What we need to do NEXT Part 4

This is the fourth part of my massive essay, "What we need to do NEXT." For the previous three parts, read them below.

Education

In the 1960’s, the average college graduate had little debt when given their diploma. Most of their education was funded through grants or the GI Bill. Now, most students graduate with a minimum of $30,000 in debt, usually more. Most of the funds spent on tuition and books come from loans. This needs to end. With credit becoming scarcer, we need to start funding our higher education. This is where fortunes are started, through education. Businesses cannot produce good products without well educated people. Government doesn’t work well without well educated people. Money spent on education is not lost, it is invested, and we need to start treating it this way, instead of treating it like it’s money thrown down a well.

We need to support our troops by giving them a free education. Honestly, how can we say that we are supporting them when in fact all of the funds they are getting for education right now are a part of their pay? We need to do more for those who would sacrifice themselves for us.

Money paid into colleges also helps our country by supporting basic research. The more basic research that is done, the more our industry benefits and the more jobs that are created.

For primary education, we need to start the reforms by paying our teachers better. The starting pay for an elementary school teacher in California is about $24,000. That’s nothing. Two teachers together aren’t making $50,000 per year. That needs to be changed dramatically. You absolutely can’t get a first-rate education from someone who can’t survive on their pay, let alone pay off their college debt. It’s scandalous.

After doing this, we need to reform our textbooks, and how they are written and chosen. History text books are written as propaganda pieces, and chosen based on how much they project the way we wish our country had been, not on actual history. That’s nuts. Let our kids know what has happened in our country, or they might make some kind of dumb mistake, like allowing a depression to happen again.

None of this is optional. If we refuse to do these reforms we have in effect decided that our country will fade away into history.

Barack Obama's Same Path Ad

Folks-
I'm not certain if I have mentioned that I am a supporter of Barack Obama. In case that isn't obvious, I am.

I do not believe that he is perfect. I'm not sure we share the same sense of urgency about the environment and alternative power, but I am very certain that McCain't and I are on different plains of existence about these subjects. Mr. Obama believes that something should be done, while McCain't thinks we don't have to change at all, except maybe by making it easier to pollute.

When it comes to the economy, Mr. Obama and I seem to be in greater agreement. I would like to see more details in his plan, like what he intends to do about the mortgage mess. Where McCain't is concerned, I would like to see him stay the heck away from the mortgage mess, since he obviously has no idea just what the heck he should be doing. Throwing money at rich people will only make them richer, not improve the economy. "Trickle-down economics," what used to be called "Reaganomics," has been an utter failure. That's what is responsible for our economic woes right now.

I'm not sure if Mr. Obama would agree with me about what to do to increase investment by rich people in America. Personally, I would tax those making 7 figures or more at a much higher rate, perhaps as high as 70%. No joke. That's still not the highest rate we have ever had. In the '60's the highest rate was 90%, and the net effect was that people who made the most money did what they could to stay under that tax rate. Think about that for a second. Imagine these CEOs suddenly trying desperately to avoid making tens-of-millions of dollars. Where do you think the money would go? Back in the '60's it went back into the business. Imagine just how solid American businesses would be if suddenly each one of these major companies had another $50-100 Million available per year, just from executives not taking such large salaries. Is it possible that this one change would fix our economy? Probably not, but it wouldn't hurt.

I'm certain that Mr. Obama agrees with me that education is the best buffer against a bad economy. McCain't clearly disagrees with us. Just this year, McCain't voted against a bill that would give Iraq War Veterans full tuition at any college or university in the U.S. because he thought it would lead to fewer soldiers re-enlisting. He didn't account for the fact that it could lead to more people enlisting in the first place. Right now, that's the problem our military is facing.

In any case, Mr. Obama has released a new short video on his economic plan. I'm including the link to that video here. Please take the time to watch it, and then read the comparison of his economic plan to that of McCain't's at http://www.barackobama.com/issues/economy/sidebyside.php.

-Edly

A Solution to the Current Financial Meltdown

By Ed Smallwood

Folks-

We’re hearing a lot of talk about the bail-out of the financial companies on Wall Street. Both parties are weighing in, with most people (more than 70% of those polled) skeptical that giving almost a Billion Dollars of money without oversight to one person to dole out to the companies is a terribly good idea. The President and John McCain seem to be okay with it. Republican Representative Joe Barton from Texas (who voted with the President 96% of the time) called the bill “Dead on Arrival,” and stated that the bill “doesn’t have 40 votes in the House,” so someone is listening.

This is my take on the situation:

We are right to be skeptical. The way the bail-out has been architected, the executives of the companies are likely to keep their jobs and fat bonuses. The government will take a chunk of the shares in the company, diluting the value of the remaining shares and shafting the shareholders if the company recovers. It does nothing for the homeowners whose failing loans are causing the financial debacle in the first place. In short: The heck with your retirement or your home. What’s really important is saving rich people’s butts! Understand?

The really huge problem with this is that we are likely to see as much as (possibly more than) Seven Billion Dollars in losses through the mortgage meltdown. That’s Seven Billion Dollars in lost home equity. To put it another way, that’s more than half of the U.S. Gross Domestic Product. Imagine if your gross salary suddenly got divided in half for a year without changing any of your other obligations. That’s what we’re talking about happening to the economy of the U.S. And that’s not counting the amount of money that people put into their home and lost due to the home being foreclosed on.

Now imagine that the current bail-out doesn’t address any of the problems with the mortgage meltdown. Why imagine? It doesn’t. None of this money, not one single cent, is slated to reduce the damage to homeowners’ pockets. All the legislation does is make sure the mortgage company is still there to foreclose on the homes if need be.

Now, keep in mind that while that’s not good, the current bill also does nothing whatsoever to address the bad mortgage making decisions that got us into this problem. Nope, repealing Phil Gramm’s deregulation of the industry is not currently on the table.

So, here’s the deal: Executives keep their jobs, retirement savings invested in mutual funds get smaller, homeowners are out on the street, and taxpayers are left holding the tab. If that isn’t a Bush/McCain field goal, I don’t know one.

Here’s what we need to really be doing:

First, we need to bring back confidence in our financial institutions. Simply making sure that they continue to exist isn’t that helpful if they aren’t doing their jobs. That means they have to be lending money out to people who can afford it and collecting that money accordingly. In order to make sure they are doing their job we absolutely must at a minimum bring back the old regulations by repealing Phil Gramm’s (architect of McCain’s economic policy) deregulation bill. Creating a few new regulations might be useful as well, as long as they prevent this kind of mindless money grab.

However, that is nowhere near enough. We should also have the FDIC and SEC swoop in on banks and mortgage companies after closing on some Fridays for unscheduled audits that would take the entire weekend. Go over these institutions completely and with a fine-toothed comb. Then on the following Monday morning if the company doesn’t pass the audit, the government takes them over. If they do, then the FDIC or SEC should make a nice, loud public statement that the company is financially sound and ready to continue business.

That helps bring back confidence in our financial institutions, but doesn’t help the real backbone of our economy. In order to fix that, we’re going to have to relieve the homeowners of some of their burden. This is going to be hard and involved. My recommendation is to do something similar to the audit of the banks themselves. We’re going to have to freeze foreclosures for a time. Before foreclosing on a property, a financial institution will have to do the following: Attempt to contact the homeowner and offer to meet with them. This should be first attempted through the mail, followed by phone calls, and then home visits if necessary. The mortgage companies would not be able to foreclose on the property if they couldn’t prove that they had done this. If the homeowner agrees to a meeting, then they would meet at a neutral location with the mortgage company and a neutral mediator.

At the meeting, the mortgage company would have to present an honest assessment of the current value of the property, as well as the amount owed on the property. The homeowner would present documents showing their income as well as their financial liabilities. It is likely in many cases that the homeowner would not be able to pay back the entire amount of the loan. It’s probable that in many areas the home could not be sold for more than the loan amount for a decade or more. The mortgage company is going to have to take a loss in these cases. But, we can mitigate the loss if we’re careful. The loan must be restructured so that the payments are affordable and not for less than the reassessed value of the property, but if the homeowner sells for more than the loan’s restructured value for up to some specified time (I would say up to 10 years after the life of the loan would be reasonable), the mortgage company should be entitled to a portion (not most or all) of the profits up to the original value of the loan. This money going to the mortgage company would be used to offset any bailout funds given to the mortgage company by the government, and buy back shares in the company from the government, helping to keep shareholder equity. Any financial institution unwilling to do this should be excluded from bailout funds.

This idea has the merit of helping to free up funds for the homeowners to spend or invest and keep our economy afloat, while protecting shareholder value. However, in order for this plan to work it will have to be heavily promoted. It will do nothing if people don’t know about it. Is this idea perfect? No, it doesn’t really punish those who were greedy enough to get us in this mess. Is it simple? No, but the simple solution was to prevent this problem in the first place (and it was clearly preventable.) However, it is the best we can probably do at this point, and it would probably be enough to prevent a serious recession.

Anyone in Congress who wants to steal this idea and elaborate on it is very much welcome to do so.

The Current Financial Situation, and Some Solutions

By Ed Smallwood

Yesterday I was watching CNN. Connecticut Democratic Senator Chris Dodd was being interviewed, I can’t remember who it was that was asking the questions. What stuck out in the interview was what he said about a closed-door briefing the Senate got from Federal Reserve Chairman Ben Bernanke. He wouldn’t comment on the exact content, after all it wouldn’t be terribly useful to keep the information in a closed-door briefing if it was all going to become public immediately afterward. What Senator Dodd said was that after Mr. Bernanke was done talking, there was stunned silence for 10-15 seconds in the room.

That’s significant. It’s also very frightening, either way you look at it.
I have known for some time that things were going very wrong with the economy. I remember an interview last March with Paul Krugman in Fortune magazine where he said that he thought we would hit 6-7 Trillion Dollars in capital losses in the housing industry this year, a 25% reduction in equity throughout the United States. That is what we are just beginning to see right now. Congress is talking about an 800 Billion Dollar bailout. You can see that what Congress is talking about is roughly an order of magnitude too small to cover what Paul Krugman was talking about. In short, 88% of the losses aren’t being addressed by Congress.

Now, we also have to take into account that the International Monetary Fund is estimating our GDP at roughly 13 Trillion Dollars. The losses we are talking about are more than half of the Gross Domestic Product of the entire United States. Nobody alive has ever faced a financial disaster of this magnitude.

Is that what Chairman Ben Bernanke was telling the Senators in that closed-door briefing? Numbers so large that it stunned veteran Senators into silence? I think that’s exactly what happened.

Here’s the real problem: The simple answer to this problem was to avoid deregulating the banking industry in the first place. Don’t let this debacle happen. Unfortunately several years ago the “Regulation is Bad for the Economy” branch of the Republican party got it’s way, with Senator John McCain cheering it on. The easy and simple answers to this problem are all gone now. There is no choice but to see our economy slide downward. It’s simply too late to prevent that.

So, what do we do now?

We’re going to have to bail out Wall Street. We don’t have a choice about this. That’s what Congress is doing to some extent now. The problem with how they are doing it is that they are diluting the shares that investors have by taking majority stakes of the companies they are bailing out and putting it under Government control. They are allowing the investors a chance to keep some of the value, but not most of it. This is unlikely to work in the long term. People’s retirement savings are going to suffer, even though it isn’t as much as they could. In short, the government is bailing out the executives of the companies more than the investors.

The landscape for homeowners is even bleaker. Nothing whatsoever has been done to address their concerns. Foreclosures are happening at an even greater pace than before. More properties are going “upside down” in value than they were before, and the Santa Clara County Association of REALTORS is estimating that this will be the case until at least 2010. Some estimates I have been reading put it at 2012 or later.

Now, with it harder than ever to declare bankruptcy (thank you Republicans,) and savings evaporating, the backbone of the American Economy, the Consumer, has almost no money to buy anything. We can see this through the fact that spending is decreasing while savings are simultaneously decreasing. Until something is done to address the concerns of the average person on the street, the economy can do nothing but spiral downward at an ever increasing rate.

This is where we stand now.

What are we going to have to do?

We are going to have to make peace with the fact that our economy is going to crash first of all. We can’t prevent it. Next, we have to do what we can to prevent it from crashing so bad that it can’t recover. This is a real possibility. There is nothing magical about the economy of the United States. Other countries in a similar state that did nothing saw their economies die outright. Most of them are third-world countries now, or failed states. That’s the danger.

We have to bring back the regulations that prevented this problem from happening decades ago. This is an absolute must. Doing any less than this means that nobody will trust banks enough to loan them money to make loans. That’s how the system works. Without that key part the system collapses and doesn’t recover.

We have to protect the money of the average person as much as possible right now. We can’t expect someone to pay back a bad mortgage at an ever increasing rate for the rest of their lives, tying up their spending power in servicing bad debt just because some company got greedy. If these homeowners decide to allow the banks to foreclose, they will find it harder to buy another home later. The inventory of foreclosed homes will increase, because there will be fewer qualified buyers (you can’t have a foreclosure in at least the last 2 years to qualify for a home loan). This is dangerous in several ways. First, unoccupied homes bring down property values. Second, they are fire dangers. Houses are fuel. If you have enough of them you can end up with a wildfire in the middle of a city. Oakland can tell you why this is bad.

This means we have to do at least one of two things, probably both: we will have to forgive at least part of the bad debt to keep people in their homes, or we will have to allow people with foreclosures on their record to get credit anyway. The former is preferable, and while the FHA is doing this to a small extent, the program needs to be massively expanded. The latter solution will probably have to be put into effect as well. Why should we do this? Why not let the people who took out these loans just hang? If we allow our spite to get ahead of our pity (or self interest), making sure these people pay back their loans, our economy suffers from having too little money left over to buy the things that we sell. All of us suffer if we make any one segment of the population suffer too much.

In addition, we really need to start working on our infrastructure, and I don’t mean just roads, bridges, ports, electricity grid, and communications grid. I mean the workforce as well. For most of my life we have seen a growing battle against the workforce. McCain’t has been talking a big game over how strong our workforce is, but the reality is he has actively been working on weakening it.

The big secret that allows the American economy to be so strong has been our educational system. Public education was invented here. We have expanded it ever sense the Brotherhood of Friends (often referred to as “The Quakers”) introduced the concept. All of my life the Republican Party has been trying to weaken it. Vouchers. Increasing tuition in Universities. Destruction of vocational schools. Even “No Child Left Behind” which is decreasing Federal funding to elementary schools. Recently when Democrats tried to bring back full tuition for all Iraq War Veterans, McCain’t voted against it. He said it would reduce the incentive for our Servicepeople to reenlist. This attitude is going to prevent our economy from recovering.

We need a top of the line communications grid to allow educated people to build products using electricity that will be shipped to the consumer through working ports and over working roads and bridges. If any one of those things isn’t working, our economy dies and stays that way.

Why wouldn’t our economy recover? Really, why would it? People with money are under no obligation to invest it in our country. If our economy is wrecked, they would be dumb to put good money after bad. They’ll invest it elsewhere, in economies that are booming. China is a good example. With no money being invested in our country, no educated people to design new products or services, a 20th century communications grid expected to help them design them, no energy to build them, and deteriorating ports, roads, and bridges to ship them our economy will stay sunk.

What we really need to get us through this crisis is a leader that believes in our future, not one that is trying to bring us back to a failed past, namely the “Roaring ‘20s.” Let’s all make sure we work toward our country’s future.

Links:

Fortune Magazine interview with Paul Krugman: March 17th, 2008 by Jia Lynn Yang http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/index.htm

Has the McCaint campaign jumped the shark?

Folks-

Maybe it's just me, but it seems that with the most recent TV ads comparing Barack to Paris Hilton and Britney Spears that the McCaint campaign has hit a new low. The desperation is palpable to everyone. McCaint has no message worth listening to, so his campaign is going to throw everything they can at Barack in the hope that something sticks well enough to him, and doesn't bounce back at them.

TV fans hace had a term for a long time, called "jumping the shark". The term comes from an event on "Happy Days" where Fonzie jumps over a shark while surfing. It simply means that a show had an event that forever changed all episodes of that show afterwards. It is often interpreted as an event that pretty much wrecked the show. Although I have never heard of this term being applied to a political campaign, I do think the Paris Hilton ad is a good example of a campaign jumping the shark.

The level of desperation on display right at this moment from the McCaint campaign is incredible. He dared Mr. Obama to go on a world tour, visiting Iraq and Afghanistan, and other world powers, and he did so, looking much more Presidential than Mr. McCaint did on his trips. Mr. Obama attracted hundreds of thousands to his speeches overseas, when McCaint has a hard time attracting hundreds to his at home.

I won't say that Mr. McCaint doesn't have a chance, but his cances right now aren't good. We will see if their desperation can muster something that can prevent real change or not.

This blog entry is also available at my.barackobama.com. I recommend anyone who is interested in positive change in this country register at that location and makes a donation to Mr. Obama's campaign.

McCain's Victory Speech

By Ed Smallwood

This is the kind of speech that John McCaint may be giving this November if things don’t start changing real soon.

“My friends, I have just been told that we have achieved victory in our campaign! We have won this battle and will be in the White House this January, as we planned!

“There are some people that I must thank due to their special help! To those who supported Hillary Clinton and voted for me, I give a special thanks! You helped us win this election by an overwhelming mandate of almost 1% of the vote! You made all the difference! To those who refused to vote because Mrs. Clinton lost the primary, you helped by not standing against our mandate! Thank you!

“Your insistence on avoiding party unity helped to ensure that women’s rights will be set back in this country! By throwing a public tantrum through sites like ‘P.U.M.A.’ or ‘Party Unity My A$$’ you made sure I will be able to replace at least two moderate Supreme Court Justices with the most conservative judges I can find! You personally, either through your vote for me, or by refusing to vote for my opponent, made sure I can mend the divisions in our country by reaching across the isle in Congress and bullying the Democrats into voting in step with Republicans on important issues like making sure I can tap your phone conversations at will and without oversight, and ensuring that rich people get permanent and generous tax breaks! We will be able to pass an amendment to the Constitution outlawing all abortions in our country by the end of my Presidency, and it’s all because you couldn’t forgive Obama for not realizing it was a woman’s turn in office!

“Yes, my friends, we do owe these stubborn Hillary supporters a lot! Especially my friends in the financial and energy industries! By throwing the biggest hissy fit in our times, they have ensured that all government regulation of these and other industries will end, allowing fraud and outright thievery to take the pensions of innocent retirees! We will, because of Hillary’s most stubborn supporters, be able to hand Social Security trust funds over to the same people responsible for the current mortgage disaster!

“And we will be able to keep our troops in Iraq for at least the next hundred years, ensuring money flows through there to our friends in Black Water and Halliburton without oversight!

“Because of them and you, my friends, the mass shipping of U.S. jobs overseas will continue unstopped, and at a greater pace than in the past, to be replaced by minimum wages jobs! And if we can get those cowardly Democrats in Congress to back down, we can even get a reduction in the minimum wage to help our struggling industry keep pace with slave wages in communist countries!

“Yes, their help was invaluable to us, and we owe them a huge debt that we can never repay. Except through higher debt to foreign governments.”

The Political Anchors Dragging Down John McCain

By Ed Smallwood

Senator John McCain has problems. He has been trying to distance himself from an unpopular President in G.W. Bush. He has been trying to convince you that because he is a former POW from the Vietnam War that he is a military supporter. He also wants you to believe that the economy is going well. Each of these issues is weighing him down like anchors around his neck.

It came out recently that former Senator Phil Gramm, who was a lobbyist for UBS, and who lobbied hard for deregulation of the mortgage industry, is a leading economic advisor to Senator John McCain. That’s right; the architect of the current “Mortgage Meltdown” is a senior advisor for Mr. McCain’s economic policy. We’ve already seen what happens when the President’s closest advisors are former industry big-wigs—you get $4 per gallon oil, manipulation of the electricity market in California, implosion of Enron, and the destruction of the home owning dream in America. Do we want to continue down this road with John McCain.

Right now the Senate and the House of Representatives are in conference to put the finishing touches on a new G.I. Bill that the President has vowed to veto. It would allow veterans to go to college after their service is completed. Many of our Military Servicemen and Servicewomen went into their branches of the service with the understanding that they would get monetary assistance in college as a result of their service to our country. All of the major veteran’s groups have come out in favor of this bill.

John McCain has publicly come out against the new G.I. Bill, in opposition to many of his peers in the Republican Party. He says it will cost too much. I’m not joking. Mr. McCain has said in no uncertain terms that he is not willing to give an education to people who are willing to give their lives for him and us. The cost of the lives of those over 4,000 dead in all of the branches of the military including the National Guard is not enough to make sure the rest get an education. Over 30,000 have been wounded, and that is not payment enough, according to John McCain and G.W. Bush, to make sure they and their compatriots get an education. Mr. McCain says he is afraid that one of the main recruiting tools that the military has, the offer of a free education in exchange for military service, will encourage current military personnel to leave the military instead of spurring more enlistment, and that could make a difference in his 100-year-war. Is that supporting our military?

Relying on industry to give input on how it should be regulated. Giving military support lip service. Allowing the economy to fall into disrepair from neglect. Don’t these all sound like the methodology of G.W. Bush? Can McCain really distance himself from Bush while using these tactics?

More importantly, can we vote for McCain while knowing all of this? For myself, I know that the answer is an emphatic “No!”

Sources:

Military Casualties:

http://www.antiwar.com/casualties/

McCain’s Veteran’s Problems:

http://www.time.com/time/politics/article/0,8599,1808161,00.html?xid=rss-topstories

http://washingtonindependent.com/view/mccains-gi-bill

Sen. Phil Gramm’s lobbying:

http://www.bizjournals.com/phoenix/stories/2008/05/26/daily15.html

Mass Commuter Migration

By Ed Smallwood

Right now we are all glued to our sets, wondering how the coming elections are going to go. Will Hillary somehow manage to get the Democratic nomination even though she’s behind? Will McCain manage to get more than 75% of his party to vote for him, even though his only competitor, Ron Paul, is getting less than 8% of the vote, and Huckabee is still pulling about 12% even though he’s no longer in the race?

I’m going to take a much longer term look at what is going to be happening. Much will happen regardless of who is President. The main difference the President and other politicians can make in the next few years will be in how traumatic these changes are.

I’m sure by now that you are aware that we have been in a significant Real Estate downturn for the last year or two. One analyst has said that he expects U.S. home values to decrease by as much as $7 Billion in the next 18 months. Some of the hardest hit areas in the country are in the state of California, specifically Stockton and Modesto. Home foreclosures could hit as much as two-thirds of the properties in Stockton. 90% of the homes for sale in Los Angeles are short-sales—being sold for less than is owned on the property.

Let me throw in another piece of information that may at first seem unrelated, or perhaps related in another way. Goldman Sachs released a study a few days ago that predicted that oil will be priced at $200 per barrel in the next two years. This sent prices for oil up to $123 dollars on Wednesday. We should expect to be paying $7, $8, or even $10 per gallon in 2010 according to this study.

I’m going to be mentioning Modesto a lot in this essay. I live in San Jose, which is the self-proclaimed Heart of Silicon Valley. Modesto, about 90 miles away, has been a bedroom community for Silicon Valley for a couple of decades now. I have known people who have commuted between Modesto and Scotts Valley, 110 miles apart, just because they could afford a home in Modesto. Keep in mind that in this part of California, a 110 mile commute takes about 3 hours each way, more in rush hour.

Since I was a child Modesto had filled two roles—It was the bedroom community for Silicon Valley, and it was an agricultural community. The population of Modesto has grown from 194,506 in 1970 to 446,997 in 2000. In short, it grew about 230% in that time. I’m sure if we had more recent information you would find that Modesto had grown even more between 2000 and 2005.

In the 20^th Century, the single biggest change in our society was brought about by the introduction of the relatively inexpensive automobile. Fueled by cheap gas, it allowed its owner to go almost anywhere they wished to go (within reason), pretty much anytime they wished to go. People were no longer restricted by how far they could walk, or what time the train was leaving. In addition, a car could be much faster than virtually any previous form of travel.

This resulted in many changes to our society. The one I am most interested in as far as this essay is concerned is our living habits. Before the car, you lived close to where you worked. Either you worked on the farm where you lived, or you lived in the town or city where you worked. You either walked to your worksite, or you rode a horse or took a train of some kind the short distance to your workplace. The idea of living in one town and working in another was unheard of, even for the rich. It was simply too expensive and too time consuming to do this.

With the introduction of the Model T by Henry Ford’s car company, this all changed. It started to be possible to live further from your workplace and commute. Suburbs started to form. This trend accelerated in the post World War II era, and continued on until very recently.

Some of you may be asking why I would talk about this trend in the past tense. The reason is because I believe it is over. The new trend will be the reversal of the past 80 years of suburbanization.

The popping of the Real-Estate Bubble about 2 years ago is simply the first shot. People ran up the cost of homes they could not afford, and when they could no longer pay back the money, the banks started to foreclose on the assumption that they could sell these properties to someone else and make their money back. In some circumstances they are tragically wrong. The smart banks are going to negotiate with the borrowers and write-off their losses. The stupid banks are going to foreclose on the assumption they will find buyers, and then find themselves stuck with many homes that they will never be able to sell.

You may be thinking that I must be wrong. People have to live someplace, right? Those homes will be sold to someone at some price, even if it is a loss, and probably most will be sold eventually for more than they did originally, right?

Not when gasoline is $8 per gallon. We are running out of oil. No amount of hope or denial is going to change that. Gasoline prices are going to ratchet up from this point out. There will be times when it is a bit cheaper, but the trend is going to be. This is unavoidable. This will have a direct effect on where we choose to live.

We should not be asking ourselves what we can do to bring down the cost of gasoline. We need to be asking ourselves what we can do to bring down transportation costs. Hybrid and electric cars may not be a solution for many people. In the near future it may cost as much to fuel up a Prius as it currently costs to fuel up a large SUV. As demand for rechargeable batteries increases, the cost is likely to increase as well. This will increase the cost of hybrid and electric vehicles. The most obvious way of bringing down the costs of commuting is not to commute very far. Living close to where you work is an easy way spending less of your paycheck on transportation.

This is an ominous thing for cities like Modesto. Modesto has very little industry outside of building homes and shrinking agriculture. Most of the jobs there are services provided to people who live there. Over time, the combined cost of commuting plus the smaller mortgage payment in the bedroom city will begin to approach, and eventually surpass the cost of the larger mortgage payment closer to the workplace. For example, a person commuting in a Honda Accord, getting 31MPG Highway commuting between Modesto and San Jose is going to be paying $465 a month for gas at $4 a gallon. When the cost hits $8 a gallon, it will go up to $930. Commuting in a Jeep Grand Cherokee getting 20 MPG brings those costs to $720 and $1440 respectively. The amount that you are paying in gas at $8 per gallon can make up the difference in your monthly mortgage payment between a $300,000 loan and a $455,000 loan for the Honda driver, or a $540,000 loan for that Jeep driver. That makes up for the difference right now between living in Modesto and San Jose, easy.

Cities that are closer to Silicon Valley than Modesto will face this issue a little later, but not a lot. Tracy and Salinas at about 60 miles away from San Jose and Gilroy at about 30 miles away may have a little bit more time than Modesto, but they will have to face a declining population of commuters eventually.

The big question for leadership in these areas is how they will face this issue. You can ignore it and allow significant parts of a city to become a ghost town. You can look to create another industry. This could involve adding Indian Gaming Casinos, and living with a greater crime rate, or adding an amusement park, and living with more noise. It could involve something else entirely. It could involve the city declaring imminent domain on abandoned tracts, bulldozing the properties, and putting in parks to improve property values nearby. You could even allow people to buy vacant properties next to their own and combine the lots, and build a nicer home on the combined property. This might be a good idea in certain areas of a city. Some of these combined properties might even be returned to agriculture as large gardens or small farms.

Regardless, the trend is obvious: With expensive gas, people will choose to live close to their job. Doing otherwise will not be an option for most people. Political leaders will have to deal with this sooner or later. Smart ones will deal with it sooner. Lesser ones will deny the problem until the trend is obvious to everyone, and difficult to deal with because tax revenues will already be dropping. Stupid ones will say having abandoned properties in a city is not a problem, and hopefully, will be voted out.

Bringing these facts to the attention of local politicians will help. People living in these areas ignore the migration of commuters toward their job city at their own peril.

Sources:

Modesto’s population:

http://recenter.tamu.edu/data/popmd/pm5170.htm