Boojum: The ‘new’ problem of immigration

December 2, 2016 | Housing, Immigration, Markets, Remittances, Ross Macdonald | No comments 21 views


By: David A. Smit




From Border Incident, 1949


I told him about the closed blue truck, the brown men of the temple. “Troy is the head of the gang.  The others work for him.  They’re been running an underground railway on a regular schedule between the Mexican border and the Bakersfield area.  The southern end is probably at Calexico.”




Immigrant farmworkers pay an arm and a leg for substandard housing in garages, residential hotels, backyard sheds, and derelict campers.



Southern California


“Yeah,” Spanner said.  “That’s an easy place to cross the border.  All they got to do is crawl through a wire fence from one road to the other.”



Texas braceros, 1956


“And Troy’s truck would be waiting to pick them up.  They used the Temple in the Clouds as a receiving station for illegal immigrants.”


Still from Border Incident, 1949


Thousands camp in gullies, dry washes, and tickets.



Company housing for migrant workers, Corcoran, California, 1940


During the wine grape harvest in the Napa Valley, field hands take over the back yard at the St. Helena Catholic church and sleep along the Napa River.



Self-built informal house, California desert


“Jesus!” Spanner said.  “If they brought over twelve a night, that’s three hundred and sixty a month.  Do you know how much they pay to get smuggled in?  A hundred bucks apiece.  This is big money.”


Legal braceros being issued identity cards, 1954


“Dirty money,” I said.  Trucking in a bunch of poor Indians, taking their savings away, and turning them loose to be migrant laborers.”


Braceros in the San Joaquin Valley, 1950s



One reason why this situation persists is the shortage of affordable housing.



Illegal rental, Echo Park, California


Another is self-sacrifice. When you earn minimum wage, don’t speak English, and work in the fields near Vista or Oceanside, the best way to save enough money for your family in Oaxaca is to camp in the canyons.



Bracero children, April, 1965


He looked at me a little queerly.  “They’re breaking the law too, don’t forget.  We don’t prosecute, unless they got criminal records.  We just ship them back to the border and let them go.  But Troy and his gang are another matter.  What they been doing is good for thirty years.”

Ross Macdonald, The Moving Target, 1949

the _moving_target_ross_macdonald


This is the hidden cost of cheap fruit and vegetables.




Richard Street, Living in the Bushes: Farmworker Housing in California


Housing is where jobs go to sleep at night. 



For people and housing, informal to formality is a journey

Undocumented or illegal jobs often go to sleep at night in undocumented or illegal housing.



“Great job! You’re fired!”: Part 2, You’re fired!

December 1, 2016 | Capital markets, China, Finance, Global news, Government, Lou Jiwei, organizational behavior, Politics, Speculation | No comments 20 views

By: David A. Smith


 [Continued from yesterday’s Part 1.]


As we saw in yesterday’s Part 1, using as source material a Wall Street Journal (November 7, 2016) story coupled with a personal experience from thirty-plus years ago (sepia font), Lou Jiwei had been hand-picked as China’s Finance Minister by none other than Xi Jinping, China’s president and increasingly imperious strongman, with the explicit goal of tightening up China’s finances and reining in local borrowing.  To do this, he had specifically requested a commitment that he would serve a full five-year term, as his anticipated reforms would take time to show their benefits, and before that happened,


January-April 2015 China reports a sharp drop in fixed-asset investments.



Not falling, Caesar, but slowing down


Fixed-asset investment is the financiers’ category for ‘large public spending’ – remember, in China it’s likely to be a state-owned developer buying from a state-owned local government agency, using financing from a state-owned bank, with the eventual goal of selling to households who finance from another state-owned bank – and who aren’t buying the houses due either to cost, isolation, or distrust.  That’s four levels of fees and costs, four cohorts of people happily making money and churning the system – and now they can’t.


In early 2015, China reported a sharp drop-off in growth of investment in factories, buildings and other fixed assets—a plunge many in the government attributed to the crackdown on local borrowing.


Occasionally journalists’ patellar-reaction desire to make everything into he-said-she-said short-circuits even the simplest common-sense understanding.  Of course it was the ‘crackdown’ (journalist signal word) on local borrowing.



Enough with that local borrowing dodge, already


And of course the local governments didn’t like it, because for years Beijing had been pushing unfunded mandates in their direction, and their only source of deficit-filling revenue was selling municipal land.


In May 2015, the central government relaxed controls on localities’ ability to raise money by again letting them tap government-sponsored financing firms—essentially reversing course on the measures launched by Mr. Lou months earlier.


Such a move, so thoroughly at odds with Mr. Lou’s policies, proved to anyone watching several things:


1.     The municipal governments had the ability to override Mr. Lou by taking political avenues to the President.

2.     Mr. Lou’s efforts to manage the money supply could no longer succeed because this enormous source of ‘shadow-government-financing’ would be unconstrained.

3.     Other stakeholders with similar political access now knew how to trump Mr. Lou.


One would expect, therefore, that Mr. Lou would shortly have been headed for the exits, his utility exhausted, but there was this achievement yet to come:



You’ll never guess what I’ve got in my briefcase


January 2016 China launches the Asian Infrastructure Investment Bank, an effort spearheaded by Mr. Lou.



And we’re all going to be Keynesians now


Working as AHI does for the World Bank (one of the Bretton Woods institutions) and the Asian Development Bank  or development finance institutions, DFIs) places me in a biased position vis-a-vis China’s new development bank, so I’ll limit myself to observing that:


1.     A development bank can provide concessionary financing to emerging nations and hence jump-start government leaders’ pet projects.

2.     China needs natural resource raw materials to feed its manufacturing industries and grow its economy.

3.     Pet-project-infrastructure development financing can be coupled with natural-resource-extraction projects that boost the country’s economy.

4.     Resource-extraction businesses don’t require good government – you just sign the concession and reap the royalties – and they are a convenient channel for corruption on a massive scale.



And hire Chiense companies to build the roads for you


5.     In the last decade, China has been incredibly active in natural-resource countries, especially in sub-Saharan Africa.

6.     The emergence of a China-controlled DFI could therefore further China’s economic interests regardless of whether the resulting development projects actually helped the poor people of an emerging nation rich in natural resources.


A China-led AIDB is thus a useful instrument of Chinese state economic policy and Chinese state foreign policy.  Its establishment is a personal coup for Mr. Lou.



Capstone of a career? Loui Jiwei at the inaugural meeting of the AIDB


Perhaps it bought him time, time he used to return to his program of reform:


April 2016 Mr. Lou’s Finance Ministry enacts a new tax regime to lift the service sector. Many companies complain they don’t have enough time to adapt to the new rules.


And he hewed to the line of fiscal prudence:


Going into this year, Mr. Lou had resisted sharply increasing China’s fiscal budget even as some officials called for stepped up government spending to spur growth. That also put him at odds with senior officials bent on sparing no effort to prop up the economy.



I’m looking at you, senior officials


Back in my mid-Eighties adventure in negotiating updated terms on the syndications of a longstanding developer client’s next properties, I too faced what seemed as if it could become an impasse:


I advised the developer that I couldn’t bring the deal forward on what they were offering as their ‘last best’ proposal


At that point, I was removed from the deal team.


At the time this surprised me, but with experience I know it shouldn’t have.


November 2016 Mr. Lou is removed from the post, and is expected to take a smaller role as head of the country’s pension fund.


I think Mr. Lou cannot have been surprised at his demotion.


In the aftermath I came to realize several important lessons that I think of as the Life Cycle of an Ambitious Technocrat:



Live fast, die young, leave a good-looking transaction structure


Sometimes the technocrat will do his job not wisely but too well.


Knowing this – I learned it a long, long time ago – I’ve come to embrace and even relish the short happy assignment life-cycle of a principled consultant.  There are times when your best use is to change forcibly the trajectory of policy, and in such times, the best thing you can do for your client or your cause is push as hard as you can, meanwhile telling those you work with that at some point you’ll need to be replaced because the counterparty will be willing to do the right thing but only if you’re removed from their sight.


I’ve also learned that, as a consultant, your prospective and current clients will tell you stories, stories in which they are good and other folks are bad.  They will make brave promises about what they will do if only the circumstances can be arranged for this, and importune you to go create such circumstances.



You believe I want to root out corruption and reform the system, don’t you?


At this point, the etiquette of contractual diplomacy kicks in.  One may never look a client in the eye and tell him you don’t trust him, but one should never trust what a client says.  So we make it a practice in every assignment to find ways to give our clients camouflaged meta-tests, and we will extend ourselves only if the client passes each successive camouflaged meta-test.


“Lou Jiwei’s abrupt ouster sends a strong signal that any prospects of even limited economic reforms are falling prey to President Xi’s focus on consolidating his power,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.


Eswar Prasad

“You see, you have to have a sense of humor about China’s politics”


Sometimes also the technocrat’s demise is the indication the leadership has failed the test.


Within China’s political, academic and business elite, however, there are concerns that Mr. Xi is increasingly focused on hitting growth targets and suppressing dissent rather than restructuring the economy and tackling other urgent problems.


The latest moves on Monday include a plan to boost coal power despite a pledge to battle China’s severe air pollution.


And people wonder why some are so cynical about climate accords.


“I can’t say I’m the toughest finance minister” in recent history, Mr. Lou said in an interview with The Wall Street Journal in April. “I can only say I’m a man of principle.”


That’s why you’re gone now, Mr. Lou, as I’m fairly sure you know.


“Great job! You’re fired!”: Part 1, Great job!

November 30, 2016 | Capital markets, China, Finance, Global news, Government, Lou Jiwei, organizational behavior, Politics, Speculation | No comments 56 views

By: David A. Smith


In life there are technocrats and there are politicians, and in political situations the former usually work for the latter – and are fired by the latter where their usefulness is over.  As reported in the Wall Street Journal (November 7, 2016):


BEIJING—China removed its high-profile, reformist finance minister Lou Jiwei from the post in a shuffle that comes as President Xi Jinping positions trusted allies in key roles and Beijing prioritizes short-term growth over major overhauls.


China's Finance Minister Lou Jiwei listens to a question at a news conference in Beijing

Nobody’s asked me for any quotes about this


Bad move, I thought.  Guaranteed bad move. 


Of the changes announced Monday, Mr. Lou’s departure was the surprise.


It shouldn’t have been.  To see why, one need only rearrange events into time sequence, starting with the Journal’s helpful time-line inset box (buff blue font), then extract relevant bits.


Enter the technocrat:



Bring it on, whatever it is


September 2007 to March 2013 Lou Jiwei runs China’s sovereign-wealth fund, China Investment Corp., turning it into a major player in global markets.


That made Mr. Lou the rare technocrat who both makes money and delivers political benefits – a man to capture, reward, and use.


In August, 2012, I posted a six-part Theory of China’s Cities and Housing, that included this condensed summary.



I’ve been a China bear for some time … eventually I’ll be right (won’t I?)


Lou Jiwei was an outspoken Communist Party veteran picked for the job for his competence rather than a close relationship with Mr. Xi in the early days of the Xi administration.


‘Outspoken’ is a journalist’s signaling word.  It’s meant to foreshadow demise, because if you talk straight and are rising, you’re courageous or principled, but if you talk straight and you fall, then you were outspoken. 


I know – I’m occasionally called outspoken.



Just outspoken


March 2013 Mr. Lou is named finance minister in the new government of President Xi Jinping with an aim to overhaul the fiscal system and tax code.


He was hired to clean up a big dirty problem: tax shenanigans.



At a time when local governments in China had racked up hundreds of billions of dollars in debt from big-ticket infrastructure projects, the new administration needed a tough official to put China’s financial house back in order, the officials said.


Indeed; Beijing need a man who (a) could find where the money was buried, (b) could establish how much of it could be repatriated to the capital, and how, and (c) would actually do what he was tasked to do and not get bamboozled, bullied, or captured by the locals.



Special prize for avoiding bamboozlement


To give some context, I’ll interleave a story from my past, using a suitable sepia font:


Long, long ago, where I was a mere sprat in business terms, I was the recently-added junior executive on a syndication with a developer client who’d been a steady and reliable customer of our firm for many years.  The developer was one of the firm’s largest sources of deal flow.  All of that developer’s properties had done just fine: he had the development and financing process down to a science, the rents compared favorably with the market, and the company was financially strong.  Yet the deal terms were out of the market.  They’d always been favorable to the developer – no contractual guarantees, no net worth commitment, splits of cash flow residuals pro-developer – and in the intervening years, the market had shifted the investors’ way so what once had been end-of-range was now, factually, out-of-range.  The sales people were (correctly) questioning how they could sell this investment, and I’d been added to the deal term to negotiate terms that were within market norms.


For Mr. Xi’s stated purpose, Mr. Lou was ideal.



Me?  You’re picking me?


Mr. Xi, who had set out to give market forces a bigger role in China’s economy, [chose Mr. Lou] largely because of his expertise on the country’s convoluted tax and fiscal system, according to the party officials with knowledge of the matter.


Because competence is no guarantee of survival, Mr. Lou made an unusual request:


Shortly before his appointment, according to people with knowledge of the matter, Mr. Lou expressed a wish to Premier Li Keqiang to allow him to serve his full five-year term.  


Presumably he’d seen what happens to reformers who aren’t given enough time to complete their reforms, including implementation.


Mr. Lou’s pitch, these people said, was that he had a plan to overhaul the country’s creaky fiscal system and tax code and needed time to carry it out. 


Because political opposition happens before political implementation, the reformer must invest by taking all the political flak up front, with the payoff of having got the reforms through a slower-maturing political yield.  Being ejected early is all pain for no gain.



Fortunately, we have cures for early ejection


The chat with Mr. Li helped launch him as a major voice for market-oriented changes in China.


‘Market-oriented’ is another journalist’s signal.  It’s meant to foreshadow that Chinse elected officials say they want something, but as they don’t know the actual political price of achieving it, they secretly reserve the right to decide they don’t want it that badly. 


October 2014 Mr. Lou’s Finance Ministry issues rules aimed at curbing local-government borrowing.


Ah, I thought.  That explains why he’s gone now.


Working with the developer’s CFO and in-house/ out-house counsel, using evidence and logical argument, I set about persuading these two executives that we needed better terms.  I was heard out – thirty years later, I think they did so with amused patience, knowing that they held the hidden ace – and secured some modest improvements on lesser issues. 


The mountains are high and the emperor is far away, and as I’ve documented at length dating back to July, 2013 and earlier), China’s corrupt money train is out of control and the leadership is looking for someone to blame.



Posted in July, 2013, shortly after Mr. Lou was appointed


Behind Mr. Lou’s removal, the party officials briefed on the change said, is his spearheading of tough measures including attempts to rein in local-government borrowing, which have had the effect of squeezing short-term growth.


‘Growth’?  Or spending masquerading as growth?



Gleefully running up local-government debts for a decade


Just as finance ipso facto will never fix a solvency problem, spending is not ipso facto growth, because value can be destroyed through misallocation or misuse of capital. 


In October 2014, Mr. Lou’s Finance Ministry issued a policy intended to prevent financing companies sponsored by local governments from taking on new debt.


Spending is one of very few things local officials and managers can do that creates immediate activity (and consequently a short-term jobs blip), so naturally, everybody was doing it – that is, until Mr. Lou turned off the money spigot.


Local officials soon complained the policy made it hard to make any planned investments.



Momma told me they’d complain like this


Knowing that curtailing money profligacy would pinch local officials, Mr. Lou undoubtedly discounted their complaints, secure in the beliefs that he was doing what the nation needed, that Mr. Xi wanted, and that Mr. Xi had assured him he would have time to complete. 


As I had been so told and was so sure:


When it came to the major points, however, we could not reach agreement. 


Of course, there are complaints and then there are complaints, and some complaints are more important to the leadership than others.


[Continued tomorrow in Part 2.]

Boojum: The political knee

November 29, 2016 | Boojum, Humor, legislation, Precautionary principle | No comments 48 views


By: David A. Smith



Introducing the Boojum series


“Just the place for a Snark! I have said it twice:

   That alone should encourage the crew.

Just the place for a Snark! I have said it thrice:

   What I tell you three times is true.”


In my voracious and eclectic reading, now and then I come upon a tidbit of indubitable three-told snark unworthy of a proper blog post (too small or too tangential), and in the interests of posting frequency and regularity, I will offer these up as Boojums:


“‘But oh, beamish nephew, beware of the day,

   If your Snark be a Boojum! For then

You will softly and suddenly vanish away,

   And never be met with again!’



If a lie can travel around the world before the truth has finished putting on its shoes, then the instinct to ban can run ahead of the possibility to do.



And here, gentlemen, you can see the prohibital gland, highly developed in this one


In 1896, a New York newspaper reported that over at Columbia’s College of Physicians and Surgeons, X-rays were being used to project anatomical diagrams directly into the brains of students, ‘making a much more enduring impression.’ 



Now that’s an enduring impression


Somewhere along the way, a rumor surfaced to the effect that opera glasses could be outfitted with X-rays, considerably upping the appeal of a night at the opera for many a bored spouse. 



Thank you, Roentgen


So thoroughly taken was the public by this story that on February 19, 1896, a New Jersey assemblymen introduced a bill specifically – and to the great derision of his peers – prohibiting the use of X-rays in opera glasses.

– Mary Roach, Spook, page 113



Evidently the political knee was strong in that one.


Month in Review, August, 2016: Part 2, The arc of economic conformity

November 22, 2016 | Airbnb, as-of-right zoning, Development, Eurozone, Housing, Innovations, Italy, kayfabe, Speculation, work-live housing, Zoning, zoning-by-taste-police, ZTP | No comments 106 views


By: David A. Smith


[Continued from yesterday’s Part 1.]




Yes, I read the Economist


So late am I in writing the periodic Month-in-Review retrospectives [Sorry, readers – Ed.], and so rapidly has our politics moved in the last few months, that it seems another century when the British vote for Brexit was triggering vibrations among the chattering classes, such as a wrong-end-of-the-telescope analysis in the Economist (July 3, 2016) of the demise of liquidity across the Eurozone that I reported in Twilight at the Groucho Marx club: Part 1, That was always the plan:


When in a moment of financial exuberance you join that exclusive club whose members and surroundings you’ve envied for years you seldom think of the downside.  As the years go by and you discover that though you’re In, somehow you’re not really In, you keep noticing that the older members tolerate your presence, nod now and then, let you stand them a drink and make pleasantries with every appearance of paying attention … but somehow you’re never on the executive committee, when the dues are raised or new members are voted upon. 



Can you believe that lout is in the club?


Readers may wonder why a blog ostensibly dedicated to affordable housing globally has more recently wandered into tangential realms like high-finance at the sovereign level, and the answer is twofold:


1. Paraphrasing Walt Whitman, Do I distract myself? Very well, then, I distract myself; my curiosity is large, it contains multitudes.

2. When it comes to urban affordable housing, everything connects to everything else, and in this case, currency union has strangled capital formation, which is choking off new housing supply, which is undermining household formation (including fertility and population growth), labor mobility and economic development, and national competitiveness. 



Oh the Euro bone connected to the (‘) debt bone

The debt bone connected to the (‘) housing bone


You think maybe you should drop out, but every time you voice this anxiety to the club’s executive committee, they explain how the club has expenses to pay and it must keep the dues high to maintain the facilities and standards.


And that calls into question not just next month’s club dues, but also what you are doing there in the first place, or so it must seem to this summer’s designated sick man or Europe, Italy:


The shockwaves from Brexit have been almost as severe on the Tiber as on the Thames.


While I like the Economist much better than any other weekly, every now and then the paper delivers an unconscious oxymoron.


Markets fear that Britons’ vote to leave the European Union on June 23rd presages weaker growth in Europe –


Nope, that’s entirely backwards logic: Brexit won’t make European growth weak, weak European growth is a contributing cause of Brexit. 



“But suppose everyone lied that way.”

“Then”, said Yossarian, “I’d certainly be a damned fool to lie any other way, wouldn’t I?”


Everything-lying-together produced a Eurozone where Part 2, New rules bent the first time they are tested, and Part 3, From whatever source:


After the previous two parts, using as source material articles from the Economist (July 3, 2016) and the Wall Street Journal (July 27, 2016; blue font). It has become apparent that though Italy is by no means an equal member of the insider’s club within the Eurozone, it has better standing than Spain, Greece, and certainly more than the most recent entrants, because despite a history of promises unkept they’re looking the other way while Italy tries to find money to funnel into the weakest of its banks.


Perhaps this is due to Italy’s longstanding membership, or for that matter the multiple 1999 budgetary finagles, basically fraud by all concerned, to allow Italy into the Euro even though it hadn’t even come close to meeting the fiscal solvency requirements.


One hope is that Atlante, a €4.25 billion fund set up in April with money from banks, insurers and other institutions to recapitalise small banks and securitise bad loans, can take more of the strain.



Single currency, multiple governments, what could go wrong?


For sixteen years, Europe’s continental leaders have convinced themselves that ‘ever closer union’ (itself a compromise of woolliness) would arise naturally if they all pooled their currencies together to create a meta-currency known as the Euro.  Indeed, the whole Euro project is simply the Atlante bailout fund writ large – everyone chips in and no one will ever need to use the fund because it will be so large, shiny, and impressive people will naturally find their common ground.


Brexit changed the equation, not for what it did or will do to the Eurozone economy but for what it is doing to the Eurozone polity – namely, it shattered the belief that Brussels always wins.


But €2.5 billion has already been spent on shares in two ailing northern banks, leaving little in the kitty.


That was fast: raise it in April, spend half of it in two months.  That’ll chill any potential second round of funding.


There’s the underlying lesson – all of the furious politicking, all the shortening-term refinancing, all the shifting of capital from one place to another – all of it does nothing whatsoever to fix the Eurozone’s solvency problem. 



Eventually you run out of other people’s money


The Soviet Union survived until two things happened:


1.     Its first-generation leadership died out, leaving in charge only those who had grown up within the system and thus saw its (growing) flaws in a way that its founders saw only its (dwindling) virtues.

2.     It has spent down its capital base to the point of insolvency.



Still pointing down, Vladimir?



Venezuela’s done the same thing, only faster.  Zimbabwe’s past its democratic-revolution-by data but Robert Mugabe, against all odds, remains alive. 


You see, the Law of Economic Gravity, which I formulated to apply mainly to commercial propositions, also applies to governmental and societal ones, and it’s the bookend to the Reverse-Anna-Karenina principle:





Really nice wife you’ve got there – mind if I ruin her?


Recognizing the arc of global economics, Saudi Arabia’s burning through its foreign reserves at warp speed and to head that off is trying to implement a top-down socio-economic revolution.


Though these dire straits do not loom imminently for the Eurozone as a whole, its extremities – especially Greece – are reaching a dangerous tipping point.  Greece is long past the point where severance from the larger body would be economically wise for both the Greek economy and that of the rest of the Eurozone. 


That its leaders are clinging to keeping the entire body intact regardless of the economic rot spreading through the political corpus is disheartening.