What California Can Teach Us About the Crisis

Great article from Gawker about the financial crisis, written by Moe


California has always fostered a kind of insane optimism that strikes outsiders as absurd and delusional and actually kind of sick. My favorite symbol of this, when I lived there, was Rent A Wheel, where you could "rent to own" chrome rims for your tires, your job is your credit etc. etc., for an eminently reasonable $200 a month. This was not the sort of business model I could see thriving back East, but there was something weirdly charming about that, and the charm was contagious, and probably enabled some regrettable apparel purchases. Well, today the rest of the country officially caught the contagion; because the nation's financial institutions are suddenly too spooked to lend money to anyone but Hank Paulson, the state of California can't borrow money, and Governor Schwarzenegger is hitting up Hank Paulson to the tune of seven billion dollars. California, much like its citizenry, has one of the worst credit ratings in the nation. It's the double-edged sword of that sunny optimism, which badly needs to be redirected and channeled toward the national interest and perhaps other pursuits like surfing.

There is little wonder House Speaker and California congresswoman Nancy Pelosi seemed so immediately convinced, as Wall Street skidded toward apocalypse two weeks ago, that Congress needed to pass a bailout plan like NOW. What is truly sad is that she failed to convince so many of her state's fellow Democrats, most notably the congresswoman from the neighboring district of East Bay, Barbara Lee, to vote for her bailout bill.

Barbara Lee wanted the bill to include provisions protecting homeowners from foreclosure. Which makes sense. Just last year Lee's district had the highest price-to-rent ratio in the country: 51. Fifty-one. People were signing up for mortgages when they could have rented for less than a quarter of the price. They did this because they were stupid, but also because housing prices kept rising, and when the value of your house rose you could take out a home equity loan and use it to buy a new car (and in many cases, chrome rims.) Last year nearly a third of vehicle sales in California were purchased with home equity loans.

The attractiveness of a mortgage, from the perspective of the bank lending the money and the investment bank taking on the loan and rolling it up into securities and the hedge fund buying those securities and the insurer protecting the bond, etc. etc. etc., has always been that there was something solid, something lasting, underlying it: a house. An elementary school teacher who couldn't qualify for a bank loan to buy a $700 laptop could get a $450,000 mortgage because it had a house attached to it. No one ever anticipated that those houses would lose value quicker than the shiny new home equity-financed cars in their garages. In contrast, the lenders and the underwriters and the re-packagers and the insurers lobbied the SEC to allow them to amplify their exposure to the risk of that outcome exponentially by piling on debt of their own in a bid to maximize their profits, then proceeded to report said incredulity-straining profits in the assumption that they would continue rising and proceeded to pass those profits on to their employees, who in turn signed on for 100% mortgages on eight figure properties in Greenwich, where fear of the same sort of tidal wave of foreclosure has citizens proclaiming the financial crisis "Our Katrina."

The whole thing was a show of such dramatic private sector incompetence it could not be achieved had the plutocracy not known exactly what the fuck it was doing, just as that great Californian Ronald Reagan knew exactly what the fuck he was doing when he railed against government waste only to ratchet up that waste to unprecedented levels by outsourcing most of the government to crony capitalists whose fiduciary responsibility by definition required they do all they could to maximize government waste. It was all an ingenious plan to de-fund the left and its socialist bureaucracy of bleeding-heart "programs," and it worked so well the Bush Administration ripped off the strategy to launch a trillion-dollar war that represents a vast minefield blocking any of Obama's plans to "level the playing field."

Because while Obama's plans for the economy allegedly involve an average $800,000-a-household tax increase on the superrich, those plans were drawn up before the employees of Goldman Sachs spent their $21 billion in Christmas bonuses. The falloff in asset values has all the big pundits worrying we'll become the next Japan, but when you go to Japan and hear about the "Boom Years" of the eighties what strikes you is that most Japanese actually had some firsthand experience of said "Boom years." Did you?

We allowed America to become the land of ten thousand centimillionaires; now that we have a crisis poised to disproportionately — from a Year On Year perspective, anyway; that's how these people think — hurt that untouchable class, it is not going to be easy to wring out a massive increase in nominal tax dollars from them.

That is, of course, is what must be done. And it probably won't be positive for the Dow or the GDP or productivity levels or any of the arbitrary little numbers with which we're accustomed to measuring our economic well-being. It may well be a short term political windfall for the stubbornly fact-resistant class of politician who likes to say tax cuts on the wealthy always create jobs (when in fact no private sector of the economy besides health care has created jobs since 2000) or that Government "isn't the solution; more often than not it's the problem." What is the problem, of course, is people who think government is the problem who go into the government in what more often than not comes off like a twisted attempt to prove that. But the happy delusions of the state that brought us the Great Communicator are infectious, and the era clearly, desperately needs a Great Rebutter capable of optimistically guiding the country through what's going to be a rough time for all. The deep — and deeply unpatriotic — immorality of the "moral hazard" that has defined the past decade must be impressed upon every American voter. Every American voter needs to be able to visualize the 24-car garage of the billionaire hedge fund manager and wonder if some of the money might have not been better spent refurbishing the subway system or paying teachers more or helping an irresponsible homeowner renegotiate her mortgage or providing more comprehensive job training to some former welfare queen. All that stuff, after all, creates jobs too.

But to impress these ideas upon voters requires a kind of moral authority that is undermined by pandering partisan rhetoric and the pages and pages of pork-tasting provisions of the bill Congress is about to pass. (It's also sort of undermined by gazillion dollar tax breaks of the sort extended to Treasury Secretary Hank Paulson for taking the job, but whatevs.) Warren Buffett could certainly muster it; more importantly, he could articulate recent history in a way the politicians he supports can't. More importantly, he can inspire and/or shame his partners in uberwealth into accepting and acknowledging a measure of social responsibility, and more powerfully, broadcasting that sense of responsibility to the public. Billionaire hedge fund manager John Paulson profited handsomely betting against the housing market; he now is giving much of that away to helping screwed homeowners. More people should know about him; more rich folks should emulate him.