Affordable Housing Institute : US

Trust the Wall Street Journal not merely to critique House Financial Services Committee Chairman Richard Baker’s Louisiana credit enhancement legislation but to heap unwarranted scorn upon it and Mr. Baker for even thinking such folly.  In its lengthy editorial (unlike their news, for which the Journal seeks to charge subscribers, their editorials are free, and worth every penny), the Journal voices some legitimate concerns, but they are lost amidst its buckshot scatter of sotto voce sneers and throwaway refutable assertions:

 

Apply conservatively, not liberally

 

Congress begins its Mardi Gras of blame this week for what went wrong after Hurricane Katrina hit the Gulf Coast, and we’ll all have plenty of time to enjoy the parade of recriminations.  [Thanks for your concern. — Ed.]

 

But for today we’d like to focus on the debate over what to do next to rebuild the region, and especially on a bad idea now gaining traction in Congress to spend as much as another $30 billion this year, with an option for more in future years.

 

That would be $30 billion on top of the $100 billion that Congress has already either appropriated or that the Bush Administration has requested.

 

Enter sophistry, stage far right. 

 

The Journal’s editorial conference room

 

“Appropriated” is not spent and “requested” is not appropriated.

 

There’s no denying that:

 

·         The disaster was unprecedented,

·         The federal government bears some responsibility for the failed levees, and

·         The rebuilding effort has so far been miserable on many levels.

 

Another classic sophist trick: claim you’re not denying something, then ignore it with every subsequent word.

 

But this is also at least twice as much money as has ever been spent on a U.S. natural disaster–equivalent to about $250,000 for every family that lost its home to the hurricane.

 

Except that’s not what has been spent.  Using an incredibly sophisticated research capacity called G-O-O-G-L-E, I have painstakingly unearthed this compilation showing that much of this figure:

 

·         Is unspent.

·         Represents commitments required under previous law, ergo, is not new money.

·         “Is inflated by including flood insurance payments due those who paid premiums,” ergo, fulfilling previous contractual commitments.

·         Includes “health and education money distributed to other states’ housing evacuees,” helps those who moved but not those who stayed or who are returning.

 

That doesn’t seem to be enough, however, for media critics and Louisiana politicians,

 

Observe this classic innuendo, only ‘media critics’ (boo!) and ‘Louisiana politicians’ (hiss!) support the proposal.

 

 

who are now pushing a proposal by Congressman Richard Baker, the Republican who represents Baton Rouge to the north of New Orleans. Mr. Baker is normally a free-market advocate who has been brave enough to challenge the bad practices of such politically powerful institutions as Fannie Mae and the New York Stock Exchange. So it’s surprising that he is now proposing a new Fannie Mae-type entity called the Louisiana Recovery Corporation (LRC).

 

Wouldn’t that ordinarily suggest that Mr. Baker’s idea is grounded in sound economics?  Or does his status as a Louisianan automatically cloud his judgment?

 

Under the Baker plan, as many as 200,000 properties would be purchased by the LRC. Current homeowners in these areas would receive 60% of the “pre-Katrina value” of the house, and banks would receive 60% of the unpaid mortgage.

 

In other words, Mr. Baker proposes that a house worth $150,000 before Katrina would be bought today for $90,000.  That’s a very substantial allowance for damage.

 

Uncle Sam would clean up debris, rebuild homes and whole neighborhoods, then put the refurbished properties up for sale. Mr. Baker tells us he expects revenues from these sales would recoup some of the costs. Given the government foulups so far in New Orleans, the idea has a superficial appeal. But the closer one inspects the details, the more it looks like a potential long-term disaster of its own.

 

In a single stroke, the Baker plan would make the U.S. government the largest property owner/ real estate agent in New Orleans.

 

In law but not necessarily in economic and managerial fact.  The government may own and not administer.   For the benefit of Wall Street Journal editors, this arcane service is called ‘asset management’ and it’s performed by every bank, insurance company, or other capital source who owns properties, mortgages, or real estate owned (REO) acquired via foreclosure or otherwise. 

 

And property development is not the federal government’s strong suit, to say the least (think HUD and Cabrini-Green in Chicago).

 

Sophistry three, smear by allusion without bothering to establish any causal linkage.  Cabrini-Green was a catastrophically awful public housing property in Chicago,

 

 

but:

 

·         HUD didn’t develop Cabrini-Green.  It was built between 1942 and 1962, before there was a HUD!

·         HUD did sponsor its demolition and redevelopment.

 

Cabrini-Green on its way down

 

In the government sphere, a fair historical model is the Resolution Trust Corporation (RTC), which in the late 1980s acquired all the non-performing assets held by failed savings and loans, repackaged them and sold them, rapidly, effectively, and largely privately.  Then it dissolved.

 

This is a recipe not for a rapid turn-around, but for making the feds the Donald Trump of New Orleans for a decade or more.

 

The art of the glare

 

Much though it goes against my nature to defend the short-fingered vulgarian, the fact remains that he’s a great property developer — lousy casino operator, but great property developer.

 

The price tag for the Baker plan is also preposterously high. Data from the Federal Office on Gulf Coast Rebuilding indicate that of the 200,000 houses destroyed by the flooding, only half are owner-occupied homes and 60,000 of the remaining homes already have insurance. This means there are only 36,000 uninsured homeowners who truly need aid.

 

See this great Times-Picayune graphic, again unearthed with that arcane wizardry known as G-O-O-G- …

 

 

The money already allocated is more than enough to make them whole. Uncle Sam has sent $24.5 billion for housing aid to New Orleans (not counting Mr. Bush’s latest $18 billion request).

 

Sophist misdirection number four: as observed above (discovered by that proprietary capacity known as G-O-O- …), much of the ‘housing assistance’ is purely temporary, has been spent, and would in any case have been unavailable to pay for damaged homes or destroyed infrastructure.

 

Residents will also receive $27.2 billion in private insurance.

 

Trick number five, the private insurance payouts are counted in the costs listed above.

 

And speaking of insurance, the Baker bill would bail out the banks that lent money to residents without the flood insurance that was required of residents who live in the flood plain. This is rewarding businesses for irresponsible behavior.

 

 

Yes, ex post facto.  By the way, whose fault was the levee breaches?  (Nifty graphic here.)

 

Where the levees breached

 

The LRC is also designed to avoid both Congressional oversight and the annual Appropriations process. Once the President sets funding levels, up to $30 billion each year, that number would automatically be spent. And while it’s true he could set that figure at $1 if he wanted,

 

Oh, so it’s not automatically spent.

 

any President would surely be lobbied publicly and privately by the seven-member LRC board

 

Kind of like now, with this President having shown himself just a weathervane on issues.

 

that would include three members from a list provided by Louisiana Governor Kathleen Blanco. The Big Easy’s politicians probably sense that the rest of the country will only write so many big checks, and so this automatic spending process is intended to avoid having to compete with other national priorities for funds.

 

In any case, the idea that rebuilding is impossible without the guiding hand of a federal planning czar is historically inaccurate. After the great Chicago fire and the San Francisco earthquake, these cities were at least as desperate as New Orleans is today.

 

 

Trick six: grab a distant nonsensical analogy.  It’s utter nonsense to compare Old New Orleans to catastrophes that occurred 100 and 134 years ago, to cities that had:

 

·         No telephone.

·         No electrical grid.

·         Precious little if any gas mains.

·         No environmental laws.

·         No highway system.

·         No container transport.

 

 

Yep, that’s a good analogy, all right.

 

But both were well on their way to restored glory within three to five years with little federal money and no central planning agency.

 

·         No income tax system.

·         No Department of Transportation.

·         No mortgage insurance programs of any kind.

 

A better analogy would be rebuilding London after 1945, where despite a national commitment, it was common to see rubble for five to ten years thereafter. 

 

We’d rather trust private homeowners and developers to make rational decisions about where re-investment in New Orleans should occur and–just as important in areas highly susceptible to future flooding–where it shouldn’t.

 

Alas, none of Louisiana’s political leaders seem to have any confidence in private investment to do the job. New Orleans Mayor Ray Nagin has proposed a plan that could cost another $100 billion. And Ms. Blanco has floated a state version of the Baker plan–a trust fund for land acquisitions and redevelopment that would be operated by a state agency, but that would spend federal dollars. This is the same governor and state legislature that approved $24 million to build white elephant projects, such as a sports arena in Northeastern Louisiana, while New Orleans was under water.

 

Trick number seven: smear by association and by innumeracy. 

 

It’s hard to imagine America without the festivity of New Orleans, and that city must be rebuilt. But $100 billion–most of which is for the city itself–is more than enough from taxpayers to put it on the road to recovery.

 

If I thought New New Orleans would actually receive $100 billion, and promptly, I’d take it in a New York minute.  But the problem is that the city is dying because the money is mostly political vaporware:

 

The slow pace of rebuilding so far says far more about the post-Katrina bungling of the city and state governments and of FEMA than it does about any lack of federal commitment to rebuilding the region.

 

Trick number eight: when many are responsible, exculpate your friend and blame your foes.

 

 

Senator Richard Shelby, who chairs the Banking Committee, says he plans to hold hearings on where all the money already appropriated has been spent. Mr. Baker’s $30 billion federal land grab proposal–a privatization in reverse–would almost certainly make the problem worse.

 

What the Journal didn’t get wrong.  I said the Journal wasn’t 100% wrong, and in presenting the above excerpts, I skipped over the one paragraph in which it mentions things that are legitimate concerns.

 

By paying out at pre-Katrina values, the feds would also deter private investors from going in and buying up properties [Presumably those not bought by the LRC. — Ed.] and thus creating a new market floor. Who knows what prices should be if Uncle Sam is setting them at what might be inflated pre-Katrina values?

 

There the real things to worry about in Mr. Baker’s bill:

 

1.       Markets must clear; if they don’t, all activity is distorted, artificial, and unhealthy. 

2.       Adverse-selection risk: those whose property was damaged less than 40% do not sell to the LRC, those damaged more than 40% do.

3.       Agency risk in economically untrustworthy adjudicators.

4.       Perverse incentives for Louisiana and New Orleans politicians. 

5.       Bureaucratic paralysis brought on by direct government ‘retail’ involvement.

 

I’ve alluded to these before, but a comprehensive discussion of Mr. Baker’s proposal must wait for a future post.

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