It looks like the hedge fund bubble may be about to burst. With more competition in the industry spreads are shrinking, leaving many funds with no greater gross returns than on conventional mutual funds, but with far greater fees. We are heading for a housing bust, with foreclosure rates soaring as a result of exploding cost loans peddled to, among others, sub-prime borrowers. Rumor has it that in order to get higher interest rates, hedge funds were buying the most risky pieces (tranches) of groups of these loans – the piece that becomes worthless if more mortgages than expected don’t pay. Other rumors say the hedge funds were gambling on commodities, and have been caught when commodity prices suddenly dropped. Some may have been trading derivative instruments without the hassles of a formal exchange – hassles like showing you have enough money in reserve to pay off your counterparties if your bets go bad. The last firm to do this on a large scale: Enron, which would have gone down much sooner without the fraud. Far from “hedging,” that is accepting a lower return but limiting the potential for loss, most of these firms are leveraging, borrowing big so that a trend slightly in your favor yields a big payoff, but one slightly against you delivers a massive loss. It is likely that some of these firms could use a greater fool. They may have just found one.

The dominant political philosophy of New York City and State is not liberalism, conservatism, capitalism or socialism. It is feudalism, American style. Under capitalism, you get what you earn, at least in theory. Those who believe that people need an incentive to work and innovate can agree with that. Under socialism, you get what you need, at least in theory. Those who believe that we are all part of one human family can agree with that. But over time, when you have the same group of people in power, both capitalism and socialism degenerate into feudalism, under which the privileged expect to continue to get what they have been getting, and perhaps a little more, whether they need it or not, deserve it or not. For those who have real needs, and who produce real earnings, it's just tough luck. The feudalism of unearned privilege explains much about the state of the State of New York, where all past deals are set in stone, and more are added every year. The most recent case in point: the City's residential property tax system.

Recent reports highlight the low value placed on consumers of public services in New York City relative to other interests, some outside the city. The New York Post reports that statewide 94.5 percent of core classes, such as English, math and science, were taught by teachers deemed by federal requirements to be highly qualified in their subject area, compared with 87 percent in New York City. The Daily News reports class sizes as high as 46 kids per class in schools attended by poor NYC kids, with most 30 or higher according to the data they cite. Also reported by the News, fewer, less qualified police officers as a result of the 40% reduction in starting pay. The Post says that in order to offset this, the city is allowing police officers to work massive overtime, further padding their pensions. This looks like failed state and local policy, but it is actually successful state and local policy. You wouldn't know this, because the News and Post fail to identify the winners.

Katherine N. Lapp has left her job as head of the MTA, Peter Kalikow will soon depart as head of the MTA Board, and Larry Reuter is moving on as head of New York City Transit. Lots of New Yorkers are bound to say good riddance, but mass transit is something I happen to know a good deal about, and I know better. The three are blamed for rising fares, service cuts, a three-day strike, and an upcoming fiscal crisis, because they happened to be around when the bills for past shortsighted decisions came due. Meanwhile, the people who made those decisions, and those who benefited from them, fail to take responsibility for their actions. As long as the public lacks the mental ability to connect problems in the present with decisions made in the past, the political class will always be tempted to sell out the future for the present. It isn’t these “villains” I blame for the ongoing financial problems at the MTA in the face of record ridership. It is past “heroes” who are actually to blame, some of whom are running for President.

In my current employment as a surveyor and describer of all things real estate across the country, I happened upon a news item which has induced me to renew my complaints against “affordable housing.” As long time readers here may recall, I believe that the government should provide services and benefits for everyone, or at least for the less well off, while “affordable housing” is necessarily made available to the fortunate few, often those with connections. There are urban legends, for example, that those in certain unions and political clubs were tipped off in advance when the lists of subsidized Mitchell-Lama apartments came open, showed up at the right time, and snatched up all the units. Those rental apartments are now the subject of political controversy, as buildings constructed in the late 1970s gain the right to exit the program – and rent stabilization – as their subsidies expire. But there was another aspect of Mitchell Lama, limited equity coops, under which apartment buyers agree to resell at lower prices in exchange for tax breaks. These coops are also gaining the right to exit the program, and sell for more, but the windfall in this case would accrue to individual apartment owners, not landlords. Let the morality tale begin!

The Governor's State of the State address didn't get down to the nitty gritty, and thus far I'm disappointed. We'll see what the budget brings. It is worth noting, however, that little more than half of NYC public school students graduate from high school in four years, nearly 20 percent of city residents live in poverty, and an unusually large share of NYC adults are not in the labor force. None of this was identified as a problem for the state. The diminished circumstances of Upstate New York, meanwhile, was identified as a problem in need of assistance. In the hard choices department, what was identified was the need to cut Medicaid spending, much of which takes place in NYC. Even if in the next decade the city becomes richer and the rest of the state poorer (it could very well happen that way), city residents should not forget the attitude of the rest of the state when we were poor. We weren’t “one state” then. We should be “one state” now, but the rest of the state should not be allowed to forget 40 years of hostility. Where would the NYC schools be today if the education bond act had passed in the mid-1990s, when the rest of the state voted it down because it would have benefited the city? That bond issue was in exchange for STAR, which diverts school funding away from the city to this day.

The last paychecks of the year are in, and looking at the withholding, it appears a non-existent tax absorbed more than 3 percent of our income. The NYC local income tax. How is that tax non-existent? It is non-existent politically, when people talk about who is and who is not overtaxed, and complain about their property taxes. Last time the Independent Budget Office looked, however, the total tax burden was higher for NYC residents than for residents of the rest of the state.

We're either all in it together or we are not. That's the feeling I had as I listened to Governor Spitzer's soaring rhetoric about being "one state." For some time, as far as our state government has been concerned, whenever some people, groups, or places have had a need, we've all been in it together. And whenever other people, groups or places have had a need, they have been told to take more responsibility for themselves. The inequities have been generational, regional, and in some cases simply insiders vs. outsiders. The optimist in me wants to take Spitzer's words as a sign of future fairness, and accountability for those with better deals. The cynic see it as a call for the losers to stop pressing their claims, and accept plans that could perhaps make them a little better off -- and the winners better off as well.

Since joining Room 8, I’ve spent much of my time writing about things I’m not happy about, generally about the policies of the State of New York. After all, it is those things that I want to see change. But I don’t want people to get the impression that I am dissatisfied with everything. Aside from my personal life, about which I have no complaints, there are many things that have gotten better in the past 30 or 40 years. In the holiday spirit, I’ve decided to list a few of those. "

Thirty or forty years ago, reasonable people thought it possible that a nuclear war would lead to human extinction in the near future. Sadly, the risk of a single nuclear, biological or chemical incident is much greater, thanks to the rise of international terrorism. But with the number of warheads greatly reduced and the Cold War over, extinction caused by a massive nuclear exchange seems to be off the table, at least for the foreseeable future.

Last week, there was a news splash about the city's population projection, with an overall gain but a decline in school-aged children. I read the fine print, and it appears that my former mates at City Planning did what I consider the right thing, and constrained the population forecast by land use. That is, since NYC is already developed at a high density, there are only so many housing units that can be added, and demographic trends are driven here (unlike in Texas) more by the occupancy of existing housing than by the amount of new housing. And here DCP used migration by type of person from 1980 to 2000 to see who would flee and who would move in. Therefore, the city's official population projection assumes that parents of school age children with the means to leave will continue to be driven out of NYC by bad schools and small housing units, as they were in my generation.

I downloaded the spreadsheet of member items for my Assembly Member, and found that he has magnificently bestowed on his district $386,000 over the past three fiscal years. Moreover, looking at the specific list of grants, I found there isn’t a howler in the bunch. He sent $4,000 per year to every school in the district (not just those in Park Slope but also those in Parkville), for things like after school enrichment, software, contacts with parents, “multi-cultural” books, programs in music, bookcases and file cabinets. He provided grants for computer training and gardening for senior citizens, along with day care and transportation. He funded Pap test for poor women, language training for immigrants, assistance with safe homes and
crime prevention, a newsletter for businesses, etc. etc., generally with grants of $3,000 to $6,000 per year. Who could be against such things? Goes this mean I agree with the Daily Politics poster that “Everybody seems to forget that one man's pork is another's ‘vital infrastructure improvement?’” Absolutely not!

According to press reports, Governor-Elect Spitzer is assembling a fully credentialed panel of wonks, lawyers and financiers. It’s good to know he will have a full supply of facts at his disposal, but facts are just the beginning of governing. First you have the facts. Then you have opinions about what the facts mean – hopefully the people Spitzer has hired will be truthful enough to distinguish between the two when advising him, or Spitzer will be sharp enough to realize if they are not. In the end, however, one has to decide what to do about the facts, and the right decision is generally not an automatic consequence of them. Decisions, unlike deals, also involve values, and it is in terms of values that the Governor-elect will have to speak if anything is going to get better. I am reminded of this because this a year ago New York City Transit was on strike, and our elected officials, particularly Governor Pataki and Mayor Bloomberg, failed utterly to speak in terms of values.

These organizations have long maintained that housing is expensive in New York City because New York City's development regulations are extremely difficult and restrictive. It is a mantra repeated over and over. Well some bad news -- a developer who builds all over the United States has moved into town, and when asked about development restrictions in an interview with the Wall Street Journal, he gave the "wrong" answer.

WSJ:   Is it easier to build in the suburbs versus the city?

Mr. Toll:   It's easier in the city. The approval process is more professional in the city. The experts that you deal with are pretty much doing the assigned job, as opposed to the secret unassigned job to stop the growth, stop sprawl [in the suburbs].

You may have gotten the impression that I’m not a big fan or our elected officials at the state level, based on my view of the decisions (and more to the point non-decisions) they have made, and the deals they have cut. But unlike many commentators I’m not going to get all worked up about the legislature getting a cost of living pay increase after many years, just as I didn’t get all worked up about the City Council pay increase. We all expect, or at least hope for, annual increases in pay that keep up with the cost of living. It may be fair to suggest that our current state legislators have treated the general public with contempt, and do not deserve the increase. But my view is that one has to meet one’s own obligations before pointing fingers, and showing contempt for the legislature by cutting its inflation-adjusted pay isn’t doing so.

So the Independent Budget Office has found that New York City’s property tax system is unfair. This is not a surprise. In a fundamental sense, property taxes are a tax on property wealth, and “fairness” requires that the tax be charged equally to all residential and commercial property owners based on the value of that wealth. This, however, has run into another definition of “fairness,” one based on income, with concern that people with high property wealth relative to income (such as senior citizens and, in rural areas, farmers) could be taxed out of their homes. This post will propose a different way to balance "wealth" fairness and "income" fairness.