New Geography

Category: Politics

  • The Former East Germany: Is It Time for Red Nostalgia?

    2009 marks the 20th anniversary of the reunification of East and West Germany into one country. Germany was divided into two separate nations with competing economic and political ideologies. Now it’s time to reassess the results of this melding of two very different systems and the impact on the urban environment.

    Emerging from the ashes as one of the world’s most powerful economies, Germany may be the quintessential example of the triumph of capitalism over communism. Yet now with Frankfurt’s powerful banking sector reeling from the global economic meltdown, reticent Marxists may well be coming out of the woods to proclaim the death of capitalism.

    The sentiment for a bygone communist dream still exists for a small minority of those living in the former German Democratic Republic (GDR), where the unemployment rate has hovered around 18% since reunification. After a recent trip, it seems clear economic growth has stagnated. Job opportunities remain very limited. Rather than attract people with its lower costs and new opportunities, the region continues to see a strong outflow, particularly among the young.

    Yet all is not hopeless in the area comprising the former GDR. The crumbling of the wall and subsequent mass exodus of East Berliners to the west may remain the most vivid symbol of reunification, but the story remains decidedly mixed in Leipzig – the second largest city in the former GDR after Berlin.

    Leipzig can be considered the birthplace of the anti-communist revolution. On October 9th, 1989, in what is known as the “Monday Demonstrations”, protests in Leipzig (pronounced lipe-tsig) came to a head. In what some feared at the time would become another Tiananmen Square nightmare, 70,000 demonstrators peacefully took to the streets chanting, “We are the people”. The Monday Demonstrations served as a turning point in the quest towards reunification. Having witnessed the courage of the citizens of Leipzig, others trapped in the GDR came out and made their voices heard. One month after the Monday Demonstrations, the Berlin Wall came down.

    With just over 500,000 residents, Leipzig is the largest city in the German state of Saxony. Roughly 90 miles south of Berlin, the city lives in the shadow of the much more “sexy” and culturally apt German capital.

    The city has a considerable history, even prior to the events following World War II. Leipzig residents included such notable individuals as the mathematician Gottfried Leibniz and composers Johann Sebastian Bach, Richard Wagner, and Felix Mendelssohn. The playwright Goethe attended the University of Leipzig and referred to the city as ‘little Paris’ in his seminal work Faust. In 1813, Napoleon Bonaparte and his troops were dealt a strategic defeat there in what became known as ‘The Battle of Nations’. More recently, Carl Friedrich Goerdeler, the Mayor of Leipzig from 1930 to 1937, is remembered as being one of the staunchest opponents of the Nazi regime.

    It is difficult to imagine the breadth of this history while traversing the streets of Leipzig today. The city still certainly has its share of old and beautiful architecture, but much of this is now abandoned, with many structures adjacent to the central core covered in graffiti. In this regard, Leipzig looks like the German equivalent of a decaying American rust-belt city.

    The derelict atmosphere that a new visitor may sense upon arriving in Leipzig is at least partly due to the fact that many long-time residents still live in Soviet-style communist housing blocks at the peripheral edges of the city. Known as Plattenbau, or “plate buildings”, these ubiquitous and dehumanizing structures were communism’s answer to the issue of quickly re-housing East German citizens displaced by the ravages of war. Building these massive housing structures far outside the center also had the advantage of locating workers closer to places of industry.

    Taking into account Leipzig’s urban planning policies under communism, it is no wonder that neighborhoods near the city center appear neglected. Yet, stepping into the pedestrian-only heart of the city also tells a much more encouraging story. Unlike the often failed policies of many American cities to spur a “downtown renaissance”, Leipzig has had considerably more success at revitalizing its once thriving core.

    This is apparent by the number of construction sites around Leipzig’s central core. The city still has the advantage of possessing a significant stock of aesthetically appealing buildings, ranging in style from Baroque to Neoclassical. Furthermore, the University of Leipzig, one of Germany’s oldest, has taken the lead in making the city center a destination by consolidating its operations there. Currently, the University is constructing a new main building off of the city’s main square, Augustusplatz (formerly known as Karl-Marx-platz during the GDR).

    Public transportation is also a bright spot for Leipzig. Modern streetcars ride above ground to the outer limits of this concentrically laid out city. The efficiency of the streetcar system would turn any American public-transportation proponent green with envy. Moreover, the construction of an ambitious underground metro system is slated to be completed next year, further easing mobility for Leipzigers.

    Leipzig’s location in the central-north portion of continental Europe also has its advantages. As a node for the transport of goods and people through central Europe, the city serves as a bridge between Germany and the once burgeoning but now suffering Eastern European nations. Even so, over time it would be in the city’s best interest to further capitalize on this asset.

    Adding clout to Leipzig’s location as a transportation hub is the city’s central train station – one of Europe’s largest and most historically significant. Grand in scale, Leipzig’s Hauptbahnhof not only sees a great deal of rail traffic from all over Germany, the station doubles as a shopping center for those living in the city. Practically a second “downtown”, the central station boasts everything from a constantly busy grocery store to clothing boutiques, numerous cafes and even two McDonald’s franchises.

    Despite its inspiring history, famous university and state-of-the-art transportation, Leipzig still faces tremendous challenges ahead. The city is not only struggling to attract newcomers but to retain a new generation of Germans born to parents who still remember what it was like to live in the GDR. Economically speaking, Leipzig stands little chance competing with other German cities in the west such as Frankfurt, Cologne or Munich where there are many more job opportunities. Aside from a plant that assembles Porsche’s struggling Cayenne line of SUVs – itself now threatened for both economic and environmental reason – industrial activity in Leipzig is limited. And with the Bohemian behemoth of Berlin not far away, Leipzig would be hard pressed to realize a full renaissance of its status as a prime destination for arts and culture.

    What does this mean for the future? In a sense, Leipzig’s problem is the same problem facing the entire region that comprises the former German Democratic Republic. The issues have been hotly debated in Germany since reunification. Some in the western parts of the country regard cities in the east as a lost cause. Contributing to the contentiousness of the debate is the ‘Solidarity Tax’ instituted to aid in the reunification process. At a rate of 5.5% of annual income tax, many Germans feel their tax dollars are being squandered on frivolous projects in the former GDR – projects that will have little to no impact on those living in the west.

    The renovation of the city center and the construction of the new Leipzig underground metro are examples of projects that benefit from funding from the Solidarity Tax. The key issue now is to see if the eastern cities themselves can use the generous government support and newfound infrastructure to stimulate economic activity and create jobs that will keep people from leaving for good. If this is not addressed immediately, the future of the former GDR looks bleak. The last thing Germany needs, especially in these times of global economic turmoil, is for those living in the east to become nostalgic for the days before the fall of the Iron Curtain.

    Adam Nathaniel Mayer is a native of the San Francisco Bay Area. Raised in the town of Los Gatos, on the edge of Silicon Valley, Adam developed a keen interest in the importance of place within the framework of a highly globalized economy. He currently lives in San Francisco where he works in the architecture profession.

  • Don’t Mess With Census 2010

    The announcement last week that Congressional Black Caucus members plan to press President Obama to keep the 2010 census under White House supervision, even if the former Democratic Governor of Washington, Gary Locke, is confirmed as Commerce Secretary, brought back memories of a movie I’d seen before — a bad movie.

    The statement came from Rep. William Lacy Clay, D-Mo., the caucus’ leading voice on the census, and chairman of the House Oversight and Government Reform panel, which has jurisdiction over the decennial count. His assertion that the White House needs “to be hands-on, very much involved in selecting the new census director as well as being actively involved and interested in the full and accurate count,” suggests that the partisan gap about what the census should accomplish is no closer to being closed than it was ten years ago when we last undertook the constitutionally mandated exercise in counting everyone living in America. The gap was so big last time that it helped bring about the complete shutdown of the United States government.

    When Newt Gingrich became speaker of the House he decided, in his own paranoid way, that Bill Clinton and the Democrats would use their executive authority to produce a biased census whose over-count of minorities would shift, in his opinion, twenty-four House seats from the Republicans to the Democrats after the 2000 census. Of course, it was ludicrous to think such an outcome would occur, since legislative boundaries are drawn by the party in power in each state. Whatever numbers the census produces in our decennial exercise can be manipulated to produce any outcome each state’s ruling party desires, as Congressman Tom DeLay and his Texas Republican cronies proved a few years ago. Nevertheless, Gingrich was determined to use the Congressional appropriations process to undercut any attempt by the Democrats to overstate minority populations in the several states.

    The method by which this nefarious plot was to be carried out, in the Republican party’s opinion, was by the use of a large sample of Americans to be surveyed at the same time as the actual count, or enumeration, required by the Constitution was taking place. In response to concerns about previous census inaccuracies — both overcounts and undercounts — the National Academy of Sciences had recommended that the Census Bureau use survey sampling techniques to validate not just the overall count but the individual demographic sub-groups that the census’s enumeration process would identify. But this was a hugely expensive undertaking. To gain statistical accuracy, about 1.3 million Americans would have to respond to a lengthy survey that would cost about a half a billion dollars to execute. And it was this expenditure that Gingrich refused to appropriate. When he and Clinton came to the ultimate showdown on funding the government Gingrich blinked.

    As part of the budget settlement that reopened the government after the shutdown, Clinton forced him to reinstate funding for the sample survey. But despite having established the primacy of the White House in the conduct of the census, matters actually got worse for awhile. When I became Director of the National Partnership for Reinventing Government (NPR) under Vice President Al Gore, I was asked to monitor the implementation of the census to be sure it was done as effectively and as efficiently as possible. But the first idea on how to accomplish that came straight out of the same White House partisan playbook that is now being invoked by the Congressional Black Caucus.

    In order to assure that the process was “bi-partisan,” it was suggested that a commission be established made up of equal numbers of Republicans and Democrats who would oversee the activity on behalf of the Congress. Since the commission was to be equally divided, the Clinton White House wanted to make sure that only the most partisan Democrats — those who would never concede an inch to their Republican counterparts on issues such as funding and methodology — were selected. Names like Harold Ickes, Supervisor Gloria Molina, and Congresswoman Maxine Waters were discussed as representative of the type of Democrat who would make sure the use of sampling to confirm the accuracy of the count was preserved. Fortunately, thanks to the eloquence of Rob Shapiro, the Undersecretary for the Department of Commerce who had the actual authority to supervise the Census, cooler heads in the Vice President’s office were able to prevail over their White House counterparts, and the Commission notion was abandoned.

    But that didn’t stop the two parties from continuing their warfare over the value of a sample supplemented census vs. a straight enumeration. Republicans sued the Census Bureau in federal court, demanding that only the actual count of residents as provided in the Constitution be used for any Congressional redistricting by the states. The Federal Appeals court dismissed the Republican lawsuit as none of the Court’s business. Foreshadowing the outcome of Gore v. Bush in 2000, the Supreme Court surprisingly took up the case and overturned the Appeals court ruling. As a result, all subsequent redistricting efforts have used only the enumeration count from the 2000 census. On the other hand, formulas used to allocate federal funds based on population characteristics were unaffected by the ruling and could have used the sampling process, had it not met an untimely and unnecessary death.

    As soon as George W. Bush was elected and the incredibly professional Director of the Census Bureau, Ken Prewitt, was removed from office, the Commerce Department’s new partisan Secretary, Donald Evans, determined that the sample that had been prepared over the strong objections of Congressional Republicans was not useable. Sampling, as originally conceived, was never implemented, and the country ended up relying on a very strong effort to count households and those living in them for its 2000 census. This method tends to overcount families with two houses, who respond to the census form at both of their addresses, and college students who generally answer the form from their dorm room while their parents report them as still in their household back home. And, of course, it tends to undercount less affluent populations with fewer physical ties to a specific dwelling, particularly Native Americans, and to some degree Hispanics and African Americans.

    Despite these problems, a sampling approach could not be used to help correct inaccuracies in this year’s census, even if Rahm Emanuel himself were to oversee it. We are too far along in the process to recreate it. There is, however, a substitute available that should alleviate the concerns of all but the most stubborn partisans on both sides of the issue. Under the Gore reinvention initiative, the Census Bureau conceived of a concept now known as the American Community Survey. It was designed to survey a vast quantity of households over time to acquire the kind of detailed demographic data that was usually obtained from the subset of the population, about one in ten, who were asked to complete the “long form” of the census questionnaire every ten years. Republicans hated this form and the type of questions it asked; they saw it as an unlawful intrusion on the privacy of families by the federal government. Those of us in charge of reinventing the federal government thought the ACS could be a much more scientific and efficient way of collecting this essential data, but our challenge was to keep it from becoming a political football in the partisan warfare over the census.

    Finally, it was agreed that the Clinton administration budget proposals would include a continuing increase in funds for the ACS. In order to garner Republican support, ACS would be justified as a way to eliminate the long form by 2010. The budget request was forwarded by the head of ACS directly to the Vice President’s office, which made it a priority each year, but which never publicly acknowledged any interest in the concept. The ruse worked and the project became a reality. The long form will not be used in the upcoming census because the ACS has gathered, over time, sufficient data on the demographic details of America’s population as to make it unnecessary.

    Given the existence of the ACS, those now waging a battle over sampling vs. enumeration are truly guilty of fighting today’s war with yesterday’s weapons. In this new era, those who have a legitimate interest in as complete and accurate a census as possible should instead direct their efforts to the neighborhoods where the accuracy of the count will actually be determined. During the last count, the Census Bureau formed hundreds of thousands of partnerships with community groups interested in making sure that everyone they knew got counted. Today, these programs, as well as projects such as former Detroit Mayor Dennis Archer’s “Nosy Neighbors” campaign, are the best way to ensure an accurate outcome.

    The responsibility for America’s next census does not and should not rest with the White House. But President Obama’s experience does offer some direction: neighborhood organizing is key. Let’s hope that community leaders will follow the advice to ‘pick yourself up and dust yourself off’… and undertake the huge task of ensuring that every person is present and accounted for in America’s next census.

    Morley Winograd is co-author, with Michael D. Hais of Millennial Makeover: MySpace, YouTube, and the Future of American Politics, now available in paperback. Both of them are fellows with NDN, a progressive think tank, which is also home to his blog.

  • Bernanke: Junkmeister Hides the Truth

    Federal Reserve Chairman Ben Bernanke testified before the Senate Budget Committee on Tuesday (March 3, 2009), the day after it was announced that AIG would be back at the federal teat for another $30 billion. The generally subdued Senate was nonetheless forceful in getting Bernanke to admit several things:

    • The Fed and Treasury are using the same three rating agencies to help them select triple-A collateral for bailout lending as were used to get triple-A credit ratings for junk mortgage bonds;
    • Neither the Fed nor the Treasury will tell us all the companies that are getting bailout money;
    • There is no “outer limit” to how much money the US government can print;
    • No one knows the “outer limit” of how much money the US government can borrow;
    • The “too big to fail” policy is a bigger problem than anyone thought it could be;
    • No one was in charge of AIG – not bank regulators, insurance regulators or capital market regulators.

    When asked about AIG several times, Bernanke replied that it’s “uncomfortable for me, too.” Through some hole in the regulations, the insurance regulators had no authority to monitor the financial products activities of AIG. Explained simply and bluntly, the world’s largest insurance company sold credit default swaps (CDS, insurance against default) on the junk bonds issued from mortgages and consumer purchases. Many of those mortgages and consumer purchases were made foolishly – when the borrowers failed to repay the loans the bonds also failed. The people and companies that bought CDS on those bonds did not look too closely at AIG to see what would happen if the bonds failed. As it turns out, they didn’t have to worry about AIG failing – AIG was deemed too big to fail.

    When the bonds defaulted and the buyers of CDS protection (“counterparties”) turned to AIG for payment, AIG turned to the federal government for help. The AIG bailout has cost $180 billion so far for which the US government owns 80 percent of a company that lost $61.7 billion in three months (for a total of $99.29 billion in 2008, an amount equal to all of their profits back to about 1990).

    Here’s a tough question: Why won’t the Fed disclose who is benefitting from the CDS payoffs? Bernanke made a comparison between your grandmother and AIG: like the owners of life insurance policies, the purchasers of financial insurance “made legal legitimate financial transactions. They have a right to privacy about their financial condition.” In other words, no one should know how much life insurance your grandmother has. That’s why the Fed won’t tell us who bought the CDS insurance on junk bonds! Senator Ron Wyden (D-OR) asked him to “come clean.” Senator Bernard Sanders (I-VT) asked point blank: tell us who got the $2.2 trillion loaned by the Fed. He got a one word response for his troubles: “no.”

    Bernanke said, “AIG made me angry…This was a hedge fund attached to an insurance company. We had to step in, we really had no choice. It’s a terrible situation, but we aren’t doing this to bailout AIG, we’re doing it to protect the broader economy.”

    Here’s how you connect the dots from AIG to main street: AIG is an insurance company and insurance companies are among the “safe” investments that money market mutual funds are allowed to invest their cash in – in fact most funds are required to keep some portion of their assets in these supposedly risk-free investments.

    Basically, this requirement is there to make sure that cash will be available to meet the withdrawal requests from investors. Now, money market mutual funds and mutual funds are a favorite investment for retirement money, including the 401k plans that many people have through their employers. But also, your employer’s retirement plan money is likely also invested in these funds. Pensions can hold stocks and bond directly, but as the size of these plans gets bigger and bigger, it becomes increasingly difficult for one or a few investment managers to handle everything. The California State Teachers Retirement System and the California Public Employees Retirement System (Cal STRS and Cal PRS, for short), the largest pension funds in the world, have $160 billion and $180 billion in assets to invest. So, propping up AIG means that the investments made in the stocks, commercial paper, policies, etc. issued by AIG will not collapse and take with them the retirement assets of many millions of Americans.

    In the final round of questions, Senators Warner (D-VA) and Wyden (D-OR) were especially clear on the point of finding out who is benefitting from the bailout of AIG. AIG was a good insurance company, Warner said, but their London-based financial products division started selling CDS into Europe. Now, American taxpayers are being asked to pick up the tab. Why does AIG continue to make the payouts when they require federal money to continue to exist? The Senators suggested that, at a minimum, Americans deserve to know who is benefitting from the CDS payouts. “It’s time for some sunlight.”

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

  • Urban Inequality Could Get Worse

    President Obama’s stated objective to reduce inequality, as laid out in public addresses and budget plans, is a noble one. The growing income gap – not only between rich and poor, but also between the ultra-affluent and the middle class – poses a threat both to the economy and the long-term viability of our republic.

    But ironically, what seems to be the administration’s core proposal, ratcheting up the burden on “rich” taxpayers earning over $250,000, could have unintended consequences. For one thing, it would place undue stress on the very places that have been Obama’s strongest supports, while providing an unintended boost to those regions that most oppose him.

    At the heart of the matter is the age-old debate about who is “rich.” If you define wealthy as $250,000 a year for a family of four, that means different things in different places. America is a vast country, and the cost of living varies widely. What seems a princely sum in, say, red state Oklahoma City is barely enough to eke out a basic middle-class life in blue bastions like New York, Los Angeles or San Francisco.

    In the recent study on the New York middle class that I conducted with Jonathan Bowles at the Center for an Urban Future, we compared the cost of a “middle class” standard of living in New York and other cities. The report found that Manhattan is by far the most expensive urban area in the country, with a cost of living that’s more than twice the national average. (This is according to a cost of living index developed by the ACCRA, a research group formerly known as the American Chamber of Commerce Researchers Association.)

    But even Queens, the city’s middle-class haven and the only other borough included in the ACCRA analysis, suffers the eighth highest cost of living in the country.

    What does that mean? An individual from Houston who earns $50,000 would have to make $115,769 in Manhattan and $81,695 in Queens to live at the same level of comfort. Similarly, earning $50,000 in Atlanta is the equivalent of earning $106,198 in Manhattan and $74,941 in Queens. (See “New York Should End Its Obsession With Manhattan.”)

    The cost of housing constitutes one critical part of the difference. Average monthly rent in New York was $2,720 in the fourth quarter of 2007, by far the top in the nation. That total was both 55% higher than the second place city, San Francisco, where average effective rents are $1,760, and nearly triple the national average of $975.

    Even in relative boom times, such high costs have been driving many out of New York, and now it could get worse. During tough times, people’s incomes drop, so they are less able to absorb high costs and taxes, which are rising in many blue cities and states. Imposing more taxes on some label-rich New Yorkers or Angelenos, who earn $250,000 a year, won’t make them more likely to stay.

    Perhaps even worse, higher taxes probably won’t help the inequality issue. True, historically and to this day, the greatest levels of inequality occur in low-tax areas like the Mississippi Delta, the Rio Grande Valley and Appalachia. But, increasingly, this unsavory distinction is shared by big cities like New York, Los Angeles and Chicago. In contrast, the most egalitarian states are generally deep red places – such as the Dakotas, Alaska, Nebraska and Wyoming.

    Higher costs – manifested in everyday expenses like sales taxes and energy bills – now contribute in a large way to growing inequality even in the richest, most elite cities. When housing and other costs are factored in, notes researcher Deborah Reed of the left-leaning Public Policy Institute of California, deep-blue mainstays Los Angeles and San Francisco rank among the top 10 counties in America with respect to the percentage of people in poverty. Only New York and Washington, D.C., do worse.

    Worst of all, the rise of inequality in these high-cost blue cities seems to be connected to policy decisions. High taxes and strict regulations have expelled relatively well-paying blue collar jobs in manufacturing and warehousing from expensive urban areas. Without them, an extremely bifurcated economy and society forms because no traditional ladders for upward mobility remain; they are critical to a successful urbanity.

    Back in the 1960s, Jane Jacobs predicted that Latino immigrants to New York, mainly from Puerto Rico, would inevitably make “a fine middle class.” Yet four decades later, in the Bronx, the city’s most heavily Latino county, roughly one in three households lives in poverty – the highest rate of any urban county in the nation.

    At the other extreme, in Manhattan, where the rich are concentrated, the disparities between socioeconomic classes have been rising steadily. In 1980, the borough ranked 17th among the nation’s counties for social inequality; today it ranks first, with the top fifth of wage earners earning 52 times that of the lowest fifth, a disparity roughly comparable to that of Namibia.

    To an old-fashioned Truman Democrat like me, this is bad news. But some modern-day “progressives,” like Richard Florida, celebrate the concentration of rich people. They see them as guarantors that places like New York will be the winners of the post-crash economy. The losers? Goods-producing regions of the Great Plains, the industrial Midwest and, of course, those unenlightened, suburban middle-class people.

    Yet it seems more and more likely that raising taxes for urban middle-income workers will, over the long term, add to the flood of people fleeing to less costly locales with lower taxes. This will be particularly true for the growing ranks of information economy “artisans” who might find critical write-offs for home offices and other business expenses cut from their next tax return.

    None of this is necessary. The “creative destruction” resulting from the downturn might actually prove a boon to these big cities – by making them more affordable for the urban middle class. This help would be accelerated if city governments – as in Los Angeles, New York, Houston and even San Francisco during the early 1990s – nurture local businesses.

    But “growth” – a word not widely embraced in this greenest of administrations – does not seem to be a priority in either Washington or in most city halls. There are murmurs that investment in high-cost, subsidized alternative energy will create vast numbers of new jobs, but this is likely just wishful thinking for everyone but Al Gore’s business partners.

    This is not to say cities’ policies need to return to Bush-style Republicanism. Tax breaks for big-time investors and real estate speculators do not make a sustainable urban policy either. What’s needed is something closer to lunch-bucket liberalism, which focuses on productivity-enhancing initiatives and sparking entrepreneurial growth. America – its cities in particular – could do with more private-sector stimulation and a lot less high-minded social engineering.

    With policies geared toward the latter at the expense of the former, one of the great ironies of the Obama era will continue to unfold.

    By targeting the urban middle class to pay for its deficit and new social programs, the president’s plan could end up draining wealth – and boosting inequality – from our nation’s great cities, where he currently draws overwhelming support, to its hinterlands. Not exactly what the White House had in mind, no doubt, but, sadly, it’s a distinct possibility.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • Democrats Could Face an Internal Civil War as Gentry and Populist Factions Square Off

    This is the Democratic Party’s moment, its power now greater than any time since the mid-1960s. But do not expect smooth sailing. The party is a fractious group divided by competing interests, factions and constituencies that could explode into a civil war, especially when it comes to energy and the environment.

    Broadly speaking, there is a long-standing conflict inside the Democratic Party between gentry liberals and populists. This division is not the same as in the 1960s, when the major conflicts revolved around culture and race as well as on foreign policy. Today the emerging fault-lines follow mostly regional, geographical and, most importantly, class differences.

    Gentry liberals cluster largely in cities, wealthy suburbs and college towns. They include disproportionately those with graduate educations and people living on the coasts. Populists tend to be located more in middle- and working-class suburbs, the Great Plains and industrial Midwest. They include a wider spectrum of Americans, including many whose political views are somewhat changeable and less subject to ideological rigor.

    In the post-World War II era, the gentry’s model candidate was a man such as Adlai Stevenson, the Democratic presidential nominee who lost twice to Dwight D. Eisenhower. Stevenson was a svelte intellectual who, like Barack Obama, was backed by the brute power of the Chicago machine. After Stevenson, the gentry supported candidates such as John Kennedy – who did appeal to Catholic working class voters – but also men with limited appeal outside the gentry class, including Eugene McCarthy, George McGovern, Gary Hart, Bill Bradley, Paul Tsongas and John Kerry.

    Hubert Humphrey, a populist heir to the lunch-pail liberalism of Harry Truman (and who was despised by gentry intellectuals) missed the presidency by a hair in 1968. But populists in the party later backed lackluster candidates such as Walter Mondale and Dick Gephardt.

    Bill Clinton revived the lunch-pail Democratic tradition; and the final stages of last year’s presidential primaries represented yet another classic gentry versus populist conflict. Hillary Clinton could not match Barack Obama’s appeal to the gentry. Driven to desperation, she ended up running a spirited populist campaign.

    Although peace now reigns between the Clintons and the new president, the broader gentry-populist split seems certain to fester at both the congressional and local levels – and President Obama will be hard-pressed to negotiate this divide. Gentry liberals are very “progressive” when it comes to issues such as affirmative action, gay rights, the environment and energy policy, but are not generally well disposed to protectionism or auto-industry bailouts, which appeal to populists. Populists, meanwhile, hated the initial bailout of Wall Street – despite its endorsement by Mr. Obama and the congressional leadership.

    Geography is clearly a determining factor here. Standout antifinancial bailout senators included Sens. Byron Dorgan of North Dakota, Tim Johnson of South Dakota, and Jon Tester of Montana. On the House side, the antibailout faction came largely from places like the Great Plains and Appalachia, as well as from the suburbs and exurbs, including places like Arizona and interior California.

    Gentry liberals, despite occasional tut-tutting, fell lockstep for the bailout. Not one Northeastern or California Democratic senator opposed it. In the House, “progressives” such as Nancy Pelosi and Barney Frank who supported the financial bailout represent districts with a large concentration of affluent liberals, venture capitalists and other financial interests for whom the bailout was very much a matter of preserving accumulated (and often inherited) wealth.

    Energy and the environment are potentially even more explosive issues. Gentry politicians tend to favor developing only alternative fuels and oppose expanding coal, oil or nuclear energy. Populists represent areas, such as the Great Lakes region, where manufacturing still plays a critical role and remains heavily dependent on coal-based electricity. They also tend to have ties to economies, such as in the Great Plains, Appalachia and the Intermountain West, where smacking down all new fossil-fuel production threatens lots of jobs – and where a single-minded focus on alternative fuels may drive up total energy costs on the farm, make life miserable again for truckers, and put American industrial firms at even greater disadvantage against foreign competitors.

    In the coming years, Mr. Obama’s “green agenda” may be a key fault line. Unlike his notably mainstream appointments in foreign policy and economics, he’s tilted fairly far afield on the environment with individuals such as John Holdren, a longtime acolyte of the discredited neo-Malthusian Paul Ehrlich, and Carol Browner, who was Bill Clinton’s hard-line EPA administrator.

    These appointments could presage an environmental jihad throughout the regulatory apparat. Early examples could mean such things as strict restrictions on greenhouse gases, including bans on new drilling and higher prices through carbon taxes or a cap-and-trade regime.

    Another critical front, not well understood by the public, could develop on land use – with the adoption of policies that favor dense cities over suburbs and small towns. This trend can be observed most obviously in California, but also in states such as Oregon where suburban growth has long been frowned upon. Emboldened greens in government could use their new power to drive infrastructure spending away from badly needed projects such as new roads, bridges and port facilities, and toward projects such as light rail lines. These lines are sometimes useful, but largely impractical outside a few heavily traveled urban corridors. Essentially it means a transfer of subsidies from those who must drive cars to the relative handful for whom mass transit remains a viable alternative.

    Priorities such as these may win plaudits in urban enclaves in New York, Boston and San Francisco – bastions of the gentry class and of under-35, childless professionals – but they might not be so widely appreciated in the car- and truck-driving Great Plains and the vast suburban archipelago, where half the nation’s population lives.

    If he wishes to enhance his power and keep the Democrats together, Mr. Obama will have to figure out how to placate both his gentry base and those Democrats who still see their party’s mission in terms that Harry Truman would have understood.

    This article originally appeared at Wall Street Journal.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • How About a Betty Ford Bottled Water Rehab Clinic in San Francisco?

    From late-night refrigerator raids to splurging on a new wardrobe, everyone is prone to the occasional overindulgence. For San Francisco Mayor, Gavin Newsom, that overindulgence meant nothing more than a plastic water bottle.

    In June 2007, the mayor “issued an executive order directing city government to no longer purchase bottled water,” to cut down on waste in the city landfill and to utilize the pristine Sierra Nevada reservoir’s resources.

    Last year, Newsom also called on restaurants to stop selling bottled water to customers and has generally declined bottled water at most events.

    In something better suited to cushy celebrity gossip rags, an empty case of Crystal Geyser Alpine Spring Water was discovered in the mayor’s trunk of his car.

    While a spokesman for the mayor has assured the public that the water was for the mayor’s security detail, the Newsom camp also issued a statement that would be better suited for rehab-bound celebrity.

    “The mayor will be the first to admit that he occasionally indulges in bottled water,” said his spokesperson. “It’s not something he’s proud of.”

    During these bleak economic times, the public’s hyper-vigilant scrutiny of politicians seems zeroed in on busting them on seemingly inevitable examples of hypocrisy.

    Needless to say, Newsom will think twice before purchasing bottled water again.

  • The Panic of 2008: How Bad Is It?

    Just how bad is the current economic downturn? It is frequently claimed that the crash of 2008 is the worst economic downturn since the Great Depression. There is plenty of reason to accept this characterization, though we clearly are not suffering the widespread hardship of the Depression era. Looking principally at historical household wealth data from the Federal Reserve Board’s Flow of Funds Accounts of the United States, summarized in our Value of Household Residences, Stocks & Mutual Funds: 1952-2008, we can conclude it’s pretty bad, but nothing yet like the early 1930s.

    But this Panic of 2008 is no picnic. And in some key areas, notably housing, it could be even worse than what was experienced in the Great Depression.

    Housing: It all started with the housing bubble that saw prices in some markets rise to unheard of levels, principally in California, Florida, Phoenix, Las Vegas and the Washington, DC area. Mortgage lenders, unable to withstand the intensity of losses in these markets caused by declining prices, collapsed like a house of cards. This precipitated the Lehman Brothers bankruptcy on Meltdown Monday (September 15, 2008) and a far broader economic crisis since that time.

    Before the bubble, housing had been a stable store of wealth (equity or savings) for Americans. According to federal data, the value of the US owned housing stock increased in every year since 1935. The bursting of the housing bubble, however, brought declines in both 2007 and 2008, the longest period of housing value decline since between 1929 and 1933. The value of the housing stock was down 20 percent from its peak at the end of 2008. In some markets the losses amounted to more than double this amount. By comparison, the 1929 to 1933 house value decline was 27 percent. However, only one Great Depression year (1932) had a larger single-year decrease than 2008.

    Indeed, between 1952 and 2006, the value of the housing stock never declined for more than a three month period. The bubble changed all that. The value of the housing stock has now fallen eight straight quarters. An investment that has been safe for most middle class Americans – the house in the suburbs – suddenly experienced the price volatility usually associated with the stock market, as is indicated in the chart below.

    The resulting losses have been substantial. By the end of 2008, the value of the housing stock has fallen $4.5 trillion. In Phase I of the housing downturn, before Meltdown Monday, the largest losses were concentrated in the markets with the biggest “bubbles,”. But since that time the market has entered a Phase II decline, while a more general decline has characterized housing markets around the country in the fourth quarter of 2008. The decline continues.

    California, the largest of all the states, has been particularly hard hit. New data for both the San Francisco and Los Angeles areas show price drops of approximately 10 percent in January, 2009 alone, as prices fall like the value of a tin-pot dictatorship’s currency. This decline, it should be noted, has spread from the outer ring of these areas – places like the much maligned Inland Empire region and the Central Valley – into the formerly more stable, and established, areas closer to the larger urban cores, which some imagined would be safe from such declines.

    Sadly, there may well be some time before house price stability can be achieved. To restore the historic relationship between house prices and household incomes to a Median Multiple (median house price divided by median household income) of 3.0 would require another $3 trillion in losses, equating to a more than 15 percent additional loss. Losses are likely to be greater, however, not only in the “ground zero” markets of California and Florida but also other hugely over-valued markets, such as Portland, Seattle, New York and Boston. Of course, these are not normal times, and an intransigent economic downturn could lead to even lower house values than the historical norm would suggest.

    Stocks and Mutual Funds: As noted above, stocks and mutual funds have been inherently more volatile than housing values. According to Federal Reserve data, the value of these holdings fell 24 percent over the year ended September 30. Based upon later data from the World Federation of Exchanges, we estimate that the value declined sharply after September 15, and at December 31 stood at 45 percent below the peak.

    The household value of stocks and mutual funds has declined for five consecutive quarters, as of December 2008. There was a more sustained drop over six quarters in 1969-1970, although the decline in value was less than the present loss, at 37 percent. A larger decline (47 percent) was associated with the four quarter decline of 1973-1974. Comparable data is not available for household stocks and mutual fund holdings before 1952. The less complete data available indicates that the gross value of common and preferred stocks fell 45 percent from 1929 to 1933. As late as 1939, a decade after the crash, the loss had risen to 46 percent, indicating both the depth and length of the Great Depression.

    The present downturn seems on course at a minimum to break the post-depression loss record with an overall decline at 55 percent as of February 20. This would correspond to a household loss of $8 trillion from the peak.

    Consumer Confidence: The Conference Board’s Consumer Confidence Index reached an all time low of 25.0 in February, down a full one-third in a month. Even with its gasoline rationing, the mid-1970s downturn saw a minimum Consumer Confidence Index of 43.2. Normal would be 100; as late as August of 2007, consumer confidence was above 100. Consumer confidence is important. Where it is low, as it is today, there is fear and even people with financial resources are disinclined to spend. Confidence is a major contributor to economic downturns, which is why they used to be called “panics.” Restoring confidence is a requirement for recovery.

    Government Confidence: If there were a federal government index of confidence, it would probably be near zero. This is demonstrated by the trillions that both parties in Washington have or intend to throw at banks, private companies and distressed home owners to stop the downturn. Never since the Great Depression have things become so bad that Washington has opened taxpayer’s checkbooks for massive financial bailouts.

    How Much Wealth has been Lost: The net worth of all US households peaked at $64.6 trillion in the third quarter of 2007, according to the Federal Reserve Board. Since that time, it seems likely that the housing, stock and mutual fund losses by the nation’s households could be as high as $12 trillion – $4 trillion in housing and $8 trillion in stocks and mutual funds. This is a major loss and is unlikely to be recovered soon. Yet it makes sense to consider these losses in context. Unemployment is far lower than in the 1930s, when it reached 25 percent, and the Dust Bowl is not emptying into California (indeed, more than 1,000,000 people have migrated from California to other states this decade).

    Born Yesterday Jeremiahs: It is fashionable to suggest that the current economic crisis is the result of over-consumption and an unsustainable lifestyle. The narrative goes that the supposed excesses of the 1980s and 1990s have finally caught up with us. In fact, however, even with the huge losses, the net worth of the average household is no lower than in 2003 and stands at 70 percent above the 1980 figure (inflation adjusted). This may be a surprise to “born yesterday” economic analysts.

    The reality is that the country achieved astounding economic and social progress since World War II. The reality remains that even after the losses we are not, objectively speaking, experiencing Depression-like conditions. Critically, the answer to the question, “Are you better off today?” in 1950, 1960, 1970, 1980, 1990 and even 2000 is “yes”. This is a critical difference with the situation in the 1930s when the country overall was much poorer, and far less able to withstand such punishing losses.

    Beware the Panglossians: Even so, it seems premature to predict that the economy will turn around soon. Some Panglossian analysts predict recovery later in the year or in 2010 seem likely to miss the mark by years. Remember analysts – particularly those tied to both the real estate and stock sectors – who have discredited themselves with their past cheerleading. In addition, the international breadth and depth of this crisis cannot possibly be fully comprehended at this time. Last week the Federal Reserve predicted a declining economy over the next year.

    And even when the recovery starts, it is likely to be slow because of the public debt run up to stop the bleeding. When the recovery begins, the nation and the world will have to repay the many trillions in bailouts one way or the other. This can take the form of higher taxes, inflation, rising real interest rates or, if you can imagine, all three.

    How Bad Is It? Bad Enough. The present downturn is not as serious as the Great Depression. Nonetheless, the Panic of 2008 is without question, the most serious economic downturn since the Great Depression. The real question is whether the government will react as ineffectively as it did back then, and prolong the downturn well into the next decade.

    Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”

  • The Decline of Los Angeles

    Next week, Antonio Villaraigosa will be overwhelmingly re-elected mayor of Los Angeles. Do not, however, take the size of his margin – he faces no significant opposition – as evidence that all is well in the city of angels.

    Whatever His Honor says to the media, the sad reality remains that Los Angeles has fallen into a serious secular decline. This constitutes one of the most rapid – and largely unnecessary – municipal reversals in fortune in American urban history.

    A century ago, when L.A. had barely 100,000 souls, railway magnate Henry Huntington predicted that the place was “destined to become the most important city in this country, if not the world.” Long run by ambitious, often ruthless boosters, the city lured waves of newcomers with its pro-business climate, perfect weather and spectacular topography.

    These newcomers – first largely from the Midwest and East Coast, and then from around the world – energized L.A. into an unmatched hub of innovation and economic diversity.

    As a result, L.A. surged toward civic greatness. By the end of the 20th century, it stood not only as the epicenter for the world’s entertainment industry, but also North America’s largest port, garment manufacturer and industrial center. The region also spawned two important presidents – Richard Nixon and Ronald Reagan – and nurtured a host of political and social movements spanning the ideological spectrum.

    Now L.A. seems to be fading rapidly toward irrelevancy. Its economy has tanked faster than that of the nation, with unemployment now close to 10%. The port appears in decline, the roads in awful shape and the once potent industrial base continues to shrink.

    Job growth in the area, notes a forecast by the University of California at Santa Barbara, dropped 0.6% last year and is expected to plunge far more rapidly this year. Roughly one-fifth of the population depends on public assistance or benefits to survive.

    Once a primary destination for Americans, L.A. – along with places like Detroit, New York and Chicago – now suffers among the highest rates of out-migration in the country. Particularly hard hit has been its base of middle-class families, which continues to shrink. This is painfully evident in places like the San Fernando Valley, where I live, long a middle-class outpost for L.A., much like Queens and Staten Island are for New York.

    In such a context, Villaraigosa’s upcoming coronation seems hard to comprehend. By most accounts, he has been at best a mediocre mayor, with few real accomplishments besides keeping police chief Bill Bratton, a man appointed by his predecessor. So far, Bratton has managed to keep the lid on crime, a testament both to his skills and to the demographic aging of much of the city.

    Besides this, virtually every major initiative from Villaraigosa has been a dismal failure; from a poorly executed program to plant more trees to a subsidized drive to refashion downtown Los Angeles into a mini-Manhattan. Instead of reforming a generally miserable business climate, Villaraigosa has fixated on fostering “elegant density” through massive new residential construction. This gambit has failed miserably, with downtown property values plunging at least 35% since their peak. Many “luxury” condominiums there, as well as elsewhere in the city, remain largely unoccupied or have turned into rentals.

    More recently the mayor has presided over a widely ridiculed scheme to hand over the solar business in Los Angeles to a city agency, the Department of Water and Power (DWP), whose workers are among the best paid and most coddled of any municipal agency anywhere. Most solar plans by utilities focus more on competitive bidding by outside contractors. Villaraigosa’s plan, which recent estimates suggests will cost L.A. ratepayers upward of $3.6 billion, would grant a powerful, well-heeled union control of the city’s solar program.

    This has occurred despite years of overruns on previous DWP “clean energy” projects. Not surprisingly, the plan was widely blasted – by the city’s largest newspaper, the rapidly shrinking Los Angeles Times, the feistier LA Weekly and the last independent voice at City Hall, outgoing City Controller Laura Chick, who proclaimed that the whole scheme “stinks.” Yet despite the criticism, a ballot measure endorsing the plan – opponents have little money to stop it – seems likely to be approved next week.

    With his firm grip on political power, Villaraigosa likes to think of himself as a West Coast version of New York’s Michael Bloomberg or Chicago’s Richard Daley. Yet at least they have demonstrated a modicum of seriousness about the job.

    In contrast, Villaraigosa, according to a devastating recent report in the LA Weekly, spends remarkably little time – about 11% – actually doing his job. The bulk of his 16-hour or so days are spent politicking, preening for the cameras and in other forms of relentless self-promotion.

    So how is this person about to be re-elected with only token opposition? Rick Caruso, the developer of luxury shopping center The Grove and one of L.A.’s last private sector power brokers, ascribes this to a growing sense of powerlessness, even among the city’s most important business leaders.

    “People feel it’s kind of hopeless. It’s a dysfunctional city,” Caruso, who once considered a run against Villaraigosa, told me the other day. “They don’t think there’s anything to do.”

    Certainly, odds against changing the current political system seem long to an extreme. The once-powerful business community has devolved into a weak plaintive lobby who rarely challenge our homegrown Putin or his allies in our municipal Duma.

    Of course, entrepreneurial Angelenos still find opportunities, but largely by working at home or in one of the city’s surrounding communities. They tend to flock to locales like Ontario, Burbank, Glendale or Culver City, all of which, according to the recent Kosmont-Rose Institute Cost of Doing Business Survey, are less expensive and easier to do business in than L.A.

    “It’s extremely difficult to do business in Los Angeles,” observes Eastside retail developer Jose de Jesus Legaspi. “The regulations are difficult to manage. … Everyone has to kiss the rings of the [City Hall politicians].”

    Legaspi, like many here, still regards Southern California as an appealing place to work, but takes pains to avoid anything within the purview of City Hall. As the economy recovers, I would bet the smaller cities around L.A. and even the hard-hit periphery rebounds first.

    The only immediate chance of relief for us Angelenos is if Villaraigosa (who will soon face term limits) takes off to run for governor. As the sole southern Californian and Latino candidate, he could prevail in a crowded Democratic primary. But the idea of this empty suit running the once great state of California – not exactly a paragon of good governance – may be enough to push even more people to the exits or, at very least, think about taking a very strong sedative.

    This article originally appeared at Forbes.

    Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

  • What Does “Age of Hope” Mean in the Mississippi Delta?

    It was during the inaugural days that an article appeared in The Washington Post about the predominantly black Mississippi Delta going for Obama – no surprise! But juxtaposed in the same time period there appeared in a Kentucky newspaper the story of predominantly white Menifee County, my birthplace – deep in the heart of Appalachia – defying the red sea of Kentucky all around it and also going for Obama.

    Quite a pairing of places. It caused the logical mind to go quickly to work. What did they have in common? The likely answer was a common thread of hope – in two places very different yet alike. Two places long left behind as programs have come and gone. Did this present them with their chance?

    It is easy to say – as I said to a group of automotive middle managers hit hard both emotionally and in the pocketbook by the feared demise of the U.S. auto industry – buck up and get over it. The world has changed. It is time to read What Would Google Do? and reinvent yourselves and your industry. So, too, the business of moving people from point A to point B will always be with us – just how to do that will be left to inventive minds which should include all of us.

    But the auto industry is not alone. Neither are Menifee County and the Mississippi Delta. We do not yet know how to grow legs under this thing called “Obama hope” for communities like those of the Delta or Menifee County. Maybe it’s easier if you’re a college student in California, Manhattan or Chicago to take pride in the greater articulateness and ‘vision’ of our new President.

    Beyond “hope”, an intrinsically ephemeral thing, what are we doing for places like the Delta and Menifee County? It is clear the world has changed. October taught us that, yes indeed, we are globally interdependent. Expertise doesn’t lie in the likes of Greenspan and CEOs and senators and representatives. Finally, government has a role to play – we humbly acknowledge after years of bashing it.

    So, what makes Obama so different and what can he do to live up to his reputation? He gave hope perhaps because he is so different, with an exotic name and so deliciously diverse ethnically that he appears to be out of central casting. Like Superman or Spiderman, he has an edge because he is not exactly like the rest of us.

    We wait and see. There is a major debate over whether places like the Delta or Menifee County can be saved…or should be saved. President Obama can be counted on to focus on other places – like San Francisco, Manhattan and, of course, Chicago – where his most intense supporters live and where the media clusters.

    The Delta and Menifee may have voted for him, but are they on the Presidential view screen? These places are not on the beaten path of interstate highways. They are not part of so-called “metro” or “hot” spots. They are small places with small towns. They are places of strong religious values. They won’t attract the creative class seeking nightclubs and outdoor cafes.

    Yet these places do have their positive attributes – Menifee lies near a lake and people looking for affordable second homes. The land is of great beauty and there are people there who know – as Wendell Berry speaks in reverence – every nook and cranny of every precious inch. So too it is with the Delta, a place full of history, folklore and the richest American musical traditions.

    There is some palpable evidence that these kinds of places may be more attractive than we may have thought prior to the October financial collapse. If you can’t live well in New York for under $500,000 a year, perhaps smaller, more nurturing places can provide a higher quality of life for far less money.

    Perhaps it will take more than government “programs” and outsiders coming in as saviors. Perhaps it will take the people of those regions coming together in some way to tout their regional rural attributes – perhaps their local culture and microentrepreneurship – with some obviously needed but as yet undefined help from “higher-ups.”

    Will local folks be willing to step up to that challenge? Let’s listen to Mayor Will Cox of Madisonville, Ky. and his “on-the-street reassurance” of his constituents through Facebook and his iPhone during the catastrophic Kentucky ice storm of ‘09. He didn’t fan flames of anger but rather was honest and straightforward and ultimately soothing. At the end of the day he got the power back on. “Obama hope” will not stoke the fire or feed the kids, but perhaps it can inspire us to do more for ourselves.

    I await spring with a little more enthusiasm this year. My father hails from Menifee County. He says to plant your corn when the tree buds are the size of squirrel ears. He is a plain old man and loves that place. We are a patchwork country with many differences, but we’re more alike than we think. Just ask the folks in the Delta and Menifee County, poor whites and blacks who opted for the same President. It’s time to grow legs under hope and act with some new thinking.

    Sylvia L. Lovely is the Executive Director/CEO of the Kentucky League of Cities and the founder and president of the NewCities Institute. She currently serves as chair of the Morehead State University Board of Regents. Please send your comments to slovely@klc.org and visit her blog at sylvia.newcities.org.

    Photo courtesy of Russell and Sydney Poore

  • Housing Bail Out Part Deux: Just Another Financial Con Job

    Last night I wrote about the Obama Administration’s housing bail out. But, I hate to say, there’s more to tell you – and it’s actually worse. In addition to the giveaways to mortgage holders, we also have to consider the federal government effectively offering to give a credit default swap (CDS, remember those?) to the banks. If one of the lucky homeowners that get a loan modification defaults on their mortgage because home prices fall again in the future, the federal government will make good to the bank for them. There are some differences between this and a real CDS, though – the banks won’t have to pay a premium for the insurance. The federal government is selling CDS for $0. Nice. We taxpayers are putting up $10 billion for this piece.

    Then there are the plans to “Support Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac.” There’s that word again: confidence. In a con game, the con man isn’t the one who is confident; he is the one who gives you confidence. You are so confident that you are making a good decision that you give him all your money to be part of his scheme. If you still have any questions about confidence schemes, watch “The Music Man” again.

    The Treasury nationalized Fannie and Freddie (F&F) last year – they are now owned by the federal government. If you need more “confidence” than that in the strength of F&F then you should consider moving to another country. Under the assumption that “too big to fail” makes sense, the new Bailout plan is increasing the size of F&F’s mortgage portfolios by $50 billion – along with corresponding increases in their allowable debt outstanding. This part of the Homeowner Affordability and Stability Plan will cost $200 billion, an amount that goes beyond the $2.5 trillion cost of the Financial Stability Plan and the $700 billion in the Emergency Economic Stabilization Act/TARP and the $800 billion Stimulus Plan. The new $200 billion in funding, according to the Treasury’s plan, is being made under the Housing and Economic Recovery Act.

    If you can remember back that far, the Housing and Economic Recovery Act was signed into law by the former and largely unmissed resident of the White House back in July 2008 to clean up the subprime mortgage crisis before any of the other bailout money was committed to clean up the subprime mortgage crisis. This legislation established the HOPE for Homeowners Act of 2008 which spent $300 billion to (1) insure refinanced loans for distressed borrowers, (2) reduce principle balances and interest charges to avoid foreclosure, (3) provide confidence in mortgage markets with greater transparency for home values, (4) be used for homeowners and not home flippers or speculators (5) increase the budget at the Federal Housing Administration so they can monitor that all this happens, (6) end when the housing market is stabilized and (7) provide banks with more ways and means to stop foreclosing on delinquent homeowners. Three million homes were foreclosed last year despite this legislation or any of the other bills that passed before and after it.

    Each new bill carries with it an increase in the limit on the national debt. The most recent Stimulus Package increased it from $11.315 trillion to $12.104 trillion effective February 17, 2009. The actual debt is currently at $10.8 trillion and rising. With only $1.3 trillion between the actual debt and the limit, Timmy Geithner’s pals back at the Federal Reserve will have to keep the printing presses running overtime.

    The “new” Homeowner Affordability and Stability Plan is just a rehash of every old financial sector bailout plan. The definition of insanity, according to a quote attributed to Albert Einstein, is doing the same thing over and over again and expecting different results. Here we go again.

    Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.