New Geography

Category: Policy

  • A Grand Alliance: Fostering a North American Central Economic Region

    Given current economic trends, the time may be ripe to consider as a concept, an economic region straddling the middle of the North American continent – a North American Central Economic Region (NACER). These cross-border economic regions spanning Northwestern Ontario, Manitoba, North and South Dakota and Minnesota, already share infrastructure, production facilities and research and development capacity. A North American Central Economic Region (NACER) would build on these existing relationships, as well as historic patterns of cultural exchange, cross-border trade, and travel.

    Governments with fixed territorial boundaries do not always effectively address the need for cross-border regional economic partnerships and co-operation. Often created under radically different conditions, borders can result in transactions costs that limit interaction and opportunity.

    The concept of cross-border regions in North America is not new. Joel Garreau’s Nine Nations of North America describes cross-border regions that share similar economic, social and cultural characteristics. Other concepts for cross-border economic regions include Cascadia on the west coast and Atlantica on the east coast. Atlantica is more formally known as the Atlantic International Northeast Economic Region (AINER) and is currently the focus of advocacy and research on the part of the Atlantic Institute for Market Studies based in Halifax and the Eastern Maine Advocacy Corporation. The AINER concept comprises the Canadian Atlantic provinces as well as Maine, Vermont and the northern part of New York State bordering Lake Ontario.

    Cascadia has been nurtured by a government funded cross-border advocacy group initiative known as the Pacific Northwest Economic Region or PNWER. PNWER defines a region of the Pacific Northwest that includes British Columbia, Alberta, the Yukon, Alaska, Idaho, Montana, Oregon and Washington with a total population of about 20 million people. The PNWER provides a forum to address important cross-border issues in trade, transportation, the environment and energy. The 18th annual summit of the PNWER was held in Vancouver in July 2008 and discussions focused on marketing the Pacific Northwest in advance of the Vancouver Olympics, trade and travel across the Canada-U.S. border.

    In a similar manner, a North American Central Economic Region (NACER) could span Northwestern Ontario, Manitoba, North and South Dakota and Minnesota. This region stands at the cross-roads of the North American continent and essentially comprises the north-central portion of Garreau’s “Breadbasket Nation.” As a region, NACER covers 1.8 million square kilometers with a population of nearly 8 million people and a GDP (US$) of about 370 billion dollars. This economic region contains agricultural production activities, food processing, forestry, petroleum, coal, mineral and hydroelectric resources as well as substantial manufacturing and service capacity.

    The recent rise in commodity, food and energy prices has demonstrated the increasing strategic importance of the NACER zone in the long run. As well, the major centers of Minneapolis-St. Paul and Winnipeg are already locations for numerous corporate head offices, health, educational, research and government services. In addition, NACER contains vital road, rail and airport hubs that would be complemented by three ocean-going ports – Churchill, Duluth and Thunder Bay as well as the Mississippi route down to the Gulf of Mexico.

    The similarities and geographic proximity of the provincial and state economies of this region create a conjunction of common interests and possibilities for economic growth. For example, Manitoba and Northwestern Ontario have abundant hydroelectric resources and would benefit from increased exports to meet growing American power needs. Given current trends in energy prices, NACER has the potential to be a 21st century energy export giant rooted in agricultural and forest bio-fuels and hydro-electricity. In particular, the potential of Northwestern Ontario as a forest bio-refining energy center and hydro-electric producer would be enhanced by sharing of expertise with Manitoba and Minnesota.

    Another specific example of economic interests coinciding can be seen in the conjunction between the aerospace program at the University of North Dakota and Winnipeg’s aerospace manufacturing sectors. As well, Manitoba and Minnesota both provide large adjacent markets for goods and services for firms in North and South Dakota.

    As a further example of common economic interests, Minnesota has robust growth and a tight labor market and some of its firms could benefit from setting up operations in nearby Northwestern Ontario which suffer a surplus of highly skilled surplus labor and capacity due to the forest sector downturn. Moreover, recent economic development initiatives announced for northeastern Minnesota could also provide opportunities for Northwestern Ontario firms. As well, improvements to the highway, road and border-crossing network in the NACER region could also generate benefits for increased regional partnerships.

    This economic region requires a sense of common vision in order to grow and prosper during the 21st century. Leaders in this region need to facilitate cross-border commerce and activity in the areas of cross-border employment and business opportunities, better relationships between producers and suppliers, improving cross-border transportation infrastructure, cross-border environmental and nature conservation, and tourism promotion. At the very least, a regular regional forum between Chambers of Commerce and political leaders to examine common economic problems and solutions would be a worthwhile endeavor.

    Institutionalizing a regular set of meetings as has been done in the Pacific Northwest would be a good start. Furthermore, developing a regional vision and set of common statistics that could be used to lobby both federal governments could also help, particularly when border issues threaten the role of the border as a zone of interaction.

    The time is indeed ripe for a North American Central Economic Region (NACER). This cross-border region shares common economic interests and is strategically positioned at the heart of the North American continent. Key immediate priorities for this region involve research and industrial partnerships, common tourism marketing and steps to reduce congestion and streamline flows of legitimate trade and travel. The next step is for interested parties and stakeholders to come together and establish a cross-border institutional framework to promote this alliance, identify issues, set priorities and most importantly, mobilize resources on both sides of the border.

    Livio Di Matteo is Professor of Economics at Lakehead University in Thunder Bay and specializes in economic history, public policy and health economics.

  • Post-Imperial Foreign Policy: Our best allies are countries most like US

    When the Presidential and vice-Presidential hopefuls talk foreign policy, they look every which way — towards the Middle East, Russia, Europe, Asia or Africa, but they largely ignore our own backyard.

    In the next decades of the 21st Century, our policymakers will need different priorities. When looking for our closest allies, we may well need to look away from current entanglements in unfortunate, far away places and towards a stronger relationship with countries — notably Canada — with whom we share so much.

    This requires some understanding of where we are today. The breathless talk of an “end of history” and inevitable democratization that accompanied the fall of the Soviet Union should be swept aside by now. Instead we need to understand both a greater diversity in national systems and, increasingly, a trend towards ever more authoritarian regimes.

    Anyone who has studied history should understand this. Authoritarianism has been the default mode for millennia and seems likely to remain so in the foreseeable future.

    Twenty years ago it was possible to see in Russia and even in China, signs of a transformation towards democracy and a civil society. But clearly Putinism has produced something of a legal dictatorship in Russia, a downsized Soviet Union dressed in democratic garb. China seemed headed towards a more civil, less dictatorial state — before Tiananmen ended that dream. The recent Olympics seemed to highlight an authoritarian success story in a way that the designers of the 1936 Berlin Olympics would have appreciated.

    The influence of these countries, particularly China, in the developing world is also growing. Many see the so-called “Beijing Consensus” — placing economic development ahead of even modest democratization — as more appealing than the inherent inefficiencies of popular control, not to mention American hectoring and self-righteousness.

    Even our closest historic allies in Europe are increasingly asserting their own notions of what is best for them. With a rapidly aging, even declining population, these countries do not share the basic American need for sustained, vibrant economic growth over the next few decades. Instead they likely will continue to embrace a conscious policy of slow growth and stability. This will not change even when the hated George Bush is gone — despite a possible flurry of post-election Obamamania.

    How to respond to these trends? Flex our muscles? Been there, done that and what has it gotten us? In the end, we will have fewer opportunities to apply either military or economic power. The latter is now too well dispersed in the world and likely to become more decentralized in the coming decades. Even military power has its limits as can be seen by the rise of asymmetrical warfare. At the same time rising economies like China are rapidly increasing their military might as well.

    None of this means that we should accept the fashionable notion of American decline. Although obscured by the current financial crisis, our unique strengths — demographic, economic, and even political — remain very much intact. An aging Europe, the favored candidate for preeminence among many east coast policy wonks — does not share these assets. They have their own ethnic problems, a weak military, a shrinking supply of skilled workers and a continuing dearth of babies. Their economic system may not have our unfortunate penchant for excess, but built on security, it appears to restrain innovation and risk-taking.

    China, India and Russia and other rising powers of today also face enormous demographic and economic challenges. All have large populations of poor people once you leave the westernized cores. Russia’s economy is overly dependent on commodities; China and Russia face demographic declines equal or even worse than the EU.

    So where can we find our best allies? We look to those countries who share our demographic vitality, our fecundity and common values — Canada, Australia and New Zealand.

    Like the United States these countries are also “countries of aspiration.” They remain enormously attractive to both skilled and unskilled immigrants, including those from Europe and Asia. If there’s a brain drain in the world, it’s mostly to the US, Canada and Australia.

    Although born to British colonialism, these countries have over time, notes historian David Cannadine, “increasingly come to resemble the United States”. This is not a matter of liking George Bush, eating McDonald’s or even getting fat. It’s about young countries that are, in their own fashion, knitting together diverse legacies, including those of indigenous people. Strong pockets of anti-Americanism exist in certain circles in all of these countries, but on the grassroots level the similarities are likely to become more striking over time.

    Bolstering ties with Canada represents by far the greatest opportunity. High energy costs mean proximity matters more than ever. Canadian and American firms need to share adjacent markets. This will strengthen even more the strongest bilateral trade relationship on the planet.

    Perhaps even more important are family ties. Canada remains the largest source of visitors to the United States and vice-versa. Some 800,000 Canadians have settled permanently in the United States; 200,000 Americans have moved north to Canada. Many have dual citizenship. (A quick disclaimer: my wife is a native of Quebec and a dual citizen).

    Building on these natural ties will take some psychological changes in both countries. A strong alliance requires both a confident Canada and a respectful America. Americans need to stop thinking of Canada as a kind of northern icebox that we raid for resources when hungry. Canadians, for their part, should no longer regard themselves as America’s poor cousins but as equal partners with enormous resources, both human and material.

    With Canada, this relationship can be immediately strengthened at both the national and regional level. One step would be to embark on a program of cross-border infrastructure that would expand trade corridors from the Arctic down to Mexico, from Cascadia to the north Atlantic. Such steps would increase markets and productive capacity across our common continent.

    Another potential opportunity lies in building an alliance around environmental and energy issues. A strongly integrated North American Energy Community, including Mexico, could insulate Americans from unreliable suppliers in the Middle East, Russia and South America. For Canadians, it would cement a stable, long-term relationship with a steady customer and perhaps guarantee a floor on prices.

    Finally, NAEC would work on environmental concerns related to energy. We all share a common space here in North America; mountain ranges, rivers, lakes and topographical zones do not recognize borders. As we work to secure our common energy future, we should then create a sustainable future for all the residents of the great continent.

    Of course, none of this likely will excite the policy elites in Washington. They are already atwitter with ideas for how the President should address our relations with Pakistan, Russia, China or other troublesome distant place. It would be refreshing instead if perhaps Mr. Obama or Mr. McCain, on taking office, might first consider to build stronger relations with a neighbor who shares not only values and family ties but also this vast, rich and blessed continent.

    Joel Kotkin is Executive Editor of NewGeography.com.

  • Old Manhattan Had a Farm

    Old Manhattan had a farm
    Ee-yi ee-yi O

    As a child of the early Sixties, I fondly remember the days when colossal albeit stupid technological projects were fashionable. I remember in particular a cartoon that showed a subway running from the U.S. to China right through the center of the earth. Of course, this brings to mind Thoreau’s quip that, while the telegraph might connect Maine to Texas, would Maine and Texas have anything to say to each other? But the very point of the trans-core subway was its pointlessness. If titanic, useless engineering projects like the Hoover Dam are impressive, then how much more impressive are titanic, useless engineering projects!

    In the Seventies, thanks to environmentalism, grand engineering projects fell out of favor. E. F. Schumacher and J. R. Tolkein were the new gods. Skyscrapers and dams were passe. Utopia was a sod-roofed hobbit hole designed by Amory Lovins. But human fascination with large-scale projects could not be satisfied by designing high-tech composting bins in the backyard. So now we have the arrival of something new: It’s the gee-whiz engineering boondoggle of yesteryear resurrected with a thin veneer of greenwash turning it into… Call it a greendoggle.

    Inside a high-rise was that farm
    Ee-yi ee-yi O

    Scientific American, a once-sober magazine that seems to be going down-market along with National Geographic, has just published its own flashy Earth 3.0 issue, with stories like “MisLEEDING? When Green Architecture isn’t Green” and “China’s Eco-City.” On page 74 you will find “GROWING VERTICAL”: Cultivating crops in downtown skyscrapers might save bushels of energy and provide city dwellers with distinctively fresh food.” The hero of the article is Dickson Despommier, a microbiologist at Columbia University, who proposes growing food downtown in glass-walled buildings.

    Scientific American, of course, gushes over the idea as a way to plan “more sustainable cities,“ sustainability being the ultimate planning buzzword of the moment. A brief internet search reveals widespread discussion of vertical farming—not only Professor Despommier’s vertical farms and feedlots, but proposals for raising produce on green roofs downtown.

    At first sight, the idea seems plausible. True, vertical farming would be a non-starter if urban rents were higher than rural rents. But we all know that land is just as cheap in downtown Manhattan as it is in rural Nebraska, right? One wonders, though, why farming moved off the island a more than a century ago.

    Professor Despommier claims that food grown indoors would be pesticide-free, unlike that dirty outdoor produce. Once again, totally plausible. Big American cities are as free of rats and roaches as Ireland is of snakes. The Museum of Natural History has a glass case containing the last rat found in New York City, way back before World War I. (Just don’t look down at the tracks when you are waiting for a subway).

    But then if we admit there are millions of rats and billions of roaches, then the crops growing in vertical farms would have to be protected by enough rat and roach poison to kill Xerxes’ army. Fortunately, in rat- and roach-free urban America, that is not a consideration. And even if it were, we would not need to worry that health inspectors would be bribed to overlook the rodent droppings and roach eggs in our tenth-story grown arugula. The civil servants in New York City, Chicago and Philadelphia are known worldwide for their incorruptibility.

    With some algae here
    And some chickens there

    Still, I do worry about the urban politicians. It’s bad enough that a mayor can pressure landlords to provide a girlfriend with an apartment for a discount. What will happen when members of the City Council start twisting the arms of realtors to give them discounts on eight-storey vertical ranchettes on Central Park West? Who needs to go to the Hamptons, when you can have your own rent-control winery on the penthouse floor?

    And then there’s the matter of competition for housing downtown. For a decade, would-be homeowners in big cities have seen prices driven up by speculators, who buy condos and then keep them empty until they can flip them. Will would-be condo owners now have to compete for airy downtown lofts with Archer Daniels Midland?

    Here a cell
    There a cell
    Everywhere a solar cell

    Don’t get me wrong. I’m for the industrialization of agriculture. I don’t doubt that, a century or two from now, much of the human diet will come from in vitro meat and fruit and vegetables, grown indoors in clean laboratory conditions and laced with the appropriate vitamins and amino acids. Back in the 1920s, before they led their nations, Winston Churchill and Franklin Roosevelt both predicted laboratory-grown food in their popular writings, and it’s coming. But, for the most part, the food labs of the twenty-second century like the robot factories will be located where land is cheap, in distant rural areas or in the outer exurban expanses of the metropolis.

    Oops, I forgot, acreage is cheap in downtown Manhattan. Never mind.

    Old Manhattan had a farm
    Ee-yi ee-yi O

    Professor Despommier’s skyscraper farms, and the community gardens on top of the Sears Tower, solve two worrisome non-problems which together create an urgent un-crisis. The first non-problem is the alleged lack of fresh produce in present-day supermarkets, a problem that doesn’t exist in any grocery store I’ve patronized anywhere in this country. The second non-problem is the alleged loss of wilderness to agriculture. In fact, thanks to the increasing efficiency of American agriculture, more food is grown on less land all the time. Some retired farmland goes to suburbs and exurbs, but the majority of it is being reforested. The wilderness is devouring farmland in North America, not vice versa.

    But that’s the nature of a boondoggle, and the coming thing, the greendoggle. It’s an overly-elaborate technological answer to a nonexistent problem.

    Why do such ideas get such attention in the prestige press? I think the answer lies in the psychology of America’s urban overclass. Deep down the urban trust-funders and professionals want the “urban archipelago” to secede from the rest of the United States. The sooner they become self-sufficient in terms of food, the sooner they can build walls around their post-American city-states. Then, when peak oil leads to the apocalyptic crash of automobile civilization, the urbanites can pull up the draw-bridges. From the safety of their hydroponic penthouses they can look through telescopes at the besieging mob of working-class hinterlanders with potbellies and bad hairdos. Who in that day of reckoning would not rather be downtown? After all, the hinterlanders will control only the farms, factories, mines and working population, but the urbanites will have…will have…worthless pieces of paper….

    Hmmm. Back to the drawing board.

    Old Manhattan had a farm
    Ee-yi ee-yi O
    Inside a high-rise was that farm
    Ee-yi ee-yi O
    With some algae here
    And a koi pond there
    Here a cell
    There a cell
    Everywhere a solar cell
    Old Manhattan had a farm
    Ee-yi ee-yi O

    Michael Lind is the Whitehead Senior Fellow at the New America Foundation. He is the author, with Ted Halstead, of “The Radical Center: The Future of American Politics” (Doubleday, 2001). He is also the author of “Made in Texas: George W. Bush and the Southern Takeover of American Politics” (New America Books/Basic, 2003) and “What Lincoln Believed” (Doubleday, 2005). Mr. Lind has been an editor or staff writer for The New Yorker, Harper’s Magazine, and The New Republic. From 1991 to 1994, he was executive editor of The National Interest.

  • Financial Innovation: Wall Street’s False Utopia

    In the popular media much of the blame for the current crisis lies with sub-prime mortgages. Yet the main culprit was not the gullible homebuyer in Stockton or the seedy mortgage company. The real problem lay on Wall Street, and it’s addiction to ever more arcane financial innovation. As we try to understand the current crisis, and figure ways out of it, we need to understand precisely what, in the main, went wrong.

    I have studied financial innovation for years and worked with some of the best minds in that business. In 2003, I wrote in Beyond Junk Bonds that financial innovation is the “engine driving the financial system toward improved performance in the real economy”. Innovative debt securities, like collateralized mortgage obligations (CMOs), I had hoped, would add value to the economy by reallocating risk, increasing liquidity, and reducing agency costs. Like the broken promises of communism, it turned out to be a utopia that was not achieved.

    CMOs were designed to diversify risk by shifting risk to larger, better capitalized and diverse institutions. Traditionally, a bank in Riverside, California would write and hold the mortgages for homes in the area. Then, if some negative shock impacted jobs and income in the area, that bank would have to absorb all of the resulting defaults. This would put the local bank at an inordinate risk. With CMOs, the risk would be spread out across banks and investors in a broader geographic area. Since CMOs could be held internationally, even a nationwide economic downturn might have little impact on any single mortgage holder.

    Unfortunately, the dealmakers sold the riskiest pieces to a few hedge funds, thereby consolidating the risk rather than allocating it broadly. The result was the spectacular crash of Bear Stearns and the incendiary damage done to a slew of US and international financial institutions.

    CMOs were supposed to produce more money available for lending to homeowners than would otherwise have been the case. Instead it produced more paper, more heavily leveraged and less secure. Securitized mortgages were misused to the extent that $45 trillion in bonds were issued on $5 trillion in assets; it’s as if someone bought insurance for 9 times the value of the house. By 2007, the market was over-sold: more bonds had been sold than could be delivered, possibly even more than had been issued. On average, nearly 20% of CMO trades have failed to settle since 2001, driving down the price of the bonds.

    CMOs should have been used to protect against conflicts of interest between managers, stockholders and bond holders (agency costs). Instead, the same companies that issued the CMO were buying large positions in the securities. Most CMOs are typically initiated by banks seeking to remove credit risk from their balance sheets while keeping the assets themselves. Normally, these securities are issued from a specially created company so that the payments from the riskiest borrowers, i.e. the sub-prime mortgages, can be separated from the more credit-worthy payees. A trustee and a portfolio manager receive fees from the newly created company.

    While CMOs reduced some of the risk to the local banks, it also led some of those banks to lend imprudently. With the cash flowing easily back to the banks after the CMOs were sold, some lenders became increasingly risk-seeking – the opposite of the intended purpose of CMOs. Companies like Bear Stearns, who acted as trustee and portfolio manager for the CMOs, also purchased the CMO securities (usually through a subsidiary hedge fund).

    Critically missing from the market for CMOs was the lack of a standard for the issuance. In more than one case, when a CMO investor attempted to foreclose on a property for mortgage delinquency, courts found insufficient documentation to support the CMO’s lien on the property. Without legally binding “receipts” of ownership, CMOs
    have had insufficient real backing — producing results we are still trying to cope with.

    Sure, sub-prime mortgage defaults were the straw that broke the camel’s back. But Bear Stearns was in financial difficulty three to six months before the sub-prime mortgage default rate spiked. The real fundamental problem lay in the multiple sales of mortgages through CMOs – the result of too much faith in financial innovation. Experts believe that, for every $1 of mortgage that defaulted, the investment banks fell behind as much as $15 in payments on the CMOs. These, not the actual mortgages of homeowners, represent the bulk of the securities that Treasury Secretary Paulson wants $700 billion to buy.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Dr. Trimbath’s credits include appearances on national television and radio programs. Dr. Trimbath is a Technical Advisor to the California Economic Strategy Panel and Associate Professor of Finance and Business Economics at USC’s Marshall School of Business. Dr. Trimbath was formerly Senior Research Economist at the Milken Institute and Senior Advisor on the Russian capital markets project for KPMG.

  • Mortgage Credit Crisis: Homeowners Also Need to Look in the Mirror

    There is more than enough blame to go around for the sub-prime mortgage crisis, and the unraveling financial disaster. But I believe the fundamental blame lies in two places: A purely American NIMBY myth about homeowners being the only genuine contributors to their communities and a capitalistic axiom, presumably started and perpetuated by a troika among realtors, homebuilders, and mortgage lenders, that the only way for middle-income Americans to truly create wealth is through homeownership.

    The main mechanism for translating these two, fundamentally flawed “principles” into an action plan was hatched not under the rightly derided George Bush but the widely considered economic stalwart, Bill Clinton. It was Clinton who in his second term decided that what the United States really needed was to become the greatest nation of homeowners ever. The goal: Move the country from roughly 64% homeowners to over 67%.

    It was the role of the two Government Sponsored Entities, Fannie Mae and Freddie Mac, to oblige this national imperative by creating very aggressive mortgage products that, for all intents and purposes, diluted the true nature of homeownership by drastically reducing the level of investment and commitment on the part of the homeowner. Loan-to-value ratios (LTVs) rose, in some cases above 100% of the home’s value so that closing costs and other expenses could be financed as well. At the same time the amount of a homebuyer’s “skin in the game” dropped precipitously, sometimes below zero, with some homebuyers walking away from closing tables with their front door keys and cash.

    Some of us in the development community were alarmed by these aggressive first-time homebuyer mortgage products. Homebuyers would be shoe-horned into homeownership, putting little to nothing in to initiate the transaction. However, as soon as interest rates climbed or home value fell, these first-time buyers were left hopelessly overextended. This disaster-in-the making was compounded by the commodification of what was once a personal asset.

    The bundling of mortgage loans into mortgage-backed-securities (MRBs) completed the separation of borrowers from their lenders. At the same time, the home itself was transmuted from fundamental shelter to an investment instrument (as the realtors association likes to refer to it, the main wealth creator for middle-income Americans).

    As soon as there was any cushion at all between the principal amount of the mortgage and a home’s fair market value, it was often immediately monetized through a second mortgage or equity line of credit. At the same time, owners of MRBs had to rely on mortgage servicers to manage and monitor timely mortgage payments and overall collateral values for huge mortgage pools and parsed segments thereof, often secured by a wide array of homes in disparate markets and sub-markets across the country.

    And yet, policy makers, the housing and mortgage industries, and capital markets all touted this great new system for wealth creation. Why?

    Because, after all, housing prices will just continue to go up, right?

    That was the fundamentally flawed foundation on which this house of cards was built, with everyone along the way—homeowners included—pocketing the cash from what were double-digit, annual increases in value in some markets. The positive consumer sentiments from the good economic times of the Clinton years, that not even the 9-11 tragedy could quash for too long, dovetailed with a blatant disregard from Main Street to Wall Street to our Nation’s Capitol for the incomprehensible national debt that was accumulating, mirrored by record consumer debt. Spend, spend, spend became the national mantra and motto. We had been transformed from a producer nation to a consumer nation.

    Whether it was houses, cars, electronics, apparel, home furnishings, appliances, entertainment, dinners out, whatever you can think of: If it was for sale, Americans were buying it and in record numbers. Much of these manifestations of perceived wealth were financed by the seemingly never-ending appreciation in home values and the astronomical mortgage-related debt that was being amassed in reliance on unrealistic expectations regarding those values.

    To be sure, there are a lot of lower and moderate-income households — many of whom are immigrant families targeted specifically as potential first-time homebuyers — who were sold a bad bill-of-goods in the form of subprime mortgage products. If anyone deserves a bailout, it is probably them. But most Americans knew what they were doing and now should pay the price.

    This includes a large number of people who could afford a home but couldn’t purchase the McMansion of their dreams with a conventional mortgage. So they went with something a little more exotic and much, much riskier that allowed them to stretch just a little farther, to continue their conspicuous consumption and help the domestic economy keep rolling along.

    So in the end, it’s neither fair nor accurate to blame just the big guys on Wall Street: This crisis was also made by ordinary Americans as well, egged on by flawed policies about homeownership and wealth-creation, allowing obsession to overtake reason.

    If, as Gordon Gecko said in the movie Wall Street, “Greed is good,” then as a nation, we’re about as good as it gets. There is plenty of blame to go around indeed.

    Peter Smirniotopoulos, Vice President – Development of UniDev, LLC, is based in the company’s headquarters in Bethesda, Maryland, and works throughout the U.S. He is on the faculty of the Masters in Science in Real Estate program at Johns Hopkins University. The views expressed herein are solely his own.

  • Villaraigosa’s Housing Proposal: Billions of Dollars and Too Little Sense

    The matter of whether private companies should be required to include so-called affordable housing units in residential developments is worthy of debate. Perhaps any developer who takes public funding ought to be subject to such requirements. A developer who doesn’t take public money is a different story.

    There is room to debate a number of points between those two notions, and we hope that interested parties will do just that as Los Angeles considers its future.

    That’s why we regret that Los Angeles Mayor Antonio Villaraigosa has confused the debate with a proposal that offers precious little clarity as it aims to spend $5 billion on affordable housing.

    The proposal counts an initial commitment of $700 million to be invested by a Columbia, Maryland-based non-profit organization called Enterprise Community Partners, along with $300 million that apparently would come from the city, although no specifics were offered there.

    The next $4 billion would be raised through borrowings, grants, and “tax-credit equity”—whatever that turns out to be. In any case, Villaraigosa claims that the city will “leverage $1 billion in public funds into a $5 billion investment in affordable housing throughout local neighborhoods.”

    The Garment & Citizen appreciates Villaraigosa’s willingness to step up to a challenge. We like politicians who want the spotlight when the going gets tough. We also appreciate Villaraigosa’s political instincts, which are usually well-honed.

    We must, however, respectfully inform the mayor that he has gone tone deaf on this one.

    Our nation is currently amid a crisis wrought by a lot of folks who talked in vague terms about the financial aspects of housing, and a bunch more who didn’t listen closely enough. We have a bunch of elected officials trying to figure out what to do about our problems, and it’s a safe bet that many of them still can’t explain how Wall Street’s exotic financial instruments figure into the misery. We have a big chunk of our corporate class that used to revel in the sharp edges of the free market but now await government rescue.

    Now is not the time to launch a $5 billion proposal that relies on “tax-credit equity” for even a single bit of its funding. Not unless you are willing and able to explain the meaning of tax-credit equity, and how it benefits taxpayers. Nor is this the proper climate for putting 20% down on a $5 billion proposal and “leveraging” the rest of the funding.

    There are many other problems with Villaraigosa’s proposal, which talks about the $1 billion in public money for starters. But that total appears to count the $700 million from Enterprise Community Partners, which is not an agency of government.

    The proposal mentions 20,000 new housing units, but then says that some of the money would go toward “addressing the foreclosure crisis” and “preserving the affordability of 14,000 rental units.”

    We wonder if those 14,000 rental units to be “preserved” are part of the overall goal of 20,000. Are we adding 20,000 units of housing? Or will we preserve those 14,000 and see only 6,000 new units? Is this a bailout for over-extended landlords whose tenants are having a tough time making the rent as the economy dips?

    Then there are the hints of a taxpayer-financed smorgasbord. Villaraigosa says he also wants to build the housing units along heavily used transit corridors. There’s a call to shift the “city’s strategy from managing homelessness to moving people out of it.” He says he wants to “transform L.A.’s public housing sites into vibrant, mixed-income communities.”

    Is this proposal aimed at reducing the city’s carbon footprint by getting residents to trade their cars for train rides? Is it about social services for the homeless? Poor folks in housing projects? The middle class?

    All of those subjects merit a clear focus, but this is a mish-mash.

    Villaraigosa should review his proposal and think again about whether he wants to pursue these goals in this way.

    Perhaps it’s worth his effort, and there might be more to like with a better explanation.

    For now, however, this is a $5 billion proposal that just doesn’t add up.

    That’s not a line Villaraigosa or any other elected official ought to be walking in today’s world.

    Jerry Sullivan is the Editor & Publisher of the Los Angeles Garment & Citizen, a weekly community newspaper that covers Downtown Los Angeles and surrounding districts (www.garmentandcitizen.com).

  • Bubble Opportunity: A New Life for Public Housing?

    The globalization of housing markets stood at the center of the vast, now unraveling, economic change of the past decade. The creation of new investment vehicles in the 90s diverted vast amounts of capital into housing markets around the world. The results were many and varied. Design features began to converge, with gated communities following shopping malls into cites in Latin America, China, Turkey and most other countries. Home prices began to rise, with The Economist even publishing a table of global house prices, indicating those with the most inflated costs (Spain and the UK usually led this undesirable ranking).

    It’s been clear for the last few years that housing was becoming the primary investment vehicle for many American families, who otherwise had a negative savings rate. Everything that happened up to 2007 was built on that premise. So here we are in 2008, facing an unraveling not just of the housing market and its financial networks, but much more besides. As the cliché has it, the devil is in the details, and those are getting much less attention. Obsessed with design features and public-private contrasts, it is hard for many urbanists to return to the old-fashioned concern for what is happening ‘on the ground’. Long gone are the days when researchers tramped the streets; now Google and GIS have replaced shoe leather.

    This is unfortunate, because there is a ‘new geography’ emerging from the wreckage. During the bubble, home buyers would purchase larger and more expensive homes because that was how they maximized the returns on their investment. And, for several years, that worked. Now, as I roam around in my neighborhood, I see that it’s the newest and largest homes that are standing empty.

    Why? In large part these were speculative constructions, and the speculation went awry. Elsewhere in this relatively affluent part of Phoenix, small subdivisions are standing virtually idle, the construction workers long returned to Central America. But this is one of the costlier parts of town. In the blue-collar West Valley, the impact has been hardest on the new master planned communities of relatively affordable homes. These were examples of what is sometimes termed in the trade ‘qualifying by driving’—that is, the homes are cheap because they are a long way from job concentrations. Many first time buyers were lured into home ownership with the teaser rates that have been replaced by higher monthly payments, along with higher gas prices. The result: whole developments with a forest of ‘for sale’ signs.

    Most discussion of the mortgage crisis has been at the elite level — where it impacts banks, Wall Street investment houses, interest rates, liquidity. But on the street level, there are other, less obvious, consequences. Animals are abandoned as owners decamp; untended swimming pools breed mosquitoes. Abandoned dwellings in far suburbs don’t attract vagrants but they do get used by human smugglers as drop houses, since there are few neighbors to notice. Owners stop paying their HOA dues and maintenance is neglected, even as the dues escalate for those who stay behind. And much of the time there is no-one to do the work, due to the disappearance of the Latino labor-force.

    So what happens now as the current crisis blows through suburban neighborhoods and some form of federal bailout comes into place? If a new Resolution Trust agency begins to buy up hundreds of thousands of single family homes, we could find ourselves face to face with a new form of public housing that hasn’t been seen since the end of the First World War. In the UK, for instance, local government built many thousands of duplexes, in what are now inner suburbs, for returning soldiers. These were high quality dwellings which provided excellent accommodation for decades, until they were sold off, at suitably inflated prices, by the Thatcher government. Over time, this design experiment was forgotten, as public housing across Europe and the US became associated instead with the construction of vast apartment complexes that turned into visions of hell, strewn with burned out cars. Only in Singapore was this kind of failure avoided, for very specific social, political and cultural reasons.

    So, we may be on the verge of reconnecting with that original vision of public housing, one that emphasized homes in neighborhoods rather than vast and anonymous apartment blocks. For this to happen, the impulse to scoop up these bad mortgages and dump them back on the market at fire-sale prices will have to be avoided.

    Instead, the Federal government should venture back into the public housing sector by keeping these bad mortgages and re-letting the properties that it accumulates. There are two good reasons for this. First, they are, in the main, desirable homes of acceptable quality, so there will be no stigma attached to public housing. Second, because no-one will be building publicly-owned houses from scratch, they will not be concentrated in public housing enclaves. Rather, they will be diffused across the city, concentrated in some neighborhoods to be sure, but not to the exclusion of other forms of tenure. Of course, some existing owners will be less than pleased to find renters living next door—but at least the grass will be mowed and the pool will cease to stink.

    How to prevent this crisis from reoccurring when things get better? Rules need to be observed. Three times your income dictates your mortgage, and you can’t buy a home in an HOA if you aren’t going to live in it. This would greatly restrain speculative frenzy. And let’s take advantage of this crisis by making affordable homes available to families in a variety of forms—as permanent rentals, as leases, or as leases-to-own. And most important, this new public housing will not be concentrated in the inner cities, far from most employment opportunities, or in dense Stalinesque apartment complexes. For years, planners have been wringing their hands about how to get low-income housing into desirable neighborhoods. Perhaps fate has now shown them the way forward.

    Andrew Kirby is the editor of the interdisciplinary Elsevier journal “Cities.”This is his 20th year as a resident of Arizona.

  • The future of suburbs? Suburbs ARE the future

    I entered the field of futures research in 1981. No, not futures – contracts to deliver a certain commodity at a certain price at a date certain (God, I wish I had) – futures research, as in scenarios, trends, strategic planning and market planning. Unfortunately the place was soon lousy with what I call “futurism”: extrapolations of the unsustainable to make the improbable look inevitable.

    A current example: suburbs are doomed because of high energy prices (peak oil!), the housing bubble, the obsolescence of the internal combustion engine, and yes, global warming (and what hasn’t been blamed on global warming?). Besides, the urban renaissance is underway; people want to live in the city for the culture, food, music and hipness, don’tchaknow. This is what I read in the Freakonomics quorum on the future of suburbia (New York Times, 8/12/08), and in The Atlantic magazine (“The Next Slum,” Christopher Leinberger, March 2008), The International Herald Tribune (“Life on the fringes of U.S. suburbia becomes untenable with rising gas costs,” 6/24/08), and elsewhere, ad infinitum.

    Well, I could be clever and say that predictions of the demise of suburbs are premature, be in fact they are just plain apocalyptic and absurd. Suburbs are the nexus of American life, have been for decades, and will certainly remain so (because, like, where else are we going to put the next 100 million Americans). Suburbs are where the majority of Americans today, and in the future, live, work, shop, create, consume, recreate, educate and, perhaps most importantly, procreate.

    Suburbs remain home to a majority of Americans and a plurality of American families. Suburban population, business and job growth each outpace those of cities, have done so for decades and will likely continue to do so. In fact, from 2001 to 2006:

    • 90% of all metropolitan population growth occurred in the suburbs (American County Survey, US Census Bureau)
    • Job growth in suburbia expanded at 6 times the rate of that in urban cores (Praxis Strategy Group)

    A small recent surge in mass transit won’t really change this. Of the 130 million Americans who commute to work every day, 41 million – by far the largest number and share – commute within suburbs (i.e. to the same or another suburb). Only 18 million, or 14% of commuters, commute from a suburb to a central city. To put it another way, 60% of commuting is suburb-related in some way. [IAC Transportation (July, 2008)] By the way, 75% of all commuters drive alone in their cars.

    Repeat after me: “multi-centered metropolitan region.” This is the model that characterizes most city/suburban regions in the US, where the urban core is just one of several nodes of development or centers of economic, residential, office, industrial, educational and recreational facilities and life. This is the model that, planned or unplanned, has evolved in the United States. It works, we like it, we’re keeping it. I know, congestion is horrible, but it’s horribly unnecessary: as explained by both Roth in Street Smart and by Stanley and Balaker in The Road More Traveled (both books published last year) [can we find a link to sites for these books] , we have the knowledge and means to reduce or even eliminate traffic congestion (more capacity, and more rational use of current capacity), but we don’t have the political will to deregulate, privatize and build.

    Repeat after me again: “mixed-use.” OK? I’m not talking about New Urbanism or smart growth, which are concepts whose utility and desirability are debatable. I’m talking about the availability, in a suburban setting, to access services and amenities, or what Wally Siembab calls “smart sprawl” – retrofitting suburbs of any density so that residents can shop, obtain services and work all within a mile or two of their home.

    One last point: Telecommuting, small home-based businesses and self-employment make suburban living all the more plausible and sustainable. If you add the number of part-time and full-time telecommuters plus home-based businesses, you’re talking about 36 million Americans, more than a fourth of the workforce.

    Welcome to the future: suburbia.

    Roger Selbert is a business futurist and trend guy. He lives in Los Angeles, edits and publishes the newsletter Growth Strategies, speaks and consults [www.rogerselbert.com]. He graduated from Bowdoin College in 1973, missed his graduation ceremony and has yet to return. But he thinks Brunswick, Maine was a great college town.

  • Back to Basics: The Financial Crisis Requires a Paradigm Shift

    It’s tempting to look at the current financial meltdown – and the proposed bailout – with a Bolshevik mentality. Let’s line up the investment bankers, hedge fund managers up against a wall and spray them with an odorous substance.
    If it were only so easy. Rescuing Wall Street may not solve many problems but letting the investor class implode won’t help many people either.

    What we really need is not a revolution against capitalism, but a paradigm shift within it. We need to move away from fads and quick bucks, and towards productive investment. If we don’t make that shift, the current bubble will simply recreate itself again, perhaps in ill-thought out speculative ventures painted “green” but motivated by the same shortsighted greed.

    Instead let’s stop the whole bubble cycle and get back to basics. That means shifting our investments towards productive activities such as manufacturing and basic infrastructure– and training the critical skilled workers that a ‘real’ economy needs. It means shifting investment priorities by providing incentives for entrepreneurs whose main interest is to build companies, not flip them.

    Over the past decade we have seen a repeated pattern. Americans innovate, start new companies and bring a moribund economy back to life. This takes place primarily in the suburbs and the expanding growth regions. Then the markets heat up and there’s rapid asset inflation. This happened in the late 1990s with dotcom stocks, and more recently in real estate creating a huge wealth effect, particularly in elite cities. Both instances ended with a dispiriting crash.

    Breaking this pattern is an important issue for all of us, but most importantly for our children. America’s robust population growth necessitates rapid long term, and widespread, economic growth. That means moving away from a financially oriented economy to a production oriented one.

    Most Americans cannot sustain themselves trading paper. We also need robust growth in a host of productive industries – energy, fiber, food, manufacturing goods and high-end business services – that can provide decent employment for someone other than Wall Street bankers, well-placed developers and dotcom entrepreneurs.

    For these broader based industries to grow, we need to improve basic infrastructure for moving goods, providing energy and educating skilled workers. American firms in fields from farm equipment and aerospace to textiles still compete with China and India. In an era of high-energy costs, we can drive more of our manufacturing closer to home, if we can provide them with better technological, transportation and human resources.

    Tragically we have ignored both infrastructure and industry. This can be seen from the largest cities to the smallest towns. “One looks back at that map ‘Landscape by Moses,’” writes the noted sociologist Nathan Glazer in looking at the legacy of New York City’s “master builder” Robert Moses, “and if one asked what has been added in the fifty years since Moses lost power, one has to say astonishingly: almost nothing.”

    Indeed, despite the staggering private wealth generated by the stock market and real estate in New York, the city’s public infrastructure has been largely neglected. Its industries are dying and new ones have trouble expanding. There are billions for new stadiums and other elements of Mayor Bloomberg’s “luxury city” but not much for the diverse entrepreneurial firms particularly in the outer boroughs.

    The city controller’s office has estimated that infrastructure spending levels in the late 1990s and early 2000s were barely half of what was required to maintain the city’s streets, main roads, and railways in “a systematic state of good repair.” Subways and rail lines in America’s richest city are frequently shut down after heavy rains due to flooding caused by poor drainage. Brownouts and blackouts, in part caused by underinvestment in energy infrastructure, have become common during summer high-use periods.

    Similarly, California’s once envied water-delivery systems, roadways, airports, and education facilities are in serious disrepair. In the 1960s, infrastructure spending accounted for 20 percent of all state outlays, but as the technocratic perspective took hold in Sacramento, infrastructure spending fell to just three percent of all expenditures, despite the rapid growth of the state’s population.

    Many communities have decided that instead of attending to basic needs, to invest in spectacular new convention centers, sport stadiums, arts and entertainment facilities, hotels, as well as luxury condos. Some have poured money into projects that they think will attract a few big corporate executives with luxury boxes or opera tickets. Others have poured their resources into ways to lure “creative” professionals with edgy museums, jazz clubs and cultural centers.

    These approaches are built around the deluded notion that Americans can thrive simply by being more clever and creative – even more self-fulfilled – than our competitors. China, India, or other low-wage nations won’t be content to concede higher-end economy activity to us. Software design, special efforts, high end legal services, architecture, fashion and even hedge funds all migrate to places where wealth is being created.

    In the coming years, for example, Mumbai, Dubai and Shanghai will employ their enormous wealth – gained in such unfashionable pursuits as writing computer code, drilling oil or making steel – to break into the lucrative businesses formerly dominated by Wall Street, Hollywood or Silicon Valley. You cannot give up productive, wealth-generating enterprises without consequences. Over time this also will hit all but the most elite workers.

    In contrast a policy that focuses both on old fashioned and new, green infrastructure would spur positive impacts on employment across a broad spectrum of activities. We could use new bridges, roads, trains, energy transmission facilities to help resuscitate the Great Plains as well as the beleaguered Great Lakes so they sustainably exploit the natural resources and logistical advantages that made them productive hotbeds in the first place. We can turn our cities, both old and new, into ideal spots for the nurturing of hosts of growing industries by providing adequate skills training, new transportation systems and updated power grids.

    Governments at every level can and should play a critical role in this great project, both in financing physical infrastructure and providing critical skills training. But given the financial realities today, we also need to take advantage of private capital available both here and abroad for such investments.

    So rather than simply rescue Wall Street, or let it hang out to die, let’s figure out how to redirect it. We need to shift incentives away from mindless speculation and the creation of ever more obscure financial instruments. Instead let’s find ways of encouraging investors to make their profits in ways that spur production and widespread wealth creation.

    Joel Kotkin is the executive editor of Newgeography.com.

  • What’s the Biggest Flaw in the Administration Bailout Plan?

    The biggest flaw in the Administration bailout package: It could all happen again. The system doesn’t need just fixing, it needs decentralizing. Financial institutions should be big enough to fail—and never any bigger. We need compartmentalization, also known as federalism.
    The current crisis was caused by mega-financial institutions that could gamble their money—and lose it. And they did. But first, they grew to the point where they couldn’t be allowed to fail. That’s why even a staunch free-marketeer such as Larry Kudlow supported the AIG bailout. “A collapse of AIG would have been unfathomable,” he wrote on Saturday. “It is simply too interconnected globally.”

    Well OK, then, AIG was too big. When even free-marketeers want the government to step in, that’s proof that size matters. In a bad way. But the American people cannot let themselves be hostage to the financial megalomania of casino-capitalist empire builders.

    It might, indeed, be the responsible thing to vote for a bailout, but it is irresponsible to allow such a meltdown to happen again. And it will happen again if banks, investment houses, and insurance companies are allowed to grow this big once again. Adding another layer of regulations and record-keeping will make work for more lawyers and more accountants, but if the basic business model survives—gambling with other people’s money, and lots of it—then we will right back into deep doodoo soon enough, except that the dollar totals will have a few more zeroes. Remember Sarbanes-Oxley? What good did that do?

    As my colleagues at the New America Foundation, Sherle Schwenninger and Michael Lind, have argued for years, we need different kinds of banks to do different things. So the Depression-era Glass-Steagall Act—which solved this problem once before—should be restored, so that the bank down the street once again is limited to only accepting deposits from its neighborhood and only making loans to locals. That’s a boring low-margin business, to be sure, but it’s mostly a safe business. Meanwhile, on Wall Street, investment bankers and speculators would be free to speculate, but they wouldn’t be free to speculate with the capital base of Main Street.

    In addition, the states should reclaim their role as laboratories of democracy—and laboratories of the economy. Leaders of each state should figure out how much money they are losing in this deal—that is, how much of that projected $1 trillion they are “contributing.” Or, to put it another way, how much of an income transfer is the state of New York reaping? How much is Manhattan gaining at the expense of all the rest of us?

    Politicians across the 50 states might be tempted to demagogue these wealth-transfer data, but there is the not-so-little concern of avoiding a depression.

    Instead, politicians should say, “I will vote for this bailout, AND I will also insist that we compartmentalize, or federalize, the solution. How? We should establish a state bank, or a regional bank, to keep capital right here in (fill-in-the-blank) state or region.” If South Carolina and North Dakota keep more of their money in the first place, to be invested in local projects, that will be good news for South Carolinians and North Dakotans. And it will be bad news for money-hungry Manhattanites, plotting their next incomprehensible derivate swap; they will be free to gamble their money, and nobody else’s.

    And that would be good news for the rest of us.

    This was originally posted on politico.com.

    James P. Pinkerton worked in the White House under Presidents Ronald Reagan and George H. W. Bush. Since leaving government in 1993, he has been a columnist for Newsday, a contributor to the Fox News Channel, and a regular on Fox’s Newswatch show.