Thursday, May 28, 2009

2010 elections and the new vocabulary for an unhinged economy ... by gimleteye

My apologies to readers with attention spans attenuated by Twitter.

It is easy to see why many find good cheer in the microscope while an economic hurricane whips around us. The Miami Herald reports: "South Florida tourism slump may be easing: April was a rough month for South Florida hotels. The good news: It was a teeny bit better than March, adding to hopes that the tourism slump has hit bottom." MSNBC says the economy is bumping along the bottom, but that "more than 90 percent of economists in a recent survey (believe) that the deepest recession since the 1930s may be drawing to a close." Since 95 percent of economists failed to anticipate the consequence of serial asset bubbles and the failure of risk management in capital markets, the best one can say is that there is a hundred percent increase of dismal scientists.

We all want this—whatever “this” is—to bottom out. NYU economist Nouriel Roubini, one of the very few who anticipated the depth of “this”, writes:"The fourth year of the U.S. housing recession - and the worst since the Great Depression - is well on course. Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 458 thousand SAAR of April 2009 (the last data point available) – a dip of 80%. In the single family housing segment, annualized starts fell by 80% between January 2006 and January 2009. Single family starts seem to have stabilized since the January 2009 low of 357 thousand SAAR.”

To the lexicon of “bottoming out”, of “green shoots” and “glimmers of hope”, now “teeny bit better” strives for footing on this slippery slope. Politicians don’t like to dwell on downside. As 2010 campaigns step into this territory, what becomes clear is a very big part of the difficulty communicating with the American public is that elected officials lack vocabulary to describe and respond to this economic crisis.

They are not only trying to use the same words that conferred such consolidation of power in legislatures and in the nation’s capitol in recent decades, the mean that they revert to is exactly the forms of economic activity that created such a calamity in the first place.

Florida could be a bellweather state for 2010 and beyond, if voters demand accountability for the economic crisis. Most people want their “Happy Motoring” back, to borrow a phrase from Jim Kunstler. Is it beginning to dawn that the days of Happy Motoring are not coming back? It is not just GM, Chrysler, et al. The whole arrangement of a consumer economy organized around speculation of real estate has become unglued. This is more clear in Florida and Miami, especially, because this is the state and the city where every single square inch of public policy is woven with the woof of development interests, bankers, and lobbyists and the warp of representative democracy serving the needs of developers for cheap, raw land, from local zoning councils to city and county commissions.

But what comes next and how to describe it, if what we have grown accustomed to is gone for good? The problem is not just that Florida’s mainstream media is loathe to offend, or upset, or startle advertisers who depend on selling furniture by the room, or cement by the ton, or cars by the parking lot full. The alternative story requires a maturity and willingness to absorb complexity that every strain of popular culture argues against.

By 2010 Florida will have a new governor and a new US Senator, as well as a re-arrangement of top constitutional officers. Within the Republican Party, the conservative remnants of the Jeb Bush era, propelled to office by the Monopoly money of the housing boom, will push back against the moderate leaning Charlie Crist, running away from the Governor's Mansion and toward the US Senate like a cowboy eager to get out of Dodge. For the vacant place in the Governor’s Mansion, the race will be a contest between Bill McCullom, former Congressman and House Manager of impeachment proceedings against President Clinton, and state Chief Financial Officer and former banker, Alex Sink.

In trying to frame, in a few words, what these contestants mean to voters, one is tempted to find clues in the nuance of optimism and that “vision thing” whose currency has been so debased by the economic calamity.

For example, CFO Sink has resisted calls to disclose what exactly the components of toxic debt was wrapped up the pensions and accounts of municipalities in the state administration pool, that segregated hundreds of millions of assets of questionable value in its own bad bank. It is largely, one can extrapolate from press accounts, the kinds of mortgage based derivatives that brought down the nation and the world’s premier financial and insurance institutions. Much of the debt was underwritten by Lehman before it collapsed and after it paid the former Gov. Jeb Bush as a consultant. Maybe it’s just the fact that certain doors in Tallahassee remain locked even to the highest elected Democrat in the state.

But there may be something else to the aversion to disclose what pollutes Florida’s balance sheet, assured as the public has been that the toxic assets represent a very small percentage of funds in the state administration pool. It is just so difficult for politicians to tell the bad news for fear of being tarred by it. Much easier to throw spears at each other from atop their embankments while the flood waters swamp the cheap seats. And, also, the lexicon of good cheer in the face of massive write-offs is firmly rooted in the spirit of Shriners, the Chambers of Commerce, countless Kiwanis and Optimists Clubs; the context of our present circumstance lacks vocabulary. Are we in a recession, or, is it a Depression? Maybe we don’t know because we have never been here.

In Florida, the composition of the legislature is mostly Republican although the demographics of voters lean the other way. Florida has about 658,000 more Democrat registered voters than Republican. Yet the composition of the state delegation in the United States House of Representatives is 15 Republicans and 10 Democrats. In the state legislature, there are 77 Republicans and 43 Democrats among members of the House, while in the Senate there are 26 Republicans and 14 Democrats. There only place there is parity is among the lobbying corps for land speculation, construction and development: both parties are served equally.

In Florida, the development industries are flat on their back. And yet, the entire legislative session was comprised of lobbyists and special interests plying their efforts to blame land use regulation on the stalled economy; a terrible bill—called SB 360, or, the "Community Reinvestment Act"—threatens to lower the bar further to assist development in the hinterlands. The St. Pete Times/Herald reports, "The Capitol lobbying corps earned up to $45 million from January through March to influence the Legislature. That's essentially the same amount that all 2,000 state lobbyists made in the same period in 2008, when Florida wasn't in a financial crisis." ("For Florida lobbyists, what recession?", May 25, 2009)

Roubini continues, “On the demand side, new single-family home sales are down 74% from their July 2005 peak. Both demand and supply of homes have fallen very sharply and inventories persist at an all time high. While the supply side might have bottomed out, it is likely to move sideways for a long period of time, absent a substantial rebound on the demand side. The weakness on the demand side is bound to persist throughout this economy-wide recession, which will continue to drive prices down in the quarters ahead." (RGE EconoMonitor, May 27, 2009)

RGE Monitor "expects home prices not to find a bottom before mid-2010 with a 38% peak to trough fall. But given the poor conditions on the real side of the economy, RGE Monitor sees a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006 (S&P Case-Shiller is the reference index for these predictions)."

The New York Times reports of further trouble, "With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy. “We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.” ("Job losses push safer mortgages to foreclosure", May 25, 2009)

It's hard to match "a teeny bit better" with the unfolding economic drama that bears a different magnification than used by the mainstream media. In another report, the New York Times noted the cognitive dissonance: the explosion of permit applications from developers and speculators. In Florida, “since 2007, permits have been granted for more than 630,000 new residential units and 480 million square feet of nonresidential space." ("Bill to ease rules on development divides Floridians", May 20, 2009) What this astounding backlog of permits means is that the Growth Machine will be agitating for the use of federal tax dollars-- and any other public moneys it can get its mitts on-- to build whatever new infrastructure, like new roads, is required to serve "what the market wants when demand returns".

There is even more dissonance in the special Sunday section of the Miami Herald. The "book" of eye-candy features real estate filled with Miami area homes for sale at $1.5 million upwards. (There are other price points, but I pick this one as an example.)

Let's do the arithmetic. Back in the day, call it the period leading to 2006, a prospective home buyer in the upper income and tax brackets might have secured a mortgage for 20 percent down payment and sometimes less. Not only were buyers able to buy on twenty percent down payment, bankers often allowed other assets, including separate real estate, to be used as collateral.

Who can afford an ordinary mortgage for $1.2 million? For a married couple seeking a 30 year term, fixed rate 6 percent, purchased in 2006 the monthly cost would be around $8,900 ( Annual gross income, if housing costs were allocated as a third of net income, would be $425,000.

According to, in Miami-Dade County there are 53,116 homes for sale at over $1.5 million. How many Miami-Dade households qualify as earning over $425,000? What does this level of inventory really represent?

For its highest income bracket, the US Census only measures gross incomes at $200,000 and up. In Miami-Dade there are 830,844 households. 30,445 earn $200,000 or more. The median household income is $41,943. (Source: US Census American Community Survey 2005-2007) One can guess the households who would qualify for purchasing a $1.5 million home based on income alone at only one to two percent. Many, many households embraced housing debt far in excess of a third of net income. Many, too, bet that homes were tradable assets like baseball cards.

Do the division: it is either 8 or 12 thousand homes for sale at $1.5 million up and an inventory backlog from four years to infinity because the market is dead as a doornail. Real estate markets are stuck in neutral, except for distressed properties. The Miami Herald reported over the weekend that 9 of 10 sales in Homestead are related to foreclosures. The national economy is still approaching the day of reckoning when middle and upper middle class homeowners who are underwater with their home values and out of opportunities to use other collateral for debt are fully counted by the economic crisis.

So, how long will it take for the fiscal stimulus to return the economy to Happy Motoring. Will 'just go shop' bromides settle nervous stomachs as national unemployment rates push to and through ten percent? With every market being rattled from root to crown, it is no wonder that consumers feel battered and states dependent on revenue from real estate transactions are chasing federal support for their municipal and state debt.

The Monopoly money that had been spent, during the boom, on trillions of real real-estate transactions has miraculously reappeared through printing presses operated by the Treasury Department sponging up the too-big from failure.

So the first problem for the 2010 elections in Florida: the next wave of foreclosures will much faster than the benefits of the federal fiscal stimulus. And how will that stimulus work, anyway?

Among South Florida projects to be funded by federal stimulus dollars, one is noteworthy: rebuilding the massive flyover junction at the Palmetto and Dolphin Expressways. Rebuilding this flyover interchange will allow tens of thousands of commuters to reach their foreclosed homes more quickly.

The point about suitable investments to "revive" the economy begs another question: what other "roadway improvements" are being planned by the county and state and will these investments further extend the failed economic model of sprawling suburbs and the cratered hopes of "values voters". President Obama has said, in comments, that the age of sprawling suburbs is over. In truth, there is nothing in federal or state law to prevent federal tax dollars to be spent "solving" traffic concurrency in order to justify new suburbs.

In Miami-Dade County in 2003, the unreformable majority of county commissioners cast aside a Memorandum of Understanding crafted by county planners and litigants against the widening of Krome Avenue, the boundary road at the western fringe of Florida's most populous county edging against the Everglades. Environmentalists strongly opposed the four-laning of the two-lane rural road because widening roads is the first step to more sprawl in Everglades wetlands as it is, everywhere else.

The agreement would have bound the county to surrender using the widening of Krome to justify more growth. At that is why the county commission strongly rejected the recommendation of its own planning staff. County commissions throughout Florida want to use roadway construction for more growth. It is a formula that has always worked, in the past, to ensure both incumbency and post-elected office employment. That is exactly where federal stimulus dollars will be heading.

So here we are: there is a tranche of middle to upper middle class buyers who are stuck in houses that once represented a ladder in a step to wealth but now are more like a ball and chain. This tranche is less visible in number than the subprime borrowers whose plight made headlines a year ago, but far more important to the outcome of political races.

In the meantime, the special interests who have controlled the state economy are using the crisis to get a free pass: killing regulations on growth management to build more unsustainable development by commandeering fiscal stimulus money from the federal government.

Elections in Florida are notoriously fickle with big issues usually sublimated by well-planned and financed diversions: from whether to remove the feeding tubes of a comatose woman to Jesus license plates. The Miami Herald reports that Florida's crippled housing markets could be the focus of the campaign to be the next governor of Florida. It would be a political event overdue by many decades, were this to be the case. Most sentient human beings are aware there are many reasons the Growth Machine and its constituents are rushing to zone and permit new development. Very little of it will be built at any time in the foreseeable future.

The future awaits a politician skilled enough to link unsustainable development practices, as glorified by Florida's Growth Machine to public anger, taxpayer anguish, and voters' dismay. But we are unaccustomed to fierce economic headwinds in the United States that will stir up the kinds of passions that appeal to fear and ignorance and propel the demagogues.

So far we are all just rolling along on repaved roads and talk of a new energy future. Someone, though, had better start working on the new vocabulary because “change we can believe in” needs robust explanation.


Anonymous said...

it's a lot to digest but the outlines of the truth are finally emerging: the US economy unloaded just about all its productive capacity abroad and shifted to shopping and building houses. the "goldilocks economy" depended on the kindness of foreigners to buy our debt and keep refinancing us. Now the music has stopped and the leadership is just incapable of processing the truth and speaking plainly to the public. They are just too far gone.

There's no demand and there's not going to be because the days of funny money are over.

Anonymous said...

The last option: to inflate the economy out of the housing crisis.