More Claptrap about the Mortgage Crisis

http://www.washingtonpost.com/wp-dyn/content/article/2010/12/22/AR2010122205557_Comments.html


The article says: "But this argument seems especially inopportune now, since whatever happened in the past, there is broad agreement about what should happen in the future: The old "government-sponsored enterprise" model is a proven failure. Fannie and Freddie should be gradually dismantled and replaced with a new system of mortgage finance that does not permit ostensibly private companies to profit from an implicit federal government guarantee. To be sure, there is no consensus between, or within, the two parties as to how much - or how little - government involvement to retain, and how precisely to structure a federal role. But all serious proposals emphasize a greater role for private capital than it currently has."

DeborahPhoenix wrote:
A brief history lesson will be of help here, and it will NOT make the anyone happy who thinks that a. the free market would have corrected this or b. that the mission of Fannie Mae and Freddie Mac was inherently flawed. Both agencies were directly controlled by the government until the mid-1970's. Then, the process of their privatization began. They were sold off to help pay for the debt accumulated during the Vietnam War. Had they been left alone, we probably wouldn't have this situation now. Since privatization is primarily a Republican "solution" I am more inclined to fix blame on that side. It is clear that both parties were whooping it up during the bubble and were too afraid to look at the dark underbelly. Because I am a former mortgage loan officer, I soon realized that the mortgage companies had abandoned tried and true underwriting principles. I could see it coming, and I am a nobody. Why couldn't all this high-priced help stop it?

How Did You Grade the Lame Duck Session?

By Olivia LaRosa
December 22, 2010

Recently, I have been amusing myself by posting to the Wall Street Journal online community regarding select Questions of the Day. Today, the WSJ asked us how we graded the Lame Duck congressional session. I gave it a "D" for bad political theater. The only decent work of the session was passing the START treaty and repealing "Don't Ask, Don't Tell." What an embarrassing policy!

In response to: He continues to lead the country from the far left and will push just as hard as he can in this direction as long as he is in office. The notion that President Obama is more centrist than Nancy Pelosi and Harry Reid is ludicrous - though a useful fiction for him. They are all cut from the same socialist cloth.

I replied: I find myself boggled by people who still think that the lowest taxes support the best society. Taxes are the price we pay for civilization. (I gave the lame ducks a D.) The goods that you have, the education you received, the roadtrips you take, the fire department nearby, and so on, were at least partially subsidized by the taxes that your parents and grandparents paid. Furthermore, most of the stories told about how lowering taxes will help the US aren't quite what actually happens. Please take a look at this article for examples.
The 9 Biggest Conservative Lies About Taxes and Public Spending
http://www.alternet.org/story/149265/the_9_biggest_conservative_lies_about_taxes_and_public_spending

And in answer to the same man who asserted that Obama was a socialist, I talked about the TWO political axes: right-left, and authoritarian-libertarian. You can take the fun quiz too!

I am far left. I know so because I took a test at http://www.politicalcompass.org. I score at -10, -9.875. I am a libertarian socialist. People get confused about political orientation because we think that there are only two directions to go; left, or right. That constitutes one political axis. There is another, though. It is the authoritarian/libertarian axis. Obama is no more of a socialist than say, Evan Bayh or Bill Clinton. His political acts place him in within the right/authoritarian corner of the political compass. So, it makes no sense to call Obama a socialist or a Marxist when he clearly isn't either one. Here's another example: people can be left/authoritarian like Mao Ze Dong or Joseph Stalin. Or they can be right/authoritarian like Hitler, Mussolini, Hosni Mubarak, Benjamin Netanyahu, Hugo Chavez, etc. Ron Paul is the most prominent example of a right/libertarian. Take the fun quiz and see for yourself where you stand, alongside major historical figures.

~~~~~

In response to this post:

One of the biggest conservative lies is that money simply grows on trees. Taxes can be lowered to zero and the economy will benefit. Borrow from the Chinese to pay for huge deficit spending and pay off the bonds by printing money (quantitative easing). The result will soon be hyperinflation.

Conservatives don't seem to care. But some people do, like many Tea Party activists, who seem to realize what a downward spiral our country's in.

I replied: The Tea Party knows that something's wrong, but they don't know what it is. They have been captured by bumper-sticker politics. If the answers are simple, then we are not talking about the problems of human beings. Sad to say, the Tea Party movement simply plays into the hands of the political agenda of transnational corporations. The political agenda of transnational corporations is to corrupt governments for the sake of profit, as their charters provide. I wish that the Tea Partiers would interrogate their basic assumptions. We need GOOD government, not what we have now. It's impossible to manage a nation of 300 million people without decent people managing the day-to-day business of keeping America together. You don't get that result by ranting about bureaucrats or term limits. You get that result by educating folks on what it really takes to run a pluralistic democracy.

Algorithms and Red Wine

Is the 'digital hive' a soft totalitarian state?

By Joe Bageant

Ferrara, Italy

Sitting in a trendy wine bar, one of those that brings out food to match your particular choice of wine, mystified by the table setting. What was that tiny baby spoon for? Cappuccino surely, at some point, but why no big spoon to go with the knife and fork? The things a redneck American does not know grow exponentially in Bella Italia, starting with the restaurants -- not to mention several civilizations beneath one’s feet. Being in a house that has been continuously occupied for over 1000 years -- resisting the temptation to piss in the hotel room bidet, that sort of thing.

One thing the Italians can never be accused of is being a culture given to vinyl sided sameness, fast food franchises. Another thing is lack of a good educational system, given that Italy’s is among the very best in the world. So here I am sitting with some college kids trying to hang onto my end of a discussion of evolutionary consciousness, and whether Italy can withstand the cultural leveling of globalism.

“And Mr Bageent, what do you think of Pierre Teilhard de Chardin’s concept of the hive mind and the noosphere? Can monolithism and totalitarianism possibly be resisted in the cybernetic age?”

Huh?

“Il regno mondiale dei computer, global computerization. Do all those disassociated shards of human input constitute an overarching hive intelligence? Or are they the emergence of further evolutionary structures?”

“Ahem, uh, well, Timothy Leary once convinced me that they are,” I said. “But after the drugs wore off, I was not so certain. And now I’m certain again that he was right. But, with a far more chilling outcome than he or Chardin could have ever predicted.”

Which was pretty good for pulling it out of my ass.

In any case, it seems that 40 years in retrospect, the human hive enjoys monolithism and totalism far more than anyone would have ever guessed back in the sixties. Most of industrial humanity, as it turns out, is, or would be, quite happy to come home from a hard day in the mines and settle down to Facebook or Twitter or hive broadcast “news” and passive entertainments, distributed by unseen “corporate entities.” I dunno, I think I liked dope and live music and sex better. But as all three diminish in my life with age, I’ve learned to settle for the Larry King Show and/or a lot less at times.

Big Al and the Tuscaloosa sprinkler man

On the other hand, this whole business of the new hive cybernetic connectivity, could be just a swarm of data bits with no particular significance, in and of themselves, other than the magical thinking belief that they do. Which ain’t no small thing, given that what we agree upon as reality is achieved by social consensus. Hell, to some people Beelzebub still stalks the earth. To others, America is a free republic, not a company town. We all have our hallucinations.

One thing for sure. Most people in the (over)developed world think the connectivity and speed of the algorithms behind the cyberhive are worth it. Even teachers teach to a standardized test so students will conform to an algorithm, and if that ain’t hive mind, I don’t know what is.

Besides, if the worship of algorithms is not worth it, it does not matter. Whether we be Tanzanians à la Darwin’s Nightmare, or some Stanford professor writing economic algorithms, the people who control all our lives in the globalized economic world believe they are.

For example, bankers and investment houses believe intelligent algorithms (Big Al) can calculate human risk in making loans. That an algorithm can predict whether a 35-year old lawn sprinkler installer in Tuscaloosa will be able to steadily make $2,300 monthly payments on his $220,000 twice refinanced “snout-house” (so-named because of the four-car garage sticking out the front) for 30 years. Most of us would be more than happy to make that prediction for them, and with far greater accuracy, for a fraction of what they paid the pinhead to write the algorithm.

In the pre-digital hive era there were limits to what the organic human brain, and therefore the mind, plus past experience, could calculate, then evaluate. At some point, one was forced to recognized the limits of a financial proposition or investment. Famliarity with the actual basis of an investment was necessary. (Hmmm. Lawn sprinklers, huh? And yer paying on a new Dodge Ram too?”) But there was no stopping such things as computer-assisted hedge funds, and the techno nerds’ faith that you could remove the human risks through complex algorithmic structures. So mythical financial instruments such as derivatives and layers of bets on derivatives, and bets on those bets, bloomed out there in the “virtual economy,” sending out algorithmic spores that spawned even stranger financial flora. The whole of it could not be understood by any single human participant. Even the individual parts were understood only by their specific designers. As in, “Just trust me on this Marv. This instrument even creates its own collateral” (which many of them did). Information, of course, is not reality, not even close to the juicy anecdotal stuff of which our daily lives are made. In essence, investment is reduced to an algorithmic Google search for debt, which is wealth to a banker, then mathematically rationalizing that debt as wealth for the rest of us.

Life is lived anecdotally, not algorithmically. And anecdotal evidence is not allowed in the new digital corpocracy. As one poster on Democratic Underground put it, “Anecdotal now has this enforced meaning such that no one is supposed to believe what they experience, what they see, hear, taste, smell, etc. The Powers That Be have basically extinguished the notion of inductive reasoning. Everything has to be replicated in a laboratory and since 90% of all the labs in this nation are operated by Corporate Sponsored monies, not much truth comes out of them.”

The trouble with the algorithmic age is that life is not a finite sequence of steps that define and contain the algorithmic concepts used. Even when created with the best of intentions -- and we can all agree by now there were few good intentions at Goldman Sachs when they were creating and bundling these mutant investments -- they cannot account for our uninsured sprinkler installer getting cancer, or divorcing the other half of the household income -- or the end of America’s residential construction orgy.

The digital folly is never ending. The knock-on effect just keeps rolling. The latest is the rising scandal of millions of illegal foreclosures created by MERS (Mortgage Electronic Registration Systems), which enabled the big financial firms to securitize and swap mortgages at super high speed. But not to worry. Nancy Pelosi and Christopher Dodd are on the case, and there is sure to be a Congressional committee appointed. Whoopee! Have one on me.

Meanwhile, we have our social networking software to better weave us into the hive. Social networking software, now there’s a term that should scare the piss out of anyone with an IQ over 40. It means the database as hive reality. Facebook, online banking, shopping, porn, years of one’s life playing electronic games or whatever, online dating and reducing romance and companionship to fit the software. Or 4,000 Facebook “friends,” data on 4000 Americans voluntarily collected for Facebook corporation. The concept of “friends” is cheapened, rendered meaningless as it passes through a database. In fact, all human experience is cheapened by that process. Information is not reality.

Flatworm economics

As my second wife, who was a mathematician, can tell you, I know as much about algebra as a flatworm. So I turn to experts when I write this stuff -- or sometimes just make it up as I go. But even a dumb person can ask questions. And one of my questions as I sit here background Googling the subject is this: Does a search engine really know what I want, or am I dumbing down to fit its hive algorithms? If the latter is the case, then why don’t we just bring back PCP?

Anyway, allegedly, the hive does many things better than paid experts. Wikipedia is an example of this assertion. Most web content is generated by hive inhabitants for free, profiting the new elite cybernetic ownership class, which is to say some corporation or other. This also means that content becomes worthless. That the efforts of skilled and devoted journalists, artists and others become valueless, unsellable, just more info-shards in the hive. Only advertising has value in the cyberhive. In a nation whose social realism has been represented by advertising for three quarters of a century, that was to be expected.

Of course the real global economic problem is seven billion people in increasing competition for ever scarcer vital resources. But capitalism loves competition, as long as, A: it is the people’s capital involved, and B: it is not the capitalists doing the competing. Either way we’re talking money here and what most people consider to be “economics.” Economics equals money. Right?

But the actual world revolves around meeting our genuine needs, which may or may not involve money. In the big picture, money is just one small, much abused abstract tool. Money has been abused from the beginning, probably about fifteen minutes after the first shekel was minted, but now the abuse has reached such levels that the entire notion of money is collapsing in on itself. Our concept of money needs to be reevaluated and probably abandoned in the distant future.

The bottliberia waiter comes with something on a plate I can actually -- by pure luck -- identify. Octopus gnocchi. The conversation rolls on.

“What do you believe allowed such abuse and calamity?” I ask.

An intense young woman leans across the table, all black hair and red lips, making an old man moan and sigh inwardly.

“Fossil fuels, of course,” she says. “An unnatural supply of energy. But once that is gone, we're going to have to go back to a whole different way of doing everything. Everything.”

“Spot on,” I agree. At that moment she could have gotten me to agree that the earth is flat.

But the truth is that each gallon of fossil fuel contains the energy of 40 man-hours. And that has played hell with the ecology of human work, thanks mostly to the money economy. For instance, a simple loaf of bread, starting with the fossil fuels used to grow the wheat, transport, mill, bake, create the packaging materials and packaging, advertise and distribute it, uses the energy of two men working for two weeks. Yet this waste and vast inefficiency is invisible to us because we see it only in terms of money, jobs and commerce. Cheap oil allowed industrial humans to increasingly live on environmental credit for over a century. Now the bill is due and no amount of money can pay it. The calorie, pure heat expenditure as energy, is the only currency in which Mother Nature trades. Period.

Despite that America produced such thinkers on the subject of living simply as Thoreau, modern hydrocarbon based civilization has driven expectations of material goods and convenience, and the transactions surrounding those expectations, through the stratosphere. Money has abstracted the notion of work to the point where, I dare say, there are not 100,000 people in America who truly understand that, although there are at least a few million trying to understand and liberate themselves.

I’m gonna take a wild shot here and say that understanding and liberation, come through self-discipline and self-denial, and that it’s nearly impossible for Americans to practice self-discipline. They cannot imagine why self-discipline, and a more ascetic life, becoming less dependent on the faceless machinery of algorithm driven virtual money, is necessarily liberating.

If there can be a solution at this late stage, and most thinking people seriously doubt there can be a “solution” in the way we have always thought of solutions, it begins with powering down everything we consider to be the economy and our survival. That and population reduction, which nobody wants to discuss in actionable terms. Worse yet, there is no state sanctioned, organized entry level for people who want to power down from the horrific machinery of money. There are too many financial, military and corporate and governmental forces that don’t want to see us power down (because it would spell their death), but rather power up even more. That’s called “a recovery.”

When viewed from outside the virtual money economy, and from the standpoint of the planet’s caloric economy, probably half of American and European jobs are not only unnecessary, but also terribly destructive, either directly or indirectly. Yet what nation or economic state acknowledges the need for a transition away from jobs that aren't necessary. None, because such an economy could not support the war machines or the transactional financial industries that dominate our needs hierarchy for the benefit of the few. Loaning us money we have already earned, stuffing us with corn syrup. And I won’t even go into the strong possibility that everybody does not need to be employed at all times for the world to keep on turning.

Like the Reagan Years on speed

One of the Italian students, Mariarosa, asks, “Is it true that so many Amerians are struggling and suffering right now?”

“No,” I reply, “not in the real sense. If they are suffering, most of them are suffering from commodities withdrawal. What they really are is people oppressed by metastasized capitalism. Which is its own form of suffering, I guess. They are squeezed hard for profit every moment of their waking lives. They’ve got families and dare not make a move, even of they knew how.”

Everyone nods in agreement.

“It’s coming to Italy too,” says one young man. Again, all nod in agreement.

Yet, despite Berlusconi, despite the rigthtist takeover in progress in Italy -- which I am guessing will be successful, because I’ve seen it all before in America through globalization -- so many are still able to ask the right questions. They seem able to filter what they need and what is best for the majority, from what they want. But looking at the overall country is like watching the Reagan era unfold again before your very eyes. Only faster. All of these kids probably own an iPod or cell phone, the only difference being that they do not let them interrupt a good meal.

The third bottle of wine arrives and the topic turns to global competition, and the EU charges that “Italy is not competitive enough.” A student named Cristiano, sits directly across form me, sporting one of those fashionable three-day beards (I tried that once -- people just asked me: “How long have you been depressed, Joe?) Cristiano offers that cooperation would get us all a lot farther than competition.” Applause from everybody on that one. I raise my glass in salute. I’ve raised a few too many glasses in salute in my life, but what the hell.

Societies such as Italy, Greece and many others are viewed by global capitalism as inferior economies. Especially agrarian societies: different rates of exchange and economies of scale, are set for them because capitalism benefits from the bonuses of synergies in scale and the virtual economy. Never do global capitalists want to see regional food security, energy security, or any other kind of security for that matter.

And I look at the faces of these young men and women, who are among the brightest, best educated and common good oriented the world has to offer. A taxi’s headlights flash through the window of the darkened bottiliberia. Each face is illuminated for a moment, then golden dimness again prevails. And I am saddened.

I do not expect that the world they have inherited will show them one ounce of mercy. But it is heartening to see clear competent minds drawing the right conclusions.

And I ask myself, what chance does America’s far less informed, and purposefully misled public stand against all this?

One shudders.

Social Science Palooka

David Brooks seems sneaky. He writes like a rational human being, but always throws in a "whammy" that tends to discredit the assumed thrust of his article. This is what some people call "polemics."

His facile conclusions never fail to disappoint. This December 7, 2010 column in the New York Times is no exception.

Social Science Palooza

Ask any Republican or other member of the right wing what he thinks about the social sciences. You will receive either a blank stare, or a sneer. So, when David Brooks wrote an article about the social sciences, I wondered why.

The first thing I learned is that he finds such studies "bizarrely interesting." Which indicates to me, a social scientist, that he finds it difficult to grasp the scientific methods used to conduct these studies. Results based on the Scientific Method are not bizarre.

When I review social science studies, I always verify the underlying data before I apply it to new information. It doesn't take long. Really. It's a non-starter when the person writing the article quotes himself or the organization who paid him to write the article as far as maintaining objectivity.

This observation will explain what I mean. "For an article in The Review of Economics and Statistics, Mark Duggan, Randi Hjalmarsson and Brian Jacob investigated whether gun shows increase crime rates. They identified 3,400 gun shows in Texas and California and looked at crime rates for the areas around the shows for the following month. They found no relationship between gun shows and crime in either state."

Hypothesis: Gun shows increase crime rates.
Underlying science: Economics and Statistics

The problem: 1. Statisticians always allow for a margin of error in their analysis. 2. Therefore, the statement that "no relationship between gun shows and crime" could not be based in fact. 3. Because there HAS to be a variation in the data, just because we are human beings and inconstant. Therefore, Brooks should have stated the margin of error. 4. And, crimes that occur around gun shows are not always violent, and can involve fraud or misrepresentation.

For example, one of my friends bought a gun at a gun show, to be delivered later. He paid his money, but the gun never came. It took research and a trip to the town where the gun dealer lived to involve the police for my friend to get his gun months later. That counts, eh?

So, when one of these rational-sounding people cannot come up with a rational explanation for normal phenomena, one must assume that they are just a few bricks shy of a load. Or perhaps just Social Science Palookas.

Dear Tea Party; what took you so long?

You didn’t get mad when the Supreme Court stopped a legal recount and appointed a President.

You didn’t get mad when Cheney allowed energy company officials to dictate energy policy and push us to invade Iraq.

You didn’t get mad when a covert CIA operative got ousted.

You didn’t get mad when the Patriot Act got passed.

You didn’t get mad when we illegally invaded a country that posed no threat to us.
You didn’t get mad when we spent over 800 billion (and counting) on said illegal war.

You didn’t get mad when Bush borrowed more money from foreign sources than the previous 42 Presidents combined.

You didn’t get mad when over 10 billion dollars in cash just disappeared in Iraq.

You didn’t get mad when you found out we were torturing people.

You didn’t get mad when Bush embraced trade and outsourcing policies that shipped 6 million American jobs out of the country.

You didn’t get mad when the government was illegally wiretapping Americans.

You didn’t get mad when Bush didn’t catch Bin Laden.

You didn’t get mad when Bush rang up 10 trillion dollars in combined budget and current account deficits.

You didn’t get mad when you saw the horrible conditions at Walter Reed Hospital.

You didn’t get mad when we let a major U.S. city - New Orleans - drown.

You didn’t get mad when we gave people who had more money than they could spend, the filthy rich, over a trillion dollars in tax breaks.
You didn’t get mad with the worst 8 years of job creations in several decades.

You didn’t get mad when over 200,000 US citizens lost their lives because they had no health insurance.

You didn’t get mad when lack of oversight and regulations from the Bush Administration caused US Citizens to lose 12 trillion dollars in investments, retirement, and home values.


No…..You finally got mad

When a black man was elected President and decided that people in America deserved the right to see a doctor if they are sick.

Yes, illegal wars, lies, corruption, torture, job losses by the millions, stealing your tax dollars to make the rich richer, and the worst economic disaster since 1929 are all okay with you, but helping fellow Americans who are sick … Oh, Hell No!!

Mounting State Debts Stoke Fears of a Looming Crisis

Mounting State Debts Stoke Fears of a Looming Crisis http://www.nytimes.com/2010/12/05/us/politics/05states.html

(Historical Note: Pressure on state governments began in the 1970s as a part of the right-wing plan to weaken the political clout of cities by shifting costs of government from the Federal budget to the State budget. The Right, in pursuing its goals, does not care that our cities, the crucibles of innovation, are struggling, dying, or dead. ~Deb)

The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.

Marco Garcia for The New York Times

Yuki Scott, right, watched her daughter and other children one Friday last May in Hawaii, because the school year was shortened by 17 days.

While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.

“It seems to me that crying wolf is probably a good thing to do at this point,” said Felix Rohatyn, the financier who helped save New York City from bankruptcy in the 1970s.

Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.

Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.

But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.

Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate.

“I don’t like to play the scared rabbit, but I just don’t see where the end of this is,” he added.

Resorting to Fiscal Tricks

As the downturn has ground on, some of the worst-hit cities and states have resorted to fiscal sleight of hand to stay afloat, helping them close yawning budget gaps each year, but often at great future cost.

Few workers with neglected 401(k) retirement accounts would risk taking out second mortgages to invest in stocks, gambling that the investment gains would be enough to build bigger nest eggs and repay the loans.

But that is just what Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.

It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs.

But it is the short-term budget woes that nearly all states are facing that are preoccupying elected officials.

Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with i.o.u.’s last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring.

Now, just as the downturn has driven up demand for state assistance, many states are cutting back.

The demand for food stamps has been rising significantly in Idaho, but tight budgets led the state to close nearly a third of the field offices of the state’s Department of Health and Welfare, which take applications for them. As states have cut aid to cities, many have resorted to previously unthinkable cuts, laying off police officers and closing firehouses.

Those cuts in aid to cities and counties, which are expected to continue, are one reason some analysts say cities are at greater risk of bankruptcy or are being placed under outside oversight.

Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.

This time is expected to be no different. The federal stimulus money increased the federal share of state budgets to over a third last year, from just over a quarter in 2008, according to a report issued last week by the National Governors Association and the National Association of State Budget Officers. That money is set to run out next summer. Tax collections, meanwhile, are not expected to return to their pre-recession levels for another year or two, given that the housing market and broader economy remain weak and that unemployment remains high.

Scott D. Pattison, the budget association’s director, said that for states, next year could be “the worst year of this four- or five-year downturn period.”

And few expect the federal government to offer more direct aid to states, at least in the short term. Many members of the new Republican majority in the House campaigned against the stimulus, and Washington is debating the recommendations of a debt-reduction commission.

So some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed.

Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.

Many governments are delaying payments to their pension funds, which will eventually need to be made, along with the high interest — usually around 8 percent — that the funds are expected to earn each year.

New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christie deferred paying the $3.1 billion that was due to the pension funds this year.

It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.

State and local pensions — another form of promised debt, guaranteed in some states by their constitutions — face hidden shortfalls of as much as $3.5 trillion by some calculations. And the health benefits that state and large local governments have promised their retirees going forward could cost more than $530 billion, according to the Government Accountability Office.

“Most financial crises happen in unpredictable ways, and they hit you when you’re not looking,” said Jerome H. Powell, a visiting scholar at the Bipartisan Policy Center who was an under secretary of the Treasury for finance during the bailout of the savings and loan industry in the early 1990s. “This one isn’t like that. You can see it coming. It would be sinful not to do something about this while there’s a chance.”

So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off — a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.

Of course, not all states are in as dire straits as Illinois or California. And the credit-rating agencies say that the risk of default is small. States and cities typically make a priority of repaying their bond holders, even before paying for essential services. Standard & Poor’s issued a report this month saying that the crises that states and municipalities were facing were “more about tough decisions than potential defaults.”

Change in Ratings

The credit ratings of a number of local governments have improved this year, not because their finances have strengthened somewhat, but because the ratings agencies have changed the way they analyze governments.

The new higher ratings, which lower the cost of borrowing, emphasize the fact that municipal defaults have been much rarer than corporate defaults.

This October, Moody’s issued a report explaining why it now rates all 50 states, even Illinois, as better credit risks than a vast majority of American non-financial companies.

One reason: the belief that the federal government is more likely to bail out a teetering state than a bankrupt company.

“The federal government has broadly channeled cash to all state governments during recent recessions and provided support to individual states following natural disasters,” Moody’s explained, adding that there was no way of being sure how Washington would respond to a bond default by a state, since it had not happened since the 1930s.

But some analysts fear the ratings are too sanguine, recalling that the ratings agencies also dismissed the possibility that a subprime crisis was brewing. While most agree that defaults are unlikely, they fear that as states struggle with their growing debts, investors could decide not to buy the debt of the weakest state or local governments.

That would force a crisis, since states cannot operate if they cannot borrow. Such a crisis could then spread to healthier states, making it more expensive for them to borrow, if Europe is an example.

Meredith Whitney, a bank analyst who was among the first to warn of the impact the subprime mortgage meltdown would have on banks, is warning that she sees similar problems with state and local government finances.

“The state situation reminded me so much of the banks, pre-crisis,” she said this fall on CNBC.

There are eerie similarities between the subprime debt crisis and the looming municipal debt woes. Among them:

¶Just as housing was once considered a sure bet — prices would never fall all across the country at the same time, conventional wisdom suggested — municipal bonds have long been considered an investment safe enough for grandmothers, because states could always raise taxes to pay their bondholders. Now that proposition is being tested. Harrisburg, the capital of Pennsylvania, considered bankruptcy this year because it faced $68 million in debt payments related to a failed incinerator, which is more than the city’s entire annual budget. But officials there have resisted raising taxes.

¶Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance at Northwestern University, and Robert Novy-Marx, an assistant professor of finance at the University of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.

¶The states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists, reminding some analysts of the lead up to the subprime crisis.

Now states are bracing for more painful cuts, more layoffs, more tax increases, more battles with public employee unions, more requests to bail out cities. And in the long term, as cities and states try to keep up on their debts, the very nature of government could change as they have less money left over to pay for the services they have long provided.

Richard Ravitch, the lieutenant governor of New York, is among those warning that states are on an unsustainable path, and that their disclosures of pension and health care obligations are often misleading. And he worries how long it can last.

“They didn’t do it with bad motives,” he said. “Ninety-five percent of them didn’t understand what they were doing. They did it because it was easier than taxing people or cutting benefits. We’re getting closer and closer to the point where we can’t do that anymore. I don’t know where that is, but I know we’re close.”

A version of this article appeared in print on December 5, 2010, on page A1 of the New York edition.

About the 100 most notable books of 2010

the New York Times 100 most notable books of 2010 list just came out today. I found some that intrigued me. I read nonfiction, mostly. My potential favs are noted below.

The links lead to book reviews at the NYT. Membership at the site is free. (Not any more. -ed) I have set up my account with the NYT so that I get no spam from them.

ALL THE DEVILS ARE HERE: The Hidden History of the Financial Crisis. By Bethany McLean and Joe Nocera. (Portfolio/Penguin, $32.95.) More than offering a backward look, this account of the disaster of 2008 helps explain today’s troubling headlines and might help predict tomorrow’s

CHANGING MY MIND: Occasional Essays. By Zadie Smith. (Penguin Press, $26.95.) The quirky pleasures here are due in part to Smith’s inspired cultural references, from Simone Weil to “Buffy the Vampire Slayer.”

COMMON AS AIR: Revolution, Art, and Ownership. By Lewis Hyde. (Farrar, Straus & Giroux, $26.) Hyde draws on the American founders for arguments against the privatization of knowledge.


CLEOPATRA: A Life. By Stacy Schiff. (Little, Brown, $29.99.) It’s dizzying to contemplate the ancient thicket of personalities and propaganda Schiff penetrates to show the Macedonian-Egyptian queen in all her ambition, audacity and formidable intelligence. I saw the author on The Daily Show. She said that Cleopatra was Greek-Macedonian, and looked semitic, if one goes by the images on her coins.

WILD CHILD: Stories. By T. Coraghessan Boyle. (Viking, $25.95.) In these tales, Boyle continues his career-long interest in man’s vexed tussles with nature

THE BOOK IN THE RENAISSANCE. By Andrew Pettegree. (Yale University, $40.)A thought-provoking revisionist history of the early years of printing.

EMPIRE OF THE SUMMER MOON: Quanah Parker and the Rise and Fall of the Comanches, the Most Powerful Indian Tribe in American History. By S. C. Gwynne. (Scribner, $27.50.) The story of the last and greatest chief of the tribe that once ruled the Great Plains.

FINISHING THE HAT: Collected Lyrics (1954-1981) With Attendant Comments, Principles, Heresies, Grudges, Whines and Anecdotes. By Stephen Sondheim. (Knopf, $39.95.) Sondheim’s analysis of his songs and those of others is both stinging and insightful.

THE HONOR CODE: How Moral Revolutions Happen. By Kwame Anthony Appiah. (Norton, $25.95.) A philosopher traces the demise of dueling and slavery among the British and of foot-binding in China, and suggests how a fourth horrific practice — honor killings in today’s Pakistan — might someday meet its end.

KOESTLER: The Literary and Political Odyssey of a Twentieth-Century Skeptic. By Michael Scammell. (Random House, $35.) Scammell wants to put the complex intelligence of Koestler (“Darkness at Noon”) back on display and to explain his shifting preoccupations.

LAST CALL: The Rise and Fall of Prohibition. By Daniel Okrent. (Scribner, $30.) A remarkably original account of the 14-year orgy of lawbreaking that transformed American social life.

SCORPIONS: The Battles and Triumphs of FDR’s Great Supreme Court Justices. By Noah Feldman. (Twelve, $30.) A group portrait of Felix Frankfurter, Robert Jackson, Hugo Black and William O. Douglas.

SUPREME POWER: Franklin Roosevelt vs. the Supreme Court. By Jeff Shesol. (Norton, $27.95.) Contention over Roosevelt’s proposal to transform the court nearly paralyzed his administration for over a year and severely damaged fragile Democratic unity.

Take Action to Extend Tax Cuts for Working People

http://www.peaceteam.net/action/pnum1062.php

Extend Only Middle Class Tax Cuts
With the top 1% of the country now in possession of 30% of the wealth of our economy, and with the federal deficit completely out of control, it is time to let the misguided tax cuts for the wealthy expire.

In the first place, they did not work. We were told that they would stimulate the economy and create jobs. They did not. All the rich did was hoard more and more of their money.

Secondly, what really stimulates the economy is when people who are NOT rich have money to spend on the things they need. Yet the most heartless members of Congress propose balancing the budget on the backs of people who cannot make ends meet as it is.

Worse yet, the Republicans are threatening to shut down the business of Congress until their most greedy constituents, the only ones they represent at all, get to keep their reserved seat at the pig trough. And it is the road to utter economic collapse and disaster. The last time distribution of wealth was so unequal was just before the Great Depression, and we all know how that turned out.

So let the overgenerous tax cuts for the wealthy expire. Enough is more than enough.

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