Am I My Brother's Keeper?

The good news is that California finally has a budget. The bad news is that the budget California finally has is really just a make-believe budget, with the important point being that after seventy something days (I've lost count) of haggling, the Governor and the Legislature have finally found something they can agree on. Putting partisanship and rancor aside, they have agreed not to deal with the state's financial mess until next year.

That's the net effect, at least, because although the state was able to balance the books, it was able to do so only by borrowing billions from the state's lottery fund, closing unspecified tax loopholes, and conjuring up some black ink through fiscal sleight of hand. No one was fooled by any of this, of course, not even the legislators themselves, but with millions of Californians looking on they promised it was the best they could do. Everyone would get the state money they were looking for, and it wouldn't cost the taxpayers a cent in new taxes. All that was required was a little razzle and a little dazzle, and the magic of pretend money.

And you know, pretend money is wonderful stuff. It's all over the front pages these days. Everybody's using it - investment banks, insurance companies, homebuyers, and now even the State of California is joining in the fun. The great unknown in all this, however, is if the state goes belly-up, will the Treasury also be there to bail California out? I only ask because when you continually have more money going out than money coming in, that's what happens.

As things stand now, I wouldn't be suprised if at some point California eventually finds itself down at the courthouse filing for bankruptcy (remember, you heard it here first). We've had cities declare bankruptcy before, and even Orange County had to file once, so if it's the state's turn, would that be such a bad thing? Let's face it, our credit rating is already one of the country's lowest, so how much damage could we do? It might give us the chance we need to get our debits and credits in order, and we could always bill the Treasury for the massive defaults on our bonds and other outstanding debts. More importantly, we could clean the slate and start to bring our pretend finances more in line with reality.

We're a can-do state, so I say go for it.

Meanwhile, just to change the subject, back in Washington it looks like things are really getting weird. First our Congress started with a simple 700 billion dollar bailout of the financial system, but not safisfied to leave well enough alone, they now want to tack on all kinds of other goodies just so they can raise the price tag even further. For example, they've decided that they also want to regulate executive pay. Well, the pay packages have been excessive, but do we really want the government to start regulating wages? I say give the shareholders a rope and a sturdy limb to hang it from and they'll know how to deal with poor performance. Ok, maybe nothing that extreme, but at least let them toss a few rotten tomatoes.

The government, it seems, also wants to enter the foreclosure market. Another good idea? Perhaps we should remind them that the national foreclosure rate currently stands at 1.6%, so when they talk about "Americans losing their homes" they're really only talking about the 1.6% who got in too deep and can't make the payments, not the 98.4% who have been able to manage their affairs responsibly and will now be asked to foot the bill. That may seem like a heartless thing to say, but I swear that in all the years I was involved in that industry I never saw a single broker put a gun to anyone's head and make them sign the papers. Sure, some brokers may have been more aggresive than others, but the final decision always rested with the buyers. Do they bear any responsibility for the decisions they made? Does anyone anymore?

But then, that's not the problem, is it? The problem is we need to stabilize the housing market (i.e. stop prices from falling), and therefore we must renogotiate these problem loans. Once again it's the "problem loans" and the "problem companies" that get assistance, while everybody else gets the bill. It's not fair, we are told, but necessary, and for that we should be glad. As the Bible says, "thy brother was dead, and is alive again; and was lost, and is found." Amen, but just how much are fatted calves are running these days?

Anyway, I saw President Clinton on the TV tonight. He's advocating a revival of FDR's Home Owners Loan Corporation to help people renogatiate their loans. It worked back in the 1930's, he said, so why not do something similar today. Of course, what the President forgot to mention was that the after the HOLC was enacted in 1933, home ownership rates sank, and by 1940 had reached their lowest level of the entire century. We can argue the reasons, but I just wanted to offer that as a historical reference.

My guess is that despite the federal government's efforst to prop them up, home prices are going to reach bottom one way or the other, and the bottom will come when houses become affordable enough so that people can put their 20% down and make the payments on a 30 year note. When that happens we won't have a pretend housing market anymore, but a financially sound housing market instead. I believe that's the whole idea.

But, I'm no expert, so what do I know.