New Geography

Tag: Financial Crisis

  • The Worst Cities for Job Growth

    One of the saddest tasks in the annual survey of the best places to do business I conduct with Pepperdine University’s Michael Shires is examining the cities at the bottom of the list. Yet even in these nether regions there exists considerable diversity: Some places are likely to come back soon, while others have little immediate hope of moving up. (Please also see “Best Cities For Job Growth” for further analysis.)

    The study is based on job growth in 336 regions – called Metropolitan Statistical Areas by the Bureau of Labor Statistics, which provided the data – across the U.S. Our analysis looked not only at job growth in the last year but also at how employment figures have changed since 1996. This is because we are wary of overemphasizing recent data and strive to give a more complete picture of the potential a region has for job-seekers. (For the complete methodology, click here.)

    First let’s deal with the perennial losers, the sad sacks of the American economy. Mostly cities in the nation’s industrial heartland, these places have ranked toward the bottom of our list for much of the past five years. Eleven of the bottom 16 regions on our list are in two states, Ohio and Michigan. In fact, the Wolverine State alone accounts for the bottom four cities: Jackson, Detroit, Saginaw and Flint.

    Unfortunately, there’s not much in the way of short-term – or perhaps even medium- or long-term – hope for a strong rebound in those places. President Obama seems determined to give the automakers, for whom Michigan is home base, far rougher treatment than what he meted out to ailing companies in the financial sector.

    In addition, new environmental regulations may not help auto production, since it necessitates some carbon-spewing and therefore perhaps unacceptable levels of greenhouse gas emission.

    However, not all of Michigan’s problems stem from Washington or the marketplace. Many of the locations at the bottom of the list remain inhospitable to business. To be sure, housing is cheap – in Detroit, property values are fast plummeting toward zero – but running a business can be surprisingly expensive in these hard-pressed places.

    In fact, according to a recent survey by the Tax Foundation, Ohio has an average tax burden roughly similar to New York, California, Massachusetts and Connecticut. But while the others are comparatively high-income states, Ohio residents no longer enjoy that level of affluence.

    Can these places come back? It is un-American to abandon hope, but there needs to be a radical shift in strategy to focus on creating new middle-class jobs. Some Midwestern cities, like Kalamazoo and Indianapolis, have made some successful efforts to diversify their economies, encouraging start-ups and trying to be business-friendly.

    But those are exceptions. Cleveland, one of our worst big cities, could spark a renaissance by revamping its port and nearby industrial hinterland. Once the world economy improves, it could re-emerge – building on the existing knowledge and skills of its production- and design-savvy population – as a hub for manufacturing and exports.

    But right now, Cleveland does not seem to be pursuing such opportunities. As Purdue’s Ed Morrison has pointed out, local leaders there seem to “confuse real estate development with economic development.”

    So Cleveland will focus on inanities such as convention business and tourism, believing we all fantasize about a week enjoying the sights along Lake Erie. Yet even high-profile buildings like the Rock and Roll Hall of Fame and Museum, completed in 1986, have not transformed a gritty old industrial town into a beacon for the hip and cool.

    Old industrial cities like Cleveland are better off focusing on their locational advantages – access to roads, train lines and water routes – while offering a safe, inexpensive and friendly venue for ambitious young families, immigrants and entrepreneurs.

    Meanwhile, cities with formerly robust economies – like Reno, Nev., Las Vegas, Orlando, Fla., Tampa, Fla., Fort Lauderdale, Fla., West Palm Beach, Fla., Jacksonville, Fla., and Phoenix – are more likely to rebound. These areas topped our list for much of the 2000s; their success was driven first by surging population and job growth and later by escalating housing prices.

    But the collapse of the housing bubble and a drop in large-scale migration from other regions has weakened, often dramatically, these perennial successes. “We could rely on 1,000 people a week moving into the area,” notes one longtime official in central Florida. “These people needed services, houses and bought stuff. Now the growth is a 10th of that.”

    Instead of waiting for the real estate bubble to return, these areas should choose to focus on boosting employment in fields like medical services, business services and light manufacturing. In much of Florida and Nevada, there’s also a need to shift away from a reliance on tourism, an industry that pays poorly on average and is always subject to changes in consumer tastes.

    We can even be cautiously optimistic about some of these former superstars. After all, observes Phoenix-based economist Elliot Pollack, the existing reasons for moving to Arizona, Nevada or Florida – warm weather, relatively low taxes and generally pro-business governments – have not disappeared. “There’s no change in the fundamentals,” he argues. “It’s a transition. It’s ugly, and there’s pain, but it’s still a cycle that will turn.”

    Once the economy stabilizes, Pollack says he expects the flow of people and companies from the Northeast and California to Phoenix and other former hot spots will resume, once again lured by inexpensive real estate, better conditions for business and a generally more up-to-date infrastructure.

    The Problem with California
    So what about California? The economic well-being of many metropolitan areas in the Golden State has been sinking precipitously since 2006. This year, three California regions – Oakland, Sacramento and San Bernardino-Riverside – have sunk down into the bottom 10 on the large cities list. That’s a phenomenon we’ve never seen before – and never expected to see.

    Like other Sun Belt communities, California suffered disproportionately from the housing bubble’s bust, which has devastated both employment in construction-related industries as well as much of the finance sector. But some, like economist Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University, where I teach, think a real estate turnaround may be imminent.

    Among the first to predict the potential for a real estate bubble back in 2005, these days Adibi is more upbeat, pointing to rising sales of single-family homes, particularly at the lower end of the market. California’s inventory of unsold homes is now down to about six months’ worth, a figure well below the national average of 9.6 months.

    It seems not everyone is ready to abandon the Golden State – but still, recovery in California may prove weaker than in surrounding states. One forecaster, Bill Watkins, even predicts unemployment could reach 15% next year, up from about 11% today. California, most likely, will see only an anemic recovery in 2010 even if growth picks up elsewhere.

    Much of the problem lies with the state’s notoriously inept government. The enormous budget deficit will almost certainly lead to tax increases, which will fall mostly on the state’s vaunted high-income entrepreneurial residents. Stimulus funds won’t do much good either, Adibi notes, since “the state is grabbing all of the federal stimulus money” to keep itself afloat.

    A draconian regulatory environment also could dim California’s prospects for growth. Despite double-digit unemployment, the state seems determined not only to raise taxes but also to tighten its regulatory stranglehold.

    This is a stark contrast to what happened in the 1990s during the last deep recession. At that time, leaders from both political parties pulled together to reform the state’s regulatory and tax environment. Almost everyone recognized the need to improve the economic climate.

    But an even deeper recession, it seems, hardly troubles today’s dominant players – public employees, environmental activists and gentry liberals who largely live along the coast. The state has recently passed a draconian Assembly bill aimed to offset global warming by capping greenhouse gas emissions – a measure that seems designed to discourage productive industry.

    “This is becoming a horrible place to produce anything,” says Watkins, who is executive director of the Economic Forecast Project at the University of California, Santa Barbara.

    California’s lawyers, though, might stay busy. Attorney General Jerry Brown has threatened to sue anyone who grows their business in unapproved, environment-threatening ways. To be sure, this promise may have relatively little impact on the more affluent, aging coastal communities – but it could wreak havoc on younger, less tony areas in the state’s interior. Many of the local economies there still rely on resource-dependent industries like oil, manufacturing and agriculture.

    It’s sad because California has the capacity to recover more quickly than the rest of the country if the state moderates its spending and stops regulating itself into oblivion. This current round of legislation is so dangerous precisely because it could eviscerate the heart of the economy by slowing down entrepreneurial growth, the state’s greatest asset.

    Even in hard times, there are people with innovative ideas trying to bring them to market – and not just in Hollywood- and Silicon Valley-based industries but in a broad range of fields, from garments to agriculture, aerospace and processed foods. The desire to increase regulation reflects a peculiar narcissism and arrogance of the state’s ruling elites, who believe the genius of San Francisco’s venture capitalists and Los Angeles’ image-makers alone are enough to spark a powerful recovery.

    This is delusional. True, California still has a lead in everything from farm products to films to high-tech manufacturers. But it has been slowly losing ground – to both other states and overseas competitors. CEOs and top management might stay in the Golden State, but they increasingly send outside its borders all jobs that don’t require access to the local market, genius scientists or talented entertainers.

    “There’s a feeling in California that we will come back, no matter what, because we are California,” Watkins says. “The leadership is swallowing Panglossian Kool-aid. Some very smart people, a beautiful climate and nice beaches is not enough to guarantee a strong recovery.”

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • How Soon We Forget: Wall Street Wages

    It also wasn’t that long ago that Congress held hearings on the bonuses paid to AIG employees after the bailout. Now, according to New York Times reporter Louise Story Wall Street compensation is rising back to where it was in 2007 – the last year that these firms made oodles of money with investment strategies that turned toxic the next year.

    And, yeah, we get it – there is a theoretic connection between compensation and performance. But we also know that there’s a difference between theory and practice. Too many of the same employees who either perpetrated the events leading to the meltdown or stood idly by while it happened are still in place.

    When AIG finally revealed what they did with the bailout money, we found out that a big chunk of it went overseas. Now, New York Post reporter John Aidan Byrne tells us that the bailout recipients are bailing out – on U.S. workers! Story found that Bank of New York Mellon, Bank of America and Citigroup, all recipients of billions of bailout dollars, are shifting more jobs overseas. The explanation, that nothing in TARP prohibits them from moving jobs out of the US, is so lame I’m surprised Story even bothered to mention it.

    The initial indicators of the current financial meltdown were visible in mid-2007. The deeper, underlying causes were recognized, talked about in Washington and then ignored as far back as 2004. The collective memory is short. Nobody wants to hear the bad news, especially when it’s this bad and it goes on for this long. The morning you wake up and wish the financial meltdown would just go away is your most dangerous moment – wishing won’t make it so.

  • Is That an Economic Light at the End of the Tunnel or an Oncoming Train?

    When it comes to the state of the economy, is the worst behind us or still to come? Informed opinion is all over the map. The optimists are citing such factors as accommodative Federal Reserve Bank policy (massively increased liquidity), bank profitability (and yes, banks are lending, but only quality loans), money velocity (trending up), a positive yield curve (long-term vs. short-term rates), housing starts (surging), favorable financial rule changes (abandonment of mark-to-market accounting, reinstatement of the short uptick rule to prevent naked short-selling), retail sales (recovering), commodity prices (rising due to increased industrial demand), used car prices (firming), and new vehicle sales (rising off their sickening lows).

    Pessimists are pointing to job losses, bankruptcies, business closings, unfunded liabilities, budget deficits as far as the eye can see, potential for high inflation, the debt overhang, and more. They don’t believe any good news is real or sustainable. On housing, for example, they say prices have further to fall, and that new construction is mostly in condominiums, apartments and townhouses, not detached single family residences.

    But that’s disputable. In fact the housing trend has become much more positive. In California, existing home sales have jumped 30% over the past year, taking the inventory from an estimated 16.7 months to less than seven months.

    Nationwide, existing home sales have been on the rise for the last few months, with strongest growth occurring in Sunbelt markets in Arizona, Nevada and Florida, as well as in California. These are the places that experienced some of the greatest surges in prices, but have now seen declines of as much as 50% below peak, allowing new buyers to purchase affordably.

    If there is one iron-clad rule when it comes to the life cycle of recessions, it is that when things get cheap enough, buyers appear.

    In other words, there is a bottom somewhere, if for no other reason than even after the worst disaster, survivors must move ahead with their lives. And we all have to buy the basic staples (even the bare necessities add up to billions of dollars in expenditures). Will we completely change our lifestyles, living in smaller places, driving smaller cars, consuming less, become more frugal, less ostentatious, opting for voluntary simplicity, etc.? Fugetaboutit. I get asked about this during every downturn and I always say the same: only those who already have everything seem to buy into the notion of doing with less. And, as it turns out, they have to spend freely in order to impress themselves that they are living frugally.

    Going socialist?
    Some observers have said that if we continue down the current economic, social and political path, we will become like the social democracies of Western Europe, characterized by slow growth, heavy government involvement in all businesses an industries, high taxes and regulations, and a resultant lower quality of life. Others – say, those who have visited Europe and like what they see – say they would welcome the guaranteed health care, education and pension. If I may offer some personal and professional insight into the argument, as I have lived in, worked in, studied, researched and written about the European system, I would say the model is not transferable to the States, and is likely itself unsustainable even in Europe.

    Europe suffers from consistently slow growth, permanently high unemployment, aging populations, declining birthrates, rising fiscal deficits, and, worst of all, little prospect of change. The labor market is less flexible, regulations are onerous, fewer new businesses are formed, spending on research and development is lower than in the US. With so much regulation and “national champions”, barriers to competition are higher.

    Europeans are less productive, work less and earn less. And no, contrary to Jeremy Rifkin (The European Dream), this represents more than a voluntary choice of more leisure and lifestyle over income. A Federal Reserve Bank of Minneapolis study found that Europe’s higher taxes explain almost all the difference in labor-force participation rates between Europe and the US. When European tax levels were comparable, European work hours were similar. Having lived among the natives in the “café society” I can confirm that when marginal tax rates are confiscatory, the best and brightest will indeed either “go Galt” (withhold their full efforts from the labor market), or seek opportunities elsewhere abroad.

    Entrepreneurs and innovation – not ever expanded government – will save the US economy, but those are in short supply in Europe. We excel in them here, but they require low taxes, low levels of regulation, low barriers to entry and operation, the freedom to hire and fire freely, etc.

    Consumers
    What about consumers and consumer spending, such an important component of economic activity? Optimists point out that most people (upwards of 90%) are still working, earning, making their mortgage and credit card payments – and spending, if at a less frenetic pace. Pessimists see the credit contagion as spreading. They point to devastated domestic balance sheets, due to collapsing home values, declining net worth and reduced financial spending power.

    I can here also offer some personal and professional insight, from my long association with the Institute for Business Cycle Analysis: our own US Consumer Demand Index, the only monthly survey of American consumers which measures actual buying intentions (as opposed to sentiment, confidence or opinion, all of which are of course subjective). We query over 1,000 households a month on their specific spending plans across a broad range of durable and non-durable goods. We don’t ask their opinion of which direction the country is going, or on how good a job they think the President is doing. We ask them, are you, or are you not, in the next three months, going to be buying a car, PC or TV, white goods, home furnishings, kitchenware, toys, etc. In the case of food/groceries and clothing/shoes, we ask whether they are going to be purchasing more, less or the same amount as in the corresponding period of last year. Regarding those durable goods, we also ask, uniquely, if their household has no plans to be buying anything in those categories during the next three months. This gives us some unique insight into real consumer behavior.

    Our March data show a fairly strong upturn (from a very depressed level of -37 to a less depressed level of -11). This is a significant improvement, but we will refrain from calling a bottom or turnaround until we see our three-month moving average in positive territory for three consecutive months. (On the basis of this March report, the three-month moving average improved only one point, from -26 to -25, so there is still a long way to go, but the positive direction and momentum is encouraging.)

    [Feel free to contact me for a copy of the US CDI and subscription information (or feel free to visit www.consumerdemand.com). Our monthly surveys, which have been conducted since February 2001, give a fairly accurate forecast of the strength and direction of the PCE (Personal Consumer Expenditures) and ISM (Institute for Supply Management) indexes 4 to 6 months ahead of official data.]

    So where do I stand? I believe the tide is starting to turn – the rate of decline in most major economic indicators is clearly slowing. The forward looking stock market is well off its lows. In our latest CDI survey, the percentage of consumers declaring themselves on the sidelines decreased from the record high level of 68.4 in February to the still awful 62.2 in March (at least we’re moving in the right direction!).

    So is that flickering light we see the end of the tunnel or an oncoming train? Ask me in two months. I would offer a stronger opinion, but everyone in the “foreseeing” business ought to be properly humble from now on.

    Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends; IntegratedRetailing.com is his web site on retail trends. Roger is US economic analyst for the Institute for Business Cycle Analysis in Copenhagen, and North American agent for its US Consumer Demand Index, a monthly survey of American households’ buying intentions.

  • Mr. Cloghessy Deserves Better – And So Do the Rest of Us

    The role of politicians in the corruption of our civic spirit – a national problem that has led us to the current economic mess – has me thinking a lot about Joe Cloghessy.

    Mr. Cloghessy lived in my childhood neighborhood. He was big and strong and worked hard for a living, like most of the men in the neighborhood. He might have had more money than his neighbors, but that never came up. He did have a pool in his backyard – he built it himself – and that made his house a rarity in those parts.

    Mr. Cloghessy was just as rare as his house. He let every kid on our block swim in his pool between 2 p.m. and 4 p.m. from the day school let out for summer until we went back to classes in the fall.

    Mr. Cloghessy was good with woodworking, too, and the nooks and crannies around his pool were filled with small bridges through garden plots adorned with wind chimes and figurines. It was as close to a country club as I was going to get, and that was just fine with me.

    Then one day I was playing around, doing the sorts of tricks that kids do, and I broke a railing on one of the bridges. I propped up the broken wood so it might pass for undamaged just long enough for me to slink away from the scene.

    Later that day one of my sisters mentioned the mishap, and my mother overheard. She immediately gave me a stern reminder that someone could have gotten hurt if they had counted on that railing to support them as they walked over Mr. Cloghessy’s backyard bridge. She told me that Mr. Cloghessy worked hard for a living – and nearly as hard to craft the handiworks that made his backyard such a special place. She made it clear that our fine neighbor was under no obligation to let every little kid on the block into his yard – into his life – every day of every summer.

    My mother also made it clear to me that it’s wrong to break something and not own up to the damage – especially when it’s something that belongs to someone who’s been good to you. Then she made me walk down the block and tell Mr. Cloghessy about the broken rail. She told me to apologize for breaking the rail – and for having lacked the courage to be forthcoming about the damage I had done.

    I was embarrassed and scared as I approached Mr. Cloghessy in the workshop of his garage that evening. He nearly gave me a pass right off the bat, just because he was that sort of guy. I think he figured out that my mother had sent me down for a lesson, though, so he got serious, telling me to come right to him if it ever happens again. Someone could have gotten hurt on that busted rail, he said.

    All of this makes me think of our current crop of politicians, who have busted more than a few rails but have yet to own up to the damage. It’s almost as though they are children who have misbehaved for a long time. It seems that nobody ever told them that fellows like Joe Cloghessy work hard and deserve better than to see their contributions to the common good left broken by someone who doesn’t even have the courage to admit to the damage.

    This immaturity in our political system has been a long time in coming. Voters helped make the problem – we haven’t done much to hold our child-pols accountable for many years.

    Now is the time for a fresh start – time to tell the politicians that they’ve disappointed us and must face some discipline.

    Many of the politicians will survive – there are some sincere ones out there, after all, and others who have a sufficient store of good deeds to ride out their missteps.

    Some shouldn’t get a pass because they’ve simply gone too far with the pay-for-play and other selfishness.

    In any case, it’s time to realize that the world has changed dramatically in just the last few months. It’s quite clear that none of us are going to get anywhere until our politicians own up to their mistakes and start mending their ways.

    It’s now up to everyone who’s concerned about our country and its civic spirit to call our politicians to account. We’re the only ones who can demand that they stop breaking things – starting with the public trust.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com)

  • TARP Criminal Charges Possible

    Of the three monitors established by the legislation that created the Troubled Asset Relief Program (TARP), only one has the authority to prosecute criminals. That is the Office of the Special Inspector General (SIGTARP) whose motto is “Advancing Economic Stability through Transparency, Coordinated Oversight and Robust Enforcement.” The Special Inspector General in charge, Neil Barofsky, told Congress before the recess that he was by-passing the Rogue Treasury to get answers directly from TARP recipients about what they are doing with the bailout money. Now, SIGTARP has set up a hotline (877-SIG2009) for citizens to report fraud or “evidence of violations of criminal and civil laws in connection with TARP.” To date, they have received 200 tips and launched 20 criminal investigations.

    What started out as a bailout costing $750 billion quickly turned into $3 trillion – an amount about equal to the U.S. government’s 2008 budget. This week, SIGTARP released a 250-page report in an attempt to place “the scope and scale [of TARP] into proper context” and to make the program understandable to “the American people.” I can’t recommend that you read a report of that length, or even that you download it (more than 10 megabytes) unless you have broadband internet access. (In fact, I don’t understand what makes them think that the American people are going to understand anything that takes 250 pages to explain… Isn’t over-complicating one of the problems they want to solve?) You can get all the high points in Barofsky’s statement to the Joint Economic Committee, which is only 7 pages and a few hundred kilobytes. If you have more time than patience, you can watch the testimony on C-SPAN.

    I applaud the hard work of the SIGTARP to provide oversight to Treasury even though they are “currently working out of the main Treasury compound.” Let’s hope they can break free of the hazards associated with the self-regulation that got us into this financial mess in the first place.

  • Can Eddie Mac Solve the Housing Crisis?

    Every downturn comes to an end. Recovery has followed every recession including the Great Depression. In 1932, John D. Rockefeller said, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” The question is not ”IF”, rather it is “WHEN” recovery will begin. The age-old question remains: what can government do to get the nation out of recession?

    Government can act wisely. In the past, it used tax legislation (the mortgage interest deduction) to create the highest home ownership rate in the industrialized world. It can also act stupidly by promoting “Sub-Prime” mortgages, “105%” financing and the “No-Doc” loan that got us into this financial mess. As many as 4.4 million more Americans could lose their homes – unless drastic action is taken to stop the process.

    Much of this was built on good intentions. One example of poor planning can be seen in Department of Housing Development’s “Dollar Homes” program. The HUD website describes this as an altruistic program “to foster housing opportunities for low and moderate income families” by selling homes for $1 after the Federal Housing Authority has been unable to sell them after six months.

    This sounds like a good idea but the program has become consumed by fraud and waste and has delivered little benefit to the parties intended. First, the policy eliminated any ability to sell the properties at market since it is clear that the value will be marked down to $1 in six months. The result was massive losses to the government as previously saleable properties were re-priced to $1. Second, the homes were snatched up by businessmen and the cronies of politicians who knew how to game the system. These homes were then sold on the retail market for huge profits. Very few homes made it to the needy parties intended. This dumb legislation created and fed a lazy, corrupt, bloated, ineffective and expensive bureaucracy.

    In contrast, smart legislation can end the housing crisis that threatens to send our economy reeling into the next Great Depression. A simple but effective governmental action does not have to cost a lot of money and more importantly, does not require a new permanent and expensive bureaucracy. It can be a win-win-win for federal government, local government and working families. This smart legislation is called Eddie Mac, which stands for the Empower Direct Ownership Mortgage Corporation.

    The genesis of Eddie Mac comes from the “good old days” when home prices were high. The most common complaint heard from police, fire, teachers, nurses and municipal workers was that they could not afford to live in the very communities where they worked. The lower wages of these groups forced them onto the freeways to more affordable neighborhoods in distant suburbs. The commute of hundreds of thousands of city workers across the nation clogged our roads, added harmful emissions to our atmosphere and exacerbated our dependence on foreign oil.

    Simply stated, the Eddie Mac program allows local government to buy vacant foreclosed homes from the banks and institutions. Local government then stimulates the local economy by hiring local realtors, appraisers and contracting with local labor to fix up the deteriorated properties. It then leases the properties to police, fire, teachers, nurses and municipal workers who otherwise could not afford to live in their own communities. Local government enters into an “Empower Direct Ownership Lease Option” with their employees so that the employees have the right to purchase the homes in the future using their rental payments to build equity. The Empower Direct Ownership Lease Option allows the employee to acquire the home in five years for the original purchase price plus 50% of the appreciated value.

    Instead of concentrating power in Washington, Eddie Mac empowers local government to solve their own local real estate economy. Eddie would employ local realtors to identify vacant foreclosed properties qualified for the Eddie Mac program. Realtors would earn a 1% fee for identifying and assisting local government with the acquisition. The purchase price would be set by a local appraiser who would also earn an appraisal fee. Use of local appraisers avoids banks profiting unfairly from a government program. The free market system would set the value. The purchase price would include an estimate of costs to bring the home back to local standards, using local workers to fix up these properties. Local government would obtain 100% financing for the acquisition from Eddie Mac bonds that would be sold on Wall Street along side of Fannie Mae, Freddie Mac and Ginnie Mae guaranteed loans.

    A $200,000 home, foreclosed upon, vacant and allowed to deteriorate has likely deteriorated to just $120,000. Its actual value will be determined by appraisal. At $120,000, a 4% guaranteed Eddie Mac mortgage would cost local government just $4,800 per year. Local government would be able to rent that home for $400 per month making it affordable to police, fire, teachers, nurses and municipal workers.

    The Empower Direct Ownership Lease Option allows the employee to acquire the home in five years for the original purchase price plus 50% of the appreciated value. If the baseline value is $120,000 and the home appreciates at 5% per year, it will increase in value $6,000 per year or $33,153 over 5 years. The employee’s Empower Direct Ownership Lease Option allows them to acquire the home in five years for the original purchase price plus 50% of the appreciation or $136,577. The price is $16,577 below market price, creating equity for the home buyer of $16,577 which can be used as the future down payment to acquire the home.

    This is a win-win-win scenario. Stopping the slide in home values by buying up foreclosed homes with federally insured 4% bonds is a low tech, low cost effort to put the brakes on the recession. And it entails no new bureaucracy. The Federal government is the big winner because they would be footing the bill for the bail-out if the economy continued to unravel. Local government wins by solving an age old dilemma of how to house its local work force. The local economy wins as fresh stimulus is put into the economy to locate, appraise, acquire, insure, repair, repaint and refurbish these homes. The city/county/municipal workers win with an opportunity to enjoy the American dream of home ownership in the very communities where they work. The environment wins as we take commuters off the road and lessen the environmental impact of their commute. And, we help reduce our dependence on Middle East oil as the ripple effect of tens of thousands of Eddie Mac homes are leased to local employees who now live and work in their own communities.

    Eddie Mac can become the firebreak to the mortgage crisis, the game changer needed to change market momentum. The hundreds and thousands of vacant foreclosed home sales generated by the implementation of the Eddie Mac program would send a strong signal to the public that the market has bottomed and the recovery has begun. Vacant homes would be acquired, fixed up and occupied by stable, important and long-term members of our communities.

    John D. Rockefeller once stood on the floor of the New York Stock Exchange and quieted the panic by firmly proclaiming; “Buy” in the dark days of the 1929 collapse. Our government can help stop the slide in prices by standing with our local governments and firmly encouraging “Buy” in the local markets. Reckless government got us into this mess. Smart government can get us out.

    Robert J. Cristiano Ph.D. has more than 25 years experience in real estate development in Southern California. He is a resident of Newport Beach, CA.

  • Solving the Economic Crisis: Fix the Banks

    Economic forecasts today reflect a remarkable variation. Some economists are predicting a rapid increase in economic activity within just a few months. Some are forecasting an economic decline that persists for years.

    At the root of the debate lies the question: where is the heart of darkness? Primarily, forecasters are focusing on the impact of the fiscal stimulus and the efficacy of monetary policy. Yet they have been less forthcoming to center on the real problem, which is fixing the banks.

    Government spending as economic stimulus is typically rejected by economists based on either a crowding-out or a Ricardian Equivalence theorem. The crowding out theory says that government spending can replace, or “crowd out”, more productive private investments. The perverse result is that the economy may slow down even more.

    The Ricardian Equivalence theory holds that future taxpayers, recognizing their increased tax obligations, simply increase savings by an offsetting amount. The result is no change in economic activity. Though I’ve simplified the respective cases, crowding-out and Ricardian Equivalence arguments are persuasive for most states of the world. So, for the moment, let’s reject fiscal stimulus as a way out of recession.

    What about monetary policy? One of Ben Bernanke’s contributions to monetary policy has been the notion that the central bank still has policy tools even when interest rates fall to zero. The FED can still purchase all sorts of assets. Those purchases increase the monetary base and directly impact targeted non-liquid markets. Continued action after interest rates reach zero addresses one criticism of Japan’s response to the 1990s in which their central bank essentially did nothing once interest rates reached zero.

    First we need to consider how monetary policy affects economic activity. We teach students that monetary policy works through a money multiplier. The money multiplier is based on lending by a fractional reserve banking system. The money goes to the banks, and the banks lend it out. The reserves are provided by FED purchases of financial assets.

    Of course the multiplier depends on the bank’s lending. What happens when banks don’t choose to lend? Scott Sumner, an economist at Bentley University, has pointed out that this is exactly the situation we have right now. The FED has been increasing reserves, but the banks are not lending. Since October, bank reserves and vault cash has grown to over a trillion dollars but lending has declined. Sumner recommends a penalty on excess reserves, but more is needed to restore bank lending.

    I see three significant issues that are driving the banks’ apparent reluctance to lend. First, banks appear to expect deflation. Fear of deflation is not unfounded. Prices are falling in many markets, impacting bank behaviors.

    I keep hearing that “Cash is king.” This is exactly what one would expect in a deflationary environment, and there is no obvious way to deal with it. You can tax excess reserves and vault cash. You can tax bank deposits. You cannot tax money that is under the mattress, and money under the mattress is profitable in a deflationary world.

    This is what some call Keynes’ famous liquidity trap. Technically, a liquidity trap is when zero interest rates make monetary policy ineffective. As Scott Sumner and others point out, the described situation is really an expectations trap. The problem isn’t zero interest rates, the problem is deflationary expectations.

    But if the “trap” makes monetary policy ineffective the arguments against fiscal stimulus are much weaker. This is where Paul Krugman says we are today, and it changes everything. We need to go back to fiscal policy to find hope for effective policy.

    If we are in a trap, it bolsters Krugman’s criticism that the existing stimulus is too little. To be effective, the stimulus would need to be very large, perhaps 40 to 50 percent of gross product. This would imply a stimulus package in the range of 6 to 8 Trillion dollars!

    But even if we were to follow this notion, I would argue that the composition of the stimulus would have to change. To be effective, government spending would have to create assets that significantly increase the productivity of private assets. We have examples from history. The Tennessee Valley Authority in the Southeast and Hoover Dam in the West cut private industry’s production costs by providing abundant and cheap energy. California’s water system, with its dams and canals, expanded agriculture’s productivity and range.

    Sadly, in spite of its size, the current stimulus plan has nothing that will significantly enhance private-sector productivity. And even any attempt to boost productivity investments is likely to run into roadblocks from the very powerful, well-connected green lobby which enjoys a far more favorable press than does business.

    Are we doomed then to deflation and slow growth? I don’t think so. The federal deficit, monetary policy, the impending Social Security and Medicare crisis, and baby-boom demographics imply eventual inflation.

    The real problem is with the banks. Banks can fail because of a lack of liquidity or a lack of equity. Last fall banks faced a liquidity crisis. There was a run on the entire financial sector. Today banks are probably facing an equity crisis, and the Treasury’s Toxic Asset Plan is exhibit one.

    The Treasury’s Plan does not make sense as presented. The plan is to leverage private sector resources, expertise and cash, with government funds to purchase underpriced toxic assets. This would supposedly reveal a true price for toxic assets. However, Gary Becker and Jeffrey Sachs have convincingly shown that the plan provides strong incentives to dramatically overprice the assets at the taxpayers’ expense. What if those toxic assets are already correctly priced?

    The Treasury’s Toxic Asset Plan does make sense if the banks are insolvent, and policy makers are unwilling or unable to more directly and transparently tackle the problem. To me, the Toxic Asset Plan looks a lot like a backdoor way to recapitalize the banks. If so, we have a problem. Insolvent banks must deleverage as rapidly as possible. That is, they must reduce assets, and a bank that is reducing assets in not a bank in the lending business.

    Here our problem is a variation of the problem faced by the Japanese in the 1990s. Their economic malaise continued for a decade in large part because they would not or could not clean up their banks. We and the rest of the World told Japan, time and again, that there was a toxic asset problem at their banks. Informed observers, inside Japan and out, knew that the core problem was bad bank assets.

    Today, the United States is probably in the same position. Our banks and other financial institutions are in trouble. They are sitting on a bunch of bad assets. If the banks recognize their bad assets, their equity is inadequate. The banks’ unpopularity prevents a bailout or a restructuring, but policy makers are afraid to let them fail. The other solution would be the Swedish solution, but policy makers don’t want to be accused of nationalizing the banks. Right now even President Obama lacks the political capital to address the problem. So, we get the convoluted Treasury Plan.

    What we need is political courage. We need to clean up the banks, and it doesn’t much matter how. We could crank up the bankruptcy courts, or we could implement the Swedish plan. Inaction will only prolong the economic pain. Backdoor plans from an unpopular Secretary of the Treasury aren’t going to get the job done. The sooner we clean up the banks, the sooner they will return to the business of lending, and the sooner we will have a recovery.

    Bill Watkins, Ph.D. is the Executive Director of the Economic Forecast Project at the University of California, Santa Barbara. He is also a former economist at the Board of Governors of the Federal Reserve System in Washington D.C. in the Monetary Affairs Division.

  • Entrepreneurs Overlooked in Recovery Plans

    As most recently spelled out in The Economist , one of America’s most potent advantages – even in the current economic crisis – lies in its entrepreneurialism. America’s entrepreneurs are the proverbial wellspring of innovation and creators of most of the country’s new economic opportunities. Entrepreneurs, or global heroes as The Economist calls them, are not only important here in this country but are the best hope for creating the innovations that will get sufficient traction to resuscitate the world economy.

    Year in and year out Small Business Administration data confirm that small businesses drive employment. Firms with fewer than 500 employees account for most, if not all, net new jobs while large firms with 500 or more employees exhibit a net loss of jobs. About 99 percent of all businesses are small businesses.

    In that case one would expect that government would be doing more to encourage individuals to start businesses and create jobs, which is ultimately the long-term solution for the country’s economic woes. Not so says a recent study by the Kauffman Foundation – Entrepreneurship and Economic Recovery: America’s views on the best ways to stimulate growth.

    The key findings of the report include the following:

    • By a margin of three to one (63 percent to 22 percent) Americans favor business creation policies as opposed to government creating new public and private sector jobs. In fact, 79 percent of respondents say entrepreneurs are critically important to job creation, ranking higher than big business, scientists, and government.
    • Only 21 percent of all survey respondents say that the stimulus package supports entrepreneurial activity and 33 percent believe it will retard entrepreneurship.
    • While 78 percent of survey respondents say innovation is important to the health of our economy, only 3 percent say they believe the stimulus package will encourage innovation.
    • Americans think the government does little to encourage entrepreneurship, despite its importance; 72 percent of respondents say the government should do more to encourage individuals to start businesses. Almost half of respondents think the laws in America make it more difficult to start a business.

    So even now, entrepreneurship is widely recognized as more important than the stimulus package in creating long-term economic stability. Yet, Americans doubt that the stimulus package will spur the entrepreneurship that they hold as so important.

    Americans Want Small Business Innovation
    If entrepreneurship and innovation are the keys to revitalizing our economy, how can the federal government spur this on without the delay involved in creating a new bureaucracy? Is there a proven mechanism in place for evaluating, vetting and administering research funds that can be used to address some of our nation’s most pressing challenges related to the environment, a dwindling industrial base, our defense capability, or the health of our nation?

    Of course there is, and it is somehow – amazingly – overlooked. It’s called the Small Business Innovation Research (SBIR) Program, an existing highly competitive program that funds the most promising scientific and engineering ideas from the nation’s small, high-tech, innovative businesses. It’s so competitive that some, if not most, agencies only fund 1 out of 9 Phase 1 proposals.

    Eleven federal departments now participate in the SBIR program; five departments participate in the companion Small Business Technology Transfer (STTR) program, which requires partnerships with universities to harness the intellectual capital of our universities and the market capabilities of small business. Altogether the SBIR/STTR programs award a little over $2 billion each year to small high-tech businesses.

    Since its inception in the late 70s and early 80s the program has awarded $26 billion to over 80,000 Phase 1 projects and about 31,000 Phase 2 projects, resulting in small businesses filing 67,600 patents and attracting over $41 billion in venture capital. Over 650 SBIR companies have gone public. Increasingly, large firms and mid-sized firms have entered into various forms of collaborative relationships with SBIR awardees to commercialize their technologies.

    Despite having a rigorous independent scientific and commercialization review process in place, and despite its record of success, the program now languishes with little support in either Congress or the White House.

    Now let me admit that I’ve been actively involved in the SBIR program since 1992 – now having served as an eight-time principal investigator for Phase 1 and Phase 2 projects. Our company’s innovations are in community-based solutions for technology-based economic development, related to capital investment, trade and technology linkages and infrastructure investment. Our company is a 1997 recipient of the Tibbetts Award, named after the National Science Foundation’s Roland Tibbetts, awarded for success in the program and for the pursuit of science-based solutions to our nations challenges and opportunities.

    I’ve also been an advocate for sustaining and building the program along with numerous colleagues in other small technology businesses and representatives of government from the technology-based economic development community. I’ve made this personal commitment because the program makes a significant difference in the opportunities that are available to small business and because the program works in creating new economic opportunities based on science, engineering and technology.

    Instead of watching the SBIR program evaporate we should be doubling if not tripling our investment. At a minimum a $5 billion SBIR program should be put in place. It will get us much more in growth than the Treasury bailouts of the banks, or General Motors. It represents both what America wants – Small Business Innovation – and needs in these times of economic stress.

    Delore Zimmerman is president and CEO of Praxis Strategy Group and publisher of Newgeography.com

  • We Must Remember Manufacturing

    General Motors‘ reorganization and contemplated bankruptcy represents one possible – and dismal – future trajectory for American manufacturing.

    Unlike highly favored Wall Street, which now employs fancy financial footwork to report a return to profitability, the nation’s industrial core is increasingly marginalized by an administration that appears anxious to embrace a decidedly post-industrial future.

    Indeed, a recent survey of manufacturers found that most see the stimulus as only “slightly effective” for them. This is no surprise, since the lion’s share of the $800 billion is going to bolster the banks, with scraps spread out to green projects, health care and education.

    The administration’s priorities reflect a new political consciousness that, if not openly anti-industrial, seems to minimize manufacturing’s role in the nation’s long-term future.

    Just examine the demands placed upon General Motors and Chrysler. Their workers are being asked to make huge sacrifices – 1,600 new layoffs announced just this week – while their executives are largely shunned and demeaned compared with the generally more gentle treatment Wall Street malefactors get.

    This disparity reflects the close ties between Treasury Secretary Timothy Geithner, chief economic adviser Larry Summers and other top administration officials with the increasingly Democratic financial elite.

    Perhaps most revealing has been the somewhat bizarre choice to make mega-contributor and investment banker Steve Rattner as the “car czar” overlooking Detroit’s fate. Rattner, after all, has limited experience with the auto industry. (His expertise is largely in media.) “About all he knows about cars,” joked one person who has worked with him, “is that his chauffeur drives one.”

    Rattner may yet lose his post because of his involvement in New York’s latest pension fund scandal – but his appointment speaks volumes about the disdain with which the administration views the industrial economy.

    It also reflects an attitude – common among the academics, financiers and high-tech executives closest to the administration – that “smart” people can solve any problem better than someone with more hands-on experience but perhaps a less lofty IQ or a less tony advanced degree.

    To be sure, we should be wary of an approach like the Bush administration’s well-demonstrated embrace of mediocrity. But it is also dangerous to embrace a mindset that disdains all practical skill and areas of business not dominated by the cognitive elite.

    These days this mentality appears alongside an overall contempt for the tangible economy. Very few Obama appointees have ties to the country’s core productive sectors: manufacturing, agriculture, energy. Veterans of investment banking, academia or the public sector, they seem to see the economy more in terms of making media, images and trades – as opposed to actually making things.

    Such an approach also reinforces the administration’s surprising radicalism on the environmental front. Most industrial firms understand that precipitous moves to limit greenhouse gases and decimate domestic fossil fuels threaten America’s international competitiveness. Apparently, patience with and sympathetic understanding for Wall Street’s foibles is one thing; figuring out sustainable economic and energy policies that are friendly to industry is another.

    Unless something is done soon, the Obama policy could end up eroding more than just the nation’s industrial base. The president’s much-ballyhooed expansion of “green jobs” to make up for massive manufacturing layoffs worked well on the stump – but in reality it’s largely a fantasy.

    Certainly windmills and solar panels won’t rescue many of the communities at the bottom of our recent list of best cities for job growth. Industrial towns like Lansing and Flint, Mich., as well as Janesville, Wisc. may only see more devastation.

    Since 2007, these areas have lost somewhere between 15% and 25% of their industrial jobs. In Flint, nearly half have disappeared since 2003. These are the places where the American dream is dying most rapidly; Big Three bastions Michigan and Ohio have seen the quickest declines in per-capita incomes for most of this decade.

    The situation may be getting worse. Industrial decline could even be spreading to areas – like Houston, Texas, Fargo, N.D., Tulsa, Okla., or Anchorage, Alaska – that have actually been gaining industrial jobs. One culprit here may prove to be the administration’s anti-fossil fuels agenda, which could undermine even healthy firms and healthy regions. Even if Congress refuses to approve draconian rules for cap and trade or new taxes on greenhouse gas emissions, the “green” agenda could be imposed by the federal apparat anyway, through bureaucratic fiat. One harbinger could be the EPA’s recent actions to regulate carbon dioxide as a pollutant.

    All this doesn’t bode well for the country’s prosperity and for the prospects of millions of Americans. As demographer Richard Morrill has pointed out, traditionally, regions with industrial economies have been more egalitarian than the finance-driven areas. If this anti-manufacturing trend continues, more of America will resemble New York, Los Angeles or Chicago, places sharply divided between a growing class of low-wage workers and a relative few hegemons in finance, academia and media.

    Perhaps even worse, by stimulating everything but industry, the administration risks accelerating the very imbalance between production and consumption that is one key reason for the nation’s economic woes. Padding incomes by handing out money without increasing production may indeed prove a great way to stimulate economies – that is, those of industrial exporters like Germany, Japan and, most critically, China.

    Over time, Republicans may try to make these points. But economic conservatives have tended, if anything, to be at least equally clueless about the importance of industry. As far back as 1984 – the peak of the Reagan era – the New York Stock Exchange issued a report stating that “a strong manufacturing economy is not a requisite for a prosperous economy.”

    Disdain for industry has since grown as industrial employment has ebbed and the finance, service and media industries – and other non-tangible fields – have gained workers. Yet few understand how a swelling manufacturing trade deficit, which has grown ten-fold since 1984 to over $800 billion in 2007, has undermined the nation’s financial position. It has shifted so much wealth to countries focused on productive industry and energy.

    In the long run, too, it’s not just forlorn factory towns that get hurt. A strong manufacturing sector also boosts science and technology; the industrial workforce is increasingly dominated by engineers and highly trained technicians, many of whom are in increasingly short supply. Marketers, media firms, advertising agencies and software companies all benefit when industry expands.

    Fortunately, the situation isn’t hopeless. Despite commonly held assumptions, American can still compete industrially – and could do even better with the right investments in both human and physical infrastructure. In fact, despite unfavorable trade policies and growing regulatory burdens, American factories have remained among the most productive in the world; output has doubled over the past 25 years, and productivity has grown at a rate twice that of the rest of the economy.

    Clearly, not all American factories are run by the kind of boobs who governed General Motors and other failed enterprises. A 2008 McKinsey study noted American factories actually were, on average, considered the best-managed in the world – ahead, albeit slightly, of competitors based in advanced nations like Germany, Sweden and Japan, and considerably better than their counterparts in key emerging competitors China and India.

    To take advantage of these assets, American industry needs government to recognize their importance. We need incentives for improved productivity and investment, including ones for those companies employing “green” technologies. Another step would be to include accurate “carbon accounting” of goods produced elsewhere – particularly in places like China, whose production tends to generate more pollutants than those in more regulated countries like the U.S. Greening may be good, but it should not become another excuse for American de-industrialization.

    Finally, President Obama should recognize that expanding industry presents some of our best chances for future growth. Once the world recovers from the current financial crisis, there will be another surge in demand, particularly from developing countries, for the basic products that the U.S. can produce at prodigious levels, such as foodstuffs and airplanes, as well as farm, energy and construction equipment. The strategic opening for American firms may indeed be greater than any other time since the years after World War II.

    “We’re in the midst of 2 to 4 billion people around the world rising out of abject poverty and demanding a better living standard,” notes Daniel R. DiMicco, head of Nucor, the nation’s largest steelmaker. “That means we have a 20- to 30-year bull market in basic stuff.”

    Hopefully the Obama administration will overcome its preoccupation with post-industrial and green industries and allow American firms and workers to take advantage of this historic opportunity. If they fail to do so, the Great Lakes, Appalachia, parts of the Southeast and other regions can expect ever more economic devastation. Rather than delivering much-anticipated “hope” to the most beleaguered parts of the country, the administration could instead leave a legacy of wasted potential and economic misery that will haunt communities, and the entire country, for generations.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • HOPE for Only One Homeowner with a $300 billion Price Tag

    The Housing & Economic Recovery Act of 2008 was passed last August. It created the HOPE for Homeowners Program, which the Congressional Budget Office estimated would help 400,000 homeowners to refinance their loans and stay in their homes. Here’s a stunning revelation: According to the Federal Housing Authority (FHA), in the first six months since the law was passed, exactly one (1) homeowner refinanced under the program!

    You can listen to the story on NPR, “Investors Support Overhauling Homeowner Program“. One such investor, PIMCO, supports programs that would reduce the principal balance on mortgages by a small amount in order to keep the cash flow coming from mortgage payments. Given what we know about investment strategies to push companies into bankruptcy in order to benefit from credit default swap payouts, I was initially leery of such statements coming from bond investors. Then I remembered the problem with the paperwork on the mortgages – if bondholders can’t prove ownership of the lien the homeowner keeps the house with no further payments. That’s when it started to make sense.

    Of course, if they can get the homeowners to come in for a re-fi they can correct the paperwork mistakes. It could be worth it to investors without default protection to accept principal reductions – if the homeowner goes into bankruptcy they may not be able to prove they own the mortgage without the new paperwork. With the re-fi, they get all new documentation.

    These programs were designed for homeowners who are current on their mortgage payments but whose homes are “underwater”, that is, the principal balance on the mortgage is more than the market value of the house. Some can keep up their payments with the hope that the market price of the home adjusts in the distant future; others might benefit by the modest reductions in principal favored by some bond investors. But in a situation described by a Stockton (CA) homeowner the principal reduction is unlikely to be enough – the home is worth $220,000 and the mortgage balance is $420,000. These homeowners’ best financial strategy is to take the hit to their credit report and default on the mortgage. Investors like PIMCO might, if their paperwork is good, get half their investment back by taking possession of the property; they’ll get it all back if they bought the credit default swap; and they get nothing if the paperwork is screwed up.

    How many mortgages are underwater? Bank of America’s annual report says that 23 percent of their residential mortgage portfolio has current loan-to-market value ratios greater than 90 percent. When they include home equity loans in the calculation, totaling lending on a residential property, the share with less than 10 percent equity rises to 37 percent. At the end of 2008, Bank of America held $248 billion in residential mortgages and $152 billion in home equity loans, after taking write-offs of about $4.4 billion last year. On the other hand, Wells Fargo did not specifically report the share of their portfolio with loan-to-market value ratios greater than 90 percent. It’s hard to tell just how many mortgages are how far underwater at an aggregate level. I would imagine that these numbers are being checked in the Treasury’s stress testing of individual banks.

    In any event, Congress is not giving up (although we almost wish they would before this gets any worse). The House Committee on Financial Services combined with the House Judiciary Committee has introduced a new bill to improve the old bill’s version of Hope for Homeowners. Trying to take it a step further, the House Financial Services Committee is holding hearings on a Mortgage Reform Bill next week. The plan is to set lending standards for all mortgage originators. Chairman Barney Frank (D-MA) is of the view that the “great economic hole” we are in was started by“ policymakers’ distrust of regulation in general, their enduring belief that markets and financial institutions could effectively police themselves.”

    With this we do agree: self-regulation in financial services is a root cause of our current economic disaster. Until it is completely removed – not just from mortgage lending but from all financial products and services – nothing Congress does will prevent another crisis.