppable force”. Hoffman was a key Republican fund raiser and former chair of both the finance committees of Governor Jeb Bush in 19998 and George W. Bush in 2000.

Florida production home builders, like Mr. Hoffman, pulled while the Federal Reserve pushed, creating a bubble in housing more quickly and efficiently than any financial bubble in US history except for the one it replaced: the dot.com craze that peaked in 1999.

Today, AP reports, “Florida home builder WCI Communities swung to a deep loss in the third quarter. …WCI’s already battered stock stumbled nearly 20 percent to $4.24. That’s more than 80 percent of its 52-week high. … After the earning’s report, Moody’s cut its credit ratings on WCI deeper into junk status…”

While Congress frets about solutions involving Fannie Mae and Freddie Mac, the White House shuffles. While Wall Street and Main Street are at last linked in agony—It is now clear how financial derivatives ( “weapons of mass financial destruction” is Warren Buffett’s apt turn of phrase), are unraveling to the scale of hundreds of billions of dollars.

Sprawl only succeeds as the macro urban version of large corporations grown to supply products at equivalent scale: Walmart, or Lowe’s, or Home Depot, as well as the oil companies and car companies and road construction companies who pave the way.

Today the United States is on the verge of the collapse of laissez faire market orthodoxy.
America took that bait, bit the hook, and the reel sang, sizzled and smoked for years. The more similar the tracts and services–the more they were the same–the more profitable the bait. Here is the dirty little secret: the more that individual properties or planned developments were the same, the more they could easily and cheaply be bundled for sale, insured and stress-tested as the case may be, in financial capitals around the world.

For nearly two decades, as US economy was transforming from a manufacturing to a service base, the bulwark of the consumption-based culture that enabled this change rested largely on debt. (It was abetted by gains in “productivity,” the ability to do more work with machines, or cheaper workers, thereby reducing income and the ability to service debt.): In recent years, the most prominent feature of debt was the inflation of the housing bubble--now burst--an ephemera that would have been impossible but for financial derivatives.

Today, world credit markets are in turmoil. Still, the world’s bankers and governments, too, are loathe to pin the tail on the suburban donkey.

Suburbia built in wetlands. Suburbia built on farmland. Suburbia built on the cheap and with a wink, through corruption of local legislatures and by strong-arming tactics of the Growth Machine including, most paradoxically of all, unions led to believe that all contracting jobs are good, all automobile jobs are good. They follow meekly as sheep to their own slaughter while income disparity put American workers into jeopardy. Would Lenin ever have believed that the last capitalist, and the last union leader on the way to the gallows, would sell the rope to the hangman?

The United States is no longer a democracy: it is a sink for sovereign wealth funds and other foreign capital from oil-producing and low-labor-wage nations to accrue interest and acquire equity while their own populations grow wealthier by the day. Where did all this capital find a home? The welcome mat (made in China) is out in a US economy defined by the excess in borrowing related to real estate in the nation’s fastest growing regions: sprawl.

What caused the stock market to swoon 360 points the other day? The statement by a central banker from China that the nation would be diversifying its holdings away from a weak dollar. But, really, what China and other investors in US debt are acknowledging is the extent to which our fiscal models for growth are in disarray: we borrow too much, we are too much in debt to the wrong organizing principles of the economy.

Of course our dollar is weak. Why wouldn’t it be?

Power is perception, and the perception of vanishing US power has as much to do with a trillion dollars of sprawl-related financial derivatives up in smoke as it does with a trillion dollars spent on war in Iraq.

Unlike the 1980’s Savings and Loan debacle, or the 1998 credit crisis that sank Long Term Capital Management and called the Wall Street cavalry to the rescue, what is emerging now looks like a ghost ship in a blockbuster horror movie: as the fog lifts, the dimensions of the ghost ship become clear.

When Bill Gross, the chief of PIMCO, told Reuters the credit crisis is “a trillion dollar problem”, he pretty much consigned the terrible news out of Merrill, Citigroup, JP Morgan, Bear Stearns, and others to a lower level of disaster, perhaps a Category 4.

What Mr. Gross and Wall Street are expecting is that soon enough, the full scale of the mess will be revealed and the federal government will be compelled to put in motion its latest and biggest blockbuster bailout in history. To be sure it will be called by another name: you can be sure the White House is poll-testing new linguistic euphemisms right now.

And it is just as likely that vested interests will repress any conversation or national dialogue about the true nature of disaster capitalism.

The latest catastrophe will gin up boffo fees for Wall Streeters who will once again save the US economy from the damage they themselves wrought. What a spectacle: banking executives headed for the exit, pink slip in hand, severance packages for $160,000,000 in the other.

It is difficult to grasp: how the world credit crisis ties back to the fabric of suburbia and local zoning decisions that permitted tract housing that attracted the debt that posed as real value that was packaged in New York that was bought in London that was bought in Frankfurt that caused the foreclosure of the house that Jack bought. (For the most trenchant examination of the corruption of suburbia, watch the Showtime comedy, “Weeds”, where a suburban mother and family grow and sell pot to survive, blending in seamlessly with local politicians.)

Clearly, the appearance of same-ness is not equivalent to worth. “Worth” was a virtue of an earlier age when local mortgages were held by local bankers. The value of a house was the bedrock of a family’s financial assets. Your local bankers may or may not have been tiny potentates enforcing good or bad taste in communities where social strata was locked down by petty, insider politics. But you knew your mortgage had a home, in a bank, on a street you could see.

Today, hundreds of billions of alphabet soup derivatives are locked up in financial distress called “Level 3 buckets”, or, SIV’s: basically the same off-balance sheet transactions that did in Enron. NYU economist Nouriel Roubini writes:

“Suddenly markets and investors are discovering that many financial institutions were parking a large fraction of their asset in the level 3 bucket where they avoid using market prices to evaluate such assets but rather rely on “model valuations” and “unobservable inputs”. But now the forthcoming FASB 157 regulation will prevent them (unless heavy political lobby leads to a postponement of its implementation on November 15th) from playing such accounting tricks and force them to use market prices – when available even in illiquid market conditions – to price these assets.

And guess what now? New reliable estimates suggest that using these market prices – rather than level 3 model gimmicks - will lead to losses of another $100 billion on top of hundreds of billions of subprime losses. And some market participants are already talking – quite realistically – about total losses from this credit disaster in the $500 billion range.”

How did this happen?

Instead of a local banker wielding power over community values or rigid orthodoxies of one stripe or another, today a dollar of your mortgage becomes ten dollars of derivatives based on a rock-solid piece of ether, measured in substance by mathematical models and ratings agencies irrespective of geographic location. There are derivatives, too, on the counter-side of derivatives, used to insure debt or even as collateral for equities.

But the best view of the clusterf#@$k is from your own front door.

That is why your suburb on the east side of town looks exactly like the suburb on the west side of town, and on the north and south come to think of it. It looks identical to a suburb in Sacramento, or suburban Atlanta, Las Vegas or Fort Myers. Suburbia leveled American culture so that securitized mortgages could fit into buckets, cups, shapes, cylinders: the simpler the better, the more profitable, the easier to foist off on distant investors, and the quicker the return.

Make no mistake, they would say in sales presentations, these shells of cities, of production homes minted in the hundreds, thousands, or millions, these are the places where the American consumer goes to rest after a day’s labor buying goods made in China, or appliances whose service centers are in India, or oil pumped in Saudi Arabia.

Now most people are utterly in the dark how sage institutions like Merrill Lynch, Citigroup, or JP Morgan, Bear Stearns, Deutsche Bank, and a host of others could have gotten caught up in a confidence game. It is simple.

Wall Street bankers got rich taking fees every time a mortgage got securitized Miami developers bought yachts and rafted together in great globs in the Bahamas slaughtering pelagic fish—the bigger, the better—like game hunters on the endless savannah. Mortgage brokers had an unregulated field day, along with condo flippers and instant experts, mixed together like a circus troupe. Simple contractors became geniuses and multimillionaires. Local and state elected officials waited for their turn at the lobbying trough, surrounded by patrons acting like Medicis with trappings of wealth, whether real or painted on velvet. No one cared. The myth that an expanding tax base provides better services of democratic institutions serviced an empire while it lasted.

Today’s credit crisis is a real Mexican standoff. Investors in financial derivatives want to cash out but can’t, except at fire sale prices, and how do the banks unwind their CDO’s or MBS derivatives if the underlying asset has already been sold off in a fire sale in order for the institution holding the “asset” to meet its own cash equity reserves with federal regulators?

In Miami today, hundreds of lawyers are working for speculators, investors, or developers trying to break or enforce contracts as thousands of condos near completion. But that’s just the retail side of the housing market crash.

On the wholesale side in Miami, at foreclosure auctions there are very few properties being sold to buyers: the banks are taking all the titles back. That cannot continue unto eternity., At some point bank balance sheets start to deform like plastic under too much heat.

Indeed there are not enough lawyers in the United States to sort through the wreckage left by the financial geniuses of Wall Street, who have themselves already safely banked commissions, fees and bonuses.

If the banks start selling foreclosed homes at fire sale prices, the production homebuilders would shrink to the point of vanishing, and, surrounding home values plummet. That may be the reason the Census Bureau reports that over 17,000,000 housing units stand dark and vacant. From California to the New York Island, from the redwood forest to the gulf stream waters, there’s an empty house for you and me.

As home values plummet, millions of Americans who took out home equity lines of credit to finance personal consumption will cease and desist from spending—and at an most inopportune time, the Christmas retail season when the American purpose is defined best: to buy. (See http://www.census.gov/hhes/www/housing/hvs/qtr307/q307press.pdf)
All the components of suburban sprawl are like sheets of canvas fastened by virtual paperclips to the tent pole of financial derivatives.

All the features of suburban sprawl, including the actions by local legislatures, only operate when the flimsiness of those virtual paperclips is ignored, overlooked, and bypassed.

Everything was good, so long as the fraud was unnoticed. “The opaqueness as well as the stinkiness are great,” said NYU economics professions Lawrence White of the problems in managing the crisis in mortgage derivatives. (Bloomberg, “Citigroup’s Stucket to run subprime unit after losses.”)

To Reuters, Alan Greenspan said that “the critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States.”

Now this is interesting! The only problem with the US economy is the excess inventory of houses, not the structural disaster as I have described it.

So thinking along Mr. Greenspan’s line: divide the total losses from the world credit crisis by 200-300K “excess” houses, and you have the approximate allocation of excess cost per home. Reducing the captured capital in 17,000,000 U.S. housing units to a global excess of 200,000 units is a turn of econometric prestidigitation by the Old Maestro of the Master Class.
If the total cost is $500 billion, and the excess number of houses in 300K, then each US taxpayer (I’m assuming that you and I will end up paying for all the mistakes of interests who should be in court instead of suites with an ocean view) would be assigned a new lien of $1.7 million dollars to get even with lossesfrom all the excess homes.

But it gets even stickier and more costly when the unabsorbed costs of suburban sprawl are factored in—to the environment, to infrastructure like roadways and bridges, and classrooms, all the pieces of the sprawl puzzle that aren’t paid for by property or ad valorem taxes—add hundreds of billions in unfunded mandates. Points of cost to Americans the Federal Reserve doesn’t ever factor.

So this is has become the American way of life: wasteland of misdirection, fiscal irresponsibility of the first order, the delusions of empire.

In Florida, a state with no income tax, 1000 Friends of the Growth Machine and the Republican state legislature are thrashing about property tax reform. Their main objective is not to help ordinary homeowners so much as it is to prime the pump of dried up housing markets in one of the nation’s fastest growing states.

Our Friends are not here to solve the problem of excess units—built on the back of exuberance fostered by political corruption and the gerrymandering of a presidential election to suit the needs of Florida’s production homebuilders who supported Jeb Bush and George W. Bush—they want to build MORE, as fast as possible.

By this logic, the cure to morbid obesity is at the dessert bar of an all you-can-eat buffet.

In the Golden Corral world created by the political and economic elites in America, suburban sprawl is the land use model that represents every man for himself or herself.

What is becoming patently obvious is that housing boom—fabricated from the confection of financial derivatives—allowed for the massive growth of local governments and accumulation of infrastructure deficits in the tens of billions of dollars while building “excess inventory” through liar loans, mortgage fraud and the notion that new buyers could be found, if only the price and features were low enough.

Here, the Everglades were trashed in service of tract housing built on farmland and wetland buffers—even while hundreds of thousands of earnest man-hours have been spent devising a $10 billion plan to “restore” what’s left.

Environmentalists were paralyzed and ineffectual, likel deer caught in the headlights. In the face of the worst imaginable perversion of the purposes of laws and regulations, they spun new ways to paint defeat as victory, compromise as success, and greed as virtue.

In other words, everyone was happy while the boom was on—delivering its regular hits of fees, commissions, and bonuses like tokes of crystal meth.

NGO’s came up with public/private partnerships to match the tilt to the right or to the center or to anyplace except the one direction that would restrain a malignant growth running amok.I’m not sure that the Governing Board of the Federal Reserve performs any better than a focus group culled from the Dadeland Mall and gathered around a conference table with a two-way mirror, discussing the role of interest rates and the economy.

Give them a box of doughnuts, bad coffee, and a 15-minute explanation how the dot.com bubble was replaced with hyper-speculative markets in real estate to mask structural imbalances in domestic production (i.e., globalization), and Joe Blow could do as well as Alan Greenspan without the halo.

Most hardworking Americans have been suffering through the worst case of government misinformation—on the war, on the economy, on the environment, on health and welfare—in US history. It has never been worse. An honest conversation is due, for the American people.

My focus group of mall strollers, now members of the Federal Reserve board, can tell you what’s coming next.