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Tereza Coraggio

Third Paradigm is an out-of-the-box thinktank on community sovereignty and regenerative economics.

We look at how to take back our cities, farmland and water; our money, production and trade; our media, education and culture, our religion and even our God.

We present a people's history of the Bible and a parent's view on how to raise giving kids in a taking world.

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Past Shows


Bad Money and Morbid Mortgages

February 1, 2009

3P-012 Show Information (includes MP3 download link)

Welcome to the twelfth episode of Third Paradigm. Our title this week is Bad Money and Morbid Mortgages. My daughter, the one that's 16 and not 10, has a Cat in the Hat lunch box. It shows Thing 1 and Thing 2 running amuck while the Cat says, "These things are good things." The Cat in the Hat terrified me as a kid. Everything was out of control and you knew it could only end badly, but here was this sinister smiling Cat purring smoothly that everything would be fine. Today, the Cat juggling the fish bowl in our house is capitalism. Money is Thing 1 and Debt is Thing 2. We're told that these things are good things – we need to breed our money to make more little Thing 1's. We need to cultivate our credit rating so our lives can be graced with Things 2. It's time to get out the butterfly nets, folks. These things are not good things.

Bad Money is the title of a book by Kevin Phillips, subtitled Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. The jacket says that "Bad Money" refers not just to the depreciated dollar but to the dangerous attitudes and flawed products of wayward megafinance. Over the last thirty years, financial services, including the ballooning debt and credit industry, have nearly doubled to a record 20% of the GDP, while manufacturing has halved to 13%, greatly imperiling the economy. We'll look at some of the reasons it's come to this.

Then we'll look at the second edition of an international bestseller called Irrational Exuberance by Robert J. Shiller. The 2000 version won him the Commonfund Prize for predicting the stock market collapse that began one month after the book was published. In this 2005 version, he looks at how investors, instead of questioning the paradigm, moved their money into the speculative housing market. He broadens the evidence that investing in capital markets of all kinds in the free market economy is inherently unstable – subject to Alan Greenspan's now-famous phrase, "irrational exuberance." Although he doesn't get into it, while Thing 1 and Thing 2 may be messing up our house, they're juggling AK-47's, doubling the cost of food, and leaving a poisoned wasteland outside in the global warming rain. What's devastating the rest of the world should be unhealthy for us. Today, 30,000 people around the world are fasting between dawn and dusk for justice in Zimbabwe. However, I remembered this while drinking my 7 am latte. It sure made me mindful of savoring it when I realized it was the last thing I'd have before sundown.

On the good side of money, we'll look at a book by Woody Tausch called Slow Money: Investing as if Farms, Food, and Fertility Mattered. Woody was in town this week speaking at NextSpace. We'll also update you on the Transition Santa Cruz meeting on The Future of Local Food. But first, we'll start with a poem by Linda Hogan called Light, to power us through the discussion of all this economic darkness.



In the first morning of the world created,

on the skin of water reflected,
is the spread of a sun,
and the sun, like god, is a power
you cannot see.
Only what it lights on,
only what it touches with warmth,
and yet it always has a shadow at its feet.
Then there is the sea, the sheer weight of it,
but the lightness of its creatures,
some silver as they leap above it,
and those at the bottom
making their own light
in what would of been
night infinite, as if the sea carries no
shadows at its feet.

Then there is the light of the wood decaying
out by the stagnant pond,
where the eyes of the prey nearby,
shine in the dark, betrayed
when the deer stares one last time
to see the hunter still follows
out in the shadow of living trees.

And bodies of men at war, they say,
give off light.
One I knew fished the sea
and told me of the silver fishes falling
from the mouth of the netted one.
As if in the last breath
perhaps we give back all the swallowed,
all the taken in, and it is light, after all,
first and last, we live for, die for.
We fly toward it
like those who return from it say.

But for now, for here, we fly without will
toward it, drink a glass of it,
see it through green leaves.
There, walk toward it.
Lift it, it has no weight.
Carry it, breathe it, cherish it.
You want to know why god is far away
and we are only shadows at his feet?
Tell me, how long does it take a moth
to reach the moon?

~ Linda Hogan ~
From Rounding the Human Corners

Another thing is rounding the corners, and cornering the humans, and it's not light. Bad Money is around every bend, lurking with its hand out like a homeless vet. Buddy, can you spare a billion? Even when it gets the payoff, we still get mugged. Kevin Phillips also wrote American Theocracy: The Perils and Politics of Radical Religion, Oil, and Borrowed Money. In Bad Money, he focuses on the latter two. I have to confess to being a data junkie. Phillips is a funny and zippy economics writer, if that's not a contradiction in terms, but it's the tables that fascinate me. Figure 1.1 is The Great American Debt Bubble. It shows that in the Great Depression, when credit market debt topped at 287% of the GDP, FDR devalued the dollar by 40%. In 2000, when the stock market bubble burst, instead of devaluing the dollar, the Fed cut the interest rate to 1%. As the stock market domino hit the employment domino in the directly aligned business world, new mortgages were offered to homeowners as a crutch. They could refinance and still pay their mortgages and bills while looking for a job. Over 600 billion was withdrawn from the equity ATM's, which doesn't include the 2.5 trillion for new home purchases. This accounted for 7% of disposable income, protecting consumerism as the American way of life. By 2006, debt was 335% of GDP. Wealth, as debt-funded purchasing is called, rose again due to this feverish mortgage activity, and The Economist wrote an article entitled, "The Houses That Saved the World."

But Robert Schiller, who predicted the technology stock crash, didn't see it that way. The 2005 version of Irrational Exuberance looks at the housing bubble as having started its pre-burst shimmer. He argues that home prices mattered more than stock because homes are the basis for security. Houses replaced stock as the pillar of US wealth creation in the 2003 resurgence. But this "wealth" was in the form of adjustable-rate "neutron" loans that vaporize the people and leave the houses. As a crutch to prop up spending during an economic downturn, it was designed to snap as soon as we'd taken on as much debt as the market could bear.

Robert Shiller isn't the only Cassandra in the bunch, however. I think that I'm the only woman to have taken her husband to marriage counseling armed with spreadsheets. In 1999, I tried to convince my husband that the stock market was a house of cards about to collapse. I argued that there's no actual value holding up stock – the only value it has is based on the perception that someone else will buy it for more. Once that perception is lost, the whole thing tumbles. I thought that the turn of the millennium would trigger the fall. Like Robert Shiller, my prediction was off by 2 months, which I still think was manipulated by the brokerage houses. Since they manage several huge funds, all they have to do is trade between them to keep the bubble intact until the principals can sell their own stash. After January, when they'd sold in a new tax year, I think they let it drop. But I failed to convince my husband.

After that, everyone jumped onto the Poor Dad, Rich Dad bandwagon – the author who made a fortune talking about how he made a fortune in the real estate market. I suspect that his real estate earnings paled by comparison to book sales, seminars, and speaker fees. The same people who, a year ago, had said that the market fluctuates but always recovers now had a new dogma - California real estate never goes down in value. What they should have said is that it never had gone down. Having never deflated, it was long overdue to pop. The real estate market, like the stock market, is speculation. Between the monthly mortgage, maintenance, and insurance, it's far more expensive to own than to rent, even with a downpayment equal to what the house should have cost. Shelter is the foundation of security. But mortgages aren't about security – they're a gambler's stake. The mortgage industry has convinced us that gambling with the roof over our heads is a sure bet, and a third of our income for the next thirty years is a small price to pay. In fact, it has been a small price – a third is what conservative loans were based on before the interest-only, adjustable rate, and sub-prime mortgage schemes. Of course, this is one-third at the high-water mark of employment. They don't readjust if you lose your job or wages go down.

For the next five years, I tried to convince my husband that we should pay off our mortgage rather than staying in the stock market. I gave him Irrational Exuberance. I put Rich Dad, Poor Dad into the recycling bin. Like stock, I argued, these inflated values have no foundation except the perception that you'll be able to sell it for more. Once that perception's gone, it's a house built on vapor. I was finally successful.

If anyone's paid off a mortgage, you know that it isn't nearly as convenient as refinancing. No one comes to your house with a sheaf of papers with Post-It flags. They have to find your mortgage first, which has been bundled and sold to China or Japan. Don't expect your local branch to help you – this will require a deep dive into the black hole of Collateralized Debt Obligations. You'll find that they applied months of extra payments as future payments, so they wouldn't have to decrease the principal and reduce the interest you owed on it. This was hidden by refusing to do automated payments but send written receipts. Eventually, they come clean and tell you what you owe. After you pay it, they send you a curt note of congratulations and say to wait a few weeks before your title's cleared. For the largest purchase of your lifetime, it's pretty anti-climactic.

This week I showed an animated video to my student group that might explain why. It's called "Money As Debt" by Paul Grignon and I recommend to everyone that you google it. It explains in cartoon-style how banks create money out of thin air by issuing loans. Based on what's called a fractional reserve, which is the banker's own money, they can loan out 99X its value. By then attracting deposits, they can issue more loans at 90% of those. But by bundling and selling off thousands of mortgages at a time, this debt becomes part of their fractional reserve, which they can loan against exponentially again. It literally creates money out of nothing. Then our government, which has the sole power and authority to issue money, instead borrows the money that lubricates our transactions. We, as taxpayers, pay the bankers interest to create the money in our Federal Treasury. It's so absurdly lucrative that you have to see it to believe it. And now we're bailing out those same bankers. We'll break for I Want My Bailout Money by Michael Adams the Health Ranger.

[Michael Adams the Health Ranger – I Want My Bailout Money]


That was Michael Adams the Health Ranger with I Want My Bailout Money, from his new album Beyond All Reason. On the healthier side of economics, however, Woody Tausch came to town this week to talk about his book Slow Money: Investing as if Farms, Food, and Fertility Mattered. He's out to build a 3 million dollar fund that grows at an organic rate of a few percentage points a year. It would be exclusively invested in smallholder farms and food production. It was a heartening presentation and a lively discussion after.

Following up on this concept, Transition Santa Cruz held their workshop on The Future of Local Food. Friday night included a slide show of our own market farmers on their own home turfs. There was also a panel talking about ag policies and subsidies. Saturday was an open source meeting that was so fertile and rich my head's still spinning. A particular highlight was the group discussion that pushed out the fence of how sustainable you can get in your own backyard. Besides gardens, there are chickens, bees, rabbits, and ducks. There are backyards without borders and biosphere greenhouses with tilapia aquaculture. One of the most popular ideas was the Farm Party Crew, a So. Cal concept of the collectively-dug one-day garden followed by the collective digging the late-night party.

A hip-hop DJ wanted to use this idea to grow new farmers, by getting High School youth to participate in Gleanings, a program where volunteers harvest excess crops that farmers would otherwise plow under. The food goes into a Salinas warehouse and is available for any nonprofit to pick up. I was going to run a session on carnivore co-ops, but I found this is already happening with a new co-op called Sustainable Nut. It includes my favorite non-pasteurized, non-homogenized milk from ClaraVale Dairy, plus eggs and meat from my friends at TLC Ranch. It has a CSA from Blue Moon Organics, and nutrient-dense foods from their namesake at sustainablenut.org.

The session I ran instead was on getting High School youth involved in global awareness and sustainability. For me, the two go hand in hand. Students need to understand the unjust practices that make possible the American way of life, the one that Bush said was not negotiable. I guess this means we'll kill anyone who gets in our way. But consumerism, it's becoming clear, will use us and trash us when our debt-carrying capacity is met. As this becomes clearer, alternatives that would've been unthinkable a year ago are becoming viable.

Some of the exciting ideas that came out of our discussion were a summer Sustainability camp, an "embedded" charter school bringing global perspective to the mainstream curriculum, and an alternative credentialing system to academia, based on apprenticeships and training. We thought that High School students are motivated by three things – fun, a little money, and a future – probably in that order. We're going to continue the discussion at the Strengthening the Roots Convergence in two weeks. This is at UCSC on President's Day weekend and put on by United Students for Fair Trade and the Real Food Challenge.

Finally, in this week's newsletter from Grameen Bank, I read a note about a Santa Cruzan that was both encouraging and sad. Jordan McKay, 23 years old, graduated from UCSC with a degree in Economics. He especially loved microfinance, and had a deep understanding of how communities can be helped or harmed by economic policies. He was also an avid cyclist who rode his bike to work at Assemble in Berkeley doing computer animation. On September 17, 2008, Jordan was fatally shot at 1:40 a.m. while biking to the SF flat he shared with his girlfriend. Jordan's sister Dana Landis says, "When asked what he would do with a million dollars, Jordan said he would create an organization that provides microfinance to small businesses around the world. So Jordan's family asked people to donate to Grameen in memory of Jordan.

They write, "Jordan was a caring, creative, principled, loyal, irreverent, adventurous and wickedly funny person who even now is still changing the world. Those who loved Jordan look for him everywhere - in the faces and voices of his friends, in the mountains and trails of Yosemite where he loved to hike, in his music, and in dreams." Now they can find him also in the benefits his legacy has brought to the world's poorest.

Our closing song is The Clockwise Witness by DeVotchKa, chosen for the lyrics which read,

"If you win the rat race,
if you come in first place,
then a rat is all you will be...

Is there something hovering?
It seems to be governing
everything once dear to me."

[DeVotchKa – The Clockwise Witness]


Thanks for Listening.