What Does California Gov. Jerry Brown Know about the Next Crash and Recession that We Don’t?

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California was America’s Greece in 2009. It had excellent wine and olive oil. But tax revenues were collapsing. The deficit ballooned. Its credit rating was cut to the lowest of any state in the US. It couldn’t borrow at reasonable rates. And when, under Gov. Arnold Schwarzenegger, it couldn’t pay its bills with real money, it sent fancy-looking IOUs to its suppliers.

Today, California is flush with money. The economy in the coastal areas has bounced back. Unemployment, while still high in some areas, continues to drop. The budget is on its second annual “surplus” in a row. Capital gains taxes from the booming tech sector, the soaring stock market, the white-hot property sector, and all kinds of other investment activities, on top of some “temporary” tax increases, triggered a flood of revenues – $6.7 billion more than Brown’s office had estimated just in January.

OK, no one can figure out how to deal with the unfunded pension and healthcare liabilities. But what the heck, lawmakers at the Democratic stronghold are now fighting over how to spend the “surplus.” They’ve got till June 15 to figure it out and pass a budget or their pay will be docked.

Gov. Jerry Brown, sworn in for his fourth and final term in January – he’d served two terms in the 1970s – is putting his stamp of frugality on the budget, trying to stem the flood of spending proposals. But lawmakers need to be reelected, votes need to be bought, special interests need to be satisfied, and so the money needs to flow.

Brown’s budget – up 6% from the current year – directs most of the “surplus,” as required by law, toward schools and a newfangled rainy-day fund. It’s also used to pay down the “wall of debt,” as he’d called it, that governments have built up over the years with deficit spending. Standard & Poor’s is watching. It currently rates California’s general obligation bonds A+. If the lawmakers don’t go overboard, it might upgrade the state back to where it was 14 years ago.

Home prices are soaring and in a number of cities have gone far beyond the peak of the prior housing bubble. Stocks are soaring. The tech boom is in full swing. Startups with multi-billion-dollar valuations and vertigo-inducing cash-burn rates are proliferating. Silicon Valley is once again changing the world for the better.

“And by the way, we don’t really compete with Texas and New York,” Gov. Brown said in a speech at the CalChamber on May 29, in reference to California’s status as the seventh largest economy in the world. “No, we’re competing with the UK and Germany. And we are ahead of India, Russia, Italy, and Brazil.” Exuberance is back.

But Brown has seen this movie before a few times. It always ends in tears. Boom and bust. Now is the boom. He told his audience at the CalChamber that in good times, as the rainy-day fund builds up, “everybody forgets the recession, and they want to start spending. And right in the middle of all that, we get a crash.”

“If we have a modest recession – not if, when we have a recession, if it’s modest – the California state budget will lose $40 billion over three to three-and-a-half years,” he added. But by next summer, the rainy-day fund would only contain up to $4.2 billion, according to legislative analysts.

In Sacramento two days earlier, he said: “The longer you’re away from a recession, the less you remember it, and all you see is money coming in. Usually at the point when the recession is right around the corner and people are feeling the best ever and they want to just spend, we crash.”

“I love all those programs I veto,” Brown explained, “because I don’t want to cut them back when we hit the next recession.”

It’s not a recession per se that will bleed California finances, but declining asset prices. The piles of money being shuffled around – in the stock market that has been soaring for six years, in the housing market that has been soaring for over three years, in the office boom, and in the startup scene – eventually become taxable events. The manna of the Facebook IPO in 2012 was of such magnitude that legislative analysts included estimates of it in their projections.

But most people in California are struggling with high costs of living and so-so incomes on their labor. Only a very small number of people get a significant portion of their income from investments – namely the “1%.” And so it’s no surprise, given this skewed wealth distribution, that the top 1% of Californians pays about half of the state’s income taxes. And when the stock market drops, when housing and office booms leak hot air, or when the whole startup mania reverts back to the mean, income tax revenues collapse.

This is what happened in 2008. The housing bubble imploded. The stock market collapsed. Tech cratered again. Stock options became worthless. Layoffs cascaded through the economy. And tax revenues simply dried up. That’s how it happens every time. And every time, it’s a “surprise”

But we don’t have anything to worry about. “We are in a much better position today to deal with that economic downturn whenever it occurs than we have been in the recent past,” said H.D. Palmer, a spokesman for Brown’s Department of Finance. Which is what they say every time. But Gov. Brown, who has seen these things unfold so many times before, seems to be warning about a crash in asset prices that could be uncomfortably near.

Forty-million people, including the folks in Los Angeles, depend on this water. Read… Water Crisis: Lake Mead, Largest US Reservoir, Faces Federal “Water Emergency,” Forced Rationing

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  13 comments for “What Does California Gov. Jerry Brown Know about the Next Crash and Recession that We Don’t?

  1. Jeff
    Jun 11, 2015 at 3:02 am

    We are in a Sabbath year (Shemitah). Started on 9-24-2014 and will conclude on 9-13-2015. I have a feeling this September into October will be the date. The house of cards is coming down!

  2. Michael Gorback
    Jun 11, 2015 at 7:02 am

    The evolution of Governor Moonbeam into a paragon of fiscal rectitude? I won’t say now I’ve seen everything but we are pretty close.

    • Rkm
      Jun 15, 2015 at 6:13 pm

      Yeah, Gov Moonbeam who wanted us in CA to solarize 30 yrs ahead of the curve. He was actually Gov Sunbeam!

  3. tom heilman
    Jun 11, 2015 at 8:26 am

    Seems, if I remember right, “governor moonbeam” left us in pretty good shape the first time around also. I thought he would make a helluva president then and even more so now.

    • Matt R.
      Jun 11, 2015 at 12:26 pm

      Funniest thing I’ve read all day! President! LOL!

  4. Julian the Apostate
    Jun 11, 2015 at 9:11 am

    I’m in Dr. Gorback’s camp. I was dubious when my travel agent sent me to Oregon this trip for 2 reasons: when I was out here in April freight was horrible, and 2nd they NEVER send be out here in the summer. However it has been a good trip so far, and hopefully that continues. If he’s keeping a tight rein on Sacramento this is a good thing, and I will give credit where credit is due.

  5. illumined
    Jun 11, 2015 at 9:59 am

    It seems like California is always one of, if not the center of every bubble we’ve had over the past 20 years. What is it about California that makes it so vulnerable to them?

  6. Hal
    Jun 11, 2015 at 11:02 am

    it’s all about cycles. This is an extended cycle

    In 1999 we had dotcom and the stock market which raised tax revenues for the US so Clinton 1 took the credit for a surplus even though debt increased every year.

    even though Greenspan printed heavily ahead of y2k and tech companies did very well due to Y2K spending–which set companies up well for a few years on tech spending. So the tech spending stopped and the economy slowed. Market puked. Ciscos Chambers said in July 2000 he sees 50% growth for foreseeable future–too bad the foreseeable futures was measured in weeks. The tax revs declined and we had a problem with economy exacerbated by 911

    this time is different–in 2000 we were coming off a high growth period which pushed stocks In 2008 the housing bubble. In 2015, its the phony data and no growth. Phony data from govt and phony corporate accounting. See last weeks AP story on NON GAAP, or read Stockman from a year ago or Blackstone from December.

    almost everybody is greedy and willing to bend rules. That’s why this ends badly.

    • Zen Shaman
      Jun 11, 2015 at 12:38 pm

      I would also like to respond to the following statement:
      “Today, California is flush with money. The economy in the coastal areas has bounced back. Unemployment, while still high in some areas, continues to drop. The budget is on its second annual “surplus” in a row. Capital gains taxes from the booming tech sector, the soaring stock market, the white-hot property sector, and all kinds of other investment activities, on top of some “temporary” tax increases, triggered a flood of revenues – $6.7 billion more than Brown’s office had estimated just in January.”
      This is an over simplistic viewpoint, in my opinion, and does not take into account the Comprehensive Annual Financial Report, which is required by law to be submitted every year. I agree with your statement regarding the phony data coming from the government and corporate America, and heres one reason alone. When you look at the bonds California has issued for public works and schools, the interest rate is near payday loan shark rates, and alot of them are coming due the next few quarters. When I began going down the rabbit hole to chase where all the money in California taxes and and other income generated by the state, I was shocked. Follow the money indeed, If more people would research how money is created and debt is sold, and how much of our hard earned money is going just to survive, after supporting this corrupt parasitic system we are born into and force to live, I think the bonfires would be lit, and the pitchforks would come out. Just my 2 cents….

      • Petunia
        Jun 11, 2015 at 5:41 pm

        When I moved to Florida I noticed that the county and city commissions, and utility boards were full of financial professionals. All concurrently employed by the biggest national and regional firms. That got my attention and then I just followed the money. Even though they never bid for deals for their firms, they always failed to disclose that the deals are all syndicated, and they would participate even if not leading a deal. They were playing you do my deal and I’ll do yours.

  7. michael
    Jun 11, 2015 at 1:56 pm

    Zen,

    It is smoke and mirrors. Unfortunately too many of our “citizens” are too stupid to understand. I have made a point of looking in my hometown for the decay. Its there to see if you open your eyes.

  8. interesting
    Jun 11, 2015 at 10:25 pm

    “Now is the boom”

    really Jerry? i hadn’t notice since my middle class income hasn’t budged in decades and i don’t see that changing ever, i simply can not afford to live in California any longer.

    • Jun 11, 2015 at 10:36 pm

      That’s because you’re in the 99%. California has been tough for the 99%. Tougher than ever before. Housing costs have soared out the wazoo, salaries stagnated or worse. But the 1% really got a deal this time (not just this time, but this time in particular).

Comments are closed.