all roads lead to home

when i delve into the forgotten depths of my memory and recall my grade school days, i'm assaulted by waves of youthful elation and bitter disappointment. and every so often i stumble across a golden nugget of wisdom gained in my youth.

i can still recall the first time that i learned something in class and had a "eureka" moment. i believe it was in third grade, when we were learning our first lessons in roman history. i remember struggling a bit as i read stories of epic battles and bloodsport, the great circuses and deadly chariot races.

we would later come to learn that while these distractions occupied the masses, the rich pursued an orgiastic existence of opulence and excess. and i can remember thinking, "hm. that sounds familiar."

those stories stuck with me throughout my youth, alongside that uncanny feeling.

i was brought immediately to that place in my mind when i read a commentary piece written by john tierney and featured in the june 11th ny times, entitled "the circus maximus syndrome." he described its pathology as follows:

"The victims of this urban-planning syndrome believe, like some Roman emperors, that a leader's prime civic responsibility is to build entertainment palaces for the masses....

They imagine drawing hordes of out-of-towners to the new convention center, and when the visitors don't materialize, the mayors' solution is to build an even bigger convention center with a subsidized hotel next door."

witness, oriole park at camden yards, the m&t bank stadium, and the baltimore convention center. we'll see how our neighbors in washington do with their $400mil home for the washington nationals.

mayors promise billions upon billions of dollars in revenue, based on feats of accounting that would earn a seat on the board at enron. a classic economic example highlights their fallacious thinking. a vandal smashes a shop window; the shop gets insurance money; the insurance money pays a contractor to fix the window. thus, his employment adds to productivity. but this reasoning ignores the opportunity cost of the labor. the contractor could have been fixing something else, or learning, or teaching -- anything more productive than needlessly fixing a broken window.

the government doesn't answer any questions by adding up how much money will be spent on a project. what truly counts is what could have been done with all those resources.

also, it might help your political comprehension if you conceptualize the relationship between politicians and consultants: picture marlon brando hiring michael moore as his fitness consultant. see, if the consultant doesn't write a jackpot report, the project stalls. if the project stalls, the mayor doesn't get cash from the usual suspects --"real estate developers, construction workers, bond traders, [and] owners of hotels and sports teams." and if the mayor doesn't get the campaign contributions, the consultant doesn't get paid.

what's more,

"aside from the thanks of these groups, politicians also get a pleasant distraction from their mundane duties. It's more fun to pose next to a model of a model of a new stadium than a new water main."

again, we can take baltimore as an example. i have a lot of time to think as i'm trotting along in my car over the undulating asphalt and endless minefields of potholes. these "roads" take me through what i'm told was once a vibrant city, before the new-new-deal of the 1960's.

now, i'm surrounded by heroin addicts and new, low-rise public housing just waiting to be abused and abandoned. these faux-suburban townhomes stand in stark contrast to their high-rise surroundings, but their design should come as no surprise. d.c.-metro area "planners" and developers funded and staffed the previous state administration.

and they had the nerve to complain about urban sprawl. amazing.*

having momentarily swept things under the a rug of new, aluminum siding, baltimore has been able to capitalize by handing out special-interest tax-breaks and condemning properties for transfer to the baltimore development corporation.**

it's sad to think that perhaps the only upshot of all this is our abundant supply of failed athletes and racecar drivers, who make great soldiers and mechanics.

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*if you're wondering what members of the former administration are doing now, they're helping developers get the zoning they want by making the right donations and "consulting," i.e. telling them how to navigate the "smart growth" laws they pushed through the legislature.

** the b.d.c. is itself an interesting case, and it may have backed itself into a corner recently. it loves its status as a private corporation because it's sheltered from the public information act. but its status may raise some interesting complications if the supreme court disallows eminent domain transfers to private corporations.

bubble.gov

this post relates to an op-ed i wrote, which appeared in the baltimore sun on may 9th. fortunately, i think it snuck in right before the recent bubble in bubble articles. (the word "bubble" just lost all meaning to me.) the piece is sort of anecdotal, and while i'd prefer to have written something objective, i think it works, nonetheless.

my only regret is having missed the opportunity to illuminate the dangerous (and, i suspect, ultimately disastrous) role of the federal government in creating and sustaining this bubble.

the main driving force of this bubble is too much credit. not too much in terms of raw borrower numbers and amounts, but too much by way of interest-rate only and adjustable mortgages that have precariously shifted interest-rate risk to unsophisticated homeowners and/or speculators.

in a natural setting, no sane lender would make these kinds of loans. the risk would either scare off the lender or drive up rates to accurately reflect default risk. but in the real world, the federal government underwrites every mortgage, unwittingly insured by the taxpaying population. so, when the baltimore sun asked one banker why anyone would make such loans, he gave them the typical response:

"'The customers are demanding it,' he says. 'We do them because the market is driving them. That's what the competition is doing.'"

that covers the demand, but what's left out of his response is the supply, and that no one would be competing in the first place if not for the fact that fannie mae and the federal government will purchase any mortgage up to around $300,000 (and, therefore, accept its default risk) with naught but a bare-bones credit check.

no one is actually sitting down to figure out whether or how borrowers will be able to pay.

quasi-governmental bankers will tell you that the loan is securitized, and that in the event of default, they can seize the house and sell it. sensibly, then, the amount of the loan is limited by the house's value, and all is well and good as long as the creditor can sell it off and minimize losses. but if everyone gets hit at the same time and the market dries up, the mortgage-backed securities will turn to junk bonds - utterly worthless.

meanwhile, fannie and freddie have worked out deals and created new and complicated derivative instruments that have them leveraged into the trillion-dollar range. given their due-diligence track record, i have some serious doubts about their ability to manage risk. my guess is that their worst-case financial scenarios, which they would use to paint a picture for government "insurers," assume rather generous salvage prices for properties in default.

the most pressing question is, how can those of us who survived the burst make money on the other side?

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here's an update: as part of the "reform" legislation that was originally conceived to reign in fannie mae, it now has permission to purchase mortgages up to $500,000. if that won't help the poor afford housing, i don't know what will.