Whatever else she had done, Meredith Whitney had found the pressure point in American finance: the fear that American cities would not pay back the money they had borrowed. The market for municipal bonds, unlike the market for U.S. government bonds, spooked easily. American cities and states were susceptible to the same cycle of doom that had forced Greece to seek help from the International Monetary Fund. All it took to create doubt, and raise borrowing costs for states and cities, was for a woman with no standing in the municipal bond market to utter a few sentences on television. That was the amazing thing: she had offered nothing to back up her statement. She’d written a massive, detailed report on state and local finances, but no one except a handful of her clients had any idea what was in it. “If I was a real nasty hedge fund guy,” one hedge fund manager put it to me, “I’d sit back and say, ‘This is a herd of cattle that can be stampeded.’”
What Meredith Whitney was trying to say was more interesting than what she was accused of saying. She didn’t actually care all that much about the municipal bond market, or how many cities were likely to go bankrupt. The municipal bond market was a dreary backwater. As she put it, “Who cares about the stinking muni bond market?” The only reason she had stumbled into that market was that she had come to view the U.S. national economy as a collection of regional economies. To understand the regional economies, she had to understand how state and local governments were likely to behave; and to understand this she needed to understand their finances. Thus she had spent two unlikely years researching state and local finance. “I didn’t have a plan to do this,” she said. “Not one of my clients asked for it. I only looked at this because I needed to understand it myself. How it started was with a question: how can GDP [gross domestic product] estimates be so high when the states that outperformed the U.S. economy during the boom were now underperforming the U.S. economy—and they were twenty-two percent of that economy?” It was a good question.
From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever-riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it all off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could only be dealt with in one of two ways—massive cutbacks on public services or a default—or both. She thought default unlikely, at least at the state level, because the state could bleed the cities of money to pay off its bonds. The cities were where the pain would be felt most intensely. “The scary thing about state treasurers,” she said “is that they don’t know the financial situation in their own municipalities.”
“How do you know that?”
“Because I asked them!”
All states may have been created equal, but they were equal no longer. The states that had enjoyed the biggest boom were now facing the biggest busts. “How does the United States emerge from the credit crisis?” Whitney asked herself. “I was convinced—because the credit crisis had been so different from region to region—that it would emerge with new regional strengths and weaknesses. Companies are more likely to flourish in the stronger states; the individuals will go to where the jobs are. Ultimately, the people will follow the companies.” The country, she thought, might organize itself increasingly into zones of financial security and zones of financial crisis. And the more clearly people understood which zones were which, the more friction there would be between the two. (“Indiana is going to be like, ‘NFW I’m bailing out New Jersey.’”) As more and more people grasped which places had serious financial problems and which did not, the problems would only increase. “Those who have money and can move do so,” Whitney wrote in her report to her Wall Street clients, “those without money and who cannot move do not, and ultimately rely more on state and local assistance. It becomes effectively a ‘tragedy of the commons.’”
The point of Meredith Whitney’s investigation, in her mind, was not to predict defaults in the municipal bond market. It was to compare the states to each other so that they might be ranked. She wanted to get a sense of who in America was likely to play the role of the Greeks, and who the Germans. Of who was strong, and who weak. In the process she had, in effect, unearthed America’s scariest financial places.
“So what’s the scariest state?” I asked her.
She only had to think for about two seconds.
“California.”
AT SEVEN O’CLOCK one summer morning I pedaled a five-thousand-dollar titanium-frame mountain bike rented in anxiety the previous evening down the Santa Monica beach road to the corner where Arnold Schwarzenegger had asked me to meet him. He turned up right on time, driving a black Cadillac SUV with a handful of crappy old jalopy bikes racked to the back. I wore the closest I could find to actual bicycle gear; he wore a green fleece, shorts, and soft beige slipperlike shoes that suggested both a surprising indifference to his own appearance and a security in his own manhood. His hair was still vaguely in a shape left by a pillow, and his eyelids drooped, though he swore he’d been up for an hour and a half reading newspapers. After reading the newspapers, this is what the former governor of California often does: ride his bike for cardio, then hit the weight room.
He hauls a bike off the back of the car, hops on, and takes off down an already busy Ocean Avenue. He wears no bike helmet, runs red lights, and rips past DO NOT ENTER signs without seeming to notice them, and up one-way streets. When he wants to cross three lanes of fast traffic he doesn’t so much as glance over his shoulder but just sticks out his hand and follows it, assuming that whatever is behind him will stop. His bike has at least ten speeds but he has just two: zero, and pedaling as fast as he can. Inside half a mile he’s moving fast enough that wind-induced tears course down his cheeks.
He’s got to be one of the world’s most recognizable people, but he doesn’t appear to worry that anyone will recognize him, and no one does. It may be that people who get out of bed at dawn to jog and Rollerblade and race-walk are too interested in what they are doing to break their trance. Or it may be that he’s taking them by surprise. He has no entourage, not even a bodyguard. His economic adviser, David Crane, and his media adviser, Adam Mendelsohn, who came along for the ride just because it sounded fun, are now somewhere far behind him. Anyone paying attention would think, That guy might look like Arnold but it can’t possibly be Arnold because Arnold would never be out alone on a bike at seven in the morning, trying to commit suicide. It isn’t until he is forced to stop at a red light that he makes meaningful contact with the public. A woman pushing a baby stroller and talking on a cell phone crosses the street right in front of him, and does a double take. “Oh . . . my . . . God,” she gasps into her phone. “It’s Bill Clinton!” She’s not ten feet away but she keeps talking to the phone, as if the man is unreal. “I’m here with Bill Clinton.”
“It’s one of those guys who has had a sex scandal,” says Arnold, smiling.
“Wait . . . wait,” says the woman to her phone. “Maybe it’s not Bill Clinton.”
Before she can make a positive identification the light is green, and we’re off.
His life has been a series of carefully staged experiences. He himself has no staged presentation of it, however. He is fresh, alive, and improvisational: I’m not sure even he knows what he will do next. He’s not exactly humble, but then if I had lived the life he’s lived I’m not sure I would be, either, tho
ugh I might try to fake humility more often than he does, which is roughly never. What saves him from self-absorption, aside from a natural curiosity, is a genuine lack of interest in personal reflection. He lives the same way he rides his bike, paying far more attention to what’s ahead than what’s behind. In office, he kept no journal of any sort. I find it amazing, but he now says he didn’t so much as scribble little notes that might later be used to reconstruct his experience and his feelings about it. “Why would I do that?” he says. “It’s kind of like you come home and your wife asks you about your day. I’ve done it once and I don’t want to do it again.” What he wanted to do after a long day of being governor, more or less, was to lift weights.
We’re just a couple of miles in when he zips around a corner and into a narrow alleyway just off Venice Beach. He’s humoring me; I’ve been pestering him about what it was like for him when he first arrived in America, back in 1968, with little money, less English, really nothing but his lats, pecs, traps, and abs, for which there was no obvious market. He stops beside a tall brick wall. It surrounds what might once have been an impressive stone house that now just looks old and bleak and empty. The wall is what interests him, because he built it, forty-three years ago, right after he had arrived and started to train on Muscle Beach. “Franco [Columbu, like Schwarzenegger a former Mr. Olympia] and I made money this way. In bodybuilding there was no money. Here we were world champions of this little subculture, and we did this to eat. Franco ran the business. I mixed the cement and knocked things down with the sledgehammer.”
Before he stumbled while running downhill with a refrigerator strapped to his back, Columbu was the front-runner in the 1977 contest for the title of the World’s Strongest Man; so there was some distinction in being hired by his operation, as Schwarzenegger was, to be the muscle. They had a routine. Franco would play the unreliable Italian, Arnold the sober German. Before they cut any deal they’d scream at each other in German in front of the customer until the customer would finally ask what was going on. Arnold would turn to the customer and explain, Oh, he’s Italian, and you know how they are. He wants to charge you more, but I think we can do it cheaply. Schwarzenegger would then name a not-so-cheap price. “And the customer,” he says now, laughing, “he would always say, ‘Arnold, you’re such a nice guy! So honest!’ It was selling, you know.”
He surveys his handiwork. “It’ll be here for a thousand years,” he says, then points out some erosion on the top. “I said to Franco we ought to come back and fix the top. You know, to show it was guaranteed for life.”
A poor kid from a small village in Austria, the son of a former Nazi, hops on a plane to America, starts out laying bricks, and winds up running the state and becoming one of America’s most prominent political leaders. From post to wire the race takes less than thirty-five years. I couldn’t help but ask the obvious question.
“If someone had told you when you were building this wall that you would wind up governor of California, what would you have said?”
“That would be all right,” he said, not exactly catching my drift.
“As a boy,” I said, taking another tack, “did you believe you’d lead something other than an ordinary life?”
“Yes.” He didn’t miss a beat.
“Why?”
“I don’t know.”
“No one has had this kind of crazy, wild ride,” he says, as we speed away from the brick wall, but in a tone that suggests the ride was an accident. “I was influenced a lot by America,” he said. “The giant six-lane highways, the Empire State Building, the risk taking.” He still remembers vividly the America he heard and read about as a boy in Austria: everything about it was big. The only reason he set out to grow himself some big muscles was that he thought it might be a ticket to America.
If there had not been a popular movement to remove a sitting governor, and the chance to run for governor without having to endure a party primary, he never would have bothered. “The recall happens and people are asking me: what are you going to do?” he says, dodging vagrants and joggers along the beach bike path. “I thought about it but decided I wasn’t going to do it. I told Maria I wasn’t running. I told everyone I wasn’t running. I wasn’t running.” Then, in the middle of the recall madness, Terminator 3: Rise of the Machines opened. As the movie’s leading machine he was expected to appear on The Tonight Show to promote it. En route he experienced a familiar impulse—the impulse to do something out of the ordinary. “I just thought, This will freak everyone out,” he says. “It’ll be so funny. I’ll announce that I am running. I told Leno I was running. And two months later I was governor.” He looks over at me, pedaling as fast as I can to keep up with him, and laughs. “What the fuck is that?”
We’re now off the beach and on the surface roads, and the traffic is already heavy. He veers left, across four lanes of traffic, arrives on the other side, and says, “All these people are asking me, ‘What’s your plan? Who’s on your staff?’ I didn’t have a plan. I didn’t have a staff. I wasn’t running until I went on Jay Leno.”
His view of his seven years trying to run the state of California, like the views of his closest associates, can be summarized as follows. He came to power accidentally, but not without ideas about what he wanted to do. At his core he thought government had become more problem than solution: an institution run less for the benefit of the people than for the benefit of politicians and other public employees. He behaved pretty much as Americans seem to imagine the ideal politician should behave: he made bold decisions without looking at polls; he didn’t sell favors; he treated his opponents fairly; he was quick to acknowledge his mistakes and to learn from them, and so on. He was the rare elected official who believed, with some reason, that he had nothing to lose, and behaved accordingly. When presented with the chance to pursue an agenda that violated his own narrow political self-interest for the sake of the public interest, he tended to leap at it. “There were a lot of times when we said, ‘You just can’t do that,’ says his former chief of staff, Susan Kennedy, a lifelong Democrat, whose hiring was one of those things a Republican governor was not supposed to do. “He was always like, ‘I don’t care.’ Ninety percent of the time it was a good thing.”
Two years into his tenure, in mid-2005, he’d tried everything he could think of to persuade individual California state legislators to vote against the short-term desires of their constituents for the greater long-term good of all. “To me there were shocking moments,” he says. Having sped past a DO NOT ENTER sign, we are now flying through intersections without pausing. I can’t help but notice that, if we weren’t breaking the law by going the wrong way down a one-way street, we’d be breaking the law by running stop signs. “When you want to do pension reform for the prison guards,” he says, “and all of a sudden the Republicans are all lined up against you. It was really incredible and it happened over and over: people would say to me, ‘Yes, this is the best idea! I would love to vote for it! But if I vote for it some interest group is going to be angry with me, so I won’t do it.’ I couldn’t believe people could actually say that. You have soldiers dying in Iraq and Afghanistan, and they didn’t want to risk their political lives by doing the right thing.”
He came into office with boundless faith in the American people—after all, they had elected him—and figured he could always appeal directly to them. That was his trump card, and he played it. In November 2005 he called a special election that sought votes on four reforms: limiting state spending, putting an end to the gerrymandering of legislative districts, limiting public employee union spending on elections, and lengthening the time it took for public school teachers to get tenure. All four propositions addressed, directly or indirectly, the state’s large and growing financial mess. All four were defeated; the votes weren’t even close. From then until the end of his time in office he was effectively gelded: the legislators now knew that the people who had elected them to behave exactly the way they were already behaving were not
going to undermine them when appealed to directly. The people of California might be irresponsible, but at least they were consistent.
A compelling book called California Crackup describes this problem more generally. It’s written by a pair of journalists and nonpartisan think tank scholars, Joe Mathews and Mark Paul, and they explain, among other things, why Arnold Schwarzenegger’s experience as governor was going to be unlike any other experience in his career: he was never going to win. California had organized itself, not accidentally, into highly partisan legislative districts. It elected highly partisan people to office and then required these people to reach a two-thirds majority to enact any new tax or meddle with big spending decisions. On the off chance that they found some common ground, it could be pulled out from under them by voters through the initiative process. Throw in term limits—no elected official now serves in California government long enough to fully understand it—and you have a recipe for generating maximum contempt for elected officials. Politicians are elected to get things done and are prevented by the system from doing it, leading the people to grow even more disgusted with them. “The vicious cycle of contempt,” as Mark Paul calls it. California state government was designed mainly to maximize the likelihood that voters will continue to despise the people they elect.
But when you look below the surface, he adds, the system is actually very good at giving Californians what they want. “What all the polls show,” says Paul, “is that people want services and not to pay for them. And that’s exactly what they have now got.” As much as they claimed to despise their government, the citizens of California shared its defining trait: a need for debt. The average Californian, in 2011, had debts of $78,000 against an income of $43,000. The behavior was unsustainable, but, in its way, for the people, it works brilliantly. For their leaders, even in the short term, it works less well. They ride into office on great false hopes and quickly discover they can do nothing to justify those hopes.
Boomerang: Travels in the New Third World Page 16