What now?

The level of failure

There is a theory about the American economy that it advances and recedes via speculative bubble these days. This seems to be particularly true of our regional economy in the San Joaquin Valley, with its unaffordable housing and nationally top rate of mortgage foreclosure, following the big boom in residential real estate speculation.

Southern California home builders, after tremendous growth during the boom, have suffering hundreds of millions in losses in the second half of 2007. However, their losses are not as severe as the losses of five San Joaquin Delta fish species that "continue marching toward extinction, according to new data released Wednesday, a result that some observers warn may signify a major ecological shift in the West Coast's largest estuary." The tremendous construction boom in Southern California, coming at the time Colorado River exports to the region was slowed by drought and new agreements among the states that take water from that river, put "excessive" pressure for the last five years on the Delta pumps, slowed only as a result of near extinction of species and lawsuits by environmental groups. Another problem in the Delta is deteriorating water quality, caused by urban and farm runoff. As it heads north on the west side of the Valley, the San Joaquin River has become an agricultural drainage sewer.

Farm and ranch land prices are also up. First, starting about a decade ago, demand from Southern California dairymen, who, having sold small dairies for large land prices there, bought large parcels and established even larger dairies here. This bubble, driven by the need to get money into land to avoid taxes, got bigger when local landowners started selling parcels to developers and buying more land. As home prices fall, agricultural land prices rise. We live in a complicated economy.

However, while dairy costs seem to be chasing milk prices (which received a hefty increase early last year) up to break-even dairy economics, rising almond prices signal business to buy orchards and to plant them in what is already by far the world's largest almond-producing area. Agriculturally, in the north San Joaquin Valley we are in the midst of an almond bubble. Yet, through the last 12 months, the same story appears periodically in the media. According to this story, honeybee hives are collapsing, their residents leaving in the morning and not returning at night. Although scientists have fixed their attention on this cause and that cause, the same story of hive collapse -- "CCD – colony collapse disorder – has resulted in a loss of 50 percent to 90 percent of beehives in the United States" -- ends with the scientific speculation that, "The evidence today is pointing to the effects of a complex chain of factors: pesticides, viruses and fungi and parasites such as mites."

Colony collapse disorder could be to the almond industry what the subprime mortgage credit collapse has been to the speculative housing boom.

If the speculative bubble in ethanol is added to the picture, perhaps we can understand a simple story told by a dairyman about feed supplies and prices. Dairies import a lot of corn from the Midwest. The prices for this corn, under pressure from the speculative boom in corn-based ethanol production, have been going through the roof. Dairies have been partly compensating by buying more alfalfa. In at least one instance, a local dairyman was unable to buy a field of west-side alfalfa because the alfalfa grower found it more economically advantageous to sell the amount of water necessary to finish the crop to a neighboring almond grower, who needed it to keep his trees alive and was evidently able to make it worth the alfalfa grower's while to sell it to him and lose a crop. Nevertheless, courts have ruled there will be up to 30-percent less pumping from the Delta this year than there was last year.

We had a recent series of storms that partially recharged Valley groundwater and dumped a great deal of snow in the Sierra. The drought would seem to be over. However, a warm rain up to 6,000 feet in early spring could convert the healthy snow pack into floods and breaks in our decrepit levee system rather than an adequate supply of water for Valley farmers, 25 million Southern California residents and Valley subdivisions dependent on surface water supplies. It is hard these days to know which weather gods to pray to for what, when. It is equally hard to blame those weather gods for an economy that lurches from boom to bust and back again without any respect for the natural resources that sustain both agriculture and urban communities.

"Long-range collateral damage" in the California real estate boom/bust economy has been our public education system. California is now

ranked 40th based on the likelihood students will thrive in school and have successful adult lives, according to Education Week newspaper's annual Quality Counts report.
It ranks high, however, when comparing students in Advanced Placement programs.
Children who live in poverty, whose parents are not fluent in English or do not have a college degree were among the factors that weaken a California child's chance for success, according to the report.
The state ranks 38th in the nation for academic achievement.
California fourth-graders ranked 48th in the nation based on their scores on a national reading test called the National Assessment of Educational Progress. Only 23 percent of California fourth-graders were proficient in reading, compared with 32 percent nationwide.
Those students also fell behind the national average in math, with less than 30 percent testing proficient, compared with a 39 percent U.S. average...

Our educational ranking has been going in the opposite direction of population growth over the last 40 years. Development does not pay for itself in this most essential category: public investment in children and young people at which California once excelled and was in the highest rank in the nation.

At the level of public higher education in the state, the governor has announced deep cuts in spending and the University of California and the State university system have announced tuition hikes, making, in a coming recession, public higher education less attainable than ever. One still hears the grand developer-driven hoopla around the necessity for UC Merced because of "tidal-wave 2" echoing in the hollowed-out economy. But the governor needs to cut the state deficit, which is growing as real estate prices fall. Real estate prices are falling because the speculative bubble burst. So, we must sacrifice investment in the real engine of growth, the resources for technological invention that exist in a well-educated workforce.

The illiteracy among home buyers, realtors and mortgage lenders, the simple inability to read small print, has had a large role in the global credit crisis.

It has been recognized, even by the state Legislature, that the real-estate "engine of growth" that has been driving California from bubble to bust to bubble again, sweeping many more modest but steadier economies before it, has had a gross impact on the state's environment. Last year, in an historic gesture, the Legislature declared itself against global warming. It also asserted the right "to adopt strict curbs on greenhouse gas emissions from cars and trucks." The federal Environmental Protection Agency denied California this right to do something more than what the federal government requires to clean up its own air quality, the worst in the nation. On the other hand, a Valley state senator is having to launch a political campaign to stop confirmation of the Hun's latest appointment to the state air board, a Fresno County supervisor with a strong record in support of air polluters.

Bank of America announced today it would take over California-based Countrywide Financial Corp., the nation's largest mortgage lender. BofA already had a $2-billion investment in the company, rumored for months to be on the brink of bankruptcy.

The takeover removes the threat that Countrywide could fail and wreak more havoc in the mortgage market, where loan defaults are soaring and federal policymakers have been struggling to limit the spillover in the economy.
The rescue of Countrywide could help calm the "crisis of confidence" that has slammed the financial system as the housing and mortgage markets have crumbled, said Brian Bethune of Global Insight, an economic forecasting firm in Lexington, Mass. "This will change perceptions."
Fear that the housing mess could drag the U.S. economy into recession has depressed the stock market in recent months and spurred the Federal Reserve to cut short-term interest rates three times. On Thursday, Fed Chairman Ben S. Bernanke said the central bank was ready to make further "substantive" moves to ease credit to help the economy.
In the case of Countrywide, policymakers had to be concerned about "a big domino going down," Bethune said..
For Countrywide, a takeover by a financially robust suitor is "a gift from heaven," said banking industry analyst Richard Bove of Punk, Ziegel & Co.

The stock market responded by falling another 267 points but: "Countrywide Financial Corp. founder Angelo Mozilo, one of the nation's highest-paid chief executives, stands to reap $115 million in severance-related pay if his troubled company is acquired by Bank of America Corp., regulatory filings show."

This is a failed chief executive -- a failed and overpaid chief executive -- who has driven his company to the brink of bankruptcy," said Daniel Pedrotty, director of the office of investment at the AFL-CIO. "I think shareholders are going to be especially outraged if he walks away with another pay-for-failure package."...
"He has driven the stock price into the ground and the company has been destroyed," Ferlauto said. "Their customers have lost their homes and he is potentially walking away with more than $100 million. For us, that's unconscionable enrichment.

It is possible that the result of this “take over” will simply be that the largest corrupt mortgage lender in the nation drags down the bank that had most to do with the agricultural development of the San Joaquin valley. It is also possible that if enough bubbles burst simultaneously in the north San Joaquin Valley, we may not live long enough to dig ourselves out of the collapse. These "possibilities," left to us by our leading public officials and special interests, are rotten. They harm our quality of life, our health, our economic futures and our childrens' futures are worse. Local politics, our own "art of the possible," has few good choices to make.

It’s no secret that Merced faces many steep challenges. Ours is among the poorest counties in California with one of the state’s highest unemployment rates and lowest levels of educational attainment. Poverty, substance abuse, and child neglect are daily realities for many of our children and neighbors. -- Merced County Human Services Agency Director Ana Pagan.

Merced was poorer than competing counties for the UC campus in the San Joaquin Valley. Maybe that was one of the deciding factors in locating it here -- the idea that it would have more positive economic and cultural benefit here than at an alternative site. In the short run, UC's largest impact on Merced has been to have acted the engine for growth of the highest foreclosure rate in the nation the worst series of assaults on state and federal environmental law and its enforcement in the history of those laws and the agencies enforcing them. In Merced, this was accompanied by a wholesale devaluation of anyone not in on the speculative boom. Local land-use officials and an endless parade of real estate boosters both promoted and believed in an instant transformation of the poor old agricultural economy of Merced. It didn't happen. It will take at least a generation for UC Merced to exert much positive economic influence here. Meanwhile, thanks to the spectacular extent of the bust in this region, it may take almost a generation for development to pick up steam again. Meanwhile, the county remains full of people who are not part of the famous "high-tech, bio-tech engine of growth" promised by UC and who are wondering what's next.

Badlands Journal editorial board
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1-10-08
Sacramento Bee
Fish: Delta drop sparks fears of ecological shift...Matt Weiser
http://www.sacbee.com/378/v-print/story/623644.html

Bees: Steep population loss hits agriculture hard...Ngoc Nguyen
http://www.sacbee.com/378/v-print/story/623661.html

Modesto Bee
Report: California a tough place for children to get ahead
California ranked 40th in nation on likelihood students will find success...MERRILL BALASSONE
http://www.modbee.com/local/story/175786.html

1-11-08
Los Angeles Times
U.S. denial of California emissions waiver criticized
Sen. Boxer, chairman of a Senate environment panel, says she might subpoena documents concerning possible White House interference...Margot Roosevelt
http://www.latimes.com/news/science/environment/la-me-epa11jan11,1,33705...

Bank of America announces Countrywide takeover
The $4-billion deal removes the threat of a bankruptcy that could wreak more havoc in the mortgage market. Both firms' stocks decline...Walter Hamilton, Tom Petruno and E. Scott Reckard
http://www.latimes.com/business/la-fi-countrywide12jan12,0,786793,print....

Mozilo could reap $115 million
The Countrywide CEO's potential pay if his company is acquired rankles critics...Kathy M. Kristof
http://www.latimes.com/business/la-fi-mozilo11jan11,1,5951348,print.stor...