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Tim Myers: Talk about a bust

Myers' Musings

Posted: August 14, 2010 6:25 p.m.
Updated: August 15, 2010 4:55 a.m.

In case you missed it, the entire world just endured the bursting of an incredible asset bubble, this time associated with residential real estate in the United States and several European countries.

What defines an asset bubble? An asset bubble exists when assets inflate to a cost beyond the present value of the future cash flow an owner can reasonably expect from the asset. This happened in residential real estate when the cost to carry real estate outstripped the cash flow reasonably expected from the holding of the asset; primarily rents or the amount of payments an owner occupant could afford.

What drives an asset bubble? Economists agree any asset bubble requires a source of cheap and plentiful liquidity that allows for the constant buying and selling of the asset class. In the case of residential real estate, the Europeans and Asians provided a source of liquidity by taking the dollars obtained in trade and buying bonds, including packages of mortgages on residential real estate, at extremely low yields.

The bubble burst when the source of liquidity suddenly dried up, and the assets securing the existing obligations dropped precipitously in value, causing the international banking crisis that necessitated TARP and the deleveraging that we still live with today.

The bursting of the real estate bubble caused the bursting of several other bubbles in associated industries, including a full-on depression in construction and construction employment. But who would guess that the bursting bubble would also impact Santa Clarita City Council elections?

The Signal recently summarized the amounts spent by the incumbents and major challengers in the 2010 City Council election. The untold story behind this excellent journalism? The utter collapse in campaign expenditures from 2006 and 2004, perhaps establishing a “new normal” in Santa Clarita elections.

One hears much talk today about the “new normal.” The new normal includes several unpleasant truths, including the inability to support consumption with debt secured by ever-increasing assets, the lowering of returns on equity for various investments and the dissolution of some rising incomes. It also seems to apply to Santa Clarita political fundraising.

In 2010, the major players (three incumbents, one political action committee and two serious challengers) in the election spent a combined total of approximately $176,000. In the 2008 election, the major players (the two winners, two main challengers and the same PAC) spent a combined total of $276,000, amounting to a 37-percent reduction in total raw expenditures.

But the bubble burst harder than that. Remember in 2010 six major players competed while in 2008 only four were compared. When taking average expenditures per candidate, the number actually falls a startling 47 percent.

With all the hand-wringing concerning the fundraising advantages of the incumbents, when compared with their 2006 races the incumbents’ direct expenditures went down from $165,000 to $89,000 — a 47-percent decrease. (The controversial PAC Citizens for Integrity in Government kept their spending relatively constant in 2006, 2008 and 2010.)

Compare Frank Ferry, the barely victorious incumbent who reduced his direct expenditures from $74,000 to $25,000, a jaw-dropping 66 percent. Challengers fared slightly better with the reduction in expenditures a more pedestrian 36 percent.

One can easily draw two lessons from these numbers. The first relates to the bursting of the real estate bubble. It turns out industries allied to residential construction, on their heels and no longer flush with cash, failed to pump their “normal” sums of money into the campaign.

The second lesson relates to my continued trope of the power of incumbency. Despite the hand-wringing whining of the challengers, the incumbents ran broke campaigns and either won handily or narrowly, despite what can only be described as a complete lack of money and effort. With incumbents winning so easily, why even bother spending the money in future?

Another fact from the filings: For the 17 percent who pay attention to local elections in Santa Clarita, David Gauny may go down in history known as the unluckiest candidate alive. Earlier in the campaign, Gauny loaned $16,000 of personal cash to his campaign, but ended up only spending $3,000 of that loan.  One can only wonder the outcome if he went all in on that original investment and spent $44,000 on his campaign, easily trumping the average expenditure of the incumbents even with their share of the PAC expenditures. Why did he not put all the chips on the table? 
Tim Myers is a Valencia resident. His column reflects his own views and not necessarily those of The Signal. “Myers’ Musings” appears Sundays in The Signal.


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