The Willful Ignorance of Bubbles

As in finance, political bubbles are characterized by willful ignorance followed by excess, a painful burst, and broad recognition that we should have seen it coming. (We pundits often claim that we did, but in doing so, it is hard to not sound like one of Sprio Agnew’s “nattering nabobs of negativity”. ) The real estate burst of the 00’s is a classic example – everybody gained by believing that you could bundle thousands of junk mortgages together to create gold – until you couldn’t. Sometimes, but not always, the financial and political are intertwined. Let’s briefly take federal, state, and local examples.

The Federal. Who really believes that trillions of dollars of budget deficits and unfunded entitlement commitments don’t matter? Barack Obama may actually believe, with his Svengali, Paul Krugman, yelling in his ear, that he can repeal the laws of economics. The public may choose to ignore Paul Ryan and the clamor of the populist Tea Party types. The dollar’s “reserve currency” status, backed by the immense power of the American economy, may allow us to ignore the problem for a very long time. The politics of ethnic, gender, class, and age divide may allow a gifted public speaker to focus the public’s attention elsewhere. The only question is whether the politics will change before or after the pain associated with the inevitable bursting of the bubble.

The State of California. Happy times are here again. The people have found a governor who is fiscally responsible on the small stuff and given him the highest tax rates in the country – a top 13.3% personal income tax rate; a 7.5% sales tax (plus up to 1.5% locally); a combined 68.9 cents per gallon gas tax; an 8.84 % corporate tax (9th in the nation); and $1,458 per capita property taxes (15th in the nation, kept down by Proposition 13). With total control of the state the Democrats can do as they wish, pension reform is not on the agenda, and the outflow of high tax payers will accelerate a bit. Out here the equivalent of Wall Street’s “mortgage backed securities” is the high speed rail project.

The basic premise is Too Big To Fail. If we begin with the $10 billion dollars approved by California voters in 2008, and add in $3.6 billion federal dollars approved by the Pelosi Congress, we will be so far along that nobody will be willing to pull the plug. Never mind that nobody believes that the current $68 billion price tag is realistic, that the requirement that there will be no operating subsidies will be met, or that the path won’t be impeded by numerous politically-required intermediate stops between Los Angeles and San Francisco.

Funding is predicated on the assumption that there will be tens of billions of additional federal money (read Democratic control of the House, Senate, and Presidency – and a “thank you” shout out to you readers outside of California) and there will be a “public-private” partnership with wealthy corporations who are not interested in making money. So, what will really happen? For decades the priority for transportation spending in California will be High Speed Rail for the wealthy business people and tourists who do not want to fly between Los Angeles and San Francisco. Forget the millions of blue collar workers who need buses to get from one side of town to the other for their jobs; forget the millions of middle class commuters who need their cars or light rail to get into the city to work. Eventually the voters will notice that the “all in” emotionally satisfying smaller carbon footprint of the few wipes out the good of the many.

The City of San Francisco. Happy times are here too. Financial constraint is unnecessary as Silicon Valley is booming (the banks are here, and the nightlife is better so the kids reverse commute), and the strength of the Chinese economy ripples onto our coast, so our politicians are geniuses. But one party rule breeds excess which is most evident at City College of San Francisco.

Picture a system with nine main campuses and some 90,000 students in a city of 812,000 people. Add a voter population which believes in the mission of providing an affordable feeder system for California’s four year colleges and training for careers such as nursing, culinary work, and information technology.  How could this be a Too Big To Fail bubble? Well, add a school board comprised of Democratic machine politicians; turn over management decisions to a council dominated by the administrator, teacher, and student unions; expand the mission so that a large part of funding goes to free  “community enrichment” courses such as memoir writing and cultural self discovery; provide socially fair staff compensation such as full health care and retirement benefits for part time teachers; eliminate any effort to measure costs of the various facilities; and on and on. Eventually, even in California, the state may well pull the school’s accreditation – after eight years of warnings, after a stern “this time we really mean it” ultimatum, after the imposition of temporary outside chief administrators. Maybe.

So, the quandry for good hearted people who want to work for a better world, and who do not want to be part of the willful ignorance: do you try to provide a warning? do you wait for the bubbles to burst? or do you just try to help the homeless guy on the corner? Illigitimi non carborundum.


This week’s video , compliments of a friend from Connecticut, captures a poignant moment in New York after 9/11/01.