Trickle Up Bankruptcy Part III

I wrote a long time ago about “Trickle-up Bankruptcy.” I wrote to Michael Savage about it and he is now using “Trickle Up Poverty” as the title of his new book.  Coincidence? Probably, he’s a smart guy.  I didn’t fall off a turnip truck and neither did he.  The impending economic crisis was obvious to the thinking man.

I hear the news about California needing to cut another $25-28 billion from the state budget.  This is before the Federal government makes the cuts they need to make, which can only negatively impact our state’s budget.

So I am wondering what is the REAL SCOOP on the California budget? I mean what are the cuts that need to be made after the Federal Government “sacks up” and makes the cuts they need to make before the Global credit markets come calling and put a stop to the borrowing.

If California has to cut more than 28 billion, what is the result?  I saw tonight on the news that the unemployment rates here in the Central Valley of California are nearly 20%.  This means that it could get a lot worse if huge cuts are made and the budgets of State, County, and City governments are cut.  These cuts would mean that more people are on unemployment, more people are in danger of losing their homes, more people go belly up on their credit of all kinds, fewer people have money to spend on eating out, buying stuff, applying for credit, etc.

The outlook is bleak no matter how you cut it.  The following facts are inescapable from everything I hear from people who ought to know:

  1. The Federal Government has to cut spending voluntarily or the global money markets will tighten up and force them to do it.
  2. Reductions in Federal spending impact every state negatively.
  3. California already has a huge budget deficit to take care of and increasing taxes to fix the deficit it is not an option.
  4. Fewer jobs and the eventual timing out of unemployment benefits is going to put additional stress on the state government for welfare benefits.

I saw some guy on the TV tonight who is in construction.  He said that home construction led us out of the last six economic downturns.  Well, that’s nice but this time we have a credit problem that I am not sure we’ve ever seen before.  The housing bubble was created by rich people lending money to employ poor people to build houses for other poor people who were lent money by rich people to buy houses they could not afford – yet, they were given the credit anyway.  The guy on the TV did not explain how the credit crisis, the resulting lack of confidence in people today to pay back their debts no matter what (instead of simply walking away from them) would be solved. 

In order for construction to bring us out of the current recession, there would have to be reconstruction of confidence in the moral integrity of the American people.  I don’t see that happening on mortgages.  I see that happening slowly – if at all – incrementally on small credit – if the American people even realize what the crisis is or how it impacts them long-term.  Do the American people realize how their own irresponsibility has damaged the credit markets?  Do they realize that each person who walks away from their home mortgage or credit cards or auto loans hurts everyone else?  Do they realize how it is damaging the long term ability of the economic system – based on credit and the honor system – to recover?  This isn’t the time of Dickens, there are no debtor prisons.

Since there are no consequences for fiscal irresponsibility and all fiscal ills can be resolved via bankruptcy, banks are going to be extremely cautious.  They are going to tighten the screws on borrowers until they can be assured that everyone gets the message that if you borrow, you WILL repay, no matter what.  Bankers might be greedy jerks but they’re not imbeciles.  They lend and expect a return on the money.  When people borrow and then are allowed to walk away without consequence, there are larger consequences for us all.  It’s harder to borrow or even impossible.

The fact that it’s harder to borrow tells me that the current recession is going to last longer than the other ones because construction can’t take us out of the crisis until the bankers have confidence in lending.  This means that there has to be a level of risk that is acceptable.  This level of risk requires that housing costs drop to the level of affordability for the average guy.  Housing costs have dropped, but they have not hit bottom – that is, the level at which the average schmoe can buy a house and the bank is assured that he can afford the payment.  Afford meaning a ratio of payments to income that leaves enough extra that the banks don’t have to worry about being repaid.

Housing prices aren’t there yet.  Houses are still way too high in price to be affordable in relation to lending confidence.  If there was a measure, I’m sure it would show that lending confidence is at an all time low. Until that confidence rebuilds, we’re in for more cuts to reduce a credit-induced deficit.  Everyone is going to suffer because rather than tighten our belts and make our payments, too many of us are choosing to walk away from debt and leave the bills for someone else to pay so we can have a bunch of presents under the Christmas tree or another meal out on the town.

We’re stuck in a downward spiral that will only be resolved through fiscal responsibility and moral uprightness.  Borrowers must make the commitment to repay their debts or we will never regain our economic health in this country.  Perhaps the lack of moral fiber that has become evident in other areas has now infected our society to such an extent that we’ll never recover.  I hope not, but I am not confident.