“O reason not the need! Our basest beggars
Are in the poorest thing superfluous.
Allow not nature more than nature needs,
Man’s life is as cheap as beast’s.” (Lear, II iv)

The Problem:

If there is any one area of American life that best expresses the adage “poverty in the midst of prosperity,” it must be housing. Even as thousands upon thousands of homes now stand empty, vast swathes of speculative suburban developments along the highways and hills of California turned into ghost towns, homelessness has increased. In Washington D.C, the number of homeless families has increased in the last year by 15%, with similar figures being reported in New York City and other metropolitan centers. Even when the sub-prime boom was spreading home-ownership wide and far and actually beginning to make headway against the unequal distribution of housing in America, in 2006, 8.8 million households were paying more than half their income in rent (I was probably one of them). Major systemic problems (the lack of affordable housing and workforce housing near where people work, the need to in-fill versus sprawl, racial and class discrimination) were not being addressed, even when the market was flush.

It isn’t flush now. If ever there was a need for proof that “spatial mismatch” and “credit discrimination” exist, we can find it in the fact that at a time when thousands of houses are empty rotting shells, that people who want and need housing are being turned away by banks who have suddenly become paragons of fiscal rectitude.

At the same time, the national unemployment rate currently stands at 9.4%. Within the construction industry, unemployment stands at 21%. Within California, the situation is even worse, with an overall unemployment rate of 11.5%, and a construction industry that’s down 150,000 jobs from last year. While I fully expect that the stimulative effect of the American Recovery and Reinvestment Act of 2009 will begin to ameliorate this situation within the next six months, I personally was calling for an even larger jobs bill at the time.

I think we can tackle both problems at the same time.

The Solution:

Public employment programs – like the Works Progress Administration (WPA)- have a special affinity for has been called “light construction.”  In its eight year existence, the WPA built nearly 40,000 public buildings, and rehabilitated or improved another 80,000, despite the fact that most WPA workers actually did road construction. Those 120,000 buildings included 6,000 new schools, 2,170 school expansions, and 31,000 school modernizations, 322 new or improved hospitals, and 6,400 public office buildings. Even if you divide it up yearly, it still comes out to 15,000 buildings a year, done with only a fraction of its 3.5 million strong workforce. In my own research, I have found that the one thing that the WPA wasn’t able to do, that administrators and experts within the WPA like Emerson Ross, Jacob Baker, Alan Johnstone, Nels Anderson and a handful of other almost completely forgotten New Dealers wanted to do, was build housing.

As you can see in the above memo written by Jacob Baker, the plan to expand the New Deal’s employment program to 3-6 million men (far bigger than the WPA eventually managed),  also went hand in hand with an attempt to deal with the chronic market failure to provide affordable housing in the city core. This insight, the drive to kill two birds with one stone, is one that we should follow today.

My suggestion would be for the Federal government, along with the state and local governments, to go into areas where the housing market has failed (large proportions of renters paying more than 50% of income in rent, housing values far out of sync with median incomes, large numbers of abandoned foreclosed properties, or a lack of affordable housing in general) and do three things: first, to restore and rehabilitate derelict housing and second, to build new housing units where new housing is needed in central cities, and third, to destroy “ghost towns” that are now nothing of blight in such a way that as much of the materials can be saved as possible.

If we were establish a Housing Progress Administration (HPA) to employ 5 million unemployed workers (many of whom would no doubt be former construction workers) to do this, and we paid $24k a year (assuming an overhead rate of 30%, which is actually 10% higher than the WPA”s historic 20% rate), making a deal with states and localities to pitch in for the cost of land and materials, it would cost approximately $155 billion per year. If we kept the program going for the next two years, at which point economic growth would start to transition into employment growth, it would cost $310 billion – less than half the cost of the stimulus bill. And it would create at least 5 million jobs, nearly the total number of jobs lost in this recession.

Now the question becomes, what do we do with this new housing? I have a few suggestions:

• Selling At/Below Cost – the wonderful, undiscovered virtue of the public sector is that it doesn’t have to make a profit. If we were to sell the new/reclaimed housing at or below the cost of construction, we could begin to reverse the impacts of the sub-prime collapse, by getting low to medium income families back into housing with low-rate, FHA-backed mortgages, instead of crooked, ballooning loans. Moreover, by moving thousands or even millions of people back into housing would help defray the cost of the construction program, pushing it well below $155 billion.
• Giving Away Housing – in cities with high rates of homelessness, one of the most successful recent programs has been to simply give homeless people housing for free. For the 17% of the homeless who work, it simply gets them over the obstacle of putting together first-and-last plus security deposit; but for many more, getting a mailing address and a phone number, a place to clean their clothes, and so forth is a huge helping hand towards getting a job and staying off the streets. Even if we don’t make any money back on giving away housing, we would be solving a major social problem and a major human crisis.
• Establishing Rental Co-ops – finally, we should recognize that home-ownership is not the only route to economic security, and that our public policy needs to do more to ensure that renters get the same kind of government assistance that home-owners get from the FHA, HOLC, tax breaks, and other public policies. Thus, in addition to providing new housing for sale, the HPA should also create a variety of apartment buildings and single homes for rent, working with local housing groups (yes, like ACORN) to establish local rental co-ops who would operate and maintain the units.

In the face of manifest human need and the gross waste of our current system, what else can we do but help?

I think the general consensus on the economy from the grand poohbahs of the establishment is that we’re contracting less slowly, that we’re easing toward the bottom and will be able to improve as the year goes on.  This optimism depends on no further “unforeseen” downturns in key economic sectors.  But that just doesn’t seem plausible.  Zillow.com’s estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline.  Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall.  And thus we will not see much of a rebound in equity in the short term.  Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.

Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation’s economy to its knees last year.

Here’s another sign that California’s foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.

The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.

The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.

Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter.  As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners.  We all understand that bad loans caused this crisis in the first place, right?  Well, a lot of bad loans are still out there.  At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006.  Loans made in 2006 have an 8.5% default rate statewide.  These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates.  And this includes jumbo loans.

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

If you think this is over, particularly in California, duck.

The CA-32 race to replace Labor Secretary has less than six weeks to go until the primary.  We know about the two major candidates; Board of Equalization member Judy Chu (not to be confused with Betty Chu, who will appear directly above her on the ballot and surely cause some errors among voters) and State Senator Gil Cedillo, whose extreme spending of campaign contributions on shopping, meals and lavish hotels made the LA Times this weekend and caused a stir.

Somewhat less remarked-upon has been the candidacy of Emanuel Pleitez, a product of East Los Angeles and Woodrow Wilson High School, who matriculated at Stanford, joined the advisory board of Voto Latino (a group that encourages voter registration and engagement for the Latino community), worked for Democratic lawmakers like Antonio Villaraigosa, Tom Daschle and Hillary Clinton, and worked on the Obama transition team at the Treasury Department.  On Friday I had the opportunity to chat with Pleitez about his life experiences, the financial crisis, housing policy and a host of other issues.  A paraphrase of that conversation follows.

(As a side note, this story about one of the volunteers on the campaign, who traveled all the way from Santiago, Chile to work on it, is pretty amazing.)

Calitics: Tell me about your experiences that have brought you to this run for Congress.

Emanuel Pleitez: You know, after college and working in the private sector at Goldman Sachs, I was able to travel a lot.  And I think visiting 27 countries gave me a new perspective on what the challenges are out there in the world.  When I would go to South Africa or India, China, Brazil, I would visit the universities, and the slums, and see their struggles, and it really made me think about the issues of global poverty.  I even drove a taxicab in Myanmar!  And what I took away from all that is that the best way to create change is to start in your own backyard.  And that’s what we’re doing in this campaign.

Calitics: So how are things going?

EP: Well, we have 25 full-time staff working every day.  And our main focus is door-to-door, face-to-face contact.  We’re out canvassing every day.  A lot of people tell me that they think we’re the only candidate in the race, because we’re the only one they see.  So we feel pretty good about our position.

Calitics: Now, you worked on the transition in the Treasury Department, and one central concern that a lot of people have had with Treasury is the lack of staffed positions at the undersecretary level, and the belief that Tim Geithner has basically had to go it alone over there.  How should people look at the transition’s performance in that respect?

EP: I agree with that criticism of Treasury.  I had nothing to do with personnel, I worked in other departments.  But there are many reasons for the lack of senior staff, and I wouldn’t discount the ability and importance of the career civil servants working in the Department, who are doing a fantastic job.

Calitics: This week, the Congressional Oversight Panel released a preliminary report on the TARP program and Treasury’s performance, and they were highly critical of the lack of transparency and clarity over some of these programs, as well as a lack of accountability for the big banks.  How would you assess the various programs offered to this point?

EP: I don’t have all the details of the COP report.  My inclination is to defend Secretary Geithner, but I want people to be critical.  I think what he’s trying to do is return confidence to the markets and get credit flowing again, and we’re seeing signs that the plans are starting to work.

Calitics: How would you approach the situation with the banks.  Would you just recapitalize them forever, or seek a Swedish-style receivership or a liquidation of the insolvent firms?

EP: I would consider a receivership, but I wouldn’t make that the first thing on the table because of the expense involved and the danger to the markets.  But clearly, recapitalization alone won’t work, that’s just making capital disappear.

Calitics: What’s the biggest problem in the economy that we’re facing at this point?

EP: The biggest problem is the foreclosures right now.  Some of them are in rural districts are suburbs and they’re second, third and fourth homes, but for families in urban districts like mine, a foreclosure means the loss of everything you’ve got.

Calitics: Would you support bankruptcy judges being able to modify the terms of a primary loan for borrowers?  Isn’t there a problem with modifying securitized loans, in that the people holding the securities that have been modified can sue the loan servicers for illegally changing the terms of the security?

EP: That is a problem.  But as I understand it, cram-down is more of a threat to incentivize loan modifications and keep people in their homes.  Which is what we have to do.  Investors will get hurt anyway if the loan forecloses.  Somehow, the lenders and the investors and the home-owners have to come to an accommodation, and in that process the primary goal should be keeping people in their homes.  I wasn’t initially open to principal write-downs, but I am more so now, because we’re seeing that the interest-only modifications are not working, and people are being forced into foreclosure just a few months later.

Calitics: What are some of the other challenges facing the economy that you want to deal with in Congress.

EP: Obviously, we still need major stimulus to save jobs and transition into a new economic future.  A large part of my district is at or near the poverty rate, and we need help in these tough economic times.  I expect another trillion dollars to be spent by the government.  In my district, we need investments in public transportation and clean energy programs to reduce emissions and create manufacturing jobs.  There’s a program here called “La Causa,” which targets the high school dropout rate, and gets those kids into vocational programs for green jobs, whether it’s solar panel installation or something like that, so that they can be prepared for the 21st century economy.  We need more of that.  And we need investment in education, because any dollars spent get the greatest return in education.

Calitics: Do you plan on joining any ideological caucus in Congress?

EP: I haven’t really given it much thought, but I don’t think so.  I think all political is local, and I’d rather focus on helping my local community and responding to the concerns of my district.  Maybe I’ll join the Congressional Hispanic Caucus, that should be safe for me.  (Laughs.)

Calitics: Well, thank you for talking to us today.

EP: Thank you.

This isn’t an article from 1933, it’s from 2009:

The customer seemed interested in a black blouse offered for $1 at the thrift store. But instead of buying it, she set it on the front counter.

Maybe tomorrow, she told the cashier, she would have the money. Or the next day. But not now.

“That is the way people are now,” said the cashier, Alicia Reyes, as she watched the middle-aged woman walk out of the store. “They just come in here and look. They just come in here to kill the time. And then they take off.”

Welcome to life in Mendota – the unemployment capital of California. With a 41 percent jobless rate, the town’s social fabric is tearing at the seams. Alcoholism and crime are on the rise. To save money, some mothers wash and re-use disposable diapers. Unemployed men with nothing to do wander the streets and sit on benches.

The irony is obvious: In a large swath of the nation’s most productive farming region, many struggle to fill their own cupboards.

There are many factors here – the economic meltdown and struggling economy, of course.  But the third year of drought conditions have devastated harvests, leading to less workers needed to pick crops.  This is the sad future of a dry California.  With housing cratered throughout the state, the fallback option of construction is closed off as well.  And as seasonal workers stay home, the businesses that support the economy have less consumers and suffer as well.

This is a disaster area, and the signs are it will only get worse.  The state jobless rate is projected to grow as high as 15% before subsiding, and will remain in double digits until the beginning of 2012.  The FDIC has issued warnings to at least six state banks, telling them to increase capital levels.  “Two-thirds of the state’s banks will be operating under cease-and-desist orders” by the end of 2009, according to one analyst.  And housing prices continue to fall off the cliff.

The Central Valley is in a Depression.  The rest of the state may not be as far behind as you think.

For several months, I have noticed a lack of context from the press when discussing California’s housing situation.  Sales of new and existing homes were rising, yes, but for a very good reason – all the bargains created by a spate of foreclosures.  In fact, the correlation matches up perfectly – the regions with the highest sales also have the lowest prices.  An example is the High Desert region, with a 203.1% increase in sales year-over-year, but a median price of $121,970, the lowest in the state.    The latest data on home sales shows a 41% decline in price year-over-year.  Bloomberg’s story reinforces the theory that only foreclosures are selling.  Does this mean that property values have decreased by a concurrent amount?  Not necessarily.  But it does mean that a non-foreclosed home in this distressed market has virtually no chance of selling, making it impossible to find the bottom of the market.  The price of foreclosures does affect the price of all homes, which is why stopping foreclosures is so important.

But that effort will be stymied by the continued erosion of the job market, leading to more unemployed and more people losing their homes.

California unemployment will peak at just over 12 percent late this year, setting a modern record, according to the latest forecast from the University of the Pacific.

Recovery will come slowly. Unemployment won’t sink back into single digits until late 2011, or some two years after the recession is expected to officially end, according to a forecast released Tuesday by UOP.

There’s typically a considerable lag between the beginning of an economic recovery and a drop in the unemployment rate, as companies are slow to re-hire even after business perks up.

We’re talking about two more years, at least, of significantly reduced revenue collection rates.  All the homes selling for pennies reduce the overall property tax revenue.  No projection of future revenues can reasonably be believed in this environment.  And so we’ll continue to see yawning gaps, with a governmental structure woefully equipped to deal with them.  The so-called “reform” of Prop. 1A, to hoard revenue in positive economic years to use in down years, will be inoperative for the foreseeable future, and even when the economy retains balance, the revenue forecasts for any spending cap will be increasingly based on these horrible years, leading to a disaster without end.

In years when revenues fall short, the state could use the reserve to cover spending up to the prior year’s level, plus an adjustment for growth in population and the Consumer Price Index.

But increases in the state’s senior population and health care costs have been outpacing both those measures, said Jean Ross, executive director of the California Budget Project, a nonprofit organization that focuses on the effect of budget policies on low-and middle-income Californians.

Moreover, Ross noted that under Proposition 58, the 2004 ballot measure, the state will continue to send 3 percent of revenues to the reserve, which would be subject to the tighter controls of Proposition 1A.

“It takes 3 percent off the top of the budget, and we don’t have that,” Ross said.

Ross and Michael Cohen, a deputy legislative analyst who studied the measure in depth, both said Proposition 1A could force revenue into the reserve even in years in which the state faced deficits.

My guess is that this is why the AFSCME local 2620 voted to support the measure and others on the ballot, while the overall union called for rejection.  The lure of easy money might sound nice for the locals, but unions with experience with spending caps in other states know that they accompany disaster.

Simply put, the state’s in an enormous amount of trouble and has no structures to deal with it.  This argues strongly for blowing up the boxes, for real this time, and starting over, by repealing the rules that subject the budget to tyranny and building a new vehicle for reform.