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California and Bust


Eric50
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I generally consider everything Michael Lewis writes to be a must-read. I was not disappointed by his latest piece.

 

http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

 

A couple of extracts include some jaw dropping numbers on the future of education in California:

 

"David Crane, the former economic adviser—at that moment rapidly receding into the distance—could itemize the result: a long list of depressing government financial statistics. The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.” Crane is a lifelong Democrat with no particular hostility to government. But the more he looked into the details, the more shocking he found them to be. In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed."

 

And some interesting thoughts on American society....

 

"The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death. The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans."

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Thanks for posting.  This was a great article.  I too consider everything Michael Lewis writes to be must read. 

 

He paints a very scary picture of the financials at the state and local level.  California is a disaster.  I grew up there and much of my family is still there.  When I was young California was a state with adundance.  I've heard from friends in wealthy counties that there is zero money for the schools.  They have to raise funds just to supply the classrooms with basic essentials like pens, pencils, paper, etc.  It's very sad. 

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Guest ValueCarl

Eric, did you not find it somewhat ironic that, the last sentence of the article was hedged to the maximum by leaving the reader with the thought, hey, maybe this is not so stupid after all? Maybe some big write down, in conjunction with loan forgiveness will end up playing a role in fixing this debt gone wild conundrum. After all, are we not all in this together? There are times when lenders who were not acting prudently,  need to take a haircut as well. Back to "too big to fail" psychology, however.  :( 

 

<As idiotic as optimism can sometimes seem, it has a weird habit of paying off.> 

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I agree Carl. To me this is the main problem we have as a society right now: there is not enough capitalism.

 

The nature of capitalism is that the competent people take the business or the market share of the incompetents. The incompetents become bankrupt and hopefully they learn a lesson. This how the system should cleanse itself. However, if there is a systematic bailout support (i.e. no failure possible), you reward incompetency. The idiotic banks that lent to Greece or corrupt states/municipalities should take a haircut; they just haven't done their homework... So you delay the cyclical cleansing and then you end up in a situation like now where the overall economy might fall pretty badly.

 

 

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I agree Carl. To me this is the main problem we have as a society right now: there is not enough capitalism.

 

The nature of capitalism is that the competent people take the business or the market share of the incompetents. The incompetents become bankrupt and hopefully they learn a lesson. This how the system should cleanse itself. However, if there is a systematic bailout support (i.e. no failure possible), you reward incompetency. The idiotic banks that lent to Greece or corrupt states/municipalities should take a haircut; they just haven't done their homework... So you delay the cyclical cleansing and then you end up in a situation like now where the overall economy might fall pretty badly.

Yes Yes Yes however I still want to be able to get my dough at the ATM if Lehman fails. 
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