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posted by King Minos in Money / Career

Local Forensic Economics

January 9, 2013

"Forensic economics," is the moniker for practices on the local level by both government and private actors based on knowledge about a coming economic bubble and then collapse in asset prices. If local people knew a peak and trough say, in the housing or commercial retail space market, was set to occur, they might adopt polices both to take advantage of the "sure thing," and protect themselves from its negative consequences.

THAT SAID, of course, many communities -- but not ATH say or said the realtors -- already saw a spike in home values around 2006; those values turned around and fell for several years afterwards producing various local effects such as foreclosures, evictions, falling property tax revenues, higher unemployment, etc. It is not important NOW to list all the negative effects and their broad consequences as the literature provides a pretty good picture of not only what to expect; but of what "just happened" RE the 2006-onward collapse of the real estate bubble.

At the least, government leaders should plan to "save" proceeds from the next bubble in asset values with the knowledge those revenues are set to expand, and then contract; before, government planners confidently asserted "this time is different" and importantly spent the more robust revenues just as soon as they could get their hands on the money; of course, with regards to the local CCSD, it is worth noting that they are today spending down "reserve" funds apparently saved from the go-go days of the housing bubble In fact, such a thing is EXACTLY what I am talking about!

There is something surreal, granted, about private and public actors looking out at significant growth in housing and retail space and just knowing those values are over-inflated and set for marked decline along with all the other "bad" effects. But, clearly, the current environment of near zero interest rates and looser credit policies may be pumping-up another speculative bubble! What's more, if the prior bubble, reliant on EZ credit but still more normal interest rates produced a large uptick, might one expect nearly "free" money to create something even larger? At least locally, recent reports of $100 million plus investments do indeed seem out-of-the-ordinary; perhaps even unprecedented, locally.

Why dwell on the potential downfall? Why look the gift horse in the mouth?

Because Athena, being a local resident, must ride the horse; sure we like the gift, but wish to know if the horse bucks, bites or otherwise has an ill temper!

THEN, we can review easily the negative effects we saw earlier and try and prevent them this go round ....

As mentioned, government ought to "save" the proceeds of the bubble; they ought also seek to limit their spending increases to something related to, say, local population growth and NOT spiking values in the tax digest;

This is a work in progress;

And let me say again our over-arching view here ...

Let us not mourn for mis or mal investment! Let us instead re-task capital and otherwise salvage the proceeds for the betterment of all!

We can't stop it! But that doesn't mean we shouldn't know what is coming (again) and do a better job preparing;

(I would hope others would think of their own experiences and knowledge of the previous boom-bust cycle, and contribute some of their own ideas about how to practice "forensic economics.")

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