by Scott Zwartz
Thursday, February 18, 2016
Corruption makes some developers wealthy, while corruption makes everyone else poorer.
While the law’s acknowledgement that corruption harms people pre-dates The Code of Ur-Nammu which is about about 4,100 years old, few people understand how political corruption spreads poverty in society. Adam Smith described it in The Wealth of Nations (1776) and it was a prime assumption in Maynard Keynes’ General Theory (1936). The government’s prime domestic role is to protect the Price System (http://bit.ly/24d6WLe).
The purpose of the Price System is to let everyone know what everything is worth. When the Price System gives false information, people make bad economic decisions. For example, if I plan to buy a new car and the Price System tells me that $35,000.00 is the reasonable price when in reality, the reasonable price is only $30,000.00, I will squander $5,000.00. While the seller is $5,000.00 richer and I am out $5,000.00, many other people are harmed. I now have 5,000 fewer dollars to buy other merchandise. Perhaps, I do not buy a new TV which depresses TV sales and that causes the store to stock fewer TVs which means the manufacturer produces fewer TVs and that can lead to worker lay offs.
If there is only a small distortion in the Price System, the impact will not be felt throughout the economy. Suppose, however, that 10,000 people over pay $5,000.00 for their cars. That is $50,000,000.00 — Yes, that is $50 Million dollars which has been taken out of the economy. Now, TV manufacturing can be impacted. Maybe it won’t be TV’s but iPhones or blueberries. We know that when consumers have 50 million fewer dollars, other producers will sell substantially fewer products. We do not know who has been affected, but we know that $50 Million was needlessly squandered on cars.
Due to the corrupt Vote Trading Agreement which has run Los Angeles City Council for years, we have squandered billions of tax dollars on un-need mega projects like the Hollywood Highland Complex which lost $424,000,000.00. $424 Million is a lot of money to evaporate from just one project! The constant propaganda about the need to build more apartments, to build more mixed-use projects, to construct more mega-projects have all seriously wounded the Price System. The persistent misinformation causes Angelenos to approve unwise expenditures of public funds so that we lack the money to pay for other things, like streets, paramedics, and water mains, which we desperately need
The City of LA itself did not lose $424 Million, but it did lose a couple hundred million which it had invested. They won’t say how much, but the CRA had invested heavily in the Project. We know that the buyer, CIM Group, likes to have investors take “haircuts.” That means people lose a substantial portion of their investments. That practice is reportedly the reason Israel would not let CIM Group participate in some real estate deals. However, when people distort the Price System, then very dumb economic decisions are made.
Billions of dollars have been misdirected into many development projects in Los Angeles and most of that money is thus diverted away from the worthwhile investments. The nation’s amount of investment capital is limited and when billions disappear into un-needed construction, all other sectors of the economy suffer.
The claim that cheaters do not prosper is false. In fact, in 1915, the City of Los Angeles did a Study of Street Traffic Conditions in the City of Los Angeles. On page 38, the civil engineers who conducted the study warned us about corrupt developers who would distort the Price System to make themselves much richer while making everyone else poorer. The developers along with politicians would thwart the Price System by using their political power to concentrate real estate development in areas which we now call Transit Oriented Districts [TODs]. The purpose of TODs is to crowd dense housing or offices towers onto a few parcels of land so that the value of those parcels will skyrocket while the value of properties which belong to people with less political clout will diminish. The politicians use the pretext that their friends’ mixed-use projects needed to be near mass transit lines and then they argue that mass transit lines needed more density because they are so expensive to operate. See http://bit.ly/cJh5BP 1915 Study of Street Traffic Conditions In The City Of Los Angeles
The current scam is the myth that Los Angeles needs to construct more housing. The population data shows no need for more construction. (We shall discuss the population data later.) The result of the City’s and the developers’ false data about housing needs and housing costs is that it unwisely diverts money into housing. Investment money needs to be invested in other parts of our economy, but due to the distortions which have been created in the Price System, too many people believe that they should invest in mega-projects in Hollywood and now in Valley Village.
Pension funds are investing in these mega-mixed-use projects in Hollywood just as they invested in the housing market between 2000 and 2007 when the Subprime Mortgage scam was deceiving people who should have known better than to invest billions of dollars into homes. Even though we have not recovered from the losses from the SubPrime Mortgage Scandals, we are falling into the same trap thinking that this time, things will be okay. The combination of gullibility, greed, and the public’s ignorance of the business cycle’s Boom and Bust Phases periodically plunge the nation into recessions and depressions.
While some people realize that the Crash of 2008 was harmful, the real harm was like the iceberg’s ripping open the Titanic below the water line. At first, virtually no one knew the real damage, bu that ignorance did not stop the ship from sinking. Economies, unlike ocean liners, seldom dramatically disappear beneath the waves. But just as the people on the Titanic never saw the huge gash along the hull, Americans will never see all the technological and medical advances which could have been made if so much money had not be diverted into the housing market. We will never be able to calculate the ramifications of the loss of consumer purchasing power of millions of Americans. We will never know how many American companies were forced to relocate their manufacturing over seas because they could not make enough profit manufacturing inside the US. When a consumer society stops spending, it stops producing wealth. No one, however, sees the wealth which was not created because so many billions of dollars were misdirected into the housing market and into the fraudulent securitized subprime mortgage bundles. That is why government’s number one domestic goal should be to protect the Price System, but in Los Angeles, the city government is the main culprit in destroying the Price System.
Both nationally and locally, a significant factor in the distortion of the Price System is the securitization of future Residential Rental Income. This scam is a repeat of the Subprime Mortgage frauds.
http://wapo.st/1YVT5U3 November 8, 2013, The Washington Post, Wall Street Figured out How to Securitize Your Rent. Should You Worry? Lydia dePhillis
http://bit.ly/1OainfV July 2014 Rise of the Corporate Landlord: the Institutionalization of the Single-family Rental Market Bundling and Securitization
The old economic model for rental properties was the same as the traditional pattern with mortgages. A lender would give the money for the purchase price and then over a few decades, the purchase price would be repaid with interest to the lender. When a businessman would buy rental property, he would his money back from the tenants in monthly rental payments, and when a mortgage company lend money to an owner, it got its money back as monthly mortgage payments.
Under the securitization scams, things are dramatically different. The person who loans the money for someone to buy property sells the mortgage and gets his money back, plus a profit, right away. Thus, he does not plan to wait years to recoup his investment through mortgage payments, but instead, he expect to get his money back ASAP by selling the mortgage payments to Wall Street. The same happens with securitization of Residential Rental Income. The apartment owner does not plan to wait years to get back his purchase price by collecting rents. He will sell his future rents to Wall Street and get back all his money plus a profit in a much shorter time span. [The math for rental future is more complicated than with mortgages and it also encourages the fraudulent hype of rental values.]
Under either scam, Wall Street bundles together thousands of Mortgages or Rental Futures and sells them as investment vehicles. The bundle’s buyer can also buy a credit default swap which means that if the investment bundle with the thousand mortgages or with a thousand rental futures does not produce the desired financial return, the investment company who sold the bundle will kick in the difference. This deal makes the bundled mortgages and the bundled rental futures seem like No Lose situations for the buyers of the bundles.
The problem is that the mortgages were given to people who could not make the payments and apartments are being rented to people who cannot afford the rents. Thus, the international investors who think they are making a prudent investment are investing in junk. But, what do they care? If every single apartment turns out to be vacant or turns out not to even exist, the investor will still get all his money. The Wall Street investment house guarantees it!
While a couple Wall Street investment firms like Lehman Bros did go BK in the Subprime Mortgage scam which crashed the economy in 2008, we now know that will not happen again. The federal government will bail out the investment houses which have to pay off on the credit default swaps.
Thus, the Wall Street firms get all their commissions, the investors get their expected profits, and the taxpayer gets the bill!
The problem is that billions of dollars have gone into constructing mega-projects on the myth that there was a housing shortage. Millions of average Americans will have been bilked out of billions of dollars by overpaying for homes and by paying excessively high rents. Everyone else in society is likewise harmed as so much money is being diverted into the housing scam that other worthwhile projects are being left unfunded.
If the government protected the Price System, none of these devastating scams would exist. With a proper functioning Price System everyone knows the true value of everything. People in Los Angeles would not pay $1,800.00 of an apartment which is only worth $975.00. The government, however, allows the Price System to be horribly abused into return for campaign dollars and other goodies which the average citizen never sees. Remember, Congress retracted its rule against members of Congress’ not being allowed to use insider information to conduct personal trades. Congress and city councilmembers know what’s happening so when they make their investments, they know what to avoid.
The impairment of the price System is a huge benefit to the crooks — average Americans never see the fruits of the investments which were never made. There is a big difference between having someone walk into your home and steal your TV and your grandmother’s not getting the new medical treatment which was not developed because so many billions of dollars were diverted into the housing scams.
When Los Angeles distorts the Price System by misleading people to believe that we need to construct mega-projects, not only does money go into these projects and not go to better use, but it also harms the infrastructure. As CalTrans predicted and Judge James Chalfant noted in his rejecting the Millennium Earthquake Towers, the added traffic congestion from the Millennium Towers would gridlock the Hollywood Freeway during rush hour. That additional traffic congestion would cost Angelenos hundreds of millions of dollars in lost productive time. The added traffic to the streets causes them to deteriorate faster and we already have the worse streets in the county.
As explained previously, a city with a decaying infrastructure deters businesses from moving to it, while causing existing businesses to depart. That is what happened to Hollywood between 2001 and 2010 when it was subjected to the myth that density was good and Hollywood needed more mega-projects. [http://bit.ly/1cPdZCR March 25, 2015, Zwartz Talk, Power Corrupts; Corruption Destroys – Power and Corruption at Los Angeles City Hall]
The unlawful voting trading which controls the Los Angeles City Council runs the housing scam in LA. Any developer can construct anything he wants without regard for the law. All he has to do is be “nice” to one council-member and his project is guaranteed to be unanimously approved by the City Council. Nothing will improve until we restructure City Council so that vote trading is impossible. [Penal Code 86 categorizes vote trading as a form of bribery.] Passing a law making vote trading a form of criminal bribery has done nothing to deter the corruption. It flows from the structure of the City Council. No matter how many laws a project violates, the City Council unanimously approves it.
Zwartz Talk, The Corruption Eradicator for LA City Council