California's Redevelopment Agencies: Another Example of Government Run Amok

California is a funny state. It is overwhelmingly Democratic, but there are old-school Republicans hidden about here and there, and the usual few Libertarians. Over the last twenty-five years, it has had both Republican and Democrat Governors, but since Reagan left the State, it has become the standard-bearer for progressive legislation.

Some years ago the legislature happily gave city bureaucrats the budgetary wherewithal to take over control of inner downtown areas through an institution called the Redevelopment Agency. The Agencies began a campaign to renovate downtown areas that had become run down due to landowner neglect.

Instead of looking for the twisted economic incentive that spurs otherwise intelligent people to allow their buildings and neighborhoods to fall apart, the politicians decided simply to override property rights by making deals with favored land developers. These professionals, backed by City Hall, proceeded to rid the city streets of the eyesores and reap huge profits in the process. The Supreme Court decision in Kelo v. the City of New London buttressed their actions.

By a strange quirk of nature, Governor Jerry Brown, who is about as progressive as they come, decided to cut the budget for the redevelopment agencies. Of course, the slighted bureaucrats howled and even took him to court. They lost.

What they don't realize is that there are other ways to combat downtown blight, as I point out in a short Letter to the Editor at the Los Angeles Daily News.



[Thanks to the Daily News.]

Quoting loosely but also filling out the shorter letter, I told them that people like Nancy Sweeney, the President of Revitalize Reseda, who defend the redevelopment agencies against Brown's budget cuts must not realize that California has come very close to bankruptcy. The agencies' pet projects may be nice on their face, but (1) they are likely to be projects that would not be completed without taxpayer subsidy, and (2) at the moment taxpayers have more important things to do with their money.

Instead, let's take away the incentive to abandon property. To avoid allowing city blocks to fall into the same blighted state again, I suggest that Californian cities and towns implement Henry George's Land-Value Taxation (LVT) scheme. According to this policy, agglomerations are, by definition, the creators of a good measure of the value of a particular central street address. Therefore they (i.e. the local taxpayers) should reap the rewards. George's taxation scheme places all the tax burden on the land and none on the improvements, while lightening or even eliminating the taxes for other things (sales tax, license fees, income tax, and oh-so-many others).

The proven results--already obtained by some communities around the country and the world--are a downtown where blight is "taxed away." Owners of valuable property cannot just sit on centrally located but deteriorating land and buildings, just to speculate in future gains. Why? Because the taxes are too high to make it worth their while. It's "either crap or get off the pot": build something useful, or sell the spot and let someone else do it.

California is special because Proposition 13 protects commercial property owners as well as residential owners from reassessments as long as they hold onto their land. They can even exchange a plot with another like landowner and retain the lower taxation rate. A change in the law for these businesspeople would force them back into a more fair taxation schedule. (After all, they are not little retired grandmas who risk losing their home in an episode of runaway inflation, like the individuals who inspired Proposition 13 in the first place.)

Then, once the LVT is in place, developers will flock downtown to buy properties from former speculators and turn valuable spaces into income sources for those who created that value, i.e. the taxpayers. To each his just desserts. And the professional developers will not install just any income source, as the redevelopment agencies tend to do (behold the restaurant over-development in Old Pasadena). These new owners have every incentive to find the ones that will be the most successful.

Although Governor Brown may not know why, he has done the right thing. Now the people of the State should take it one step further.

But for the Grace of the Almighty Dollar Go We

Anyone who has been watching this European fiasco play itself out might get a kick out of this little cartoon I did today. (Click on the various images until you get the largest size you like.)

A Default By Any Other Name

Isn't it wonderful how our Ruling Class can persuade itself that something isn't really what it is, simply by calling it something else.

"EU Forges Greek Bond Deal," shouts the headline on Thursday's Wall Street Journal. Aha, one thinks, they've found a solution that doesn't involve Greece going into default. They reached a "deal."


[Thanks to Bloom4ever.com for the image.]

But wait a minute. The second line reads: "Private Investors to Take 50% Haircut." What is a 50% haircut if not a default?

Let's see here. What is the definition of the word "default"? According to my handy Webster's New World College Dictionary, 4th ed., it is:

"1. failure to do something ... when required or expected; specif., (a) failure to pay money due...."

I see nothing in this definition implying that acquiescence by a defaultee changes the nature of the act of the defaulter. Let's be frank: at 50 cents on the euro, Greece is defaulting on its bonds, i.e. failing to pay money due.

Yet French President Sarkozy was ecstatic that the "drama of a Greek default" would be avoided, and that " 'the Greek debt agreement wouldn't be forced on holders of Greek bonds' ... that the leaders had reached agreement with private banks on a 'voluntary' [quotes in the original] 50% reduction of Greece's debt in the hands of private investors." (Original article.)

Angela Merkel was "very satisfied" with this arrangement. President Obama calls it "an important first step".

Apparently, the key word here is "voluntary." Oh, I see, so when a victim doesn't cry out as a knife pierces her skin, she is no longer being stabbed.

I love the logic. And the funny thing is that the market seems to be going along with the charade--for now, anyway.

My guess, however, is that the market will be quicker to wise up than our Ruling Class. More importantly, the Greek people seem not to be duped at all. A bookstore owner named George Patiniotis reacted this way:

"Who are they trying to fool?" (WSJ piece.)

Sure-Fire Solution to our Banking Woes

All of the government's efforts to force the banking industry to its knees will probably backfire. I have designed a perfect solution.


[Click on the image for a larger version.]

Basically, what I'm saying is:

Go back to something like Glass-Steagall and force separation of the commercial banking function and the investment banking function, and:

COMMERCIAL BANKS

1. Allow commercial banks to accept savings for deposit, and/or offer checking accounts, and to create credit only for commercial-paper purposes, based 100% on bills of lading with maximum 90-day payoff.

2. Allow commercial banks to invest in other sound instruments and loans, but ONLY up to the amount of the savings on deposit plus bank capital and equity. No credit creation permitted.

3. Allow commercial banks to function on a 10-20% reserve requirement, whichever the system finally decides is best through trial and error.

4. Allow commercial banks to function under the FDIC's umbrella, and allow the Fed to issue money only in times of war or of serious disruption of the interbank lending system (which is unlikely to occur, because these banks are not playing Santa Claus with credit).

On the other hand:

INVESTMENT BANKS

1. Force investment banks to change their structure to a partnership, where the partners are 100% liable for losses. Change the laws so that poor investments mean personal wipe-out for the partners.

2. No FDIC, no bailouts.

3. Put a big sign on the front door that says, "Enter at your own risk."

How simple is that? Fits on one page, not 2,300 like Dodd-Frank.

I think this might go a long way to solving our problems in the future. Of course, we must eliminate all government-sponsored banking enterprises and all government participation in the banking industry.

There's nothing like failure to teach people a lesson. It's call Creative Destruction.

What To Do If There's a QE3? --or-- Is This 1933 All Over Again?

Quantitative Easing is nothing but a planned inflating.


[Beautiful rabbit bubble image created by Iman Sadeghi]

To be sure that everyone understands this phrase, let's look at the definition of "inflation":

Inflation ... 2a) an increase in the amount of money and credit in relation to the supply of goods and services b) an increase in the general price level, resulting from this, specif., an excessive or persistent increase, causing a decline in purchasing power. (Source: Webster's New World College Dictionary, 4th ed., 1999.)

In other words, Quantitative Easing is the Federal Reserve's attempt to support the economy, general prices, and asset prices (e.g., the stock market) by purchasing government bonds with nothing but its own full-faith-and-credit, backed, of course, by the full faith and credit of the U.S. taxpayers. In effect, the Fed is performing 2a) to achieve 2b). (The decline in purchasing power is just an incidental but not unattractive side-product, at least to the Fed governors' way of thinking.)

Does the Fed really know what it is doing? Let's look at history.

Back in 1933, a little known economist named Edward C. Harwood took a look at the Federal Reserve's intended "planned inflating" of the day. (Harwood later came to dislike using the word "inflation" when referring to 2a) above, and so he substituted the word "inflating," to avoid any confusion.)

Harwood was shocked to learn that anyone was actually considering a planned inflating as a stimulus to cure the Great Depression. He had observed through his statistical work that by 1933 the economy had rid itself of the causative factors behind the crisis, and that business was poised to make a comeback. Interference by government was the last thing the economy needed. Yet here came the politicians and Federal Reserve officials contemplating intervention.

In an article appearing in The Bankers Magazine of New York, Harwood wrote the following (I have substituted "inflating" for "inflation" where necessary):

"[T]here are several possibilities with respect to the scheme itself. It may work as planned and actually cause a return to the general price level of 1926, or at least a movement in that direction of substantial proportions. It may not work at all. It may prove to be unmanageable and carry on to an indefinite expansion of credit and currency which will finally render the dollar valueless. Unfortunately, the historical record suggests that the last named possibility is perhaps the most probable of the three. In any event, it is obvious that every businessman and every investor will be faced with the problem of adjusting his affairs to the new possibilities....

"It is clear that anyone who believes that the attempted inflating will be abortive and without substantial effect will not change his present course of action. However, those who anticipate a recovery and higher prices in general, as well as those who fear an indefinite expansion and ultimate collapse, will surely act with a view to taking advantage of the situation, at least to the extent of protecting themselves. Careful consideration of just what this will mean in the case of each type of individual mentioned will prove illuminating....

"The owner of equities has nothing to fear from inflating, in fact, is apt to gain thereby, [if he or she thinks the planned inflating will be successful;] but the position of the bond owner is vastly different.... [T]he obvious remedy for the situation is to sell fixed income securities and buy equities.

"If, however, the holder of bonds and mortgages fears a runaway inflation [hyperinflation], he may attempt to convert his securities into gold for the purpose of hoarding it....

"The situation of the depositor who has savings accumulated and of the man who owns life insurance policies is similar to that of the bond owner. In the first place, the value of dollars on deposit will decline, in terms of goods, during a period of inflating. It is quite obvious that it would pay depositors to withdraw their funds and buy equities or commodities of some kind. Those who feared that the dollar would go the course of the German paper mark would naturally withdraw their savings, and also their cash surrender values in the case of life insurance, in order to hoard gold.

"It follows that if the inflating is assumed to be effective, the banks will be called upon to pay out vast sums to depositors at the same time that the bond market is flooded with securities for sale. Banks and insurance companies will also be sellers in order to meet demands for cash or cash surrenders and complete demoralization of the bond market would result. It is hardly necessary to add that this would mean the closing of every bank in the country.... [This happened a few weeks later.]

"The truth of the matter is that inflating is the road to ruin. Deliberately planned inflating only makes the road so much the shorter because it points the way for even the most ignorant to see. Inflating can only 'succeed' by fooling most of the people all of the time. That anyone would be fooled concerning a measure which would be fought over in both branches of Congress and in the public press, is beyond belief....

"Those who advocate even the least degree of planned inflating are attempting to set in motion forces which will bring utter ruin, not only to their puny schemes, but to our whole economic fabric. Words are too weak to express adequate condemnation of those who, like children with a complicated toy, are willing to destroy that which they do not understand."

Today's Kitco gold chart gives us an interesting counterpart to his views:


[Kitco gold chart, 8/22/11, 4:30 p.m. EDT]

Today, I would say that the American economy is not in the same place Harwood found it to be in early 1933. We are faced today with another year and a half of "regime uncertainty", a major factor in our current stagnation. However, the market show must go on.

As a result of all the confusion, the market has multiple personalities these days (just like my Sybil). A third of it believes QE3 will be "successful," i.e. it will turn the stock market into a winner. A third believes the European problems will destroy the stock market but reinforce the U.S. Treasury market and dollar hegemony, in spite of QE3. Another third thinks we will see a flight from the dollar and maybe even a worldwide plunge into a Double Dip, just like in 1933.

What do you think?

Where is Peter Sellers When You Need Him?

Remember "Dr. Strangelove"? Peter Sellers could probably do a smashing take on Paul Krugman, if one is to judge by the latter's performance on a recent CNN interview.



Then again, Krugman does a pretty good job of making a mockery of himself without any help whatsoever.

If I were to tabulate the laughs gifted to me by decades of movie-makers, I would have to list Peter Sellers at the top of the column entitled Best Comedic Actor. "Being There" is my all-time favorite, closely followed by scenes from the original Pink Panther series, and then by some of his earlier films.

I have to put the laughing aside, though, when I realize the damage this "economist" is doing. Where are the serious economic scientists when Krugman goes on these rants? Why isn't the economic community signing petitions to get this guy's Nobel Prize back? Correction; I suppose the Nobel Prize is now so ignominious that this gesture would be a waste of time. But at least they should be publicly denouncing such rubbish from the mouth of one of their kin.

I suppose there's always the possibility they don't take him seriously. But they must realize that CNN and The New York Times are contributing to the death of the Dismal Science as quickly as they can make a folk hero of this guy.

After I had watched the CNN video, just as the disgust within me was about to bust a blood vessel in my brain, I fell upon Buffett's latest "Gauche-Caviar" antics (French for "Caviar-Leftist"). Thank goodness for my brain circulation, even the ever-serious Patrick Buchanan seems to have easily found the perfect repartee to this nonsense, saving me from apoplexy.

Ah, what would we do without a little humor to carry us through the chicanery and comic posturing of the pseudo-wise-men that surround us?

French People: Hurry and Get Your Gold Before It's Too Late

In France, the noose is beginning to tighten around the necks of anyone wanting to buy or sell gold anonymously through professional vendors.


[Thanks to Comptoir Change Opera at www.ccopera.com for the image.]

It used to be possible to make cash purchases or sales of gold up to an amount of 15,000 euros without declaring the purchase (although at least one company limits the sum to 3,000 euros).

As of July, however, there is a new law. It says:

"Law No. 2011-900 of July 29, 2011 of financial rectifications for 2011(1)
"Article 51
"I. - After Article 88 of the General Tax Code is inserted an Article 88A as follows:
" 'Art. 88A - All persons or corporations who regularly purchase ferrous and nonferrous metals on the retail market must submit, before January 31 of each year, to the taxation authorities of their place of residence or legal domicile, a declaration the contents of which is fixed by decree, in which shall figure the identity and address of the sellers and the total amount of the purchases made from each of these.' "

This Law also modifies another Article which now reads as follows:

"Article L.112-6
"Modified by Law No. 2011-900 of July 29, 2011 - Art. 51(V)
"I. - ... Any transaction relative to the retail purchase of ferrous and nonferrous metals is to be made by check, bank or postal transfer, or by credit or debit card, with the total amount of the transaction not to exceed a ceiling fixed by decree. The non-respect of this obligation is punishable as a misdemeanor of the fifth class...."

This punishment consists of a passage before a judge, a fine of between 1,500 and 3,000 euros, possible imprisonment with or without a suspended sentence, mention in one's criminal record, and some kind of restriction of liberty such as the confiscation of the assets involved.

- A vendor's web page on the subject

- Article L.112-6 itself, in the original French

- The new Article 51, in French

The sale of gold bars or coins to a professional vendor is currently taxed in France, unless the seller can prove he acquired the assets more than 12 years ago. If the seller can prove the date of purchase, he can calculate the tax at 31.3% minus a 10% reduction for each year of possession starting with the third year. If he cannot prove the date of purchase, he can opt to pay an 8% tax, no questions asked.

Sovereign-state politicians are too smart to allow the public to buy and sell gold free and clear, because they know that if they did permit it, the public would no longer allow the state to manipulate the currency. But even with the taxes, people are now buying gold more than ever.

Perhaps the reason for France's recent law changes has to do with political fear of the public's reactions to what politicians have done, and are continuing to do, to their national currency.

Pictures Are Worth a Trillion Words

I could almost throw these at you without any explanation, but I will give the context, source, and some data details. (Please click on each image for a larger version.)

Inebriated consumers stopped partying and began some sober saving when the boom-town lights went out in 2008, according to this graph from the St. Louis Fed:



(Unfortunately, it looks like this process of deleveraging has hit a ceiling of some sort--not surprising, given that the economy has stagnated and people are struggling.)

Now for the banking sector. What about bank assets versus their liabilities? Rather than resolving and reducing troubled assets, banks still have an increasing assets portfolio (graph from the Federal Reserve):



What about the banks' investments? Here is a graph from the St. Louis Fed showing total commercial bank investments:



Of this total, much of the increase is in government securities (purportedly safe, but currently financing problematic US debt) (source):



Here is the corresponding diminishing quantity invested in "other securities" (source):



Some of these "other investments" are now held at the Fed. The Fed's assets have exploded with precarious instruments and government securities (source), to be unloaded when, to whom, and at whose expense no one really knows:



And here is a graph showing the market's evaluation of the value of the dollar versus Bernanke's "commodity," gold (source: Kitco):



Must I say more? I think not.

Trying to Get My Funny Back

This wonderful piece over at TheOnion.com made me laugh out loud for the first time in months. It also made me realize that I have completely lost my sense of humor.


[Thanks to Artfire.com for the photo.]

Does anyone else notice the vitriol that is beginning to seep out from under the covers of some very good intentions? Have you, like me, begun to feel a twinge of resentment for one or more of your fellow Americans? Perhaps your neighbor, the nice one who asks you to water her flowers when she's away, recently made a nasty comment about someone or something on your political side of the fence, and for the first time ever you thought to yourself, "What an idiot"? (You can assuage your bad conscience with the likelihood that she feels the same way about you.)

Maybe you were playing tennis with the usual crowd, and someone who used to be lighthearted pipes up, all irritated, about how stupid the "socialist Democrats" are, or how scary "those crazy Tea Party Republicans" can be? Does this sound familiar, my friend?

Are you, like me, wondering why bands of youths are beginning to create havoc in public gatherings, seemingly just for the fun of it?

Well, I've noticed these changes; so I've stopped to ponder and I've found that it's no wonder that we've all gone sour:

-- Our Congress just proved to us once more that it is composed of complete nitwits (with a few exceptions) who are ready to sneak around important issues rather than face them head-on and deal with them. How did this happen? Or more appropriately, why did we entrust these professional politicians with such serious issues? The answer lies beyond my comprehension.

-- Our savings account interest is plunging lower than ever. Jokingly, I say to myself, "Maybe soon our banks will start asking fees just for stocking our cash...." Wait! They already have!

-- The stock market is crashing again, most likely due to poor economic growth and bad employment figures mixed in with serious European banking woes. It looks like we're headed for a double-dip, just like in 1933. And we thought things were bad already.

-- We've got another whole year to go before we find out who will run the country, what our tax structure will be, what the debt situation will look like, whether the euro will still exist--heck, even whether the dollar will still exist!--and whether businesses can start investing again or not.

-- News is seeping out that S&P just might downgrade the US after all. (Correction: It just did.)


This country has never been so divided since the Civil War. I have lost my sense of humor because there is little to laugh about these days. Our federal and state governments have managed to ensconce themselves into every facet of our lives and, in the process, have split this country right down the middle. Are they dividing us, the better to conquer us?

But, remember: They are only doing what comes naturally. We are the true guilty party. Politicians crave power, and somehow we let them have it. Now we must reverse this process, and it is going to be very, very painful--not a laughing matter at all.

Over the past six years, I have written thousands of words about the value of gold as a measure of the value of currencies, and I am convinced more than ever of the soundness of my analysis. Gold, at well over $1,650 an ounce, is proving to be the best thermometer of monetary mischief, even better than "the Almighty Rational Market" (the stock market, that is) that tends to be about as rational as a Las Vegas gambler.

[Aside: Oh all right, perhaps it's rational over a period of 200 years, but who lives that long? In the end, the success of the theory in any particular case depends on the prices at which you got in, and whether or not you actually reinvested those dividends like you were supposed to.]

In my book, the current gold rush has been the only rational part of today's crisis. And it was predictable (and in fact predicted) since the 1990s when the Federal Reserve began manipulating the interest rates downward and trying to tinker with the U.S. economy (again).

Even as long ago as the 1970s, a few common-sense economists warned us about the approach of the problems through which we are living today (example: Edward C. Harwood in The Money Mirage and elsewhere). Why so few people heeded them, and why even fewer are turning to their research today, is a mystery that's--well, it would be funny if it weren't so tragic.

(If you didn't click on TheOnion.com link, do so now. The chuckles'll do your sad heart some good.)

Another Inadequate Defense of a Zombie-Idea

Professor Laura Tyson has given us the Nth argument for stimulus spending in her latest commentary at the Financial Times. While more humble economists are scratching their head and wondering where they went wrong, a few like the Professor are still trying to revive dead economic notions.


[Thanks to Aboutcostume.com for the zombie photo.]

Her headline:

"Only more stimulus can fix a jobless recovery."

Wasn't it Keynes who thought that "[t]he short-run challenge is inadequate demand" (Tyson's words)? This is a zombie-idea if there ever was one. A good deal of evidence invalidates it, never mind that it's especially noxious at this time of fiscal over-expansion.

Tyson isn't completely off base: she admits that "the long-run challenge calls for fiscal contraction". However, she insists that "the short-run challenge calls for fiscal support."

Her solution? Promise to do both--and then start with the stimulus first under the wisdom of the old adage: Never do today what you can put off until tomorrow.

Her idea is to "pair fiscal measures targeted at job creation during the next few years with a multiyear deficit reduction plan that kicks in once employment recovers. Pass both now as a package."

But what happens if employment doesn't recover? Isn't her suggestion what every pro-stimulus economist and their politicians have been trying to do since this whole episode began? But the Professor is unfazed by the up-to-now inefficacy of the idea. She continues:

"At the very least, the federal government should introduce additional stimulus measures to offset the substantial fiscal drag that is slated to occur this year and next when current stimulus measures expire. On the spending side, it should invest more in infrastructure maintenance and replacement. Such investment raises demand, creates jobs and increases the growth potential of the economy."

Oh it does, does it? I think what we have here is a person with no fear of the facts.

1. Which fiscal stimulus measures have been proven to increase anything other than temporary job creation or maintenance?

No one can point to evidence that stimulus measures create jobs in a cost-effective and enduring way; and, on the other hand, evidence supports the hypothesis that fiscal stimuli are ineffective and even counterproductive. Who has produced that evidence? Ironically enough, today's version of Professor Tyson's own Council of Economic Advisers has come out with a study concluding that Obama's stimulus measures have produced jobs, but at a cost of $278,000 each.

The study also points to the fact that "the 'stimulus' has been working in reverse over the past six months, causing the economy to shed jobs." (Source; also, download the full CEA report from the same page.)

May I also point out that the latest job figures include a hefty release (see chart part-way down) of government employees, and that this is a good thing? Much of the stimuli went towards the maintenance of useless federal and state jobs. We are finally shedding these, thanks to the stimuli's demise, and we're helping our state and federal budgets in the process.

Lastly, I would like to point out that road maintenance and replacement are not job growth measures; they are simply ordinary expenses, the budget for which the politicians have stolen for other items.

2. Next question: When should the stimuli stop, given that most jobs created (or not lost) are dependent upon continuing stimuli for their survival?

3. Isn't excessive boom-time spending the very stimulus-like activity that got us into this predicament in the first place? Isn't more stimulus spending the same as throwing good money after bad?

4. To finance the stimuli and infrastructure, will Congress prefer that the Treasury go deeper into debt, or will it have the wisdom to cut spending elsewhere to compensate (which would seem counterproductive to her argument)? Our current cost-cutting-minded Congress has enough on its hands just trying to reign in the wasteful, debt-producing spending we are already doing, never mind finding places for even more cuts.

On the revenue side, the Professor thinks "the government should extend some of the targeted tax measures including the payroll tax cut for employees and the capital investment expense deduction. It should go further and cut payroll taxes for employers on all new hires, including hires by new businesses. This cut should be linked to the unemployment rate and should be maintained until it falls to the 5-6 percent range."

This is the only suggestion that makes any sense. Better yet, put a torch to the whole current tax code and instigate a much more fair flat tax. And while you're at it, stop farm subsidies. Oh, and turn back the regulatory clock and cancel some very bad recent legislation. But I suppose these ideas make too much sense.

Hopefully, the stimulus zombie-idea will soon turn to dust and disappear once and for all. (But don't hang around any economic-idea cemeteries long enough to find out.)