FR Readers, I don’t know whether you have had an opportunity to meet Frank Schubert.  Frank is one of California’s premiere public affairs and political consultants — and is also a fine conservative.  Some time ago, Frank began to pen a week "rant" over on his firm’s website.  Very quickly I came to look forward to them as Frank would also write about issues that matter, with a healthy injection of cynicism or humor (whichever is appropriate depending on the subject).  I am very excited that we here at the FlashReport have successfully lobbied to carry Frank’s Rant as a regular feature here on the FR Blog.  Below is Frank’s most recent diatribe, and look for his next one later in the week!  

Jon Fleischman
FR Publisher

BAILOUTS, BUDGETS AND VETOES
by Frank Schubert

The political leadership of the nation, from the President on down, are in near panic over the state of US financial markets. Governor Schwarzenegger has written lawmakers declaring the situation to be a crisis for California – the state will be unable to pay our bills unless we can access supposedly frozen credit markets.

Recognizing the influence of message positioning, people are running all over Washington and the cable news shows to declare that this is an economic recovery plan, not a bailout. It’s not about Wall Street, we’re told, but Main Street. The trouble is, it IS about Wall Street and it is a bailout. I don’t like it, and don’t support it.

Either you believe in economic freedom or you don’t. A lot of companies, and people, made big money in real estate over the past decade. A lot of companies and a lot of money. We saw a historic run up in values, record loan volumes, and unprecedented economic growth. It was that record growth that sowed the seeds of the current downturn. Lenders actively and aggressively loaned money to people who could not afford to pay it back. Those borrowers bet that their property would increase in value and they’d be able to refinance later when, presumably, they could afford the payments. The equity markets, egged on by investors eager for fat returns and government-backed agencies like Fannie Mae and Freddie Mac, developed exotic investment vehicles to package those loans so that Wall Street could sell those packages. The good times flowed.

I don’t recall anybody suggesting back then that people should be sending their profits to the US Treasury Department (other than the normal confiscatory tax policies we deal with every day). Nor should they have. My wife and I bought a house in Fair Oaks in 1998 for $265,000. We invested about $100,000 in remodeling the house, and sold it in 2005 for just under $750,000. A handsome profit, indeed.

Now the real estate market has turned and a lot of people and companies stand to lose a lot of money. My wife and I are among that group as well. We invested our profits from the sale of our former home in the construction of a new home that, today, is worth at least one-third less than when we moved into it in 2006. So now should the taxpayers write us a check for the value we’ve lost due to the market turn? Of course not.

Now I realize that the situation facing the national financial markets is much more complicated than the simplistic example of Frank and Maryann Schubert, but the principles remain the same. I will feel badly for the investors and employees of those companies that go under, and for the vendors and suppliers to those companies. Credit markets will tighten considerably, in the short term. But they won’t stay that way for long. Lenders lend – that’s what they do. They will continue lending to people who are able to pay them back, with interest. And if the market is allowed to self-correct, it will do so as it always has. Assets now on the books of investors will be re-priced according to demand for those assets. That is inevitable. The only question is who bears the cost of the re-pricing – the taxpayers who did not profit when times were good, or the investors, who did.  I’m standing with the taxpayers.

For the government to obligate the taxpayers to pick up the tab of this financial mess makes as much sense to me as the government loaning money to a homeowner whose beach house has been destroyed by a hurricane, so that the homeowner can rebuild in the very same spot.

Regular readers of my Weekly Rant are familiar with my views of the recently concluded state “budget.” When last we visited, the legislature had passed a document that was “balanced” largely on the basis of forcing taxpayers to pay taxes months earlier than they were due. This, we were told, was not a tax increase because, eventually, taxpayers would be made whole (without interest). I called it one of the sorriest examples of legislating I had seen in my 30 years of following the budget dance. Fortunately, Governor Schwarzenegger threatened to veto the entire budget (but not over this issue. He was largely concerned about the details of the budget reserve). That threatened veto is to his credit. The budget that was ultimately passed included stronger language on the reserve, and fewer taxpayers who will be forced to pay up early.  But it is still a sorry piece of legislation that largely defers to the next Legislature the job of fixing the structural problem that California government spends more than it takes in, no matter how much it takes in.

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Just when you thought that Governor Arnold Schwarzenegger’s relationships with legislators couldn’t get worse, they did. In an unprecedented decision, the governor terminated 136 bills through the issuance of a “general veto.” Huh? He said he would only sign bills that are, "the highest priority for California."  Those apparently included bills dealing with the labeling of olive oil, surplus property at the Lynwood Armory, dreissenid mussels and dungeness crabs. It was a good year for shellfish.

[Publisher’s Note – This is actually Frank Schubert’s 27th Rant since he started using the internet as a means to vent his thoughts.  While going-forward you’ll be able to see them weekly here on the FR, you can see all of his past rants here — Flash]

This entry was posted on Monday, October 6th, 2008 at 12:00 am and is filed under Blog Posts.