. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.
The School Board and Superintendent want to demolish Roosevelt Elementary. I disagree.
(Disclosure: Although I did not attend Roosevelt myself, and am neither a Roosevelt parent nor a "Myrtle Orchard Neighborhood" resident, I do live in the adjacent "Melrose Neighborhood," which also looks to Roosevelt as its "neighborhood school.")
From 1998 to 2001 I served as a member of the Iowa City Community School District School Board.
Since that time, while I have of course maintained an interest in K-12 education generally, in this country and beyond, and in our District in particular, I have mostly maintained a respectful silence with regard to the actions of my successors.
Having served on the Board I have some sympathy for those holding the job of which I once said, "well, it may not pay anything, but at least you get a lot of grief." It's not my desire to add to that grief.
But the District's recent decision (something between an "inclination" and what some insiders report as being "a done deal") to tear down Roosevelt Elementary School caused me to attend a public meeting last Saturday, March 7, and to publish this blog entry today. (Some of the Board's overall planning can be found in its Iowa City Community School District, "Strategic Facilities Improvement Plan," 96 pp., undated (a pdf file).)
One of the features of Saturday's gathering was small group meetings at which we were to list what we considered to be the "pros" and "cons" of the Roosevelt demolition. The group I was in noted the following (that is, this is not necessarily my personal list):
Pros: the proposal brought the community together to talk about K-12 education in general and socio-economic issues in particular (the disparity between schools regarding the percentages of "free-and-reduced lunch" (i.e., low income) students).
Cons:
Student safety and walking distance. Many Roosevelt students would need to walk farther and along more dangerous routes (e.g., busy street crossings) to reach a different school. They will be farther from downtown cultural events.
Parental participation. Parental participation in schools enhances their children's education -- some say it is the single most important factor. Parental participation is increased when parents, as well as students, can easily walk to school. This is especially true for many of the low income parents whose children attend Roosevelt, parents who may not even have cars. Increased distance will tend to further remove these parents from connection with their children's activities and education.
Insufficient system-wide planning, public participation, and diversity balance. Diversity balance requires redrawing all school boundaries throughout the District, not just those for two or three schools. (One obvious way to minimize the disruption this would cause, thereby making it more politically feasible, would be to announce the new boundary-drawing principles (and resulting boundaries as of now) -- but withhold their implementation for six or seven years, thereby removing any impact whatsoever on children now in school. For more on this approach, see my earlier writing on boundaries, linked at the bottom of this blog entry. Obviously, had this suggestion been followed when I was on the Board those boundaries, with more boundary flexibility for the Board and Administration, would now be in place.)
To plan a new school (Crossings), knowing that it will be 40% low income (the District average is 28%) seems contrary to the Board's professed goal of improving balance. The Board needs to plan for construction of new schools beyond five years. It needs to provide for more public participation on the front end of this planning.
Uneconomic. With new schools costing millions, to renovate Roosevelt for $900,000 is a cheap price to pay for a "new" school. The "substitute Roosevelt" at the "Crossings" location may be subject to the same kind of cost overruns suffered by the Van Allen school -- making renovation of Roosevelt an even better bargain. Especially given present economic conditions it seems wasteful in the extreme to choose this time to demolish a neighborhood school only to have to spend millions on another school to replace it. Moreover, the additional cost of the demolition itself is not inconsequential and will either be an added cost to the District, if it intends to use the property for some other purpose, or a reduction in the selling price of the property if it is sold to developers who must bear that cost.
Flexibility in renovation costs. The study of Roosevelt renovation costs identifies levels of priority in tasks. Shive Hattery, "Roosevelt Elementary School Assessment," February 13, 2008 (a pdf file). If only the highest priority renovations are made the costs could be even less than the $900,000 referred to above. Lower priority renovations could be done later, in better economic times, while still permitting the building to be used. On the other hand, if every possible change and improvement is made, and additions to the building are constructed, obviously the costs could range upward of $5 or 6 million. Thus, while there is tremendous flexibility in the potential costs of whatever might be done with Roosevelt, they will be by any measure far less than the cost of a new school.
Failure to consider wide range of options; e.g., possibility of Roosevelt-Horn linkage such as K-3 in one school and 4-6 in the other (as both schools are relatively close). The small group making this list felt that the Board had not done an adequate or creative job of considering all the options that would include the preservation of Roosevelt. At the present time low income students are bussed past Horn on their way to Roosevelt! The result is that Roosevelt has one of the highest percentages of low income students (54%) and Horn has one of the lowest (12%).(See, Iowa City Community School District, "Frequently Asked Questions #1; Proposed Strategic Facility Improvement Plan and Roosevelt/Weber/Horn/Kirkwood Recommendation," March 4, 2009, "8. What will be the socioeconomic and racial balance among the schools?") If the Board honestly wants to improve District diversity an obvious answer would be to bus those students to Horn, thereby improving the ratios at both schools.
Removal of family resource center. Roosevelt provides a Family Resource Center for a student population in need of one. It would be lost (or at least there is no clear plan for providing one) for these students following Roosevelt's demolition.
Transition problems. There would be a two-year delay getting benefits to current Roosevelt students.
Finally -- and I deliberately list it "finally" here, because while it involves values that indirectly impact on people of all ages currently a part of the "Roosevelt family," this concern of the Myrtle-Orchard Neighborhood residents in our small group is not "educational" in the narrow sense --
The adverse impact on the "Melrose-Orchard" and "Melrose" neighborhoods. There is reason to believe that if Roosevelt is abandoned by the ICCSD its nine-acre plot would be acquired by developers who would fill it with condos, apartment buildings, or stand-alone homes. This would be a double whammy for two Iowa City neighborhoods that are already fragile. (Melrose Neighborhood is subject to constant invasion by the University from the north.)
A "neighborhood" is in many ways defined by the existence of its "neighborhood school" (rather than the other way around). For a neighborhood to lose its neighborhood school is an enormous whammy to its identity. This is only made worse when developers are permitted to take over an open, green, distinctive location and structure and turn it into more of the same-old, same-old that has already caused a loss of the neighborhood's "character." (There is, for example, a nature trail through a wooded ravine on the Roosevelt property, a kind of park, used by neighborhood residents as well as Roosevelt children.)
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The above are points made by members of the small group I attended -- points I agree with for the most part, but were for the most part not my contributions.
There were many more points made by reporters for other groups that will, hopefully, soon be transcribed and available on the District's Web site.
To them I would add a couple more.
School size. It is somewhat bizarre that one of the arguments put forward by the Board for demolishing Roosevelt is its "small class size," given that smaller class (and school) size is universally heralded as a desirable goal even for high schools (a range of 600-800 students), let alone elementary schools (300 students). A part of the plan is to expand Horn Elementary -- necessitated in part because of the proposed demolition of Roosevelt. But that is simply the worst of all possible worlds -- losing the desirable school and class size of Roosevelt, while making worse the school size of Horn. (On the other hand, especially given the two empty classrooms at Horn, this is just another reason for dropping off some of the low income students at Horn rather than bussing them by Horn on their way to Roosevelt, see "Failure to consider wide range of options," above.)
Other schools, other neighborhoods. Roosevelt, built in the early 1930s, is certainly not Iowa City's oldest school. If it is to be demolished should we assume those other older schools, which also need remodeling, will be torn down as well? In that case, all the concerns about Roosevelt -- and the impact on its neighborhood/s -- will only be multiplied many times over. And, if they are not to be torn down, what is the rationale for choosing only Roosevelt? Is it possible that schools in more affluent neighborhoods, such as Lincoln, populated by influential parents, have been better maintained over the years than a school like Roosevelt, with its less affluent and influential parents?
Broken SILO promises. Promises were made by the School Board at the time of the District citizens' vote to increase their taxes to provide the District SILO funds for new schools. In addition to new school construction, the vote passed in large measure (one can safely assume) because of promises that the money would be used to refurbish and remodel the older neighborhood schools.
On February 2, 2007, an op ed column "by Iowa City School Board" appeared in the Press-Citizen explaining "How to Spend SILO Funds." It expressly stated:
The district estimates more than $147 million in priority infrastructure projects over the next 10 years. SILO funds would enable us to make improvements to our buildings that serve our students. There are inequities between buildings constructed in 2005 and those built in preceding decades (some dating to 1917). Those inequities include cost efficiency, handicapped accessibility, gyms and science labs, climate controls, air conditioning, air quality, lighting and overall learning environment. Repair, maintenance and accessibility needs have been deferred for many years because we have lacked the necessary funds. If the SILO sales tax is approved, the district will over time be able to improve the learning environments of our students. (emphasis supplied)
There was no mention of the demolition of Roosevelt -- or any other school for that matter -- indeed, quite the contrary. It is troubling that the Board would now fail to honor the representations, relied upon by voters, made by the Board in its effort to obtain the passage of the SILO referendum a mere two years ago.
Development. I hate to even mention this, and I'm certainly not asserting any wrongdoing, but it can't go without comment.
This plan hits a double for local developers.
The Cardinal Road/Crossing development (which, in my opinion, should have been retained by the City/County as greenbelt land in the first place) will receive an enormous economic boost by the sales force being able to tell potential home buyers that their children will be able to attend, within walking distance, one of Iowa City's newest, and most modern schools. That's worth a lot in an escalation in home prices, and presumably is one explanation for the developer's "generous" offer to make the land for the school available "free."
Moreover, the demolition of Roosevelt opens up for the same, or other, developers the opportunity to buy, develop and sell off one of the most prime pieces of land on the West side of town.
I'm not suggesting Roosevelt's demolition, and the new Camp Cardinal ("Crossings") school, are being proposed to enrich a developer -- let alone anything worse. But when public entities (in this case, a school board) are involved in creating millions of dollars of private profit (for, in this case, developers), while destroying a neighborhood school, dealing a heavy blow to two neighborhoods, and throwing the burden on the backs of the children and parents least able to represent themselves, it does deserve a very, very close look.
Economic downturn impact on Camp Cardinal development. Finally, it should be noted that the Camp Cardinal housing development was planned before the recent economic downturn. Home sales are never a slam dunk in the best of times. And these are not the best of times. Some consideration needs to be given to the possibility/probability that the "Crossings" school might end up finding itself to be a "neighborhood school" without a neighborhood.
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
A Multiple-Variable Analysis of Newspaper Delivery (brought to you by FromDC2Iowa.blogspot.com*)
What a treat to open my kitchen door at 4:30 this rainy Sunday morning and find two newspapers, neatly wrapped with their protective plastic covering, waiting side-by-side less than three feet from my door.
It's not every day that starts that way. And that's the subject of this morning's blog entry.
A convergence of forces have made these tough times for newspapers. Going public meant some initial infusions of cash, but also brought Wall Street's insistence on ever-increasing profits. The Internet generation's gone electronic; and even giving away free hard copy newspapers in college dorms hasn't reversed that trend -- nor has giving away the content with online editions helped their bottom line. Now even those students' newspaper-addicted parents are doing more newspaper reading on the Internet. Craig's List has taken much of the lucrative classified ad revenue. Newsprint and ink costs keep going up. And now general ad revenue is also down as the global economy collapses around every business. The Rocky Mountain News, once one of my favorites, is only the latest in a string of closing newspapers.
Meanwhile, as everyone struggles to find alternative business models for newspapers some are appearing. That was a part of the discussion six weeks ago in Nicholas Johnson, "Whither Newspapers," January 18, 2009.
This morning's commentary is much more modest. It involves the application of a proverb, with origins going back to the 14th Century, to the newspaper industry's woes:
For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rider was lost. For want of a rider the battle was lost. For want of a battle the kingdom was lost. And all for the want of a horseshoe nail.
And what is "the nail" in this analogy?
Newspaper delivery.
I read a number of newspapers with some regularity, but only four in hard copy, two of which are delivered to my home daily.
Permit me to preface what I am about to say with some qualifiers. (a) I used to deliver newspapers in the same neighborhood to which I have now returned to live in the old family house. It is a thankless job, and I have nothing but appreciation for those who are willing to provide this service for much less pay than reason and equity would dictate. (b) Home delivery of hard copy newspapers is not a business model in which I'd be willing to invest my money -- for some of the reasons I've set forth above, and more. (Some of the alternatives are discussed in the "Whither Newspapers?" blog entry, linked above.)
So I don't think newspapers should have to provide home delivery at all.
All I'm about to suggest is that, if they are going to provide that service then there are some fundamentals requiring a little more attention.
As I mentioned, I have home delivery of two newspapers (both of which will remain nameless), so I have two different approaches to newspaper home delivery to compare.
Here is a quick once-over of what seem to me the relevant elements of home delivery.
1. Does the paper come every day, or are there more than a statistically insignificant number of days when it doesn't arrive at all?
2. Is there a regular time at which it arrives?
3. Is there a consistent location where the paper can be found?
4. When there is a problem with delivery (say, there's no paper well past the promised delivery time) can the subscriber explain the situation to a human, or must s/he try to place the round pegs of concern into the square holes of a computerized system?
Here has been my experience:
1. One of the papers comes every day. The other has a significant number of days when it does not arrive at all.
2. One of the papers usually arrives by 3:30 in the morning. The other may come at any time, when it comes at all, normally between, say, 5:00 and 8:00 a.m.
3. One of the papers is almost always just outside the kitchen door. The other requires a daily scavenger hunt -- sometimes it's under a bush, sometimes out by the city street, sometimes in winter hidden in a snow drift, and occasionally by the kitchen door (as it was this morning).
4. The newspaper that rarely requires a call has a human to answer the phone. The newspaper that often needs to be called has a computer that explains humans can only be reached during "regular business hours" -- when those humans sometimes explain that newspapers can no longer be delivered that late in the day.
One variable is manageable by a subscriber.
If the paper always comes, and is in the same place when it does, but at various times, one can look in that place and quickly see it's either there or it's not. If it always comes, and at about the same time, but may be anywhere, the subscriber can go on the scavenger hunt at the same time every day, knowing the paper will ultimately be found somewhere on or near the property.
It's the multiple variables that create the problem. When one doesn't know whether it's going to be delivered at all or not, or what time it will be if it is, or where it is to be found on a given day, the only way to receive the paper is to undertake periodic searches of the entire property during the morning hours, never knowing if it has been delivered or not, or where it may have been left.
Like I say, I (a) really appreciated not having to search for a paper in the rain this morning, (b) have great appreciation for what delivery persons go through, and suspect much of the problem is that they're not being paid enough to be able to keep the job for long, (c) don't think newspapers should have to provide home delivery of hard copy papers at all, and (d) am not making a special appeal for the delivery of my paper. The disparity between these two newspapers' delivery practices has existed for years in spite of periodic suggestions to management; and it is highly unlikely it is limited to one neighborhood.
No, this "multiple-variable analysis of newspaper delivery" is simply provided as yet one more good will offering, without charge, to a newspaper industry that has played a major role in my life over decades in a variety of ways and that I would like to see survive.
It's merely a reminder that in 21st Century business, as well as 14th Century warfare, success often turns on attention to detail -- like the nails in horseshoes and the home delivery of newspapers. Maintaining profits by cutting back on basic services has seldom if ever been a sure road to corporate survival.
And I do hope you found this blog entry promptly and properly delivered to your computer this morning. _______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
The Sure-Fire Solution to Economic Pain (brought to you by FromDC2Iowa.blogspot.com* -- and Saturday Night Live, see below)
My Dad told the story of a Kansas farmer who was asked whether he believed in baptism. "Why of course I do," he said, "I've seen it done."
That's kind of how I am about credit. I've seen it done. And all about me I'm now watching the consequences of its having been done. And that's why I really don't believe in credit.
Mason Williams (the composer of "Classical Gas" and one-time head writer for the "Smothers Brothers Comedy Hour") once wrote the story of the automobiles in his life, which he called his "Auto-biography."
In a similar spirit here is how I would describe my own "Auto-biography" of Nicholas Johnson.
My first car was a 20-year-old Model A Ford I bought from a local farmer for $25.
I paid cash.
My second car required saving money for a year as a college student. It was a much fancier Model A, with four doors and a roof, and therefore cost $75.
I paid cash.
Over the years the cars got grander and more expensive. A two-door Chevy ($700), a Volvo ($600), and a couple others along the way.
I paid cash.
My current vehicle is a 1978 VW camper van, one of my most expensive ever at $2000.
But I still paid cash.
Is this because I'm wealthy? No; quite the opposite. When offered job choices I've never simply picked the one that paid the most. I've chosen the ones that would offer the most interesting new experience, the most fun, or the greatest opportunity for public service -- one of which was serving on the local school board, a job I once described as providing "no money, but at least you get a lot of grief."
(Don't get me wrong, this is not a "pitty poor me" blog entry. I've been blessed at every turn in a life that could not have been better: my parents, growing up in Iowa City, the University's schools, from the two-year-old group at the Iowa Child Welfare Station on through University High School, a top flight public university undergraduate and law school education when tuition was $50 and a couple part-time jobs plus managing an apartment house were enough to get you by (compared with today's near-$50 thousand at private colleges, with the accompanying student loan debt), the lucky accidents of the U.S. Court of Appeals and Supreme Court clerkships, and three presidential appointments, and being able to return in my later years to my home town, live in the house where I grew up (on which the mortgage has long since been paid -- if indeed it was not purchased for cash), and welcomed into the UI College of Law, a three-block walk from home, where I live with a former high school classmate who is, for me, the perfect wife -- in addition to our wonderful children, grandchildren and now great-grandchildren. No; all I am saying is that I have, by choice, purchased cars for which I could afford to pay cash, rather than paying interest to a bank on a newer, more expensive one.)
No; I've paid cash because, in attempting to control living costs, the elimination of interest payments always seemed to me to involve the greatest returns for the least effort -- with the least pain.
I don't confess this as a badge of honor. I'm fully aware most Americans will ridicule my choices and think me a fool.
I merely mention it to give you some insight as to why I might be questioning the behavior and choices of those who propelled us into this global economic collapse -- and who now propose that the way out of the pit we're in is to go back to making more credit available, to recreate the economic structure and behavior that got us into this mess.
Why should every small business, home and automobile be owned in largest measure by a bank's shareholders? And for what? So we can have our stuff a few months before we'd have it if we saved first and then paid cash? Rented a few more years before buying a home? Drove a little older car?
Why should one of our largest expenses -- as taxpayers as well as consumers -- be the transfer of our hard-earned dollars (in the form of interest payments) to bankers and investors who have contributed neither goods nor services to our economy? Banks were getting "bailouts" from the federal government -- that is, you and me as taxpayers -- long before they brought down our economy. Do you know what one of (if not the) largest expenses of the federal government is? That's right, interest payments from you and me to those wealthy enough to loan their money to our government -- some $412 billion in the FY2008 budget! Federal Budget Spending and the National Debt. I'd say that's a pretty nice income for what Senator Bob Dole once described as "indoor work with no heavy lifting."
And our payments to those folks are only going to increase as our government continues its present "solution," this glide path to economic hell: getting us out of a economic mess created by credit and debt by taking on more credit and debt.
[Credit: "Don't Buy Stuff: The sure-fire way to get out of debt," NBC Saturday Night Live, Season 31, Episode 12, aired February 4, 2006, available from hulu.com.]
I don't expect anyone to agree with me. But I think Saturday Night Live had it right: "The sure-fire way to get out of debt"? "Don't buy stuff you can't afford."
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Don't Buy Stuff," March 6, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
No More For AIG and the View from the "Frontline" (brought to you by FromDC2Iowa.blogspot.com*)
Prologue
I dreamed I was having a beer with Tim Geithner and Ben Bernanke. (I had to explain to them that we were fresh out of champagne.)
"So what do you think is the answer for AIG?" I asked.
"We think handing over billions of taxpayers' dollars to the company is the way to go," Geithner said. Bernanke nodded, while looking suspiciously at his glass of beer.
"Have you tried that?" I asked.
"Oh, yes." Bernanke smiled. "Three times. I think we're up to about $150 billion now, aren't we Tim?"
"Yeah, about that." Geithner took a sip and scowled.
"So how's that been working for you?" I asked.
They both looked down and said nothing.
"How's that been working for you?" I repeated.
"Not really all that well," Geithner finally replied in a near whisper. "They lost another $60 billion this last quarter, and the Dow just dropped below 7000."
"Oh, my." I paused. "So what are you going to do now?"
They both smiled and said, as if in chorus, "We thought we'd give them another $30 billion."
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What the hell is the Obama Administration and Fed thinking to give AIG another $30 billion of our (taxpayers') money?! When you find something that doesn't work, repeating it over and over in the hopes that it will is one definition of insanity. This means we've now underwritten a single company to the tune of what will soon be a quarter of a trillion dollars -- two and a half times the entire federal budget when I was in government!
AIG, this so-called "insurance company," just reported a $61 billion dollar loss during the last three months! That's nearly $1 billion every business day. Andrew Ross Sorkin and Mary Williams, Walsh, "A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid,"New York Times, March 3, 2009 ("the deal . . . presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises").
Stories like that always kind of make me wonder. If you were paying even a modicum of attention wouldn't you kind of notice after a day or two that there was $2 billion missing from the petty cash drawer?
These are the guys, you'll recall, who celebrated one of our early infusions of billions by heading off to a luxury resort to spend some of it.
And let's get straight why these losses are occurring.
Bankers, through greed or ignorance, were issuing mortgages they knew, or should have suspected, would not be paid ("sub-prime mortgages"). So long as they could mix them up, package them, call them a security, and sell them, the profit (and resulting bonus) was theirs and the risk of loss was someone else's.
Those holding these worthless ("toxic") securities wanted protection. So AIG issued insurance -- an agreement to make good on the mortgage/security if it turned out to be worthless because the debtor defaulted on this "credit" -- a "credit-default swap."
For more details on what AIG and the banks did to our economy see Joe Nocera, "Is AIG the Worst of Them All?"New York Times, February 27, 2009 ("the practices that led to its troubles . . . were shocking"); and "Propping Up a House of Cards,"New York Times, February 28, 2009 ("Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more . . . Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. . . . either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up. That would be us, the taxpayers").
Normally insurance, whether home, auto, or life, is designed to spread the rare or occasional loss among a great many premium payers. Every homeowner has fire insurance, but very few have fires -- there's no "bubble" that suddenly bursts and causes all homes to burn, thereby bankrupting an insurance company suddenly called upon to pay full value for 40% or more of the homes it insured.
Moreover, regulated insurance companies are required to maintain "reserves" sufficient to pay off an unexpectedly large number of claims. (AIG's conventional insurance operations are still profitable.)
By contrast, when the real estate bubble bursts during an economic downturn it tends to burst nation wide. Providing "insurance" for mortgage defaults means the insurance company has assumed the risk that when the bubble bursts it will be responsible for the losses sweeping an entire industry, not just those of a handful of individual investors.
Not only is this not a normal -- or sensible -- risk for anything called an "insurance company," credit-default swaps are not regulated, and therefore do not require reserves -- creating the risk of a kind of double whammy of losses.
In short, the taxpayers are bailing out, assuming executives' and investors' losses, brought on from fraud, greed (or, at best, stupidity and ignorance). This includes the folks who sold the mortgages originally, who bundled them into securities, who bought and traded those securities, and who insured those investors -- all a pretty scummy lot who should have known better and were engaged in fraud-like behavior bordering on, and sometimes crossing over into, criminality.
They must be thought of, in moral terms, as the equivalent of the arsonists who cause major forest fires, with injury and death of the individuals caught in the fire and those brought out to fight it, property damage in the millions or billions of dollars, seriously disrupted lives, and a drain on taxpayers' resources.
Those fires are not "acts of God." Nor is this economic calamity. Both are the clearly predictable result of reckless and irresponsible behavior by humans. The only difference is that those who deliberately set the woods on fire don't personally profit financially from their acts. These men and women did. It's like crashing the power grid, causing Americans to freeze in the dark, or setting loose a computer virus that ultimately brings down the Internet and causes billions of dollars of losses
In short, the harm these corporate executives have done goes far beyond their own investors, employees and retirees. It goes beyond their customers. It has resulted in what may prove to have been the most serious body blow ever suffered by the American economy and the people whose welfare depends upon it. And we now know not only does the suffering go far beyond our shores and fall most heavily on those least able to withstand it, but it has become a threat to our national security far more serious than anything threatened by "terrorists" -- as the CIA must now brief the president each morning on the potential threats to our country, foreign and domestic, brought on by this sorry lot of bankers. See, Nicholas Johnson, "Terrorist Bankers," February 13, 2009.
So why has our government given them a single dime, let alone the trillions of dollars it has -- including what will soon reach $250 billion for one company alone, AIG?
It's the old "they're too big to fail" ruse. My response? Any company too big to fail is simply too big; the sooner it can be broken up into manageable-sized pieces the better.
These "toxic assets" have some value -- or would if the government would get out of the market, remove any possibility of a bailout, thereby forcing the holders, and potential buyers, to do the sorting through of what's in those securities, and put a price on them. Of course no one's going to buy them for their true value so long as the government can't make up its mind but may, in the end, buy them for much more than they're worth. These securities actual market value may be a lot less than what the holders paid for them. That's too bad. But that's the way their beloved "marketplace" is supposed to work.
No one ever promised them this system of privatized profits and socialized losses that these johnny-come-lately socialists now believe is their birthright.
One of the best television explanations of how we got into this mess, and how little the relevant government officials really knew about how to get us out, was prepared by PBS' "Frontline" in its show titled "Inside the Meltdown," February 17, 2009 (the link goes to a complete online video, transcript, timeline of the economic collapse, and other features).
If you think global economic collapse is of sufficient significance to warrant an hour of your time coming to understand the tension between the competing concerns over "moral hazard" and "systemic risk," and the meanings of "toxic assets," "bundled, securitized mortgages," and "credit-default swaps," I highly recommend the show. Not only is it a balanced effort to inform, it's also entertaining -- not in a "Daily Show" way, but because it is so well written, shot and edited into a classic "Frontline" presentation.
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Bankers as Arsonists," March 3, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
How did half of our nation’s population – the half that defines itself as conservative or moderate with conservative leanings – come to believe that it was ok to lie on a mortgage application? To put together thousands of loans into securities that were so complex that the printed documentation spanned thousands of pages? To sell a mortgage to a consumer knowing full well they could not pay? To sell a security out the front door to a customer, while shorting it in the next room?
How is it that our government has become so corrupt that Stanford Financial, now accused of a massive fraud spanning more than a decade, gave $250,000 to the Republican Senatorial Campaign – and nearly a million to the Democrats? Their lobbying successfully killed a bill that might have uncovered their alleged fraud years ago – in a Senate Committee. Partly as a consequence, over $8 billion in uninsured CDs held by Americans appears to have disappeared. Someone clearly got the best government money can buy, but it certainly wasn’t us.
How did Congress look the other way while our nation’s leaders – allegedly conservatives themselves – locked senators and representatives in a room one dark September night and predicted the end of the world unless Henry Paulson was given a blank check for $700 billion dollars that this nation did not have and would have to borrow?
We have descended the economic slope to where we are today because we, as Americans and conservatives, were willing to tolerate “just one little lie” in the pursuit of profit. As we have now seen, one little lie, repeated often enough, becomes one gigantic mess.
Karl Denninger, with his "The Market Ticker: Commentary on the Capital Markets" blog, is a knowledgeable market analyst and self-professed conservative. He won an award last evening from "Accuracy in Media," AIM, which I knew of years ago when involved with media reform because AIM was then taking aim at what its leader, Reed Irvine, characterized as "the liberal media." The excerpts quoted above are from Denninger's speech to AIM last evening.
Like Denninger, I too think of myself as far more pragmatist than ideologue. There are plenty of directions in which to point fingers, and I -- and apparently Denninger as well -- think it's long past time politicians get beyond the very generous campaign contributions from their "friends" in the financial community and start doing more of that finger pointing. The diversion of focusing on the millions CEOs are spending on parties and planes is only blinding us to the trillions the politicians are continuing to give them. See, Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009. _______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
With our President talking about spending billions on "infrastructure," I thought it might be useful to bring this concept "FromDC2Iowa." But how? What might be an Iowa City-sized example of an "infrastructure" in need of repair?
And what lessons might it hold for our current global economic collapse?
Walking to town the other day, coming round and down the circular walkway across Riverside Drive to the Burlington Street bridge, I noticed some chunks of concrete and rust in a pile on the walkway.
Curious as to where it might have come from, I looked up and saw:
Apparently the steel used to hold the concrete together was beginning to rust through. Other, seemingly tiny spots showed the beginning of deterioration, presumably from deep within.
Sometimes there were what appeared to be lengthy stretches of rusting metal. Could this have anything to do with why the concrete span across the highway sort of bounces up and down when you walk on it, I wondered.
There were more missing chunks of concrete.
I'm no engineer, but I recall being told years ago that this can be a result of the salt used to melt ice on bridges in the winter -- whether pedestrian or car and truck bridges.
There are nearly 600,000 auto/truck bridges in the U.S. (597,404), and nearly a quarter of them need work (24.3%; 144, 942). Better Roads Magazine 2008 Roads Inventory, November 2008.
Our footbridge is just one little home town example of the economic challenge -- and opportunity for job creation -- confronting our nation if we were to really undertake the task of rebuilding the infrastructure (not just roads, bridges and schools, but natural gas pipelines, sewers, power lines, railroads, Internet broadband, and water lines, among other things).
We're still living with "infrastructure" built by the "CCC boys" and others during the last Great Depression 70 years ago -- indeed, some of our infrastructure is twice that age.
Somewhere along the way we lost a major part of what made America great: sacrificing and building for future generations, creating rather than just consuming. A commitment to, an investment in, future generations is what inspired the Louisiana Purchase, opened the West, spanned the continent with railroads, and later the Interstate Highway system; set aside some of our country's greatest beauty spots as national parks; built libraries, K-12 schools, land grant colleges, universities, and funded a "GI Bill" to fill them with returning veterans -- the list is endless.
We are no longer willing to share the sacrifice of war with our military: instead of pay-as-you-go financing, with citizens scrimping to buy the equivalent of the WWII "war bonds," our government grants tax breaks to our wealthiest and passes the cost to future generations; instead of rationing our president told us after 9/11 to "go shopping;" instead of a Selective Service draft, with the pain of dead sons and daughters falling on all American towns and families, we divert state and national guard members, and enrich the likes of Blackwater and Haliburton with the billions spent on for-profit, privatized war.
Instead of building family businesses over decades, we've turned a blind eye to businesses merging to a size now "too big to fail;" run by hired hands earning millions, willing to move on when more millions are offered elsewhere; whose performance is measured by three-month (quarterly) stock prices and other statistics. Why would they fix the roof this quarter when it's not going to start leaking until next quarter? Why worry about mortgages that will never be paid when bonuses are based on sales this quarter rather than bankruptcies next quarter? After all, you'll be gone four months from now.
Instead of the levels of saving of the Chinese, or even what Americans were averaging three decades ago (9%), we've spent the last ten years spending more than we earn -- a "negative" savings rate made possible (even if only temporarily) with second mortgages and credit cards.
Instead of building on the hills, and clearing the rivers' flood plains for parks, forests, prairies, and recreation areas for our own and future generations, we rebuild -- hoping and assuming that the government, somebody, anybody, will quite literally "bail us out" when the inevitable next flood occurs.
We act as if Gordon Gekko ("Wall Street" (1987)) was right: "Greed is good." Ayn Rand is our shepherd, we shall not want. Government is the problem, not the solution.
Karl Marx told us there would be days like this.** [Lest there be any question, no, I'm not advocating that "communism" would be an improvement over what we have.]
But even he did not predict crumbling walkways in Iowa City.
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[** I don't want to take the time to try to find passages in Das Kapital that would be both relevant and comprehensible, so here is a very quick and secondary source summary: "Marx argued that capitalism was prone to periodic crises. He suggested that over time, capitalists would invest more and more in new technologies, and less and less in labor. Since Marx believed that surplus value appropriated from labor is the source of profits, he concluded that the rate of profit would fall even as the economy grew. When the rate of profit falls below a certain point, the result would be a recession or depression in which certain sectors of the economy would collapse. Marx thought that during such a crisis the price of labor would also fall, . . .. Marx believed that increasingly severe crises would punctuate this cycle of growth, collapse, and more growth. Moreover, he believed that in the long-term this process would necessarily enrich and empower the capitalist class and impoverish the proletariat." Karl Marx, Wikipedia.] _______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
President Obama says he wants to cut the deficit in half. Jackie Calmes, "Obama Planning to Slash Deficit, Despite Stimulus Spending,"New York Times, February 21, 2009 ("After a string of costly bailout and stimulus measures, President Obama will set a goal this week to cut the annual deficit at least in half by the end of his term, administration officials said. The reduction would come in large part through Iraq troop withdrawals and higher taxes on the wealthy").
He's called a meeting today to start the process. Michael Falcone, "The Early Word: Budget Week,"New York Times, February 23, 2009 ("At a mini-summit today, President Obama and an invited group of lawmakers and advisers will be discussing how to shrink the federal deficit and possibly how to reform some of the largest government programs, including Social Security and Medicare").
That's good. But cutting that baby in half is not enough. For starters, the public needs to understand the difference between "deficit," "debt," and "unfunded obligations."
President Bush started his eight years with a President Clinton-created surplus and ended with a half-trillion-dollar deficit he handed off to Obama. Roger Runningen, "U.S. Deficit to Reach Record $490 Billion in 2009," Bloomberg, July 28, 2008 ("The projected deficit for the fiscal year that begins Oct. 1 [$490 billion] is higher than the $407 billion forecast by President George W. Bush in February. . . . Bush inherited a budget surplus of $128 billion when he took office in 2001").
That will increase our current "debt," which is in excess of ten times that. (Once it went over $10 trillion, the National Debt Clock actually ran out of numbers. Frank Ahrens, "Debt Clock Out of Numbers,"Washington Post, October 8, 2008. zFacts.com reports that "We hit a 53-year high for debt as a percent of the economy (GDP).")
As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.
The total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the U.S. government in bankruptcy, even before new continuing social welfare obligations embedded in the massive spending plan are taken into account.
The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.
In other words, cutting the deficit in half means we're going to continue to add to the government's debt each year at least $500 billion -- if Obama is successful, and of course more if he's not.
A story later in the day hit on many of the above issues. David Stout, "Obama Vows to Slash Federal Deficit,"New York Times, February 23, 2009 ("The president promised, as expected, to halve the deficit that he inherited, estimated at $1.3 trillion or more for 2009, by the end of his first term . . .. The deficit is the year-by-year gap between what the federal government spends and the revenue it takes in. So even if the annual deficits are cut, the total national debt will continue to grow. It now stands at just over $10.8 trillion, according to the Department of the Treasury").
No less an Obama predecessor and American hero than George Washington once encouraged his countrymen to exercise "vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear." (The full passage is quoted and linked below.)
(Around the Internet this quote is often attributed to a 1789 letter from Washington to James Madison as "No generation has a right to contract debts greater than can be paid off during the course of its own existence." See, e.g., Joan C. Browning, "Spending Our Grandchildren's Money," February 2, 2008. But I have been unable to find any more precise reference to the source, let alone a link, to confirm it. It is not even included in Wikipedia's rather lengthy collection of Washington quotes. This may be in part a confusion with the first "Farewell Address" of 1792, following which Washington served another term, a draft with which James Madison is said to have assisted. Obviously, if you know of an authoritative online source for the "quote from the letter" please enter it as a comment to this blog entry.
Feb. 24, 5:10 p.m.: The mystery is solved. It was not a letter from Washington; the letter was written by Thomas Jefferson. And having done the research, to save others going through the same lengthy process, here are a couple of hard copy cites and a link as my modest daily contribution to academic scholarship and my "let's please provide sources for our Internet postings" campaign.
Thomas Jefferson, Correspondence: To James Madison, Paris, September 6, 1789, in Andrew A. Lipscomb and Albert Ellery Bergh, eds., The Writings of Thomas Jefferson, Definitive Edition (Washington: The Thomas Jefferson Memorial Association, 1905), vol. 7, pp. 454, 456.
Thomas Jefferson, The Earth Belongs in Usufruct to the Living, II. Thomas Jefferson to James Madison, Paris, 6 September 1789, in Julian P. Boyd and William H. Gaines, eds., The Papers of Thomas Jefferson, 27 March 1789 to 30 November 1789 (Princeton: Princeton University Press, 1958), vol. 15, pp. 392, 393.
The quotation ["no generation can contract debts greater than may be paid during the course of its own existence"] is contained within a lengthy and very thoughtful essay on the subject, well worth our reading and contemplating today. A link to a brief excerpt from the essay, including this quote, is available at "The Limits on Contracting Debt" in 38. The National Debt, Thomas Jefferson on Politics & Government, Jefferson Quotations, University of Virginia.)
As is so often the case, our editorial cartoonists are often much more able to make the argument with the point of a pen:
[Credit: Gary Bookins, Richmond Times-Dispatch, February 13, 2009; reprinted, The Gazette, February 23, 2009, p. A4.
Here is the passage that contains the opening Washington quote:
As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate. To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.
Needless to say, I'm going to be very interested to see what comes out of today's White House meeting. My three great grandchildren are asking me how much debt our generation is going to be leaving to them.
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Related Blog Entries on Global Economy and Bailouts
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
Who is back? The auto companies -- GM and Chrysler.
G.M., the nation’s largest automaker, . . . is assuming it will be able to pull off a remarkable turnaround if gets the additional loans.
In its restructuring plan filed Tuesday [Feb. 17] with the Treasury Department, G.M. projects it will end 2009 with a $14 billion cash shortfall, but then improve to a $6.6 billion surplus by 2012.
That would be a swing of more than $20 billion, and whether G.M., which last earned a profit in 2004, can realistically achieve it is among the biggest questions for the Obama administration as it reviews the company’s latest loan request.
G.M. has received $13.4 billion in loans since late December . . .. Most of the new loan money that G.M. requested would be used to cover its continuing losses. The company has been losing roughly $2 billion a month since last fall.
Frankly, I see nothing that has happened during the last three months, or that GM is now proposing, that leaves GM's request for more funds as anything other than even less compelling than it was last November and December.
I don't see the business plan that explains how $30 billion more from taxpayers -- essentially $300 from every family in America -- is going to recreate the profitable and vibrant GM of old.
And I sure don't see how a proposal that includes laying off 47,000 workers and closing 14 plants can be characterized as either "a jobs program" or a part of a stimulus to our economy. ("G.M. contends that . . . losses will shrink . . . because of savings from cutting 47,000 jobs worldwide and shutting 14 plants in North America." Ibid.)
After all, GM's problem is not that there aren't enough GM cars in dealers' showrooms -- or that there could not quickly be. The problem is that those vehicles are not selling -- and that there is nothing in its proposal designed to increase sales. ("United States vehicle sales this year are at their lowest point in more than 25 years, and many industry analysts do not share G.M.’s optimism for a recovery by 2012." Id.)
Nor is this just my opinion: "in a scathing review of the restructuring plans submitted by G.M. and Chrysler, Moody’s said there was a '70 percent' probability that one or both of the companies [i.e., Chrysler as well as GM] would have to file for bankruptcy protection." Id.
Giving more taxpayer money to "the automobile industry" -- meaning GM -- primarily benefits its shareholders and handsomely paid top executives. It doesn't put money in the pockets of potential car buyers. And it essentially turns its back on the UAW members who, as a potential part of the consumer spending that is 70% of our GDP, could actually do something to boost the economy.
Insofar as those auto industry suppliers and their workers are concerned, their welfare turns on vehicle manufacture and sales -- which the GM bailout does nothing to improve. There is still an automobile market in the U.S. -- albeit substantially less (10 million vs. 13 million cars a year) than it used to be. The cars that will continue to be manufactured to satisfy that market, whether Fords or Toyotas, will continue to need parts -- all the parts for which the U.S. auto industry has a need (with or without GM). Will those suppliers take a hit? Absolutely. But it shouldn't be much greater without a GM than with it.
Here are links to eight of the blog entries from last November and December that explore some of these issues in greater depth. Almost all of them seem equally applicable today, if not more so.
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Nicholas Johnson, "Why America Needs a Jobs Program: Because When Your Auitomobile (Industry) is in the River It Makes More Sense to Go For the Shore Than to Continue Bailing it Out," in "Jobs, Not Unemployment, Key to Recovery," November 8, 2008
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
Financial Crises for Dummies: An Open Letter to Secretary Geithner and Congress (brought to you by FromDC2Iowa.blogspot.com*)
[This parable showed up in my email this morning. The author is unknown. (Given the Berlin setting it may have originated in Germany.) In any event, it's as good an explanation of how we got into this mess as I've seen.
It's also a warning to Washington that "we know what you're up to."
My solution?
1. Kill the zombie banks before they strike again; shareholders take a bath, FDIC protects depositors.
2. Let investors, not taxpayers, evaluate the value of, and buy, "toxic assets" (what an oxymoron that is!) with no government guarantees.
3. Temporarily nationalize any banks that believe they need taxpayer funds, buying their stock at current market value.
4. Break up those "too big to fail" (any bank "too big to fail" is simply too big, and too inclined to take risks likely to fail).
5. Fire the top executives (after getting back from them as much of their ill-gotten gains as possible), and then prosecute and imprison those guilty of violating any laws.
6. Distribute the assets to community banks.
7. Re-enact Glass-Steagall. (This is the 1933 Act of Congress that, among other things, prohibited bank holding companies from owning other financial companies. Its repeal, by the Gramm-Leach-Bliley Act of 1999 was a major cause of the current economic collapse.)
Why do these things? This parable explains why:]
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Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.
However they cannot pay back the debts.
Heidi cannot fulfil her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.
The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
Source: David Horsey, Seattle Post-Intelligencer, March 27, 2008, DavidHorsey.com.
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009 _______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
