Shock and Awe Economics

It was inevitable that the shock and awe we glimpsed for the past twenty years in the fast growing regions of the United States through an unsustainable boom in housing and construction would come to grief. It was born of hubris, and it continues through this day.

In The Miami Herald, Stuart Miller, CEO of Lennar Homes, the Miami-based homebuilder expresses hope that a fiscal stimulus package by the Obama administration will lift the fortunes of his company and homeowners. Lennar has suffered consecutive year losses totaling $3 billion; it has $1.1 billion in cash and also received “a $230 million tax refund” as part of an earlier intervention by the homebuilding industry, crediting to homebuilders some of the taxes paid during the fat years. (Lennar fights back in housing freefall, December 19, 2008) And it wants more.

CEO Miller told the Herald, “… home prices are in a ‘freefall’, and the only way to break the downward spiral is a federal government stimulus package.”

But largesse from the federal government—the same government that Lennar and fellow homebuilders bullied when it came to fighting growth curbs through environmental regulation and by throttling regulations governing the issuance of debt, insurance and mortgages– has a hollow, devalued ring to it as eight years of George W. Bush unwinds to a dismal end, removing bubble gum from under the White House desks on the way out and keys to Barack Obama and a Democratic majority in Congress in an envelope by the door.

Yesterday President-elect Obama sought to dampen the flames of anxiety with a cool, calm and collected wartime demeanor. Responding to the deepening revelations of Wall Street fraud earning billions while losing trillions, he called on all Americans to return to the ethical behavior we expect of adults; not just through regulation but by moral values.

That is all well and good, as fear of deflation see-saws with fear of inflation; the confidence of ordinary investors has been badly shaken to navigate the kind of long, protracted recession/depression/crisis that Lennar and its $1.2 billion will ride out; its corporate values intact.

The Financial Times writes that Federal Reserve Chair Ben Bernanke “has not merely slashed the federal funds rate to below 0.25 percent. He has lent freely to the banks against undisclosed but probably toxic collateral. Now he is buying securities in the open market. The result has been an explosion of the Fed’s balance sheet and of the monetary base. With assets approaching $2.263 billion and capital of less than $40 billion, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1.” (The Age of Obligation, December 19, 2008)

So, what, then are the lessons since the Reagan Revolution? If we had truly organized ourselves by Reagan “values”, filling mega-churches and supporting elected officials devoted to “free market” corporate fundamentalism, how is this a rational outcome unless the preachers of virtue were thieves?

“The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: ‘So, just how corrupt is America?'” This is how Tom Friedman’s latest column in The New York Times begins. (The Great Unraveling, December 16, 2008)

I wonder if Americans are ready to understand the full scope of the dilemma. I’m not sure Friedman gets it right, either: “Far from being built on best practices,” he describes the Wall Street fraud, “… this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.” But that’s not all.

Wall Street greed was the big gear driving a whole system of smaller gears, all the way down to property rights activists in bankers’ wing tips; turning farmland into suburban sprawl one hundred acres at a time and becoming wealthier by load of limerock fill in wetlands.

If you have ever spent time trying to influence a zoning hearing to protect your community — to persuade community councils or planning advisory boards or county commissioners– you know full well that what drives Lennar and fellow inflaters of asset bubbles is fealty to the law of predetermined outcomes that tilts the playing field toward behavior that, in its best light, is unethical.

The housing boom in fast growing states like Florida was a feast for special interests connected to Wall Street. Anyone else, from any other class of interests, for instance non-profit environmental groups, were given a seat at the table if they “played ball” and acted nice but otherwise played jester, relegated by the politically powerful to kicking and clawing, often at each other, for scraps fallen from the table.

It is important to hold this picture in mind, when reading The New York Times, “Wall Street Profits Were a Mirage, but the Huge Bonuses Were Real.” (December 18, 2008) “Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recalls Pebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco. Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.”

I don’t know the specific platted subdivisions whose grid lines delimit mortgages packaged into “Costa Bella”, and the Times doesn’t say: but I can take a good guess: the same subdivisions that comprise Costa Bella’s can be found behind high stucco walls off any turnpike exit in Florida. From the air, they look like fields of Mediterranean tiled roofs fixed by the square mile. And from the air, too, you can see the lifeless water features that pass for amenities or “flood control structures”, depending on the audience; fooled consumers, regulators, elected officials or all of the above.

What fattened Wall Street was called “what the market wants”. It was what the market wants, the same way as what tobacco and sugar said the market wanted– products to make Americans passive consumers of danger and risk; toxic to public health, to the environment, and last but not least– the premise that an economy can exist on debt-driven consumption without generating of real growth in the economy.

Wall Street paydays weren’t made by “what the market wants”: they were made by what they could finance under the lightest touch of supervision and regulation their campaign contributions could buy. They built structured financial instruments around any forms of debt they could lay their hands on: home mortgages, car loans, student loans, credit card loans, loans based on loans based on insurance, swaps involving phantom products to offset real liabilities chopped, sliced and diced in a thousand directions and enriching their originators every step and every trade along the way.

The housing boom ground the public interest into the dust in Florida and other fast growing parts of the nation; wetlands plowed under with no compunction but avoidance of regulation, beaches cleared for sandy ribbons printed with condominiums like those built by WCI Communities—whose former chair, Al Hoffman, ran both George W. and Jeb Bush’s finance committees, Army Corps projects filled and done to protect sand here, losing sand there, coral reefs despoiled by clouds of sand and nutrients, metering and science dodged, streams polluted, estuaries over-taxed by fresh water demands or inputs: an entire system of living out of balance, out of scale, out of reach of citizens, and built on sand.

“It’s an unstoppable force!”, Hoffman crowed of suburban sprawl to the Washington Post in 2002.

One of the most false moments of the Bush presidency was the appeal by the president to volunteerism as the housing boom and asset bubbles pushed the ship of state onto the shallow reef of greed and great expectations. If you tried to “volunteer” by offering your time to go to public zoning meetings, to charitable organizations that scrounged for exhausted wage earners to participate in a civil society, in particular to protect a neighborhood stream or the Everglades, you know exactly what it meant to stand up to the shock and awe campaign that unfolds here:

“… Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.”

Here’s what happened in Florida, the state where US Senator Mel Martinez found his way to the top of the political ladder through careful cultivation of developers who originated the housing asset bubble. At the time, he was Secretary of HUD and explained to a January 2003 audience of the National Association of Home Builders in Las Vegas:

“We also must work in close partnership to dispel the myth that our nation is experiencing a “housing bubble.” … Bubbles of course do burst, but the housing market is not in the same category of other weaker and less competitive sectors of the economy… this Administration is making it easier for people to purchase their own homes – a change that will help drive home development and sales. And, it will help more minorities become homeowners.”

The New York Times goes on: “By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division.

Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar. Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.”</span>

The truism goes: “It takes a village to raise a child.” These days we learn, “It takes a Depression to raze a village.” At companies like Lennar, still trying to plant a small city of 18,000 called Parkland within shouting distance of the Everglades, the values take back seat to clamor for bailouts and aid. If the American village emerges from the brink of insolvency, it will be through resourcefulness, not just fiscal stimulus.

What is so worrisome is that we are not yet there, by half.

ALAN FARAGO, who writes on the environment and politics from Coral Gables, Florida, and can be reached at








Alan Farago is president of Friends of the Everglades and can be reached at