Friday, September 07, 2012

It ISN'T the Unions Fault: And this is why

One of the big lies that frosts my balls is the following: Cities and States are failing because of public unions.  It is not true in a lot of locales.  Three cites in California are bankrupt or nearly so - and the situation is as follows...
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See if you can guess who does Okay.
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Year 2004
Scenario: Starting Level in a far suburb (like Stockton).  Nice little community doing fine for years.
Homes
Value
Property Taxes
City Income
80
$100,000
$80,000
$80,000
Year 2006
House prices double in two years.  Half the homes are sold or refinanced to improve.  40 new homes are built.  City income comes up by $120,000 – but city has to increase police / fire / schools / roads / sanitation, etc.
40
$100,000
$40,000
40
$200,000
$80,000
 New 40
$200,000
$80,000
$200,000
Year 2008
House prices double again in the next two years.  Half the homes are sold or refinanced to improve agin.  40 newer homes are built.  City income comes up by $200,000 –city has to increase police / fire / schools / roads / sanitation, etc.
20
$100,000
$20,000
20
$200,000
$40,000
40
$300,000
$120,000
½ 2006 new 20
$200,000
$40,000
½ 2006 new 20
$300,000
$60,000
 2008 new 40
$300,000
$120,000
$400,000
Year 2010
House prices crash.  Homes are worth about $175,000.  Therefore only about 20 homes are okay, and 40 more possibly ok.  The majority are underwater.  City revenues fall by $295,000 – but still has the infrastructure to support including abandoned homes they must maintain.
Value = $175,000
20
Houses OK
40
House border line
100
Houses Underwater
Homes
Value
Property Taxes
City Income
60
$175,000
$105,000
$105,000

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Who pays?
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The underwater homeowners are screwed.  The bank said their house was worth $300,000.  The "independent" appraisers said they were worth $300,000, and so they borrowed much of it on the experts opinions.  They no longer have the homes.
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The city is screwed.  Based on the experts advice, the city approved housing and built infrastructure to support it. They hired police and teachers.  They can't get rid of the teachers because the people are still there - maybe in foreclosure, maybe at shelters - but the children still need to go to school.  They can't get rid of fire or police personnel because the homes are still there.  No if the area isn't patrolled they will be a magnet for crime - so those costs aren't going down.  But lots of politicians here blame the "unions", like if it wasn't for greedy teachers or police, then budgets would balance.
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In a actual capitalist society, the lenders would also be screwed.  They loaned too much money on an investment they over-valued.  Just like people took out too much debt on over valued property.  But we don't really like in a place where the rich pay their far share - do we?  So the banks - the ones that did the actual overvaluing - they had their loses covered by taxpayers.  Banks were bailed out by the government and supported in mergers. **1
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People aren't too big to fail.
Cities aren't too big to fail.
Banks ARE too big to fail.
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FYI - To be fair, the finance industry has paid handsomely for this (via lobbying - not taxes).  In 2012 alone... (from http://www.opensecrets.org/industries/mems.php)

Donations  -      Industry
$28.5 Million    Financial Securities Firms (investments)
$20.7 Million    Insurance (think AIG)
$11.5 Million    Misc. Finance (That is how it is listed)
$11.0 Million    Commercial Banks
$ 9.9 Million     Business Services
$ 8.2 Million     Public Sector Unions
$ 3.9 Million     Finance / Credit

**1 : Without getting on too big a rant here, some finance institutions rebundled homes loans, sold them as recommended investments - then shorted them (bet their customer's investments would fail).  So they got a bailout AND to profit on their lies!

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