Bubble blindness

"It's one of those perfect storm situations," said UC Merced economics professor Shawn Kantor. "So it will take a very long time for this area to recover." ..."This particular area has chronically had high unemployment relative to the state and the country, which all ties to low educational attainment and poverty," Kantor said. "The circularity of the socioeconomic conditions make it difficult for this area to succeed economically. And then it got hit with the housing and government bubbles bursting." ... "Even though agriculture is healthy and we can expect further growth, it doesn't have the job-generation capacity to mop up all this displaced construction labor," said Jeff Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton.--Merced SunStar, January 6, 2011

How did we convince ourselves that real estate values would eternally ascend? As Dean Baker has written so often before and will so again, we're sure: the rot begins in the eyes of the culture, in the universities, long before it hits the streets. So in California particularly, which is experiencing the largest destruction of real estate value in the nation, with its bloated public university system, we paid to be lied to by our economists.
Where was the "leadership" -- political, business, cultural, religious -- crying out in the wilderness of the Boom-that-could-not-end, that it is was unwise for the largest state in the nation to equate, absolutely, economic growth with the growth of finance, insurance and real estate? Where is it now?
That "leadership" remains in place here in the Valley, now rebranding itself as the "Costozo," representatives Dennis Cardoza and Jim Costa, both from the San Joaquin, neither of any party but the Hyraulic Brotherhood, which provides irrigation to some of the most wretchedly poverty stricken parts of America, where growers use subsidized water to grow subsidized cotton. The Costozo, amusing itself yesterday on the House floor, nominated itself for speaker. It must be the water.
Costa said it was Cardoza who came up with the idea of casting protest votes for each other, making them the first Portuguese-Americans to receive votes for House speaker.
"I'm frankly frustrated with the situation that transpired over the last several years," Cardoza said. "I did not get the support I felt I deserved on the Valley's housing crisis and the water crisis."
The "water crisis" Cardoza refers to in the phony drought that was part of a huge propaganda campaign in 2008-2009 bought by the finance, insurance and real estate interests (including agribusiness) to prepare the state to pass an $11.4-billion water bond. But the winter of 2009-2010 had above-normal rainfall and the congressional districts represented by Cardoza and Costa have both been declared flood emergency zones with many road closures, much local flooding from overflowing rivers and creeks.We don't know about Costa, but Cardoza, the Pimlico Kid, probably didn't know about the flooding in his district because he lives in Maryland and is consumed with the care and training of his race horses.This speakership-vote stunt they just pulled is just one more version of the "Valley Whine," the only mode of political speech our "leaders" have. It is an embarrassment. Evidently, their constituents don't take themselves seriously enough to say anything about it.

Badlands Journal editorial board

1-6-11
Counterpunch.com
Sticking the Taxpayer (Not the Banks) With the Tab
How Many Economists Does It Take to See an $8 Trillion Housing Bubble?
By DEAN BAKER
http://www.counterpunch.org/baker01062011.html [1]
The answer to that question has to be many more economists than we have in the Unites States. Very few economists saw or understood the growth of the $8 trillion housing bubble whose collapse wrecked the economy. This involved a degree of inexcusable incompetence from the economists at the Treasury, the Fed and other regulatory institutions who had the responsibility for managing the economy and the financial system.
There really was nothing mysterious about the bubble. Nationwide house prices in the United States had just kept even with the overall rate of inflation for 100 years from the mid 1890s to the mid 1990s. Suddenly house prices began to hugely outpace the overall rate of inflation. By their peak in 2006 house prices had risen by more than 70 percent after adjusting for inflation. Remarkably, virtually no U.S. economists paid any attention to this extraordinary movement in the largest market in the world.
Had they bothered, they would have quickly seen that there was no plausible explanation for this jump in prices in either the supply or demand side of the market. There were no major new restrictions on supply, with the builders putting up homes at near-record rates. Nothing on the demand side suggested that prices should rise. The healthy income growth of the late 90s was followed by stagnation in the last decade and population growth was relatively subdued. Finally, there was no unusual rise in rents, which just slightly outpaced inflation over this period.
Therefore it should have been easy for any competent economist to recognize the housing bubble. Moreover, the dangers for the economy should also have been apparent. The boom in construction (both residential and non-residential) had raised its share of GDP by morevthan 3 percentage points above its long-term average. In addition, the creation of $8 trillion in housing bubble wealth predictably led to a consumption boom, as households spend based on the new equity created by the bubble.
All of this presaged disaster for the time after the bubble burst. Construction spending was sure to plummet to below normal levels as the market recovered from the long period of overbuilding. Consumption would also fall back as households adjusted to the disappearance of the housing wealth that they expected to be available to them in future years.
Yet, almost no economists saw what was clearly in front of their eyes. They thought everything was just fine until the house of cards eventually collapsed in 2007-2008.
Unfortunately, the reign of error is not over. House prices in the United States are again declining and most of the economics profession remains clueless. The Case-Shiller 20-city house price index for October (the data is released with a two-month lag) showed a decline of 1.3 percent from September. This implied an acceleration from the prior month's decline, which is now reported as 1.0 percent. In other words, house prices are again declining at double-digit rates.
A more careful examination of the data reveals the underlying logic. Prices are declining most rapidly in the bottom third of the market. Prices for this bottom tier of the market were in a literal free fall in recent months in several cities.
The reason is that a first-time buyers tax credit ended in June. This credit caused many buyers to move their purchase forward. People who might have otherwise bought in the second half of 2010 or in 2011 instead bought in the first half of 2010.
This tax credit had the effect of ending the plunge in house prices in 2009 and even leading to small rise in the second half of the year. But with the credit now expired, the price decline is resuming. It will likely spread from the bottom tier of the market to the middle and higher end, since the sellers of bottom-tier homes are the buyers of higher-end homes. If they must sell for much lower prices than they had anticipated, then they will have less money to buy these higher-end homes.
The further decline in house prices will have predictable consequences for the economy.

If house prices drop by another 15 percent, completing the deflation of the housing bubble, this would imply a loss of $2.5 trillion in housing wealth. If consumers spend 6 cents for every dollar of housing wealth (near the middle of the range of estimates), this would mean a fall in consumption of roughly $150 billion or 1 percent of GDP. This will be a substantial drag on growth over the next two years that will no doubt surprise most economists.
The other important part of this story is that many more homes will fall underwater and there will be new losses for banks. However one result of the delay in this second round of price adjustments is that trillions of dollars of mortgages were taken out of private hands and shifted over to Fannie Mae and Freddie Mac, the mortgage giants that are currently owned by the government. This means that the losses on these mortgages will be the problem of the taxpayers, not the banks. Why is no one surprised?

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

1-6-11
Merced Sun-Star
Valley cities among worst for jobs
Federal report includes six San Joaquin Valley metro areas
By MARIJKE ROWLAND and ROBERT RODRIGUEZ
http://www.mercedsunstar.com/2011/01/06/1718320/valley-cities-among-worst-for.html [2]
The San Joaquin Valley continues to be at the heart of the nation's unemployment problem.

A report released this week by the U.S. Labor Department shows that the Valley accounts for six of the 10 metropolitan areas with the worst unemployment rates in the country.
The Valley cities stretch from Stockton to Visalia- Porterville and include Modesto, Merced, Fresno and Hanford-Corcoran.
Two other California metro areas also made the bottom 10: No. 1, El Centro in Imperial County and No. 2, Yuba City in Sutter County.
"It's one of those perfect storm situations," said UC Merced economics professor Shawn Kantor. "So it will take a very long time for this area to recover."
The metro area jobless rates across the Valley range from 18.6 percent in Merced to 16.4 percent in the Hanford-Corcoran area, well above both the California and U.S. unemployment rates of 12.4 and 9.8 percent, respectively.
The Labor Department report looks at 372 of the nation's largest metro areas in November.
Economists said it is important to note that the San Joaquin Valley started the recession with a historically higher unemployment rate than other parts of the country. The region has been consistently above the state and national averages, even during sunnier economic times.
During the Valley's boom growth years of the early to mid-2000s, the annual unemployment rate in Stanislaus County hovered between 8 and 9 percent.
"This particular area has chronically had high unemployment relative to the state and the country, which all ties to low educational attainment and poverty," Kantor said. "The circularity of the socioeconomic conditions make it difficult for this area to succeed economically. And then it got hit with the housing and government bubbles bursting."
No fallback industry
The Valley was among the regions affected worst when the housing and construction bubble burst nationally. But unlike other hard-hit areas like south Florida and Las Vegas, the Valley had fewer other industries to fall back on.
Stanislaus County's construction, mining and logging work force was 14,300 in November 2005, when the area's housing prices were near their peak. In November 2010, the construction work force had shrunk to 6,700, according to data from the California Employment Development Department.
Fresno resident Edward Gutierrez knows exactly how badly the construction industry was affected.
The former electrician has been out of work for more than two years.
"Things were really good, and there was a lot of work, but starting around 2008 everything came to a halt," said the 33-year-old. "I've done a few side jobs, but nothing steady."
Gutierrez stops by the Fresno Workforce Connection office at least once a week for any job leads. He has applied for everything from dishwashing jobs to electrician's assistant.
When the bottom dropped out of the housing and construction industries, the region fell even farther.
"For several years in the early 2000s and up to 2006, our economy was expanding unnaturally as a result of the building boom," said Bill Bassitt, chief executive officer of the Stanislaus Economic Development and Workforce Alliance. "When that crashed, that put us in a really bad situation."
The Valley's agriculture-based economy has been a positive and negative. It has remained relatively strong throughout the recession, but it hasn't provided the growth needed to make up for shortfalls in other industries.
Those factors are compounded by low educational attainment and younger work force in the region.
"Even though agriculture is healthy and we can expect further growth, it doesn't have the job-generation capacity to mop up all this displaced construction labor," said Jeff Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton.

Business owners cautious

Steve Geil, president of the Fresno County Economic Development Corp., said he isn't surprised that the Valley's jobless rate continues to climb. He said the state's uncertain budget picture exacerbates the problem.
Geil said some business owners remain cautious about the future and are putting their expansion plans or hiring on hold.
"The businesses I visit from day to day are doing well, but they just don't have the faith that what may be coming down from government is going to be good for them," Geil said. "They don't want to hire someone only to have to turn around and let them go."
Fields like transportation, logistics and health care could be growth industries for the Valley, but economists said there are no quick fixes for the region's chronic unemployment.
Michael said the Business Forecasting Center projects the jobless rates will rise to about 19 percent in Valley counties through the winter.
UC Merced's Kantor said larger demographic and developmental issues need to be tackled to permanently lift the area's unemployment rates out of the national basement.
"There is just not much immediately on the horizon that will provide a huge stimulus to the Central Valley," he said. "Given the nature of our economy, until we solve those chronic problems that affect our educational attainment, income and job opportunity -- which could be decades -- this particular area will have a hard time matching up to the rest of the state and other regions of the country when it comes to employment."

1-5-11
Merced Sun-Star
Cardoza, Costa vote for each other for House speaker
By MICHAEL DOYLE
http://www.mercedsunstar.com/2011/01/05/1717367/cardoza-costa-vote-for-selves.html [3]
WASHINGTON -- Democratic Reps. Dennis Cardoza of Merced and Jim Costa of Fresno on Wednesday cast protest votes for each other as House speaker, distancing themselves from party leader Nancy Pelosi.
As 173 of their fellow House Democrats supported Pelosi as speaker, a position ultimately taken by Republican John Boehner, Cardoza and Costa sent signals that likely foreshadow their actions in the House, now under GOP control.
"It's a reflection of several years of frustration in trying to make sure our Valley voters were being heard," Costa said Wednesday afternoon.   
Costa cited frustrations over what he called Pelosi's inattention to Central Valley water and a new UC Merced medical school.
Cardoza and Costa sat together in the House chamber during the roll call, a rare occasion in which voices, not voting cards, are used.
Costa said it was Cardoza who came up with the idea of casting protest votes for each other, making them the first Portuguese-Americans to receive votes for House speaker.
"I'm frankly frustrated with the situation that transpired over the last several years," Cardoza said. "I did not get the support I felt I deserved on the Valley's housing crisis and the water crisis."
By distancing themselves from Pelosi, Cardoza and Costa are engaged in a cost-benefit calculation whose end results cannot be predicted.
Having taken this public step, they gain more legislative flexibility to ally themselves with Republicans and centrist Democrats.
But if Pelosi and her allies feel in a retributive mood, the votes Wednesday could come back to sting the dissidents.
"I'm not concerned about retribution," Cardoza said. "I'm concerned about representing my constituents. My constituents have been through hell."
Cardoza and Costa were among 19 House Democrats to vote for someone other than Pelosi as speaker. A 20th Democrat didn't vote.
Their actions were essentially symbolic, as the Republican majority in the House ensured Boehner's election from the start.
Other Democrats set themselves apart from Pelosi by supporting Rep. Heath Shuler of North Carolina or an assortment of other lawmakers.
For Cardoza and Costa, the protest votes Wednesday mark by far their most emphatic break with the woman who has led House Democrats in the minority and majority since 2002.
Until this year, for instance, Cardoza was a Pelosi-appointed member of the House Rules Committee, where he consistently supported the Democratic leadership's position on key procedural votes.
Cardoza and Costa voted with the Democratic majority on last year's health care bill, among other measures. Both faced Republican challengers last year who tried to detrimentally tie them to Pelosi.
Politically inexperienced Republican candidate Andy Vidak, in particular, pulled a respectable 48 percent of the vote with a campaign in which he pressed such claims as: "Costa continues to do as he is told by Pelosi ... instead of listening to the voters."
Costa discounted any future campaign motivations for his speaker vote.
"It reflects the concerns I have on a policy basis," Costa said.

Making way for more water
String of storms creates soggy conditions throughout Merced County
By CAROL REITER
http://www.mercedsunstar.com/2011/01/05/1716853/making-way-for-more-water.html [4]
Although blue sky has graced the Merced area for the past couple of days, floodwaters are still plaguing parts of the county.

On South Highway 59, Mariposa Creek is still over its banks, and drivers are not being allowed on the highway near McNamara Road. It's the second time the highway has been shut in the past two weeks.
The California Department of Transportation will close Highway 165 at the Merced River today from 9 a.m. to 3 p.m. to allow crews to clear debris that washed over the riverbank from the recent storms. Motorists should expect delays, and detour routes have been set up.
Farther out in the county, the San Joaquin River near Gustine is near its banks, and some of the sloughs in the area have gone over their banks, flooding farm and pasture lands.
At the North Freitas hunting access and public access area on the river, California Department of Fish and Game employees were moving boulders Tuesday morning to make room for parking in case the river rose any higher.
One of the workers said the river doesn't usually get as high as it is. It usually happens once every 10 years or so.
While moving one of the big boulders, the workers found a sleeping California king snake. They moved him to a safer area, because as groggy as he was from hibernating, he was in danger of being drowned.
Across the street from the Freitas area, the China Island flood plain was closed to foot access. It's usually open to duck hunters this time of year.
The boat launch area at the North Freitas area was under about three feet of water, which was why the boulders were being moved.
The San Joaquin River is high because water is being let out of Friant Dam at the Millerton Reservoir in Fresno County. Pete Lucero, spokesman for the Bureau of Reclamation, said 4,000 cubic feet per second is being released from the dam. "We are a bit encroached into the flood space at Millerton," Lucero said. "We have to reserve flood space at the lake."
Lucero said the river channel at that part of the river takes 8,000 cubic feet per second of water, so the channel should be able to take water releases up to that capacity.
Lucero said the water will continue to be released from the reservoir until the chance of storms stops for a while.
The Merced Irrigation District is letting water out of the New Exchequer Dam at Lake McClure because the reservoir level has increased, according to district deputy general manager Hicham Eltal.
"We have to leave room and let water out in a manageable manner so we don't hit people downstream," Eltal said.
The storms stopped Sunday just in time, Eltal said. "We were fortunate in the last storm that the precipitation quit on Sunday during the day because the reservoir was coming up fast," he said.
Black Rascal Creek saw a spike in water, along with the reservoir behind Castle Dam on Canal Creek, Eltal said. Lake Yosemite also saw a rise of three feet over the weekend.