Hope in DC, Panic on Wall Street

This post first appeared on Minyanville.

The party’s over - it's time to get to work.

Amid much fanfare, President Barack Obama was sworn in yesterday as the forty-fourth president of the United States. A few short hours later, shares of the largest American banks tumbled, as if to remind the incoming Commander-in-Chief that, though America was jubilant, Wall Street remains in dissaray.

Shares of Wells Fargo (WFC), JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), the backbone of what remains of the world’s financial system, reached lows not seen in decades. Investors fear what some have called “creeping nationalization,” as monetary and fiscal authorities appear content to let equity holders suffer the worst of the losses.

Obama is now expected to rush through a sweeping economic stimulus plan, which, by most accounts, could pump upwards of $800 billion into our floundering economy through a patchwork strategy of tax relief and government spending.

And while pundits, academics and bureaucrats bicker about the best way to spend our precious taxpayer dollars, an arid swath of suburban California desert could serve as a valuable test case for effective (and ineffective) public spending.

Just a few years ago, homebuilders like Lennar (LEN), DR Horton (DHI) and Centex (CTX) flocked to Riverside and San Bernadino County to capitalize on the nascent housing boom. McMansions were frantically shoehorned between strip malls and clogged freeways. The 2 counties, which together make up the Inland Empire, a vast tract of urban sprawl east of Los Angeles, are now home to more than 2 million people.

The housing bust, well into its fourth year, has crippled the local economy.

Bloomberg reports unemployment in the Inland Empire matches Detroit at 9.5% - the highest of any metropolitan area in the country. 17,400 construction jobs have been lost in the last 12 months, home prices have slid almost 40% and previously dependable employers are closing up shop.

Local governments, however, are pushing ahead with over $1 billion in spending projects, from much-needed widening of freeways to a new $300 million jail. As Bloomberg notes, the projects illustrate both the potential and the limitations of government-led economic stimulus.

While infrastructure projects have helped limit layoffs, job openings are still virtually nonexistent : In one city, as many as 100 people per day may compete for a single minimum wage job. Local economists fear unemployment could reach 12%.

Outside construction, job creation has essentially stagnated. While a few intrepid entrepreneurs have sought out the region's now dirt-cheap office space and homes, anemic consumer spending is damaging traditional retailers, restaurants and other consumer-centric employers.

The biggest project -- the jail, naturally -- will create 4,500 jobs. But building new jails is hardly the economic stimulus the country should be depending on for job creation.

Obama’s strategy has shifted in recent weeks, as his plans to revive the American economy are becoming increasingly focused on tax relief, rather than on massive infrastructure projects. Tax cuts and rebate, while widely viewed as a less immediate way to jumpstart an economy, would reach into all industries, not just those tied to infrastructure.

Obama would be wise to spend a few minutes contemplating the dilapidated developments and barren strip malls of the Inland Empire. Although the area certainly represented the worst of the real estate bubble’s excesses, its woes are emblematic of the broader crisis the country now faces.