NewGeography.com blogs

In the new Wall Street math of the post-9/08 world, it seems that some people turn to humor and others to rage. First they burned down our 401k plans: some people found this funny and made jokes about their “201k” plans. The French got angry and took CEOs hostage. Now, Goldman bankers are buying semi-automatic weapons to protect themselves from the angry mob. Matt Taibbi is desperately seeking humor in this, currently rating it a 7 on a scale of 1 to 10. Alice Schroeder, the story’s originator, finds it humorless, suggesting there could (should?) be “proles…brandishing pitchforks at the doors of Park Avenue.”

In true on-the-ground reporting, a Bloomberg reporter wrote a story after a friend told her that he had written a character reference so that a Goldman Sachs banker could get a gun permit. Alice Schroeder (author of “The Snowball: Warren Buffett and the Business of Life”) also recounts a few examples of Goldman bankers using their other-worldly prescience to protect themselves: Goldman Sachs Chief Executive Office Lloyd Blankfein – only too well known now for saying that Goldman is doing “God’s work” – got a permit “to install a security gate at his house two months before Bear Stearns Cos. collapsed.”

All of this contributes to the view that Goldman Sachs is, indeed, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I’m certain that Rolling Stone and Bloomberg have taken action to protect their right to be critical of Goldman. I’ve spent plenty of time on the phone with their fact checkers to know they put a lot of effort into being able to support every word they print. Blogger Mike Morgan, who founded www.GoldmanSachs666.com, had to defend his right to be critical of Government Sachs by going to court last April when Goldman lawyers Chadbourne & Parke threatened him with trademark infringement.

But it isn’t just Goldman and it isn’t just our 401k retirement plans that have been damaged. There are fundamental problems in the way our capital markets are being run. The people running the system have known about these problems since at least the Crash of 1987 – I warned the U.S. central depository for all securities (Depository Trust Company) about it in 1993. Brooksley Born warned a presidential working group about it at a Treasury Department meeting in 1998 – and it contributed to the crash of 2008. As you read this today, nothing has been done to stop it from happening again. The real question is: which group will be the first to turn to action? Those with a sense of humor, those with a sense of security provided by a handgunor those with the sense to make changes?

Part III in the video series on East St. Louis explores ideas put forward for (re)development of the city, including cultural tourism based on the city's African American heritage and use of vacant land for farming to create a local food source for the St. Louis metropolitan area.

Part II gives views of downtown today, shows how its history can be seen in the city, and explains why the city could still be a good place for new development.

Part I discusses the origins and development of East St. Louis as an industrial city.

Michael R. Allen is an architectural historian currently serving as director of the Preservation Research Office, a technical assistance and preservation consulting firm. Allen also serves on the boards of the St. Louis Building Arts Foundation and Preservation Action.

Alex Lotz is a graduate of the Film Production program of Chapman University's Dodge College of Film and Media Arts.

There is considerable discussion about tasking the Federal Reserve Board with monitoring and even taking actions to prevent asset bubbles. Before they move too far, the Fed needs to understand what happened in the housing bubble to which they responded after the world economy was decimated.

Any initiative on the part of the Fed to seriously understand, much less do anything about asset bubbles requires that their causes be comprehended at more than a superficial level. To this day, the Fed appears to presume that the housing bubble was simply the result of financial factors, such as loose money and loose lending. In fact, however, the housing bubble was far more complex than that.

The averages on which the Fed and much of the business press have based their analysis hide the dynamics that were at the heart of the price explosion. The housing bubble inflated with a vengeance in only one-half of the major US metropolitan markets, and inflated very little in the others.

There is no doubt that the bubble would not have occurred without the loose monetary policies. However, where the bubble inflated the most, it was in a metropolitan environment of excessively strong land use controls or artificially constricted land supply (called compact development or smart growth). In these markets (such as in California, Florida, Phoenix, Las Vegas, Portland and Seattle), regulation is so strong that when the loose credit induced expansion of demand occurred, the housing market was not permitted to respond with a supply of new affordable housing, and there was a rush to purchase existing stock, which drove prices up.

On the other hand, in the traditionally regulated markets, including fast growing metropolitan areas like Atlanta, Dallas-Fort Worth and Houston, there was comparatively little escalation in house prices. In short, one-half of the country had a housing bubble, the other half did not. In the more highly regulated markets, the Median Multiple (median house price divided by median household income) increased to from 4.5 times to more than 11 (compared to the historic ratio of 3.0). In the traditionally regulated markets, the 3.0 standard was generally not exceeded. Thus, as Nobel Laureate Paul Krugman of Princeton University and The New York Times noted more than three years before the crash, the United States was really two nations with respect to house price escalation, and the difference was land use regulation.

We have estimated that the house value losses were overly concentrated in the compact development markets, accounting for 85% of the peak to trough declines. Without these artificial losses, which were the result of unwise policy intervention, the international Great Recession might not have been set off or it certainly would have been less severe. All of this is described in the last two editions of our “Demographia International Housing Affordability Survey” and related items (the 6th Annual Demographia Housing Affordability Survey will be available early in 2010).

The purpose of compact development and smart growth is to stop the expansion (the ideological term is “sprawl”) of urban areas. Clearly, given the distress that has occurred in the US housing market and the wave of additional losses in both the domestic and international economy that followed, the price of stopping urban expansion (or attempting to) has proven to be immensely larger than any gains.

At least in housing, until the Fed understands what happened, it will be powerless to effectively apply whatever new powers it employs to control future housing bubbles.

In the 1990s, just about the only site amenity that most suburban developments offered was a fancy entrance monument. Usually, there were no other additions beyond ordinance minimums and even those weren’t generally elaborate. Some of these monuments did cost millions, but once past the gilded gates, the seduction ended, and residents were greeted by familiar monotonous cookie cutter subdivisions.

As neighborhood planners, we educate our developer clients regarding the virtues of building site amenities that improve Quality of Life (trails, gazebos, decorative ponds and fountains, etc). You would think these amenities were an easy sell to the cities approving the developments. After all, great developments create a great city, right? It’s not that simple, because all of these amenities require maintenance, and that places a burden on tax payers. No city wants to create a tax burden for all, when the likely benefit accrues to the few within the development.

The solution to that problem was simple: The Home Owners Association. We are not talking about the type of Stepford-like association where lifestyles and flower plantings are strictly dictated, but the more limited type that adds a small monthly fee to service the common outdoor site amenities. In other words, only those extra amenities are cared for. Private yards still remain the financial burden of the individual homeowners. In the North, with snow removal, these neighborhood association fees are likely to be higher if the trails and walks are cleared. Since these Associations do not have to maintain private yards or address maintenance of buildings typical of townhome projects, the monthly fees are minimal. Some associations were formed in the North that did give options for snow removal on private driveways, at a very reasonable cost (after all, why not clear a few extra driveways while you are out clearing the trails?).

The developer could now offer a much higher living standard and create more valuable lots that would be easier to sell. The majority of the neighborhoods we designed in the late 1990s through 2006 (the recession) offered the advantages that these minimal cost Associations could provide. We encouraged developers to spend less on elaborate entrance monuments and instead spread real value through the development where people lived.

How HOAs May Be At Risk The recession has not just brought about massive foreclosures and reduced home prices. It has escalated real-estate taxes (the home value may be 40% less but the tax remains at pre-recession rates) and put the very idea of a Home Owners Association at risk. With failed development, there are often also failed Associations. With little or no maintenance of a development that was once cared for by private funding, cities may have to take over the burden until the economy recovers, and in some areas, if it recovers. Comprehensive associations that maintain all of the grounds (where there are no privately maintained yards),including the building exteriors and rooftops, as well as the streets, are at the greatest risk. The limited Associations that were typical of the neighborhoods we designed are not as much of a problem, but could easily be lumped into “all Associations are bad news” category in the minds of those approving future developments, after the economy returns.

This affects all types of residential development.

Developments that exceed minimum standards typically offer site amenities to make the development more enticing. Someone must maintain these extras. Fear of HOA failures will certainly be more on the minds of cities after the recession, but without HOAs, who will maintain the amenities? A two million dollar entrance monument does not make a neighborhood sustainable. Spreading value through the neighborhood with features that enhance quality of life, is a better investment. The Homeowners Association must not fall victim to the recession.

When a bunch of American bankers woke up last Thursday, I hope they found more to be thankful for than just a traditional turkey dinner. It’s thought that the American banks will have less exposure to Dubai World than most European or Asian banks – although the American banking industry is known to hide a thing or two up their sleeves. Dubai World is asking creditors for a “standstill” – meaning they want the interest to stop accumulating on their debt. It’s a polite way of saying they can’t afford the interest payments anymore.

Dubai is one of the seven states that make up the United Arab Emirates (UAE). Dubai borrowed heavily to finance a building boom supported by high oil prices. They now lay claim to the world's tallest building and an island in the shape of a palm tree – at least General Motors went broke building cars. The capital of the UAE is Abu Dhabi. It’s unlikely that Abu Dhabi can come to the rescue. Just last February Abu Dhabi injected $4.5 billion into five banks that were coming under financial pressure when the real estate market shifted. Bailing out banks seemed to stop the U.S. government from bailing out General Motors.

Dubai World is said to be in debt for $60 billion, although some reports put the figure much higher at about $90 billion. Even at the low end, that figure is equal to all the foreign direct investment in the UAE. (Foreign direct investment is all the money that foreigners invested in UAE.) By comparison, the direct investment of all UAE residents in other countries is less than one half that amount (about $29 billion at the end of December 2008). But don’t think that means that Dubai World’s investments are of little consequence outside the Gulf region. Recent projects include ports in London and Vancouver. DP World was at the center of a controversy in February 2006 when they announced the purchase of a firm that oversees operations at six U.S. ports – DP World subsequently sold them off.

Dubai World is the UAE government’s investment conglomerate. That makes this a crisis in sovereign (public) debt – possibly only the first shoe to drop in the coming crisis I warned about back in July. Hope you don’t get tired of hearing me say “told ya’ so” – I suspect it will happen with increasing frequency during the next twelve months. The real problem with defaulting sovereigns is that there is no Chapter 11 bankruptcy process for them, like there was for General Motors. When a country defaults on their debt, they just stop paying – “governments can change the rules on a whim.”