Tuesday, July 27, 2010

Analysis of Management Changes at LA’s Planning Department

Although it is hard for the general public to fathom what takes place at City Hall, we know this much about recent changes imposed on LA’s Department of City Planning. Gail Goldberg, the Director of Planning, recently quit her job. One week after her last day at work, the Mayor nominated the Chief Zoning Administrator, Michael LoGrande, to become the new Director of Planning.

Many others have written about this management change, with plenty of ink and tears spilled over the new Planning Director’s level of knowledge, seniority, and servility to real estate developers. But, I don’t think the real question is the new planning director's history and style, but why the Mayor and his consigliere, Austin Beutner, decided they wanted a City Hall backroom player to take over the Planning Department.

Some turn to personal scheming for an explanation, but I think the deeper answer is the poor state of the local, regional, and national economies. As they continue to decline, the pols and the investors they enable increasingly turn to short-term real estate speculation, not long term business or city planning, as their preferred investment strategy. Despite the Great Recession, with its unemployment, foreclosures, bank failures, and declining stock markets, the large investment houses and corporations are awash with cash, but with few ways to profitably invest it.

Old fashioned options, such as taxing some of this money so the government can use it for planned infrastructure improvements, no longer compute. Such a public approach is too iffy, and it takes too long for a new subway or remodeled airport to produce a better business environment. Since major investors can’t make money like they used to, by investing in public infrastructure and actually making and selling things for a profit, they have turned to increasingly risky financialization.

In a nutshell, more and more of their business models consist of buying and selling financial instruments, most of which are based on real estate speculation. This desperation by large investors previously led to the Savings and Loan crisis of the 1980s, when over half of this country’s S and L’s failed in a giant real estate bubble. It also produced the bank meltdowns of 2008-9, when many a house of cards collapsed because borrowers could no longer repay mortgages on their real houses. In both cases losses at the top were covered by the Federal government.

The process which led to those speculative collapses is still alive and well in Los Angeles and much of the United States. Never mind that the crises of the 1980s and then twenty years later in the first decade of the 21st century showed the folly of such a high risk investment strategy. Never mind that it will not work again. After all, there simply is not enough demand to profitably fill new condos and shopping centers, especially in Los Angeles. The specter of empty buildings, just like the S and L crisis, is again at hand, except this time the Federal Government is broke.

Even those real estate investors who have no intention to build anything, whose investment strategy is to collect building entitlements so they can flip properties and make some quick money, will be blind-sided when they, too, run out of buyers and bailouts. Meanwhile, with public services cut and infrastructure underfunded, Los Angeles has become a less inviting place to live, to work, or to run businesses. Voila, a downward spiral appears in which each short term City Hall maneuver, like furloughs and layoffs, begets further urban decline.

Who wants to live or do business in a rundown city, like Los Angeles is becoming, if they have a choice?

As part of this pitiful race to the bottom, each “planning” decision is short term and designed to facilitate risky real estate speculation at the expense of adopted city plans and zoning. More to the point, why go through the pretense of maintaining plans or having a planning director who can talk the profession's talk, when you can quickly bring in a replacement from the dugout who claims he can walk their walk. Why should plans and zones get in the way of quick entitlements allowing commercial real estate to be flipped?

But, sooner or later, the truth will come out. Quick entitlements might produce a few small fortunes or even a modest building boom, an echo of the 1980s, but they will not revive Los Angeles. When the dust settles and the quick buck artists have moved on -- most of them avoiding a stint at “Club Fed” -- Los Angeles will need even better urban planning than it has occasionally had in the past and could still have and desperately needs in the present.

* Dick Platkin is a Los Angeles based city planning consultant. He invites comments on this article at rhplatkin@yahoo.com

Tuesday, July 6, 2010

Why Richard Riordan is lobbying local unions to cut salaries

Why is former LA Mayor Richard Riordan, according to Rick Orlov in the Daily News, trying to persuade local municipal unions to accept wage and benefit cuts? It is his contribution to business efforts to recover from the recession through wage and benefit cuts. Not only will it not work, but it is part of a larger process which several astute analysts, such as Paul Krugman, argue is leading to another depression.

See highlighted explanation below. I remain skeptical, however, that the author's solution, essentially a second New Deal, will work. After all, it took WWII to resolve the economic crisis of 1929-1945.

More Red Flags for the Economy

By Mike Whitney

http://www.informat ionclearinghouse .info/article258 79.htm

July 05, 2010 "Information Clearing House" -- Bonds are signaling that the recovery is in trouble. The yield on the 10-year Treasury (2.97 percent) has fallen to levels not seen since the peak of the crisis while the yield on the two-year note has dropped to historic lows. This is a sign of extreme pessimism. Investors are scared and moving into liquid assets. Their long-term expectations have grown dimmer while their confidence has begun to wane. Economist John Maynard Keynes examined the issue of confidence in his masterpiece "The General Theory of Employment, Interest and Money". He says:

"The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention.

The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong."

Volatility, high unemployment, and a collapsing housing market are eroding investor confidence and adding to the gloominess. Economists who make their projections on the data alone, should revisit Keynes. Businesses and households have started to hoard and the cycle of deleveraging is still in its early stages. The winding down of the Fed's liquidity programs comes at the same time as Obama's fiscal stimulus begins to run out. Bank reserves are not getting into the hands of the people who will spend them and increase economic activity. These things all indicate a generalized tightening in the money supply. Soon, incomes will begin to contract and the CPI will turn from disinflation to deflation. Aggregate demand will weaken as households and consumers hunker down and increase personal savings. The financial crisis may be over, but the Depression has just begun. Here's how Nobel prize winner Paul Krugman sums it up:

"We are now, I fear, in the early stages of a third depression.. ..And this third depression will be primarily a failure of policy. Around the world ... governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. ... After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times." ("The Third Depression", Paul Krugman, New York Times)

More than 8 million jobs have been lost since the beginning of the crisis, and yet, President Barack Obama has made no attempt to initiate a second stimulus. Government spending must increase to make up for the slack in demand and to increase capacity. That means larger budget deficits until households have patched their balance sheets and can again spend at pre-crisis levels. Belt-tightening should wait until the economy is stronger. Withdrawing stimulus now, while the economy is still weak, will crimp spending, collapse state tax revenues and increase unemployment. Here's an excerpt from an article by James K. Galbraith which helps to explain what's needed to get back on track:

"The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.

To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.

To be clear: unemployment can be cured without private-sector financing, if public deficits are large enough — as was done during World War II. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential.

One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed." (James K. Galbraith, "Why the Fiscal Commission does not serve the American People", New Deal 2.0)

The economy cannot grow without private sector credit expansion. But the banks are constrained by toxic assets and a lack of creditworthy applicants. On the other hand, deleveraging households and consumers are less willing to borrow at any rate. Retirement age "boomers" have lost nearly $12 trillion in net wealth since the crisis began and must hunker-down and save for the years ahead. They are no longer in a position to spend freely anticipating their home equity will rise 10% or 15% per year creating a cushion for the future. In fact, bond yields indicate that retail investors have lost faith in both the housing and equities markets. These people have moved their savings into low-yielding, risk adverse assets-- US Treasuries. Here's what Keynes said on the topic:

"Our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future.... The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of money which has been hoarded... supposed to have a direct proportionate effect on the price level through affecting the velocity of circulation. But the quantity of hoards can only be altered either if the total quantity of money is changed or if the quantity of current money income (I speak broadly) is changed; whereas fluctuations in the degree of confidence are capable of... modifying... the premium which has to be offered to induce people not to hoard. And changes in... liquidity preference.. . affect, not [consumer] prices, but the rate of interest.... " (John Maynard Keyne, "1937 Quarterly Journal of Economics")

So, hoarding reduces spending which leads to economic contraction. But behavior can be altered by changing incentives, raising incomes or restoring confidence. Keynes was less sanguine about merely increasing the money supply which he compared to "trying to get fat by buying a larger belt". The point is to increase consumption, which means that money has to get in the hands of the people who will spend it to grow the economy. Bank reserves alone won't do the trick.

Presently--accordin g to data collected by the Federal Reserve-- companies are hoarding capital due to the lack of investment opportunities. High unemployment has led to falling demand which is stifling investment. As households continue to deleverage, many companies will opt to pay down debt rather than seek new investments (as they did in Japan) This will further reduce economic activity and deepen the slump. The government must increase the deficits to offset cuts in state and private sector spending and to avoid another excruciating cycle of debt deflation.

The economy is at a tipping point. CPI is is slipping from disinflation to outright deflation. Unemployment has flattened out at 9.5%, but 650,000 discouraged workers have stopped looking for work altogether which will add to the slowdown.
The cash-strapped states are laying off workers in droves. The rate of underemployment has soared to 16.5%. There are 6 applicants for every new job created. Conservatives believe that the ongoing crisis creates a unique opportunity to crush the labor movement and to force down wages. GOP senators and congressmen have quashed a bill that would extend unemployment benefits to over a million workers. Apart from the gratuitous cruelty of the action, their obstructionism only adds to deflationary pressures.

Nomura economist David Resler says that congress's action will have an immediate and damaging effect on the economy and could trim GDP by 0.2 percentage point this quarter and by 0.4 point in the period from July through September. (Bloomberg) Republicans are precipitating a crisis to garner support in the upcoming midterm elections, but they may not fully grasp the knock-on effects of their vote on their constituents. Here's a clip from economist Steven Keen on Naked Capitalism:

"The final debt-driven collapse, in which both wages and profitability plunge, gives the lie to the neoclassical perception that crises are caused by wages being too high, and the solution to the crisis is to reduce wages.

What their blinkered ignorance of the role of the finance sector obscures is that the essential class conflict in financial capitalism is not between workers and capitalists, but between financial and industrial capital. The rising level of debt directly leads to a falling worker share of GDP, while leaving industrial capital’s share unaffected until the final collapse drives it too into oblivion." (Steve Keen's Scary Minsky Model, Yves Smith, Naked Capitalism)

The FOMC's June statement was a real stunner. The economy is losing-ground in nearly every area. Household spending, business spending, bank lending and housing are all either beginning to slow or falling sharply. The Commerce Dept. revised its first quarter estimate of GDP from 3.0% to 2.7% due to lower than expected consumer spending. The recovery is largely a mirage created by inventory adjustments and fiscal stimulus. 46 of the 50 states are mired in huge deficits that will require substantial cuts to balance.That will be a drag on activity going forward. This is from Bloomberg News:

"States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama’s $787 billion stimulus package starts to wind down.

State and local governments will have to dismiss 162,000 workers if Congress fails to extend about $24 billion of Medicaid payments, Lawrence Mishel, president of the Economic Policy Institute in Washington, said during the governors’ call. Payrolls have already registered 11 straight months of year- over-year declines, the longest stretch of continuous drops since 1983, based on Labor Department data." (Bloomberg)

State budget cutting will swell the unemployment lines and slow consumer spending. With fiscal stimulus quickly running out and the deficit hawks pushing for greater austerity, the Fed will be forced to intervene in the 4th quarter resuming its quantitative easing bond purchasing program to pump more liquidity into the financial system. The recovery is not self sustaining.

In Europe, the scenario is much the same only worse. ECB head Jean-Claude Trichet has been preaching austerity while conducting a massive stealth bank bailout, providing limitless funds in exchange for dodgy collateral, overnight deposits for wary banks that no longer trust the repo market, and bond purchases of sovereign debt that is vastly overpriced given the fiscal position of the issuers. Germany is calling for additional belt tightening across the eurozone as a hedge against fictitious inflation. German policymakers don't see that their trade surpluses translate into deficits in the Club Med states, or that their solutions will only exacerbate existing imbalances, increase the deficits, and put the EU on course for another contraction. Here's an excerpt from the Wall Street Journal:

"Germany’s unwillingness to accept higher domestic levels of inflation in order to alleviate the burden of debt elsewhere in the euro zone ultimately constrains the European Central Bank in how much it can do on the monetary side....

... governments already nursing fragile financial sectors are being forced into some of the most severe austerity programs ever planned in modern developed economies at a time of rigid monetary policy.

If policy goes through as planned, a severe depression is almost certain to follow across peripheral euro-zone countries and a significant downturn elsewhere across the continent. Even European countries with power over their own monetary policy are bound to suffer from a euro-zone slump." ("Euro-Zone Policy Sets Stage for Depression", Allen Mattick, Wall Street Journal)

After Lehman Bros. collapsed in September 2008, the world was pulled back from the brink of depression by an activist Federal Reserve that (arbitrarily) assumed the authority of congress and conducted a massive rescue operation that provided unlimited liquidity and government support for teetering financial institutions. And, while the Fed's uneven treatment of Wall Street has been widely criticized, (the banks have been allowed to carry on much as they had before) the precipitous slide into the abyss was halted. Now, the congress seems eager to reverse that achievement for fleeting political gain.

It's important to understand the process so we can settle on a remedy. Economist Bradford DeLong explains what's going on with the economy and why it would be a mistake to count on the so-called "self correcting" powers of the market rather than government intervention. (additional fiscal stimulus) Here's an excerpt from DeLong's blog "Grasping Reality With Both Hands":

In our normal, microeconomic world it is not a big deal when excess demand emerges in one market and excess supply emerges in another..... But in macroeconomics things are different. The excess supply is economy-wide- -throughout all commodity markets, producing supply in excess of demand for goods, services, labor, and capacity. Producers and entrepreneurs respond to an aggregate demand shortfall just as individual producers respond to a particular shortfall of demand for their products: they hold sales to liquidate inventories, they cut prices, they cut wages to try to preserve margins, they fire workers.

Thus workers fall into unemployment from the excess supply in the goods and services industries.. ..

Wages should then fall. And when wages fall higher profits should induce employers to expand production even without any increase in spending. Eventually wages should fall low enough that the economy returns to full employment and to normal levels of production and capacity utilization even without any increase in asset supplies. Or will it? Falling wages means that households have even less money. Some of them will default on their loans. Some banks will find that their reserves are no longer large enough to provide an ample cushion because of these loan defaults.... ....

Relying on nominal deflation of wages to restore full employment runs the risk of creating yet another shock of excess demand in finance and excess supply in goods and services to deepen the depression. The hoped-for cure's first effect is to worsen the disease.

We trust the market to take care of a microeconomic excess-demand excess-supply situation in a few industries in a productive way in a short period of time. Do we trust the market to do the same way to a macroeconomic imbalance, to quickly resolve a depression in a productive way without help? No, we do not. Rather than relying on economy-wide deflation to eventually restore balance, we should pursue other alternatives. " ("Microeconomic and Macroeconomic Excess Supply", J. Bradford DeLong, Grasping Reality With Both Hands)

True, in some perverse sense, the market is "self correcting", but in this case, it would take years if not decades of high unemployment, overcapacity, dwindling investment and social unrest. Are we ready for that? The preferable solution is to plug the regulatory holes that allow financial institutions to speculate in massively- leveraged instruments that have implicit government guarantees (CDS, MBS, CDO), and to promote income growth so the supply/demand balance that is essential to economic growth is restored. The way out of this mess is more jobs and higher pay. And that will take public mobilization and whopping big deficits.


http://www.dailynew s.com/ci_ 15440926? source=rss_ viewed

Ex-mayor Dick Riordan tries to gain union concessions

By Rick Orlov, Daily NewsStaff, Updated: 07/04/2010 06:33:59 PM PDT
Say you're an ex-mayor of Los Angeles and you're convinced the city is going to hell in a handbasket. What do you do?
Well, if you're Dick Riordan - a self-described professional problem solver - you take it on yourself to begin negotiating with city unions to try to win concessions that neither Mayor Antonio Villaraigosa nor the City Council seem able to achieve.
Acting as an unofficial ambassador, Riordan has been meeting with a number of city unions to talk about what he sees as the main problems facing the city: pension reform and health costs.
"What I'm trying to do is get them to look at the problem and talk more about it," Riordan said. "What I want is to try to get them to begin looking at the city's problems realistically. "
Riordan created a stir earlier this year with talk about the city declaring bankruptcy - a prospect rejected by all city officials from Villaraigosa on down and averted this year with a new budget that calls for layoffs.
Riordan has not been talking to Villaraigosa about his efforts, although other city officials are aware of them and trying to direct him - not an easy task.
"I'm just trying to get people talking and thinking about where we are," Riordan said. "If the city is going to survive, we need to change the way we're doing business."
The first thing he has been dealing with is getting the unions to agree to changing the current pension system over issues such as contributions, health care costs and retirement age.
Also, he has been pushing for change in the health care costs of current city workers, seeking at least some contributions to their own health coverage.
Rick Orlov is a Daily News staff writer. His column, Tipoff, appears Mondays. To contact Orlov, call him at 213-978-0390.