B is for Bankruptcy

The economic plague which began in 2008 and has swept the planet is not finished with its decimation of national and state economies yet.   Greece and other European countries still may be crippled by its effects and the 28 June 2010 issue of TIME reports the next phase in the United States is going to be what happens to individual states as the economic plague grips them (New York and California both in budget crises have economies far larger than Greece).   The massive influx of federal money into the economy has given the U.S. a huge debt well into the future, and yet may not have been enough to stem the weakening effects of the world economy on state and local governments.   Thirty one states anticipate a budget shortfall in 2011 of 10% as compared to their 2010 budgets leaving them with a projected $55 billion debt.

David von Drehle wrote a few comments in the Time  magazine article which I will quote:

All kinds of real estate dreams can go up in smoke in hard times

When times were good and the future seemed bulletproof, all sorts of grand ventures were floated on waves of debt. No one cared, because everyone planned to be richer when the bills came due. The arbitrageurs of leveraged derivatives, the cash-strapped subprime home buyers, the government grandees issuing bonds and boosting pensions — all were versions of the same doom-shadowed figure. Only if the bubble burst would the bills become unpayable. How did so many people forget all at once that the bubble always bursts?

Ahh, yes, and they say Christianity promises only pie in the sky – the states all banked on a miraculous Shangri-La future forgetting that meanwhile they still had to survive on this earth, and that “tomorrow never comes.”

It also is notable (to me at least) how often and to what extent real estate plays into economic and banking woes and collapses.   Real estate is linked to those false expectations that the future promises that when it comes we all will be richer, and then everyone banks on that dream.   It is also amazing the extent to which the U.S. economy relies on real estate sales and value to drive the economy – we always are relying on “the American DREAM” to build our economic present and future.  Why are we then surprised time and again  to wake up and realize we were living a dream, but now reality says the debt is due?

Tales of lavish retirements for relatively youthful public servants have been making a lot of headlines lately. The New York Times reported that some 3,700 retired New York State public employees earn more than $100,000 a year in pension payments, including a former policeman in Yonkers at the ripe old age of 47. California’s pension poster boy is a Bay Area fire chief who, at 51, was collecting more than $241,000 a year in retirement pay.

See the NY TIMES article, “In Budget Crisis, States Take Aim at Pension Costs” for more information on this crisis.

In sun-drenched San Diego, meanwhile, a grand jury probing that city’s troubled finances found a recurring practice of skipping required payments to the city’s pension fund while simultaneously awarding ever more generous pensions to public employees. Legal? Apparently. Prudent? Nope. A once solvent system is now billions of dollars in the red.

The amazing thing is people seem to forget that the future turns into reality, and when that reality doesn’t match what we were banking on, how unprepared we are for reality! 

The great reckoning of 2010 took us years to create and will be years in the fixing. It’s not as if the economic crisis isn’t plenty painful already. In government, as in life, there are cuts that injure and cuts that heal. As they continue to slog through the wreckage of the Great Recession, state and local leaders have a challenge to be surgeons rather than hacks and make this era of crisis into a season of fresh starts.

To what extent the economic problems were caused by economists mis-guessing  where things were headed is no doubt going to be debated in years to come.  I found interesting (and I can’t deny his writing style is entertaining as well) David Freedman’s “The Streetlight Effect” in the July/August 2010 issue of DISCOVER MAGAZINE.  Freedman is addressing the issue of why there is so much dubious science, and uses as his metaphor of explanation the old  joke about a drunk searching for his lost keys where the streetlight is, rather than where he lost the keys.  “Researchers tend to look for answers where the looking is good, rather than where the answers are likely to be hiding.”

Freedman examines research in several fields including physics, medicine and economics and the resulting claims by “experts.”   The relevance to this blog? 

“In 1992 a now-classic study by researchers at Harvard and the National Bureau of Economic Research examined papers from a range of economics journals and determined that approximately none of them had conclusively proved anything one way or the other.  Given that dismal assessment—and given the great influence of economists on financial institutions and regulation—it’s a wonder the global economic infrastructure is not in far worse shape. (Of course, scientific findings that point out the problems with scientific findings are fair game for reanalysis too).”