Trouble in Paradise: Marin County - foreclosures double - commercial real estate vacancies top 41%

Marin County commercial real estate vacancies top 41%

While not faring as badly as some California Counties, Marin County, according to the 2000 census, has the highest per capita income in the country, is awash in supply in commercial and residential real estate. Vacancy rates in class A commercial real estate is cited as being over a stunning 41% in San Rafael by the Marin Independent Journal. The Examiner recently reviewed one of the most extensive reviews of current foreclosures throughout Marin County provided by Foreclosure Radar. Foreclosures almost doubled to over 800 residential properties from the 440 cited by the Marin Independent Journal for 2008 (http://www.marinij.com/data/ci_11564640) just five months ago. The 800 plus Marin households cited are currently in pre foreclosure, foreclosure or being auctioned off by banks. The entire housing supply in Marin County according to wikipedia totals 61,000 (http://en.wikipedia.org/wiki/Marin_County,_California) .

Mortgage experts have often cited some localities in California as being relatively immune from harsh downturns in real estate due to a limited supply of new homes or office buildings due to stringent building codes, zoning and a anti growth stance among the local community. Estimated values for the distressed homes in Marin County ranged from $100k in Novato to a $3.6 mm home in Tiburon an $4mm home in Kentfield. Mark Hanson, Managing Director of the Fieldcheck Group thinks its going to get much worse before it gets better for the mid to high end of the residential market. " I don't think we have begun to see the beginning of this negative equity crisis yet. Its all about who can buy these homes at the higher end and with the home financing market tightening the way it is, the number of buyers that can put down $300k - $400 k cash in order to buy a $1mm plus home is getting smaller and smaller. Historically, 'move up buyers" would take up supply in the high end, but these potential buyers can't sell their homes at their desired prices and therefore can't move. I think we are heading for a castastrophic fall in home values in the upper end of the housing market. " According to the website: www.marinrealestatewiz.com/ , as of May 2009, 19 homes were listed for sale in Ross, with 0 being under contract.

The economic impact of the distressed markets and high upturn in vacancy rates is not good for the County and City government budgets within Marin County as the tax rolls suffer from lower taxes bases when homes are finally sold to receiving little to no income from vacant commercial properties. The inventory of unsold homes continues to grow, actual sales (which triggers precious sales tax revenues for the cities and County) have stalled. Meanwhile the continuing increase in the velocity of foreclosure listings further deteriorates local markets as banks auction off homes for rock bottom prices creating a downward spiral on property values.

Like many Counties around the state, the County of Marin has a large and growing unfunded pension liability with 14 recent retirees receiving over $100k for life from taxpayers. Estimates for unfunded public employee pensions and medical benefits range from $700mm to over $1 billion which means cuts in services and a "crowding out" effect for government services to taxpayers as all monies are used first to payoff cadillac pension and healthcare benefits. Recent statewide initiatives, backed by Governor Schwarznegger, leading Democrats and public employee unions, asked California voters to approve more taxes. Four out of five of these intiatives were soundedly rejected by voters, thus leaving policy makers and government leaders little room to manuever. The mandate and choices are few but one is clear: "cut spending....now." And local government leaders can no longer look to any budget relief from real estate sales as the economy continues its stall and with unemployment statewide at almost 10% and current and unfunded budget deficits soar.

According to the San Francisco Chronicle, home prices are seeing significant declines or "reductions" original asking prices from Marin County home sellers . In Tiburon, 28% of homes had to lower their prices close to 20%, In Mill Valley, 34% of homes put up for sale reduced their asking prices, on average by 8%. With multi million dollar homes, these write downs can be costly, particularly given most homeowners put up 20% equity or less to buy their homes. Should prices deteriorate more than 20% or more , many Marin homeowners find themselves in a "negative" equity situation...further fueling homeowners' concerns and heightening the risk of even more and more foreclosures perpetuating deeper declines in property values across the commercial and residential markets. This toxic swirl has already hit the lower end of the Marin residential markets hard in places like Novato, where homes have settled back 40% from their highs two or three years ago.

California is bankrupt

If you make a decent wage (I don't, but many do) then the state income tax is about 10% as well. That rate is also among the highest in the nation.

What we have here is not just cognitive dissonance but pathological disassociation from reality: California is a very high-tax state, with among the highest rates in the nation in virtually every category of taxation. Voters rejected the bogus tax-and-borrow-more propositions for two reasons:

1. The propositions were deceptively written and presented in a ham-handed attempt to mask the fact they weren't tax increases. Voters rejected this incredibly crass attempt to deceive them. Lesson for state politicos: if you want a tax increase, ask for it in plain English.

2. Residents already pay high taxes, and the state has already garnered $40 billion per year in additional funding over this decade. We seem to have received little in the way of improvements for the extra $40 billion a year in state spending. Even in a state with 36 million residents, that is a stupendous sum. Therefore voters desire to send more of their money to a government which has shown little fiscal restraint and precious little oversight of current spending was low.

To understand California's impending bankruptcy, we have to consider these fundamental issues:

1. State, county and city employees are paid (wages and benefits) between 50% and 200% more than equivalent private-sector employees.

2. The California economy's real-world foundations--agriculture, entertainment, technology and tourism--are all in decline or pressured by state policies.

3. Overlapping state regulatory agencies are effectively strangling real-world businesses in favor of high-on-the-food-chain enterprises like attorneys and Web 2.0 firms--businesses which create few jobs and which ultimately depend on highly profitable real-world businesses for their own incomes.

4. The Prop 13 limits on raising property taxes has saved millions from losing their homes due to escalating property taxes even as it has unintentionally created vast injustices.

Let's tackle the last item first. Pundits both in-state and out-of-state are quick to identify not bloated public-employee pay and benefits but low property taxes as the culprit. My wife and I bought our residential property 17 years ago at a cost far below current values and we still pay $10,000 a year. Is that "too low"? If that's too low, then what do these pundits think average wage earners can afford? $20,000 a year? Do they really think $1,660 per month is "reasonable" for property taxes? How much do they pay?

The injustice in the system is obvious but difficult to rectify. To understand why, let's consider the other taxes: income and sales. A rough form of justice is implicit in both: everyone who buys something regardless of their income pays sales tax. Those who buy more are presumably wealthier, hence they pay more sales taxes than those of limited incomes. (Food is exempt from sales tax in California.)

Income tax is highly progressive in California, with moderate-income folks like myself paying modest sums (I paid $513 on adjusted gross income of $30,000) while high-income residents pay a stiff 9-10%. This too carries a readily comprehensible justice: higher income residents can more easily afford higher tax rates as they have more income above subsistance.

But a tax which is $1,200 for for one house and $12,000 for the identical house next door is explicitly unjust. The problem is that the elderly resident of the house paying $1,200 a year might be scraping by on a Social Security check, while the house across the street paying $1,300 a year in property taxes might be long-owned by wealthy pensioners pulling in $10,000 a month.

Meanwhile, the young family who foolishly bought in at the top of the housing bubble next door might be paying $15,000 a year in property taxes even as 65% of their income goes to pay their mortgage and property taxes. (I have friends who pay even more than this stupendous sum for their "fixer-upper" purchased in 2006.)

The only fair way to rectify this structural injustice is to consider the total income (not just taxable income, but all income) and total assets of the residents. Simply raising taxes on low-tax properties will only create new injustices as low-income retirees are forced from their homes by suddenly steep tax increases.

On the other hand, why should residents pulling down $10,000 a month pay 10% of the tax their neighbors pay? That too is unjust.

It seems obvious that some straight-forward adjusting based on income and assets could rectify the worst of the injustices of the current system. Yes, this would require a lot of paper-processing, but isn't justice worth some paper-pushing?

How about something along these lines: if you pay property tax of less than $3,600 a year and your gross income from all sources (including tax-free bonds) exceeds $100,000 a year then your tax jumps to $3,600 a year or 90% of the county's average property tax, whichever is lower.

Look, if you're enjoying an income of $100K or more, I think you can manage $300/month instead of $150/month in property taxes.

If you pay more than $10,000 per year in property tax, the property is worth less than $1 million and your household income from all sources is less than $100,000, then your tax drops to $10,000 per year.

Whatever parameters are set, a fairly limited set of adjustments like the above would rectify the worst injustices of the current system in short order. Yes, some would still pay much less than neighbors while others would pay far more, but some modest attempt at justice would still be worth the effort.

I know all you who work for government and quasi-government agencies like water boards, transit systems and school boards will find this disagreeable, but the vast majority of public employees are paid twice as much (or more) as their private-sector counterparts when benefits are factored in. I know for a fact that clerks in school district offices are paid well over $40,000 a year, with benefits exceeding $20,000 per year, while private-sector clerks with the same skillsets are worth perhaps $22-24,000 in the real world, with minimal pension benefits.

Including rich benefits and pensions, many public-sector employees in California are paid twice or more the market-rate value of their labor.

Since labor costs make up 3/4 of all government budgets, it is obvious the only long-term solution to deficits in states already groaning beneath high taxes is to bring public employee wages and benefits in line with real-world market valuations for that labor.

To date, California's public employee unions are fiercely resisting all but the most feeble reductions in their members' pay and benefits. Given the outsized share of labor costs in all government, this recalcitrance guarantees the state will become insolvent/go bankrupt and literally be unable to meet its payroll.

It is instructive to recall that in 1932, the city of San Francisco reduced its municipal salaries by 25% and limited city jobs to one per household. Note to public-employee unions: that is a real-world start you might do well to accept before even harsher terms are offered.

Overlapping dysfunctional regulations are driving real-world businesses under. Like a prissy spoiled princess, California has turned up its nose at enterprises like making steel (smelly), surfboards (let China worry about fumes), agriculture (uses too much water which I need to keep my lawn green and pool filled), aerospace (there's never enough taxes on the military-industrial complex) and physical technology (that wafer plant is too toxic for our taste, no matter what controls you install).

Oh, and every permit application will cost you big-time. The actual permit--well, what makes you think we'll actually lower ourselves to grant you one? If we do, the fee will hit you like a sucker punch to the gut. Then we'll add inspection fees, business licenses and a swarm of other junk fees. But really, we're "pro-business" here--we love businesses dumb enough to stay here. Sadly, the ranks of sucker corporations seem to be thinning.

As a result, California now depends on top-of-the-food-chain enterprises like attorneys (sue it if has insurance, don't bother if it doesn't), tourism and the horrifically overhyped fraud known as Web 2.0 (a handful of young coders constructing a web business suposedly worth billions but the only source of revenues from now until the sun explodes is advertising). In case nobody noticed, adverts only work on people with jobs and income.

Tinseltown is tanking. The Web is dismantling the film and music industries faster than you can say "Ten bucks to see a freakin' movie?" Unemployment in the film and music industries is rampant and growing. The costs of doing business in california are simply too high to make money.

The illusion of corporate headquartering in California is like a Hollywood set facade. Behind the corporate facade, global giants like Intel are basing most of their employees overseas or in lower-tax states like New Mexico and Oregon. Yes, Silicon Valley is still the place to come for venture capital; and yes, entrepreneurs are still starting companies. But once they need to grow, they have to exit the state to prosper.

The state organs of propaganda will deny all this, but then why are tax receipts down over 40% year over year? Is that because so many new businesses are prospering and hiring people?

The pathetic truth is California got by on a mere $100 billion a year in spending not many years ago and now there is great gnashing of teeth and weeping that the state is ruined if spending doesn't stay at $143 billion a year. If this were true, then how did we get by on $95 billion a mere decade ago? The answer to cutting $42 billion is simple: all agencies must revert to their 2001 budgets.

The housing bubble provided California with one last glorious shot of fantasy. No need to tax and spend prudently--housing will keep going up and the property tax increases are stupendous. No need to make anything tangible any longer--just fill office towers with brokers, attorneys and mortgage sales staff. Property taxes and capital gains from housing will keep rising forever.

Yeah, right. Welcome to reality, California. Either fix your structural problems or prepare your bankruptcy filing.

Signs Of Real Estate Rebound In San Francisco ~ video ~

The real estate tracing firm Terradatum ran some numbers for CBS 5, which show that more San Francisco properties have gone into escrow in the last two weeks than at anytime in the last six months.

One reason is prices are down 10 percent city-wide, which has unleashed pent up demand. Adding to this are low interest rates, with 30-year-fixed rates now hovering around 5 percent.

See video: http://cbs5.com/business/real.estate.sales.2.956968.html

DK

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The Road to National Insolvency

March 9, 2009

Insolvency does not just mean liabilities exceed assets--it also refers to being unable to pay the interest and principal on one's debts and cover one's other expenses. The U.S.A. is headed for this insolvency.

How could the U.S. government become insolvent? Easy: when the costs of servicing its rapidly increasing debt rise to the point that it is no longer able to pay its mandatory bills.

The Mainstream business media is offering some faint recognition that borrowing several trillion dollars a year might have some consequences such as higher interest rates and less money available for private-sector-borrowing: Will the Obama Budget Hurt Private Borrowers? The humongous sums the U.S. Treasury must raise in coming years may eventually make credit unduly expensive for businesses.

But let's start at the beginning and build a more comprehensive context.

1. The U.S. government does not "print money" to fund its deficit: it borrows the money on the open market by selling Treasuries (T-bills) of varying maturities.

2. If the Treasury sells a 90-day T-Bill, then in 90 days the coupon (face value) of that bond is paid and the Treasury has to sell another T-bill to replace the one it paid off. If the government pays off $1 billion in short-term T-bills in any particular week, it must auction $1 billion of new T-bills to replace those paid off, i.e. roll over the debt.

3. To cover this year's deficit, the Treasury must sell more T-bills. Thus the Treasury won't just auction $2 trillion of T-bills to fund the 2009-10 Federal deficit--it must also sell untold billions more to replace all the Treasury debt which is coming due and must be rolled over into new Treasury bills.

4. The current era of low interest rates a.k.a. "cheap money" has allowed the Treasury to borrow stupendous sums of money at low rates of interest.

5. Even as these historically low rates, the interest on the public national debt (that is, not including the interest paid on the Social Security Trust Fund, which is considered "intergovernmental holdings") reached $260 billion in fiscal year 2009. The Treasury includes all interest, including that "paid" to the Social Security Trust Fund for the Social Security taxes collected but promptly "loaned" to the the general fund to spend, so you find news articles like this: Uncle Sam Will Pay $450 Billion This Year Just to Cover Interest on National Debt

According to the Treasury Department report, released on Dec. 10, the federal government expects to pay $449,070,000.00 in interest on Treasury debt securities for FY 2009.

The Health and Human Services budget, which includes Medicare and Medicaid, will cost $739,241,000.00 for the fiscal year; Social Security Administration, $699,976,000.00; and the Defense Department-Military budget, $656,722,000.00.

Here is a link to the Treasury's accounting of the debt: The Debt to the Penny and Who Holds It. It states that the debt held by the Social Security Trust Fund and other governmental agencies is $4.4 trillion, and the remainder of the debt (owed to citizens or "external" owners) is $6.6 trillion.

According to the Treasury, the average interest paid on this $10.95 trillion in debt is 3.7%. In January 2001, not very long ago, the average interest paid was 6.5%--almost double the current rate. Historically, a rate of 6-7% is not uncommon.

6. Thus a return to 7% interest rates would in effect double the interest paid annually to nearly $1 trillion per year. As noted above, this debt is spread out over varying maturities, so a rapid rise in interest rates would only effect a small portion of old debt at first.

Nonetheless, all new debt would be paying the new higher rates, and every month more of the existing $11 trillion in debt would roll over at the higher rates.

Think of that $11 trillion in debt as a mortgage which resets to higher interest rates as the "owner" keeps adding debt. Just like the homeowner who manages to make mortgage payments when the low "teaser" rates are in effect but who is unable to pay the mortgage when rates revert to actual market rates, the U.S. government will become insolvent as rates rise.

But why would rates rise? Why can't they stay low forever? I believe certain "one-shot" circumstances are masking longer-term trends:

1. Central banks (i.e. other governments) are buying huge amounts of Treasuries. (Central banks are still buying large quantities of Treasuries (Brad Setser, March 7, 2009). Theories abound, including the perceived need of central banks to build reserves to protect their currencies, etc.

The reason I don't see this is as sustainable is governments everywhere are busy announcing massive fiscal-stimulus spending bills, and whatever funds they can collect from taxes, borrow or print will soon be diverted to essentially "anti-rebellion" domestic spending.

2. Global savings are not infinite. The U.S. comprises about a quarter of the global economy as measured by GDP; by at least some measures, for the U.S. Treasury to borrow $2 trillion a year then a significant percentage of total global savings must be diverted to Treasuries.

Recall that virtually every other government on the planet is also busy selling trillions of dollars of their own debt to fund their own deficit spending, and that private debt for new mortgages, corporate debt, etc. sucks up additional funds. It's not hard to foresee a point at which newly issued debt exceeds the available savings/surplus capital.

At that point, a competition for available funds begins, with the "winner" being the borrower who pays the highest interest rate and offers the most safety/security.

With the global economy in a complete freefall, global savings are also in a steep decline. Just as the demand for capital leaps, the supply of surplus capital plummets. That's the long-term trend.

3. The U.S. savings rate has jumped up recently, reflecting a new prudence/fear in U.S. households. But as unemployment rises, we have to wonder how many households will be able to save, say, $2 trillion a year to fund their own government's debt.

Yes, I know insurance companies and bond funds will also be buyers, but as people cash out their insurance and retirement funds to survive then this "national savings" might still decline.

4. Treasuries rocketed in value as the stock market's decline caused institutions and individuals alike to sell REITs (real estate funds), stocks and other securities and put their cash in safe Treasuries.

But with the returns on T-bills being so pathetic, at some point institutions' models for 7% annual average returns will require that they seek higher yields. At that point, money will actually flow out of Treasuries.

5. Major institutions like life insurance companies and pension funds cannot survive drawing 1% or 2% interest on their capital. They simply cannot put all their money in "safe" short-term Treasuries and continue to pay out redemptions and pensions. That reality suggests the rush to Treasuries will be short-lived, unless T-bills start paying 7%.

At some point fear will recede and the priority of professional money managers will shift from "safety" to "higher return." As noted above, they simply have no choice. Investors can earn 2% on their money themselves; why hire money managers? Because they're supposed to earn higher returns than T-bills.

There is a definite possibility of positive feedback loops triggering a mass exodus from Treasuries and a resultant jump in interest rates that surprises (almost) everyone. Let's say global savings dries up (already a reality) along with global profits and global tax revenues and indeed, every possible source of governmental revenues other than borrowing.

At some point, the desire for "safe" low-paying Treasuries will dry up, from a shortage of capital and/or a reversion to a less risk-averse model of portfolio management.

Once interest rates pop up, the face value of existing bonds plummet, causing a mass exodus which feeds on itself. The face value of bonds is exquisitely sensitive to the rates paid for new debt. A $1,000 bond earning 2% falls to $500 if rates pop to 4%. That is why any rise in rates would cause havoc in the bond market and cause selling as those holding bonds begin fearing the destruction of their wealth via plummeting bond values.

Once the psychological certainty of "low rates will last forever" is broken, then rates can rise quite quickly, and the value of bonds can fall equally quickly. A trickle then turns into a torrent, which causes rates to rise even faster.

One last trend few seem to fathom: tax revenues are about to plummet. As profits vanish and head counts drop, then so do taxes collected. As assets crash, then the fat capital gains taxes collected by states and the IRS alike are drying up like summer rain in Death Valley.

So all those rosy predictions that the deficit will shrink as the economy recovers--don't count on it. Capital gains will never return to 2005 levels, nor will financial-sector and real estate profits. Structural unemployment will remain far higher than most believe possible.

Four short years of $2 trillion deficits will effectively double the U.S. national debt and the interest it pays. The Social Security surpluses are "borrowed" every year without any notice, so the U.S. debt rose by $300 billion a year even when it supposedly ran a slight surplus; that $300 billion+ a year in new debt goes on top of the stated $2 trillion/year in deficit spending.

So the nightmare scenario is this: the debt doubles over the next 4-5 years, causing interest payments to double from $450B to $900B a year. But interest rates also double due to the global shrinkage of surplus capital and the monumental rise in demand for capital (borrowing). The $900B in interest then doubles to $1.8 trillion--roughly equal to Medicare, Social Security and the Pentagon combined.

Can't happen? Really? With tax revenues dropping along with profits, employment and assets, then where will the political will arise to cap entitlements and other spending? I predict the U.S. will continue borrowing trillions of dollars until it is no longer able to do so.

By then, the interest owed each and every year will crowd out all other spending. With the debt machine broken, the government will simply be unable to service its debt and fund all its mandated entitlements and other programs. It will be insolvent.

By Charles Smith

Middle Class: big trouble (long post)

I found it interesting that President Obama has already identified the pressing need to rescue the middle class. Without a middle class, then government ceases to exist, because from the Roman Empire to the present, it is the middle class which pays the bulk of the taxes. The wealthy find waivers and exceptions via corruption and guile, while the poor pay little or nothing but extract much.


I am wondering if the American middle class is crumbling for structural reasons even beyond taxation and government-sponsored degradation of the currency. As destructive as those forces most certainly are, I wonder if the "de-scaling" of the U.S. economy isn't the larger factor.

By "de-scaling" I mean the loss of large organizations capable of generating office towers full of people profitably manipulating information. Simply put: small businesses have no need for HR (human resources) managers, facilitators, project managers, coordinators, assistants to the second vice president of marketing, etc.

The entire edifice of "middle class jobs" depends on large-scale enterprises in need of massive bureaucratic management. The smaller the enterprise, the more actual productive work is done by everyone and the less essentially unproductive "managerial" and "reporting" work is done by anyone.

If we boil down management to its essence, it is this: trying to get recalcitrant workers to do their jobs efficiently while putting the best possible face on things to superiors via reports, meetings, balance sheets, etc.

But all this management requires stupendous sums of money to support. Interestingly, as the Roman Empire lost its grip, its many edicts to the crumbling provinces were largely ignored; without an Imperial presence to track and punish slackers and corrupt officials, then all the reports, demands and communications were essentially one-way: ignored.

Basking in the afterglow of 25 years of prosperity (as bogus as it might have been), we have perhaps forgotten that huge enterprises with all the layers of management beloved by business schools have vanished without a trace: DEC and Wang, to name but two.

In previous recessions, as corporations lost money, they were forced to either strip out layers of management via ESSA--eliminate, simplify, standardize and automate--or go under. It is now widely held that U.S. corporations are "lean and mean" after all this "flattening" of management, but for every reduction in overhead costs a new one has popped up: for instance, Sarbanes-Oxley (SOX), a vast system of costly reporting which was supposed to collar corporate malfeasance.

Instead, the greatest thievery has occured under the nose of SOX. It is in effect a gigantic unproductive tax on large enterprises.

Other regulatory "reporting" systems also exact a staggering toll on private enterprises, and most of it is never questioned: it is truly useful? Now that thousands of jobs depend on it, there is bureaucratic resistance to any trimming of regulatory reporting.

One way to get out from underneath such onerous bureaucratic systems is to leave the country or shut down all but a skeleton crew. Those with no understanding of private enterprise bemoan the loss of "good-paying American jobs" without looking at what it costs to maintain the overhead of the enterprise, never mind its actual production costs.

In general, if you want to pay an employee $50,000, the position will cost at least another $50,000 in overhead. To actually make a profit, the company needs to get $150,000 of value out of the employee whose salary is $50,000.

Thus a reduction in sales will quickly lead to the need to shed not just the salary but all the overhead costs: the medical insurance, the reporting, accounting, etc.

The Federal Government, of course, has no need to turn a profit, and being able to borrow or print unlimited sums of money gives it elbow room no other enterprise can afford. In other words, the regulators and edict-givers can continue to grow even as their tax base shrivels.

We are fast approaching the point, in my view, where global corporations will have only "show" staffs in the U.S. because there is simply no way to make a profit in a global Depression with a high-cost U.S. workforce and regulatory structure to serve.

Goliaths like IBM already have more non-U.S. employees than U.S. based employees, and there is absolutely nothing on the horizon to suggest this trend will reverse: as the government raises the cost of overhead with ever more edicts and regulations and taxes, the pressure to leave the U.S. entirely only increases.

We would do well to recall that businesses of all scales must make a profit; losses will eventually take them down. The higher their overhead, the more likely their demise.

On the other end of the scale, small businesses are like the provinces of the crumbling Empire: they mostly ignore the Imperial edicts because they have no choice financially but to do so.

This is the essence of why I have predicted the blossoming of the informal economy: once the costs of a "legitimate business" with all its reporting, overhead and taxes becomes too high to bear, the entrepreneur has no choice but to slip beneath the radar and work out of his/her home/garage.

The government, of course, will attempt to seek out and punish these miscreants, demanding they pay fines, licensing fees, meet various regulatory codes, etc. But an interesting feedback loop is now in play: the more government squeezes business via higher fees and taxes, the more business owners will simply give up/be driven bankrupt.

To reiterate: the higher the overhead burden, the likelier the bankruptcy. Once the overhead reaches a certain level, cutting staff isn't enough to bring expenses down to match shrinking revenues: as absurd as it sounds, the enterprise could lay off every single worker and still have expenses above revenues due to fixed overhead costs.

As these once-prosperous business close, the government collects less tax, and at least at the local level, eventually this loss of revenue crimps their ability to chase down those who have slid into the informal economy.

You see where this leads. At the global-enterprise scale, corporations will continue to downsize costly, high overhead U.S. offices and staff in favor of lower-cost, lower overhead workforces elsewhere. At the other end of the scale, small businesses will disappear by the tens of thousands, and entrepreneurs who once paid huge sums of rent, taxes, medical insurance, fees, etc. will no longer be paying anything but their own living expenses.

At some point, local government will have to face the reality that their expenses will have to be aligned with diminished revenues. The city of New York has some 330,000 employees (if I recall correctly). Perhaps the economy of the city can only support 250,000. Now the city can attempt, like the Roman Empire, to raise more revenues by taxing the remaining middle class.

But given that small business already faces very high overhead costs, the proper metaphor is a rowboat so heavily loaded that the waves are already lapping over its gunwales. It won't take much more weight to sink it, and right now we see local government desperately shoveling more weight into everyone's sinking rowboat: higher sales taxes, higher fees, and ever more edicts and penalties.

Is there any recognition that higher sales taxes, fees and taxes are not exactly incentives to buy more or start new businesses? Apparently not.

So what happens to "middle class jobs" as private enterprise is de-scaled at both the global-enterprise and small-business levels? They vanish. And as tax revenues plummet in a never-ending down-spiral, then local and state governments will face the same constraints as private enterprise: something has to give, and it can't be the guys and gals picking up the trash every week. It has to be the private drivers of the police captains, and all the other layers of essentially unproductive labor on the public payroll.

Sadly, there is little evidence that we recognize the danger of taxing and regulating the productive middle class out of existence. Instead, all the feedback loops are in place to hasten its crumbling.

Bailouts and the future

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

It gets worse. While Washington debates TARP II, the Federal Reserve Board continues to buy or guarantee or provide loans for a vast and growing pile of questionable financial and corporate assets, much of which are likely to be worth far less than the Fed has paid or guaranteed or accepted as collateral. We're talking big money here -- so far over $2.4 trillion. (The entire TARP -- parts I and II -- in combination with the proposed stimulus package come to just over $1.5 trillion.)

Taxpayers are on the hook for this Fed bailout money, too, of course. We have to pay the interest on the ever-growing debt used to make these payments or guarantees and loans. Yet while TARP II and the upcoming stimulus package are receiving a great deal of attention, this much larger public commitment by the Fed is not. That's partly because the media doesn't much of understand it, but also because the Fed is doing it in secret, using provisions of its charter never before utilized, and avoiding discussion before the full Board of Governors for fear such meetings would be subject to the Freedom of Information Act.

Put it all together and at this rate, the government -- that is, taxpayers -- will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

Madoff: taxpayer scam nobody is talking about

Madoff pulls the wool over everyones' eyes.

In a brilliant piece of detective work and logic reasoning, writer Muhammad Rafeeq has exposed what Madoff is really at by pleading guilty to the $50 billion so called fraud.

Rafeeq worked for many years in large investment firms and knows how the system works. On reading that banks like HSBC and Santander and others have lost billions, he says there is absolute no way that these banks would commit money to a single institute like Madoff without an extensive history of accounts going back at least 3 years and investigation and analysis of the investment model, assets and other data. There are teams of specialists in these banks to do this all the time.

Rafeeq suggests that Madoff fund simply went bust in which case the investors would not be entitled to get any money back. But by claiming it is a fraud and Madoff has pleaded guilty, and the state accepts it, it means all the so called defrauded investors are entitled to be fully compensated under the US government's financial fraud protection scheme.

In this brilliant article Rafeeq brings to the fore what any of us should know as obvious if we think about it and Madoff has deceived us all twice. There is no way that so many people and so many institutes, banks and pension funds would have invested billions with Madoff with absolutely zero oversight or prior investigation.

The more likely scenario is that is hedge fund went bust as are up to 30% of hedge funds are expected to do so. But by pleading guilty, the entire corrupt and criminal system has gone along with his deceit and accepted. It means that the tax payer will ultimately be bailing out these losses. Expect more "frauds" like Madoff to be come to light and the CEOs to strangely plead guilty because they now all want to get on the bailout gravy train.

Here's some choice quotes from the article: The first caught his attention

....So a truly heartwarming confession. And it was apparently made to his 2 sons, both of whom who worked for the fund and who had absolutely no idea that this fraud was being perpetrated, until such time as this astounding confession.

But then I started to look more closely at the mix of investors who have lost money. About half of them are professional investing institutions....
...Spanish bank Santander had £2.1billion of client money with Madoff. HSBC has admitted to lending about £600million to funds who wanted to use debt to gear up their positions with Madoff.


Then the dots begin to join...

I have acted as a professional consultant to major EC and US financial institutions on corporate and institutional credit risk and the idea that anyone in HSBC or Santander could authorise large investment without the internal checks and controls being employed is almost impossible. To try and believe that EVERY institution that invested in Madoff circumvented their internal control procedures IS impossible. ....
....
When the credit committee are called together to review an application, everything is ready prepared for them ..... ..... the lower levels of credit approval process will have prepared a summary of all the application documentation, included in the meeting bundle, with the strengths, weaknesses, and other important credit risk points. This application will usually contain a set of audited accounts going back a minimum of 3 years and most likely 5 years. There will be a full credit breakdown of the investment profile of the business, Madoff's hedge fund, looking at how the fund obtains its returns; investment assets and investment methodology. After the committee is satisfied that all the issues and concerns have been addressed they will vote on the approval or otherwise.

The article provides even more compelling evidence....


So why plead guilty? The answer is simple. Look on the net and you will see that because this case is being labelled a fraud, it would appear that investors are going to be able to claim their investment back under the US government's financial fraud protection scheme. A judge has already given his approval in principle for compensation, without any evidence having been presented and financial fraud being demonstrated in a court of law. And it would appear that there will never be such a demonstration in a court of law. Why? It would appear that all the funds financial records are mostly "missing" (rather like Dov Zakheim's US$1.4tn) and those few records that do survive are in a terrible mess.

However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.


And look further on the net and you will see that these "victims" have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.

Rather than saying this hedge fund has gone bust, due to its choice of investment assets and investment methologies, a scenario which is highly probable in the current financial paradigm, since all the professionals are predicting that at least 30% of all hedge funds are about to fail, more than 700 of them, the CEO chooses to fess up to fraud. If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer, just as they are also drawing money back from the tax payers with the other hand.


The lesson to learn from this article and relatively simple logical reasoning about the facts of the case is how shallow all the other coverage has been and how easily the public even in a huge swindle like this is distracted from the key kernel of truth that common sense thinking about the facts demonstrate.

It should also be quite clear that all the investors and institutes that will get their money back, know that Madoff is falsely pleading guilty and carrying out a fraud by pretending it to be a fraud. Thus they are essentially parties to the crime too.