Saturday Morning Essay: Going B/K in the Golden State

Brought to you by Trader Joe's Dark Roast

 First, I must correct an erroneous slur: it is widely assumed that the bankruptcy of Mammoth Lakes, California, is in some ways comparable to the previous bankruptcies of Vallejo, Stockton and San Bernandino, California.  This isn't fair.  Mammoth Lakes filed Chapter 9 because it wound up on the wrong side of a lawsuit, a $32 million judgment against it, which was enhanced by legal interest and costs to $43 million.  That could happen to any municipality defended by typically incompetent county counsel.  The bankruptcy of Mammoth Lakes is not really indicative of a general trend toward insolvency of cities in California.

The way that bankruptcies in Vallejo, Stockton and San Bernadino are indicative of a general trend toward insolvency of cities in California.  They will soon be followed by a couple of other Southern California cities, probably Compton, then Montebello.  These cities are facing Chapter 9 because they've run out of money.  It's not really a lot more complicated than that.

Chapter 9 was enacted during the Great Depression to give cities and other local government entities (such as transportation districts) a way to "reorganize" in bankruptcy, along the lines of corporate reorganization under Chapter 11.  It imposes an "automatic stay" against further legal action versus the city except through the auspices of the bankruptcy court, which oversees such litigation and the city's plan for reorganization.  While a corporation has the option of converting a Chapter 11 to a straight belly-up Chapter 7 if there is no hope, a city can't really go out of business since technically it's not in business in the first place, and it can't really simply cease to exist.  Otherwise, people living in the city would not be living anywhere, and that violates one or more physical laws, I'm sure.

Cities use Chapter 9, in general, to deal with onerous and unpayable recurring costs (Mammoth Lakes being an exception, as we've seen) such as pensions and muni bond payments.  This is what's going on in Compton, for example, and Stockton rolled over for the same reason (that sleepy little Valley town is the largest muni b/k in history, by the way).  The bankruptcy court can release a city from its collective bargaining agreements with government employees, thus paving the way for relief from pension payments it can't afford or bond payments it cannot make.  Some form of "cram down" can be visited on the unhappy heads of the city's many creditors.

I was thinking that California would be particularly susceptible to muni b/k for a couple of reasons. (You might think of this as a Feynman-style First Approximation, since I've been reading a lot about that remarkable man and his unworldly-smart mind of late.)  California has Proposition 13, which sets strict ad valorem limits on real property taxes, a principal source of revenue for the state and local governments.  A curious feature of Prop. 13 is that it was originally designed to shield homeowners from runaway assessments on the values of their homes back in the go-go days of the mid-1970's in California, when everyone wanted to live here and houses were appreciating at an astonishing rate.

Essentially, taxes are set at 1% of the house's fair market value.  Assessments can only add 2% per year to the tax bill, a constraint on government.  It's all written into the state constitution, of course; Howard Jarvis saw to that.  I believe a War Between the Worlds is necessary to relieve the state of Prop 13's rules - nothing less.  Yet another curious feature of Prop 13 is that it has a yo-yo effect.  It can cause assessments to go down as well as up, and there is no "2% per year" limitation on declining real property values.  Thus, when the housing bubble popped around 2007, and the first waves of foreclosures hit with all of their distress sales and bank repo action, the bottom fell out of state and local governments.  Real property values plummeted and with them that inexorable 1% calculation.

Meanwhile, California's cities and state government had blissfully planned their future based on Jarvis's great fear, that housing prices would always go up, and furthermore that the anomalous period of high capital gains paid during the DotCom boom would represent some kind of permanent bonus for the state treasury.

Alas, no.  As with everything else in matters fiscal in the United States, everything depended on sustained growth, growth which is not happening,  Quite the contrary.  If we strip out deficit spending at the federal level (which has been as high as 10% of GDP), the economy has been contracting as a matter of reality.  What kept California afloat during these five years since the bursting of the bubble was ARRA, aid from the federal government to states in particular.  All of that money, of course, was borrowed or printed or in some form hallucinated into existence, but now Congress doesn't want to do that anymore, and California faces the icy cold winds of penury without that cover.

A disturbing situation.  California tends to lead the way in national trends, after all.  The Golden State is saddled with a 2012 budget based, perhaps, on revenues from 1996 valuations, or at least we're gravitating toward that reality.  Every time a house changes hands at a price below the value carried on the tax rolls, the state budget takes another hit.  Each time a real estate developer applies to downgrade his mid-city skyscraper's tax valuation (permitted under Prop 13, and this is a booming business for lawyers), California goes a little deeper into the red.

The question is how far this will go.  Will there be a tipping point?  Some dreary prognosticators (such as Mike Shedlock) forecast that it is only a matter of time before a big enchilada like Los Angeles or Oakland files for Chapter 9, since all of the same problems seen in miniature in places like Compton and Montebello are present in Large Format in L.A. and Oakland.

To finish my Thought Experiment: it seems that at the root of this malaise is the natural human tendency to conceptualize the future in terms of what's happening in the here and now.  This was unrealistic.  Not only did the housing bubble pop, but with its bursting came the knock-on effects caused by the loss of all that notional "equity," the re-fis and equity loans that powered so many of the "discretionary" businesses in the Golden State.  It was hard to see all that coming, especially if you're a government bureaucrat running a business that isn't really a business, and it doesn't seem to matter, at the time while you've got the job, whether you're right or wrong.

How to feel good about any result in November

http://www.youtube.com/watch?v=A7ktYbVwr90&feature=player_embedded

As Matt Taiibi has written, the Presidential campaign of 2012 is likely to be the most boring electoral race in the history of the American Republic.  I don't know what Millard Fillmore sounded like on the campaign trail, or James Buchanan or some of these other hacks, but I'm fairly confident that Barack Obama versus Mitt Romney will be a grueling, mind-deranging thing to watch after they get into high gear, if that is not a contradiction in terms.  We are getting close to that Event Horizon (sorry to use this metaphor two posts in a row, but I think it fits again) where all loyal Democrats are reminded that maybe President Obama's entire presidency is veiled in complete secrecy, maybe he makes war on whistleblowers to an extent never before seen in American politics, maybe he starts wars in foreign countries with no Congressional authorization whatsoever, maybe he has institutionalized a program of whacking American citizens with no due process of any kind, maybe the President of the ACLU says that Obama's presidency is "worse than George Bush" in terms of civil liberties abuses, but dammit - think how bad Mitt Romney will be for the Middle Class!

And yes, President Obama is on the payroll of the same Wall Street financial institutions as his opponent, but gosh, what's a President to do if he betrayed every promise for "Hope & Change" he made to the American people in 2008 and now has no choice but to go hat in hand to the fat cats he used to deride (but no more, you'll notice)?  Without money, there is no way to buy all the media time necessary to fill the airwaves with the half-truths, propaganda and slogans essential to the manipulation of the half of the voting-age populace who will actually show up to vote in November.

Still, Barack is our guy.  More important, he's Our Brand.  Although I'm voting for Jill Stein, the Green Party candidate.  Am I wasting my vote?  Well, of course, in one way of looking at it.  She isn't going to win, not by a long shot.  She'll barely register on the tally, on election night I doubt you'll ever hear her name.  My general feeling is that either President Obama or President Romney will be driving the American Bus in the same direction it's been going for quite some time over the last couple of decades (longer, really, but never mind), and that route is the HOV lane on the Highway to Hell.

And that's okay in my book, because there are more important issues that Planet Earth faces than the tiny comparative economic advantage offered by either of these Empty Suits.  I would encourage you to watch the short lecture by David Roberts embedded in this blog.  I've read his stuff for years on the HuffPost, and I found this video on the Skeptical Science blogsite, which deals with global warming and more specifically with the constant bad faith attacks on the scientific consensus concerning global warming which originate, almost without exception, with American legacy industries with a vested interest in finishing the planet off.

If you take the thesis advanced by Mr. Roberts (and by many, many others who are conversant with the frightening magnitude of the problem) at its face value, then you must admit that, if the world only has about 5 or 10 years to move decisively on global warming or face irreversible consequences, then whatever means are necessary to bring about these changes are the only way to go at this point.  This is simply logical.  The truth, as General Buck Turgidson told us in "Dr. Strangelove," is not always a pleasant thing.

Now the upside of America's slide toward economic collapse is that the world's largest economy, that of the country which is probably the most intransigent and obstructionist on the issue of global warming (shamefully so, because we really have no excuse), is that we have, for example, dramatically reduced our use of petroleum and gasoline over the last 5 years.  Not because we're virtuous and concerned, of course, but because we're broke.  I am confident that either of the two schlemiels running for President can guarantee that nothing will be done to slow this descent toward collapse.  They are the two avatars of the completely sclerotic political system which has ruled this country for decades, a corrupt, non-adapting, thrashing-in-the-tar-pits brontosaurus of a nation. So to speak, at least environmentally.  I mean, how much time do you ever hear Barack Obama or Mitt Romney spend speaking along the lines covered in the Roberts lecture? Exactly.  So if neither spends any time discussing this existential issue, then what is the relevance of either of their candidacies?

Jill Stein does talk about such things, in the tenor and with the sense of urgency appropriate to the magnitude of the threat.  She'll lose, but it's not a "wasted vote.  Wasting your vote is voting for a candidate who pays no attention whatsoever to the mounting environmental catastrophes threatening human survival, instead devoting his time to absurd discussions of "tax policy," and "terrorist threats" and whatever the hell else they waste their time on.

As a concrete example, here's how this Administration deals with the Midwest drought and the devastation of the corn and soy crops: Agriculture Secretary Tom Vilsack prays for rain. It might have been an opportunity to talk about the increased likelihood of extreme weather events that come with climate change.  It might have been an opportunity to wonder aloud whether it's a good idea to devote 40% of the (inedible) corn crop to ethanol production, a process that has a negative energy return on energy invested (EROEI), but continues because of Congressional corruption.  It might have been a time to raise the issue that the failure of a corn crop should have no effect on beef prices, because cows are ungulates which naturally eat grass, and left to their own devices do not graze in corn fields. Which is why they have to be loaded up on antibiotics in feed lots where they eat a nonstop diet of corn.

Jill Stein favors a return to sustainable agriculture and food production.  Thus, I leave others to vote for Coke or Pepsi, confident that November will be a win/win no matter what happens.

The Quantum Mechanical Resignations of Mitt Romney

It so happens that I've been reading and hearing about Mitt Romney's difficulties in getting his story straight about when, or even if, he resigned from Bain Capital, the American-job-killing enterprise he wants to use as a stepping stone to leading the American people, at the same time I've been reading Quantum Man, a book by Lawrence Krauss about Richard Feynman's life in physics.

It was a feature of Feynman's early breakthroughs in understanding quantum theory that it is sometimes necessary to postulate that subatomic particles travel backward in time, as in the case of a positron which "quantum fluctuates" itself into existence out of nothing, travels backward in time to annihilate with an electron, and thus preserves various rules of Heisenberg's Uncertainty Principle, Pauli's Exclusionary Principle, and other sacred edicts of the Science of the Very Small.  It's a strange world, way down there, but quantum mechanics has been experimentally verified many times and seems to have real world referents, which differentiates it from, for example, String Theory, which is mathematically impressive but seems to lack any correlation to reality.  String Theory has been likened to a drunken game of darts at a pub, where the players throw the darts any old which way, then walk to the wall and draw a bull's eye around wherever the darts stuck.

Anyway, for reasons related to statistical mechanics, another dense and fascinating subject, it does not seem that the  anomalies of the quantum world happen in the world of Macro-Reality, so we're stuck with plain old entropy where we can tell what time it is, or at least whether Now is later than Before, by watching an egg roll off the kitchen counter.  A highly organized egg on the counter: Then.   A mess of yolk and egg white on the floor: Later.

This is the world that Mitt Romney is stuck in as he attempts to explain his Theory of Retroactive Resignation.  Mitt himself wants to be a big, white, cornball, empty-suit Positron who can move backward in time in a Large Feynman Diagram and quit Bain Capital in 1999, where he wants to have quit, and not years later during a period when Bain was busy shipping jobs to Bangalore and engaging in other anti-American economic activities which form the basic business model of the modern American corporate world.  Not that Bain Capital wasn't bad enough when Romney was definitely in charge, in the years before 1999, but it got worse, and Romney would like as much distance between Himself and his Anti-Particle Self in order to avoid mutual annihilation.

Mitt's big problem is that he remained as President, CEO, Chairman of the Board, and sole shareholder of Bain Capital in SEC filings until probably 2003, and you can't really ignore these filings and claim you had "nothing to do with the company" after 1999 when the corporate record says otherwise.  And since corporations are strictly creatures of statute (something that seems to be overlooked in much of the current discussion), whatever a corporation appears to be as a matter of regulatory filings and corporate formalities is what it actually is, since its Virtual Reality is equivalent in this case to its Actual Reality.  That is to say, Mitt's SEC filings for Bain are not likely to quantum fluctuate themselves out of existence.  Nevertheless, the Romney campaign is striving mightily to sell its version of the retroactive resignation, even if it violates one or more of basic quantum tenets, such as the Bullshit Principle.

Who knows if Mitt will get away with it?  It's amazing to me that the American commoner would contemplate for a moment voting into office a corporate raider who parks his multi-millions offshore, takes advantage of every loophole available in the Internal Revenue Code so that his effective tax rate is lower than that of the baristas down at Peet's Coffee, and, in general, has absolutely nothing in common with well over 99% of the Americans he would serve as President.

Although, you know...I hate to get involved in this kind of thing.  The absurdity of Romney's candidacy is kind of interesting, in a macabre way.  I keep wondering whether there is some sort of rational limit, somewhere, to the capacity of the American Commoner to vote against his/her own interest.  If Americans actually start electing presidents who spent their careers dismantling American business, in the very activities that led to the complete undoing of the American Middle Class, then we've reached some sort of Event Horizon, another fun concept from the world of physics.