Chief Justice Eric Magnuson Understands the Seriousness of the Budget

From the Star Tribune:

If another budget cut of 5 percent or more comes down, Magnuson will recommend dramatic action — shutting down conciliation court, cutting hours and suspending prosecution of 21 types of cases, including property damage, harassment, probate, and more than 1 million traffic and parking cases a year.

That last step could interrupt a $200 million flow to local governments.

Magnuson said that shutting down traffic cases is no small move, “but we’re running out of choices here, and I will not compromise the prosecution of criminal cases.”

Another 5% would bring us back closer to the 1970’s as a percentage of the state budget, and I’m not sure that’s such a bad thing. Criminal cases must be a priority, and if there is no money for the others, there isn’t. Obviously some of this is real, and some is political spin for more money. There has to be a cost/benefit analysis done, granted criminal prosecution costs are much higher than they were years ago. Now, this may mean limited court access or alternative means of resolution for other matters, and in some cases, laws would need to be repealed or changed. When it comes down to prosecuting, and keeping a non violent individual in prison, or hiring/retaining a few teacher(s), or getting medical care to those in need, I would error on the later two over the first one. That’s how things worked years ago, that’s how they can work again. The exception of course is if the citizens want to spend a lot more on taxes, and if they do, fine, but be open as to what the tradeoffs would be.

I do however agree with Chief Justice Magnuson as well as concerns the erosion of the rule of law and its impact on society, but with a different spin on it. If the govt cannot afford the rule of law they created, than the rule of law needs to be changed to make it affordable.

No matter what, once efficiency is wrung out, then no more cuts can be made… and wringing efficiency out of the legal system is a very slow process with tons of unintended consequences. Changing the rule of law would be less expensive, faster and likely less prone to counterproductive consequences.

Neither change of course is politically friendly, but the days of Cadillac rules of law for cheap must end. Either pay through the nose while carefully going after efficiency gains, or change the law, I’d go with change the law as I’m cheap, its faster, and I fully believe history shows it works. Others will view this differently.

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Why MN real estate prices must continue to shrink

CR had an interesting graph comparing house prices with median household income late last year. His was focused on the entire US, I did the same thing, but focused mine on Minnesota.

Minnesota Housing prices as a function of household income over time
Minnesota Housing prices as a function of household income over time

As one can see, we are far from the bottom, housing prices still have quite a bit to drop before they reach a point where they are affordable and perhaps more importantly sustainable for the average Joe. Any attempts to try and prop up the market are likely to be exercises in futility, short of govt subsidizing most folks paychecks to bump up household income.

As far as timing goes, I think CR’s suggestion as to the end of 2009 or longer, with the emphasis on longer is legit. I don’t think anyone expected to see the huge number of salary cramdowns as are becoming more common place today (I expect many to stay in place for a long time, if not be made permanent). Those combined with increases in the number of folks underemployed or unemployed will shift nominal income to even lower levels, and thus housing has still further to fall than my or CR’s graph would suggest. Then add in with under employment, or unemployment, credit scores are going to head to the dumpster. Even for those who might want to buy, either A, their payment is sky high, and thus they cant afford a more expensive house, or B they don’t qualify for as high a principal, or C they don’t qualify at all. The end result will be even fewer potential buyers. This will then further push down the demand for houses.

Its not all doom and gloom though, a housing reset will likely result in much more manageable cash flow for new buyers, and with it, the potential for investment and innovation can be huge. Its just getting through things while it happens that’s the problem.

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On the bailout plan… protect mainstreet

So Tim Walz voted it down Monday, and we called over to his office to say thank you. Its not that something needs to be done, but the bill as written is so full of holes it would appear one could sink a battleship.

The bill is really complex… egads, I spent an hour reading it, and a full study could take days, if not a week or more. Granted I’m no politician… but needless to say, with such a short time frame, things will get missed. Perhaps that was by design. Interesting to note the authority to suspend FASB 127 was in the bill, and yet some congressman apparently missed it, or maybe they wanted it pulled by legislation, not sure.

Apart from that, it appears way too much lip service and not enough real solutions. In many ways, this bill seems to be a delay tactic… and if it wasnt so expensive, that would be fine. Solutions to years of problems are not solved in a week, and considering the money involed, rushing is not prudent. Yet, now that the stock market went through a bunch of gyrations… those who didnt understand the ramifications of passing, or not passing such a bill, are likely going to press the issue to get it passed. Ie, Ideologically the bill is very bad, but when folks get a 5-30% hit on their retirement, ideology often goes out the window. The worst part is, any serious judgements errors in this, of which I am certain there are, is likely to have a much worse effect on ones retirement savings, than no bill at all. Its just that the effects will be delayed.

There is the mainstreet aspect in the short term as well. Sun Country Airlines is having their employees take a 50% paycut deferral due to cash flow problems. Granted in their case, it was an issue with private equity, rather than an operating line of credit being pulled. Banks I am sure even if the economy was rolling would be leery to fund airline ops (the risk issues are outside their domain of expertise). Yet, the situation parallels the issue in mainstreet business, ie the need to meet payroll during cash flow problems to say nothing of expansion, or even increased production for the holidays, and thats apart from the huge delays accounts recievable are going to get hit with 4th qtr. 

If the banks pull in lines of credit… the same situation with Sun Country is going to ripple through the economy. WHen joesixpack gets asked to take 50 cents on the dollar in his paycheck… things are not going to be pretty. Yet, I sort of think thats inevitable, either by a cash flow issue in the short term, or via selective inflation/deflation over time. And yet the bill’s hope, is that by dumping a ton of cash now, credit will open up, rather than being used to bail out the shareholders… and unless something is explicitly written into the revised bill, I sort of think the shareholders are the ones who will walk away happy, and Joe still gets hosed.

I have serious doubts as to whether this bill will accomplish anyting for mainstreet, other than create a false sense of security for a few weeks, or maybe if we are lucky months, all the while killing off the much needed cash to fix things the right way down the road.

Ultimately though, folks are concerned with the short term… and the long term aspects of the need for real estate valuations to drop by 30%-60%, credit to become much less available, and the killing off of excessive leverage are far off. This weeks paycheck, and the loss of retirement savings ends up being the #1, rather than the much needed changes in order to cause the least amount of collateral damage to those who can least afford it. Imho, a few weeks or months of momentary hardship can prevent years of long lasting and hard to undo damge, and might even get us back on the fasttrack to growth and economic expansion.

So, going forward…. suspending mark to market is idiocy. We need greater transparency in accounting, not less, we need fewer games, not more. Granted there is a death spiral aspect to FASB 127, in that when markets tank, valuation goes away, where as 30 years down the road, the value may be much greater.  The key is where things are today, what is something worth, not a gamble on what it might be. Wishful thinking on future valuations all around got us into this mess… we dont need to foster further errant behavior along that line, or it will bite us back later. In addition, suspending FASB, pretty much guarantees during a bailout the taxpayer will pay way way too much, albeit to do so does drag things out, as the house of cards is held up a bit longer.

Mainstreet could be protected by govt insurance of existing business operating lines of credit… selling that would be like selling ocean front property in AZ, but alas, unless something is clearly written in, expect shareholders to reap the rewards, at the expense of Joesixpack and mainstreet getting hosed over. At a bear minimum, expansion of unemployment compensation rules are a must. Joe’s hours are likely to be cut, his pay to be cut, or he will loose his job, irrespective of the bill being passed. (short of the Swedish plan)

World wise… as much as I disagree with Paulson’s plan, as it perpetuates the shell game, a variant may be the only way to go politically in the short term. It likely will fail, and then we will have to consider the Swedish plan (which does have a track record of success, where as Paulson’s historially doesnt). Its a no win deal all around. 

Yet, I could be way off in right and left fields… this is a complex mess, and few if any have really looked and studied this enough all around to come up with a viable long term solution. Major economist’s disagree all around, international sentiment is all over the place, and no one has much for confidence in anything. Stepping back, clearly identifying the problems, and then coming up with solutions is really the key, but alas we are out of time. Its not going to be pleasant no matter what.

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