October 3, 2008

The California Disconnection

- Gov. Schwarzenegger is asking the federal government for a $7 billion emergency loan so he can meet payroll.

- Roughly half the dollar value of foreclosed-upon mortgages is in California, which has 12% of the population.

- California Scheming -- the leader of a real estate fraud ring in Beverly Hills is sentenced to 14 years in jail for buying the lousiest homes on Beverly Hills blocks, then having them appraised like their neighbors. Lehmann Bros., who lost $42 million in the scam, hired a private detective to check up on these guys and found they were inflating appraisals and spending the loans on private jets. This kind of thing was imitated all over Southern California on half-million dollar homes in dumpy neighborhoods with nobody being caught because the losses from fraud were too spread out for anybody to bother burning any shoe leather to check them out. (It makes you wonder how much money would have been saved if Wall Street firms had employed a few hundred Philip Marlowes to gumshoe around California's subdivisions checking up on mortgage applicants?)

As a native Californian, something that I've noticed is an increasing intellectual disconnection between the power centers of the East and the reality on the ground in California. At bottom, this financial crisis is California's fault. But Wall Street and Washington seemed to have no clue what California was like in this decade. Observe, for instance, all the incredulity when I've pointed out the role of Latinos in the housing fiasco.

In the 1960s, it was a cliche that California was where America's future was being test-driven. That has certainly panned out, and yet New York and Washington D.C. strike me as having lost interest in California, and thus have become increasingly oblivious to the future of the country.

A generation ago, New York and DC interest in California was motivated by envy, along with fear that California would someday displace them at the top of the totem pole. That fear has faded as California's future has faded.

Yet, California's fraction of the nation's population has grown since the 1960s, making the state even more important than when it was closely observed.

My published articles are archived at iSteve.com -- Steve Sailer

27 comments:

Garland said...

I know you wrote about Fred Barnes' characteristically brain dead "California Doesn't Matter" piece at the start of the decade. Harold Meyerson wrote something in 2002 for American Prospect gloating that California was the great new laboratory for progressive politics. He was right!

Anonymous said...

Steve do you have a link for 75% of the total dollar value of foreclosures occurring in California, Nevada, Arizona and Florida? Also, for the 50% total number of foreclosures in California?

- Maxwell

Black Sea said...

I think this post hits upon an important point, the role of California as a leading indicator for the nation.

I've never lived in California, so this is merely the impression of an outsider, but it certainly seems that the Golden State has become a much more difficult and complicated place to live over the past thirty years.

Absurdly inflated housing prices (apparently that's now being rectified), public school performance rivalling that of Mississippi, chronic budget crises in the state capital, an array of ethnic rivalries and competing spoils systems that threaten to turn ever policy matter into a simple battle over how to divide the cake. Immigrants flooding into the state from overseas, and across the border, and then qualifying for preferential treatement on the grounds of historical discrimination, which their ancestors couldn't have experienced (since they weren't there) and which obviously didn't worry the current immigrants too much, since they've chosen to come.

What holds California together as a coherent entity, other than the dream of material abundance and endless good times, and what's likely to hold it together once that promise has faded? I don't mean simply to dump on California, as I think this question will become increasingly acute for the whole of America.

And then you have to contend with the landslides, wildfires, and periodic earthquakes, nature's way of reminding you that you aren't really living in paradise.

I think California remains a leading ─▒ndicator for America, and our future is being test-driven there, which is why the political and media elites don't really want to dwell too much on conditions in California any more.

Anonymous said...

Won't market dynamics help California? As economic opportunity dries up for the uneducated (with the bust in residential construction, for example), won't some of these illegals go elsewhere? That, in turn, may make California more attractive (along with low real estate prices), and maybe California will get another wave of white homesteaders from the Midwest (or perhaps a wave of former Californians returning from the Pacific Northwest).

- Fred

Bill said...

I always paid attention to California because it's just a ways down I-5. And my folks live there. Guess that makes a difference.

But even up here in the NW I've noticed the Mexican/construction scam going on for at least a decade. Bring in Mexicans to build houses, sell houses, then bring in more Mexicans to build more houses. What could go wrong?

We used to have a comprehensive, logical economy. Now, what's left besides a bunch of worthless houses? Health care, I guess. That's the last big bubble we've got, and it's going to go soon. You think real-estate lenders are the only big cheats? Take a look at health care.

doug said...

I would think it would be good for California if the Feds turned them down, the same way they turned NY City down in the 1970s when it was looking for massive "bridging" federal loan guarantees. The forever memorable NY Daily News headline was: "Ford to City: Drop Dead"

Of course politically Schwartznegger has to ask.

It will of course be very painful for California short term. But doesn't the state have a hugely bloated and over paid public employee sector? NY City's shrunk considerably compared to what was expected under mayor Koch in the late 1970's and the eighties.

H. said...

I am another California native who's never going back there. I and all my relatives saw the writing on the wall decades ago and began to move out. All that's going on in California, and nationwide, doesn't really surprise me. It is, however, dismaying, since the California disease has spread. Maybe most of the country will be going the same way soon ....

Anonymous said...

Meyerson's article garland referenced is here:

http://www.prospect.org/cs/articles?article=californias_progressive_mosaic

RKU said...

Does this really make any sense?

Hollywood and Silicon Valley are two of America's most powerful and successful world-class industries, probably two of the top three or four now that "Wall Street" has blown up.

CA's real estate bubble was partly caused by exactly that success, and an over-estimate of its extrapolation. Bubbles tend to happen in very successful places, not backwaters.

Once the dust settles after the housing crash, CA homes will still be more expensive than those in the rest of the country, just not 3x or 4x.

Frankly, high gas prices are probably the biggest threat to CA's future, but that would have been almost as true in 1980 or 1960.

Anonymous said...

Well look on the bright side.
What a dull place the world would be to us internet-tuggers if the wonderful California porn industry (invcreasingly staffed by the most magnificent young racial melange)did not exist.
Perhaps there's the way forward for the USA.

Nuum said...

On that theme, check this article from the FT about a similar scam in London.

SKT said...

I think what holds California together at the end of the day is that a significant number of extremely wealthy people are willing to put up with all of its other hassles to have a place near the beach with warm weather. These people pay lots of taxes which is used to pay off California's huge inland underclass with various government programs.

As risky as that might seem it seems to work. The upper end of the rich keep getting richer and the climate and topography aren't changing, so they stay in California.

Captain Jack Aubrey said...

which is why the political and media elites don't really want to dwell too much on conditions in California any more.

Except for San Francisoco, which is now mostly a home just for rich European* and Asian liberals. The attention paid to California over the last decade has shifted noticeably away from LA and towards the Bay Area (and the left side of the Bay at that).

* I'm now going to start using "European" for white - our ancestors invented European culture, we damn well better start getting credit for more than our skin color.

According to US census data (2006) the data for the four states is:

California: 43.1% European
Arizona: 59.7%
Florida: 61.3%
Nevada: 58.9%
The US: 66.4%

Captain Jack Aubrey said...

Won't market dynamics help California? As economic opportunity dries up for the uneducated...won't some of these illegals go elsewhere?

A little, perhaps. But we have to spur these "market dynamics" with a little government dynamics (i.e., enforcement). Of course given the next two possibilities for president, that's not gunna happen anytime soon.

zylonet said...

"That, in turn, may make California more attractive (along with low real estate prices), and maybe California will get another wave of white homesteaders from the Midwest (or perhaps a wave of former Californians returning from the Pacific Northwest)."

Fred, if you are like most people I know, then you value space. Even if some Mexicans vacate, California is still going to be vastly overdeveloped. Who wants to live in a place where every inch is covered? Moreover, I don't see how the Mexicans can leave. There are too many and they have too many kids. If 5,000,000 left tomorrow, the state would still be overpopulated (compared to an ideal) by more than 50%.

Anonymous said...

"Fitzgerald and Abrams, the alleged ringleaders of the fraud, sprang onto the Beverly Hills real estate scene as the 1990s ended and the Westside market began to recover from a long downturn.

It was the beginning of an era of freewheeling lending that later helped fuel the current turmoil in U.S. credit markets. As interest rates fell, lenders jumped in with anything-goes loans, some requiring no proof of borrowers' ability to repay them."

Interesting. So the long downturn of the 90's (at least on the westside) was ended by bogusly low interest rates and an easy lending policy. No surprise there that the gvt would fudge the numbers.

Anonymous said...

I think California remains a leading ─▒ndicator for America, and our future is being test-driven there, which is why the political and media elites don't really want to dwell too much on conditions in California any more.

And much for the same reasons we dont hear a lot about South Africa anymore either.

steve wood said...

As a native Californian, something that I've noticed is an increasing intellectual disconnection between the power centers of the East and the reality on the ground in California.

That's because the parts of California you're talking about are basically flyover territory for NY and DC. Everyone in the eastern elite knows someone - usually more than one someone - who lives California, but they almost invariably live in Westside LA or maybe San Francisco. Of course this is true on the East Coast as well - upstate New York beyond the Hudson Valley might as well be North Dakota as far as these people are concerned ... EXCEPT that many of them are actually from these places. Even given the high mobility of the elite classes, there is still a tendency for people to end up in the same general area where they went to college, which in turn is partly driven by where they grew up. In other words, those "power center" folks have a marginally greater familiarity with conditions in the northeast and midwest because many of them are from those parts of the country.

On the other hand, California outside the wealthiest, most fashionable areas is completely foreign territory to them. I guarantee you if you say "Lancaster" to a New Yorker he will think of many things - Pennsylvania Dutch Country, the War of the Roses, a WWII British bomber - but a dusty down north of LA will never cross his mind.

Big Bill said...

Steve, the locally-produced program "Foreclosure Alley" brought home just how desperate California is.

See

http://kcet.org/socal/2008/09/foreclosure-alley.html.

I was stunned at the desperation that would cause people to abandon their entire California lives and all the status crap they piled up around themselves and just ... leave. (For where, though?)

The video follows the dozens of cleaning crews that show up for massive "trash-outs".

They empty McMansions that foreclosed folks just walked away from taking just the clothes on their backs, leaving giant TVs, stereo systems, furniture, clothes, power tools, personal photos, EVERYTHING, to be thrown out in giant dumpsters in the driveway.

And even more bizarrely, nobody even bothers to salvage stuff! Not even the 20-somethings who are doing the "trash-outs"!

Lawn spray-painting companies that color burnt lawns to make the homes look occupied and keep the houses from being gutted.

Pool pumping people that drive around empty fetid swimming pools before they breed mosquitoes.

It all hints at a level of sheer desperation that is carefully masked in the LA Times, for example.

It must be almost as bad living through what is happening in California as it is to live through the South African waking nightmare as its culture, society and infrastructure collapse.

See http://zahell.blogspot.com for more on the SA insanity.

David said...

Well, for the "Eastern elites" who used to regard California as a laboratory, the experiment succeeded. They no longer take an interest because the mission is accomplished.

Now they're bent on doing to America as a whole what they did to the formerly livable state.

Bob said...

I really wonder about the image of CA in the heads of people who have never spent much time here. Images of gays leather daddys running SF city counsel, these mysterious white liberals who hate other whites (I've never met one of these) and Mexican gangsters roaming the streets.

The reality of things is that the state is extremely segregated, with almost the entire coast from Marin to San Diego more than 95% white/asian. These are the people who run the state.

As for the state being expensive, the state income tax is pretty high, but that is about it.

Housing is only expensive if you bought during the housing bubble of 03 to 07. But this was obvious to intelligent people, and rents were very reasonable during this time. A 3-bedroom house in a good school district in LA would rents between 2000 to 3000, less than many studios in Manhattan.

Here is an example, a 3-bedroom house in Sherman Oaks for $2600:
http://losangeles.craigslist.org/sfv/apa/866373125.html

Bob said...

zylonet is wrong about "every inch" of CA being developed.

There are parks, rivers, nature preserves, and undevelopable mountains everywhere. As for density, unlike South Florida where the whole coast in in is lined with massive condo and hotel towers, there are still low-density beach neighborhoods that are 50%+ single family housing.

All over LA you see these big grassy fields marked as "wetlands."

Doug_S said...

I read Steve for his seeing these obviously true but overlooked gems. Ten years ago it was obvious that the Eastern Establishment feared the movement of power and wealth westward to California. I represented the Met Museum of Art and duing due diligence for a bond issue I saw how the Getty outbid the Met for art after art. Similarly, new ideas and institutions, the vanguard, appeared to be coming from the West. Just as Steve observed, California sank, as did envied Japan. Now the NorthEastern elite ignore California. This post opened my eyes to something I was vaguely aware of under the radar and made it clear. The vanguard is leading us into chaos and insignificance. Poverty and bankrupcy.

Good job.

Anonymous said...

Silicon Valley and Hollywood

RKU, like you I have been stunned and amazed by the high natural verbal and mathematical abilities of Mexicans, Guatemalans, and Colombians. They have regularly shown themselves to be competitive with Asian computer scientists in Silicon Valley and Jewish screenwriters in Hollywood. Because of their remarkable, overnight assimilation into the middle class, I think the Hispanic surge into California portends well for the hightech and entertainment industries.

Because as we all know, the continued success of knowledge industries like Silicon Valley and Hollywood is based upon importing just as many illiterate, resentful migrant workers as possible into the country!

Right? Right? Back me up here RKU!

Eric said...

But this was obvious to intelligent people, and rents were very reasonable during this time.

A large gap between house payments and rents for similar properties is the definitive sign of a bubble. Investor are buying properties expecting to make large capital gains, so there's a glut of rentals. I know people who were staying in houses for free because the owner couldn't find a renter and didn't want someone to sneak in and set up a meth lab in his unoccupied property. After the forclosures work their way through the system rents will rise.

By the way, since housing appreciation isn't considered in inflation calculations, this dynamic made inflation look lower than most people perceived it on the ground. I suspect now that rents are set to rise the (negative) price appreciation will find its way back into official inflation formulas.

Anonymous said...

Lathering morons with easy credit might be not a bad way to get illegals to leave the country. Once they realize they can't pay back, they just scoot, rather than stick around and face consequences.

mmack said...

It makes you wonder how much money would have been saved if Wall Street firms had employed a few hundred Philip Marlowes to gumshoe around California's subdivisions checking up on mortgage applicants?

He walked into my office around 1 PM. A nervous little guy in an off the rack suit. He was bald as a cueball on top of his sweaty little skull. He looked like a pencil with the eraser bit off. I instantly knew the type: some mid-level banker trying to put on an air of importance. If he was coming to see me he was in trouble. Self important men in trouble usually pay well.

"Good afternoon, Mr. Marlow. I'm Ted Peters of Mid America Fidelity."

I took my cigarette out of my mouth, leaned back in my chair, blew a cloud of smoke from my lips and sized him up.

"Yeah, well how can I help you, Mr. Peters?"

He hurridly sat down and drew the rickety visitors chair in my office up to my desk. He leaned in like he was going to tell me a secret.

"Mr Marlow," he hesitantly began, "I find myself in need of your services."

"Yeah? Well, what kind of services do you need?"

"I need you to investigate a bank customer . . . "

I broke in. "So, is it the long legged redhead who's dating the bank president on the side? Or maybe the platinum blond who keeps coming in every day, you know, the one with the gorilla of an ex-con boyfriend who did time in San Quentin for robbery?"

"No, no, that's not it" he said, waving his hand to stop me mid sentence. "I want you to investigate a real estate appraiser who we think is defrauding the bank."

I looked at the cigarette I held in my right hand. I took a long, slow drag as I contemplated what he said. I exhaled and looked him in the eyes.

"Mr Peters" I began.

"Yes?" he asked expectantly.

"In all honesty, I'd rather investigate the redhead."