Is blight, like beauty, in the eye of the beholder?

Houses to be condemned to make way for Atlantic Yards in Brooklyn. Look blighted to you?

Or is blight just a planner’s word for a city’s natural messiness?

Does this look blighted to you?

Though the question is metaphysical, the answer is anything but.  On that finding of judicial ‘fact’ hinges the most contentious issue in eminent domain for economic development (ED4ED) today, as explored in a protracted City Journal editorial essay by Nicole Gelinas.

Spot the blight: Atlantic Yards

Indeed, what seems an intractable policy problem – when is ED4ED permissible, and when must it be prohibited? – can be reduced to a problem of boundary –what is blight?  In turn, the entire problem, over which so many hours of legal wrestling have been held, can be solved easily – the fuzzy boundary has to be construed against the party with power, so either define blight objectively and observably, or eliminate it as a valid reason.

To see why, we must descend the rabbit hole of current jurisprudence, in particular the way ‘blight’ has been redefined out of all observable meaning (Part 1 of this post), and then resurface elsewhere to see how ED4ED is requisite for urban improvement (Part 2), and hence how to reconcile the competing pressures.

1. If property is ‘blighted,’ government can take it.  Lost in the political uproar that followed the Supreme Court’s Kelo v. New London 5-4 decision is that the jurisprudence on ED4ED is half a century old, as laid down in a landmark 8-0 decision in 1954 [Same year as Brown v. Board of Education of Topeka, another landmark – Ed.], Berman v. Parker.  Under Berman, a Supreme Court enraptured with the promise of economic development allowed the District of Columbia Redevelopment Authority to demolish and rebuild a large chunk of southwestern Washington, based on the finding of ‘blight’, which in the 1954 decision was concluded to exist because:

“64.3% of the dwellings were beyond repair, 18.4% needed major repairs, only 17.3% were satisfactory; 57.8% of the dwellings had outside toilets, 60.3% had no baths, 29.6% lacked electricity, 82.2% had no wash basins or laundry tubs, 83.8% lacked central heating.”

I think anyone today would agree that even in 1954, properties without indoor plumbing, central heating, or running water, constituted blight.  Indeed, under today’s laws – absent in 1954 – those buildings could be condemned as unsanitary. 

 The court that gave us Brown v. Board of Education also gave us Berman

As Justice William O. Douglas, writing for the unanimous court, put it:

Miserable and disreputable housing conditions may do more than spread disease and crime and immorality. They may also suffocate the spirit by reducing the people who live there to the status of cattle. They may indeed make living an almost insufferable burden. They may also be an ugly sore, a blight on the community which robs it of charm, [p33] which makes it a place from which men turn. The misery of housing may despoil a community as an open sewer may ruin a river.

Unfortunately for Justice Douglas’s defenders, the greatest blight now inflicted on many northern urban communities are the slums inside, the high-rise public housing properties such as the French banlieues, all of which should be torn down, and many of which have been torn down or are being torn down.

We’re not sorry to see you go

Justice Douglas was doing more than penning a manifesto.  (No one ever accused Justice Douglas of lacking in legal imagination, as when in Roe v. Wade he found that a right to privacy ‘emanates from the penumbra of the Constitution’ – in other words, that were was no Constitutional language to support it.)  Here he was grounding the decision in an expanded concept of ‘public health’ so as to argue that blight goes beyond the optical:

In the present case, the Congress and its authorized agencies have made determinations that take into account a wide variety of values. It is not for us to reappraise them. If those who govern the District of Columbia decide that the Nation’s Capital should be beautiful as well as sanitary, there is nothing in the Fifth Amendment that stands in the way. ["Nor shall private property be taken for public use without just compensation," the 'takings' clause. -- Ed.]

Berman proved to be the opening salvo in a half-century of ever-expanding municipal authority and judicial deference to local findings.  In 1984 the Supreme Court even expanded municipal discretion through the Midkiff decision, so that when in 2005 the court upheld New London’s taking of Suzette Kelo’s house, the remarkable point was not that the city won, but that it won ‘only’ 5-4, and in winning provoked an impressive and sustained voter backlash.  As the City Journal essay put it:

In 2005, in Kelo v. New London, the Supreme Court decided that these “public purposes” could even include economic development. But New York’s constitution theoretically holds the state to a higher standard. In 1967, Empire State voters voted not to add a “public purpose” clause to their constitution, preferring to stick with the stricter requirement of “public use.”

2. Once ‘blight’ is found, the state can flip property to a private developer.  In parallel with the thread of government having a police power to take small parcels and aggregate them into more rational urban uses ran another thread, that the state can contract these basically technical functions to a private third party.  Here too it was the supremely confident Douglas who wrote the sweeping apologia:

The firebrand justice: William O. Douglas

Here, one of the means chosen is the use of private enterprise for redevelopment of the area. Appellants argue that this makes the project a taking from one businessman for the benefit of another businessman. But the means of executing the project are for Congress, and Congress alone, to determine once the public purpose has been established. See Luxton v. North River Bridge Co., supra; cf. Highland v. Russell Car Co., 279 U.S. 253.

The public end may be as well or better served through an [p34] agency of private enterprise than through a department of government — or so the Congress might conclude.

We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects. What we have said also disposes of any contention concerning the fact that certain property owners in the area may be permitted to repurchase their properties for redevelopment in harmony with the over-all plan. That, too, is a legitimate means which Congress and its agencies may adopt, if they choose.

Now enters the worm of self-interest, for if the state can gobble up small parcels from small and politically unconnected holders, and bestow them in a bundle on a politically connected private redeveloper, then both the redeveloper and the municipality have a selfish interest in doing so.  Land that is redeveloped becomes more valuable.  Land that is rezoned becomes more valuable.

Raise the height, raise the value, raze the incumbents

None of this bothered Douglas, taken as he was by a vision of the city council as philosopher-kings:

Subject to specific constitutional limitations, when the legislature has spoken, the public interest has been declared in terms well nigh conclusive. In such cases, the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation.

Evidently they trusted their government more back then.

3. By now, the practical definition of ‘blight’ has been diluted into ‘economically underperforming’.  If finding a word translates into giving someone more money, then the word is increasingly found.  With ‘blight’ the key to unlock potent government power to take property from A and then to give it to B, why then will develop, in short order, an active marketplace in finding blight.  [The same thing has happened, on a multi-billion-dollar global scale, in the counterfeiting of certified emission reduction (CER) certificates, otherwise known as carbon credits … but that's another story, about which I may post in the context of India. – Ed.]

You cannot outreach the long arm of the law

Kelo highlighted this and empowered other opponents of ED4ED, such as in Brooklyn, with its billion-dollar battle over Atlantic Yards, which has been going on for more than half a decade.  As City Journal puts it:

Brooklyn’s Prospect Heights, industrial and forlorn for much of the late twentieth century, was looking better by 2003.  Government was doing its proper job: crime was down, and the public-transit commute to midtown Manhattan, where many Brooklynites worked, was just 25 minutes. That meant that the private sector could do its job, too, rejuvenating the neighborhood after urban decay. Developers had bought 1920s-era factories and warehouses and converted them into condos for buyers like Daniel Goldstein, who paid $590,000 for a place in a former dry-goods warehouse in 2003.

My $590k says my home isn’t blighted

These new residents weren’t put off by the Metropolitan Transportation Authority’s railyards nearby, and they liked the hardwood floors and airy views typical of such refurbished buildings. They also settled in alongside longtime residents in little houses on quiet streets. Wealthier newcomers joined regulars at Freddy’s, a bar that predated Prohibition. Small businesses continued to employ skilled laborers in low-rise industrial buildings.

Two questions are entangled here:

1. From an urban-vibrancy perspective, would we ‘like’ to see redevelopment?

2. Is the neighborhood ‘blighted’ today?

It’s entirely possible to answer Yes to the first question – making us wish we could assemble the land – and No to the second, meaning we cannot do it, tempted though we may be.

I can resist everything but temptation

Except that it is all too easy to substitute “I am entitled to” for the phrase “I want to” – especially if one is adjudicating for oneself.

The state hasn’t let this inconvenience derail its plans for Prospect Heights, however. For seven decades, courts have let New York seize and demolish slum housing if it’s blighted—which New York State defines as “substandard” and “unsanitary.” So the Urban Development Corporation (UDC), a public entity of New York State, decided that the “public use” of Atlantic Yards would be blight removal. The city had already designated part of the neighborhood as “blighted” 40 years earlier, long before its resurgence. As for the rest, the UDC commissioned consultants—previously employed by Ratner—who soon returned the requisite blight finding.

I applaud the commission’s consultants

4. When courts confront a blight dispute, they tend to defer to the public agency.  Judicial deference to legislative or executive decision-making is generally a sound principle for separation-of-powers. 

Property owners have looked to the judiciary to check the overweening grasp of the legislative and executive branches.

Yet the courts seem to have difficulty grappling with the municipality’s economic conflict of interest:

In Brooklyn, Goldstein and his neighbors have lost their lawsuits—most recently, in New York’s highest court, the court of appeals. In November, the court decided 6–1 that “all that is at issue is a reasonable difference of opinion as to whether the area in question is in fact substandard and insanitary. This is not a sufficient predicate for us to supplant [the state’s] determination.”

Goldstein’s got his dander up

Except that the harm is unbalanced, because either way, the decision is irrevocable.  If a court finds blight, then owners are dispossessed of their property – uprooted.  With that dispossession goes their entire way of life.  I’m especially sensitized to this by all my global South experience, where slum dwellers are routinely dispossessed of land, once it has become valuable.  The slumdwellers lack legal title – they gained their occupancy rights by squatting – so their claim is weaker, but the principle is the same: occupancy vests political legitimacy.

The court essentially abdicated its duty to protect property owners from the governor and the Legislature.

I choose to abdicate my duty

That’s City Journal’s conclusion, not ours, but it’s in line with the factual record.

[Continued tomorrow in Part 2.]

Send post as PDF to

While housing is immovable, jobs and people move, and where people live in one house and work in another, they must commute between the two, mustn’t they? 

RDP houses, Soweto … and jobs are ninety minutes away

As reported in The New York Times, this is often more contentious than it should be:

SOWETO, South Africa — Since the days of apartheid, when blacks were required to live in distant townships like this, Susan Hanong, a 67-year-old maid, has commuted to the wealthy northern suburbs of Johannesburg, one of the spectral figures trudging through darkened streets on long trips to wash white people’s clothes and mind their children.

Soweto is an old acronym for South West Township:

Soweto at lower left; Sandton in upper-center

It was deliberately located out of sight, and out of mind, behind an artificial mountain of mine tailings.

A mountain of crushed ore that hid Soweto from downtown

At dawn recently, after walking through Soweto to the sounds of roosters crowing and her sandals slapping against her feet, Mrs. Hanong beheld a vision of urbanity: a stylish, new high-tech bus station.  As the doors of a gaily colored bus closed behind her, she claimed a front-row seat reserved for the elderly and settled in for a smooth, tranquil ride, so different from her usual experience on careering, jam-packed minibus taxis.

We’re visual creatures.  We take our cues from color.

“These people on taxis, they shout at us,” she said. “They say, ‘Granny, just move!’”

Curious response – move where?

“They talk funny to the people. On the bus, no one can shout at you, you see.”

South Africa has erased apartheid from its statute books, but the racist schemes of white minority rule remain engraved on the landscape in an extreme form of residential segregation. Millions of blacks still live in townships far from centers of commerce and employment.  

We’ve seen throughout the world that residential segregation is a preferred tool for keeping ‘those people’ near when we want them, far when we don’t.  We’ve also discovered that housing and transportation are intrinsically linked costs in the family budget, so it is possible to keep ‘those people’ away from us by channeling their affordable transportation alternatives.

Those with jobs, like Mrs. Hanong, must endure commutes that devour their time and meager incomes, while legions of jobless people are isolated from opportunity.

Like the QWERTY keyboard, that was apocryphally designed to slow down typing and hence prevent jamming the keys, a city can survive the deliberate inefficiency of an economically segregated residential pattern for a while … but then, as speeds increase, that inefficiency leads to insupportable traffic jams.

Traffic on the M1; note the walkers

Cities do mean traffic jams, yet traffic too snarled can undermine a city’s efficiency – and therefore its global competitiveness.

The new Bus Rapid Transit systems planned for South Africa’s major cities in recent years have promised to ease those hardships by providing fast, affordable, dignified travel on bus lanes cleared of other vehicles.

The addition of ‘dignity’ is curious.  Are the alternatives, such as combi vans known as taxis, undignified?

Prodded by a national commitment to improve public transportation for soccer’s 2010 World Cup, Johannesburg is carrying out the nation’s most ambitious program.

Need this station open by the time the stadium’s open!

Global events – like the World Cup or the Olympics – are always levers for dramatic and large-scale improvement of the urban infrastructure.  The accelerated political urgency of a hard date and global visibility conjures forth vast financial resources, and also a climate of relaxed regulatory permissiveness.  Things are done swiftly that could never be done slowly.

The city predicted that buses would be rolling from Soweto, where a quarter of the city’s four million residents live, to Sandton, the region’s commercial and financial hub, by June.

But its bus project is falling short of that goal and has also become a reminder of just how challenging it is for South Africa to transcend its scarred history. Beyond the usual logistical delays and a recession-related slowdown in financing, the project has confronted resistance from both suburbanites in what were once exclusively white enclaves and from some in the black-owned minibus taxi industry that sprang up during apartheid.

The taxis are an economically rational pure-market solution. 

The city’s formidable minibus taxi industry moves 14 million people daily in a nation of 49 million, far more than the bus and rail systems combined.

Like slums, they crammed poor people into smaller spaces, so as to raise aggregate spending power to the point of financial viability.

The economic solution: overcrowding

They also drive like madmen, with predictable results.

Fatalities after a Johannesburg taxi collision

“The transport system tells a very big story of the psyche of the nation,” said Rehana Moosajee, the City Council member who leads Johannesburg’s Transportation Department,, explaining that the country still had a long way to go in bridging racial and class divides.

Moosajee knows taxis are a big story

For the taxi operators, the problem is simple – the state-subsidized buses will destroy their business.

“Stop the BRT” = Keep us in business

The city’s first challenge was to win over the formidable minibus taxi industry.  It is perhaps the country’s greatest success story of black entrepreneurship, though with a history of ruthless violence.

Taxi operators demonstrating, March, 2009

Almost certainly it is the province of organized crime, part of the alternative power structures that operate in slums.

Experts estimate that hundreds, if not thousands, of people have died in “taxi wars” to control routes.

To the visible costs of commuting inefficiency, therefore, we must add the invisible costs of crime, violence, and extortion.

Who else lies behind the protests?

The city has sought to get the industry involved by offering taxi proprietors ownership of the bus operating company, but negotiations have dragged on, and some in the industry remain fiercely opposed.

As we saw in slums, the enemy within, inefficient systems nevertheless support free riders, fellow travelers, and fifth columnists, all of whom feed on the inefficiency and use subterfuge and manipulation to preserve it. 

Taxi blockage action, Johannesburg

After the bus line began running five months ago, along a 16-mile route from Soweto to the central business district, a bus was fired on and a passenger and a policewoman on it were hit.

Not by whites, I dare say.  This is black-on-black violence, with economics at its root.

Gunmen shot at the home of Mrs. Moosajee, hitting her security guard in the neck. And Vananda Khumalo, a taxi industry official and advocate for a deal with the city, was killed.

Murder for money, pure and simple.

At the other end of the pipeline, the opposition is more genteel but no less fierce:

The city has also faced steely opposition from suburbanites that some officials describe as a classic case of not-in-my-backyard resistance. At a packed meeting in November 2008, residents from the strand of stately, still mostly white communities along the heavily traveled Oxford Road shouted down city officials who were trying to describe proposed bus routes, including one that would use two of Oxford Road’s four lanes for buses.

Everything in Joburg goes up and down Jan Smuts

I’m very familiar with the Oxford Road area; good friends of mine live and work in its vicinity.

Although NIMBYs never want ‘those people’ to have access, this is a smidgen more rational in Johannesburg, where more affluent households have been subjected to carjackings and home invasions at gunpoint.  And not isolated incidents, either – rampant.  Many South Africans I know fear crime is rising steadily and wish they could emigrate.

Welcome to Saxonwold

“They just stood up and said, ‘No, no, no, no!’ ” recalled Tessa Turvey, a resident married to a mining industry entrepreneur. Mrs. Turvey has since honed a message in defense of her neighborhood, Saxonwold, where jacaranda trees arch over tranquil streets and homes are adorned with rose gardens, swimming pools and lush greenswards.

Plus high cement walls, razor wire, and ADT Armed Response signs …

A fast-growing sector of the economy

Mrs. Turvey, who is white, was dismissive of those who contended that the suburbs were guarding white privilege, noting that much of the black political elite, including Nelson Mandela, now lived in these same neighborhoods.  In a letter to the city, the neighborhood association’s members welcomed a mass transit system but opposed what they considered hastily and ill-conceived routes that they said would pollute the air, cause traffic to spill onto side streets, increase crime and damage property values.

 “This is not a race issue,” she said indignantly.

Regardless, it’s certainly a class issue, and a crime issue.

But Shireen Ally, a sociologist at the University of the Witwatersrand and a resident of Killarney, one of the affected suburbs, said race had everything to do with the suburbs’ reaction.

Anti-black or anti-green?  Often it’s impossible to separate.

At the raucous 2008 meeting, Ms. Ally said she grew angry as resident after resident in the overwhelmingly white audience said the bus project would damage their property values. Ms. Ally, who grew up in Lenasia, a township south of Soweto for Indians, chided residents with cars for not considering the needs of people dependent on public transport.

One in six working women in South Africa is a housekeeper or nanny. Families in the northern suburbs depend on these women, the overwhelming majority of them black, to iron their clothes and clean their toilets. Ms. Ally, who wrote her dissertation on domestic workers –

I’d love to read Ms. Ally’s book, From Servants to Workers: South African Domestic Workers in the Democratic State.  I’ll have to hunt it down.

– said she was disturbed by “the incapacity of these suburbanites to think about it from the perspective of the women they trust their children and home to, the women they call part of the family.”

Obliviousness is not necessarily racism, though.  Just oblivion.

Shortly after 5 a.m., while the suburbs slumbered, Mrs. Hanong stepped out from her small, tidy home in Soweto, a pocketbook dangling from her arm, bound for the housekeeping job she has held for a quarter century.  Just months earlier, Mrs. Hanong, who has never learned to read, was still catching taxis close to home. But her preference for the new buses is so strong that she walks an extra half hour to reach them. They cost about 65 cents each way, a savings of about 50 cents over taxi fare, a considerable sum, given her earnings of $160 a month.

In making that trade, Mrs. Hanong is paying herself about $1.00 per hour, or $25 per month, the equivalent of giving herself a 15% after-tax raise.

The newer buses in Johannesburg offer a smoother ride for workers who commute to wealthy suburbs from distant townships.

Even so, she has to transfer to a taxi to get to Sandton. Transportation still gobbles up a fifth of her salary.

As we saw in driving to the poorhouse, transportation normally takes a fifth of everybody’s salary – it’s just that the poor have less money.

Two hours after she left home, Mrs. Hanong stepped down in Sandton and headed to the townhouse of her employer, who works in a real estate office.

The near-northern business center of Sandton

There she shed her tan dress to reveal a baby blue uniform. She stripped the bedsheets, loaded the washing machine and put the dishes away with a soft clatter. When her boss’s white cat trotted into the kitchen, Mrs. Hanong pleasantly asked him, “Why not have your breakfast?”

From Ian van Coller

Send post as PDF to

[Continued from yesterday's Part 1.]

Continuing the recap of December’s post, during December we looked globally (Dubai’s shadow bankruptcy) and locally (New York City’s public toilets).  Gotham City, the cradle of American apartments, also served as the setting for an Experiment in urban micro-living: Part 1, the pluses, and Part 2, the minuses:

It’s quite clear that the Prokops have made a conscious choice – foregoing large elements of what you and I would consider minimum acceptable living in exchange for security of tenure and controllability of occupancy cost, some potential for appreciation, and above all reduced occupancy cost.  They then have taken the resulting savings and spent it on things they value more than their mousehole apartment.

The welcome mat marks my territory

In making that choice, what have they renounced?

* Children

Unlike cats, they cannot be left alone all day, and unlike dry cleaning, they cannot be parked elsewhere overnight.

* Entertaining guests

She joked that the tiny apartment gets her out of hosting duties and dissuades long-term guests.

“No one ever stays too long,” she said. “It’s too small.”

Am I the only one who hears enforced brightness in their comments?

9. Christopher, 35, and Zaarath, 37, pop open a bottle of champagne.

The Big Apple also hosted a tussle over personal behaviors in the privacy of one’s own home, in Not illegal, merely despised:

And Audrey Silk, the founder of Citizens Lobbying Against Smoker Harassment, a nine-year-old advocacy group, said the trend was troubling from a civil liberties perspective.   “If we’re talking about annoying odors, where do you draw the line?” she said. “What about cooking odors, from fish or curry?”

In A Wild and Crazy Guy (1978), Steve Martin explained how, when asked by a fellow passenger on an airplane, “Mind if I smoke?” he would answer, “No, mind if I fart?”

“It’s one of my habits!”

“Yeah, they got a special section on airplanes for me now.”

These issues of urban cohabitation and coexistence are critical, for during 2009 humanity passed the majority-urbanization mark, homo urbanis overtaking homo agricolas, and whether or not we like it, we are hurtling toward the future city, such as the ultimate future city: Trantor:

Continuing our occasional series on the Ultimate Future City:

The Caves of Steel, by Isaac Asimov, 11/07

The Naked Sun, by Isaac Asimov, 11/07

The World Inside, by Robert Silverberg, 12/07

Diaspar, The City and the Stars, by Arthur C. Clarke, 3/08

Displaying our technology for the universe to see

The half-century in which we are living, which opened in 1975 and will close in 2025, will be without equal in human history for its urbanization.  In both its rate and scale, this fifty years will permanently remake our planet, as homo agrarius gives way to homo urbanis.  We are moving to the cities, and our world will never be the same.

Coruscant from Star Wars, modeled on Trantor

Shifting from the cities to the Mission Entrepreneurial Entities that develop, own, and operate affordable housing in those cities, I reported on my ULI Affordable and Workforce Housing Council meeting, where I moderated a debate on the Low Income Housing tax Credit, and where I also heard from long-time housing consultant Helen Dunlap, who offered Rumfeldian organizational suggestions in Knowing your unknowns: Part 1, real estate, and Part 2, organization and governance:

“Mission” (multiple bottom lines) is achieved when the business works, not the other way around.

Amen.

All you little mission Hulkamaniacs, take note

Too many MEEs think that mission will carry them, and that business principle and systems are to be avoided, at least an allergy, more often a positive infectious rash to be scrubbed out. 

An MEE is a business that pursues mission and redeploys its profits into expanding mission.  Any other orientation eventually fails.

Make the money first, then reinvest it in good works

Freshly back from a gates Foundation convening in Durban, South Africa, I posted what was for me the most personally moving event, my Pictures at an enumeration:

What is important is not principally what happened – it totaled a few hours’ work, and resulted in a stack of papers with information.  Papers that had legal validity to the city of Durban, hence economic, judicial, and political consequences. 

I realized with a shiver that I’d seen this dynamic before – at real estate closings.  The same curious convergence: months of work, negotiations, bringing people together, culminating in a gathering where papers are filled out and signed, then taken to government for recordation. 

Information becomes part of the legal reality.  A bargain is struck, a bargain with consequences. 

In a closing, it’s about property and money and future obligations.  So too in an enumeration – property and money and future obligations.

The city has now taken cognizance of this neighborhood, its people, and their property. 

Enumeration is the inauguration of urban citizenship.

Enumeration creates citizenship rights

Finally, Sherlock Holmes took time out from his intertemporal schedule to explain What makes a good consultant? Attributes of character, Part 3a and Part 3b:

It was always Watson’s place to listen actively

Continued from the previous Part 2b and Part 2a, which dealt with services and activities.]

[A previous trio, Part 1a, Part 1b, and Part 1c, covered the rules of engagement with clients.]

Quick to absorb and process new information

Holmes feared subconsciously anchoring his or his client’s expectations through half-baked theorizing and prescribing.  For that reason, he sought to ascertain and enumerate the whole ecosystem of facts surrounding a particular case before making any deductions:

“You don’t seem to give much thought to the matter in hand,” I said at last, interrupting Holmes’s musical disquisition.
“No data yet,” he answered. “It is a capital mistake to theorize before you have all the evidence. It biases the judgment.”

A Study in Scarlet, Part 1, Chapter 3

Start by examining the evidence

Voraciously he sought data:

“I am an omnivorous reader with a strangely retentive memory for trifles.”

The Adventure of the Lion’s Mane

Is constantly learning

 “Education never ends, Watson. It is a series of lessons with the greatest for the last.”

The Red Circle

So is a blog.

There is yet more to learn, Watson

Send post as PDF to

[Previous Months In Review available here: Nov 09, Oct 09, Sep 09, Aug 09, Jul 09, Jun 09, May 09, Apr 09, Mar 09, Feb 09, Jan 09.]

When the history of our global credit crunch is written, the last two weeks in December will be seen as an outbreak – the Patient Zero, as it were, of an epidemic of sovereign shadow bankruptcies, as posted in a five-part series Sovereign bankruptcy: Part 1, the Dubai double standard, Part 2, the bank has a problem, Part 3, the watershed moment, Part 4, the invention of bankruptcy, and Part 5, whither Islamic finance?:

Everyone’s credit is infected?

This multi-part post covers the upcoming sovereign bankruptcy of Dubai World, a shock of the first magnitude whose consequences that will reverberate for years if not decades.

Part 1 deals with the Dubai double standard of relations between debtors and creditors.

Part 2 reveals while the banking system, and by extension the world, now has a massive new problem.

Part 3 shows why this is a watershed event from which there is no going back.

Part 4 covers why the invention of bankruptcy in seventeenth-century Massachusetts was a critical advance in finance.

Part 5 asks the question, whither Islamic finance?

From the beginning of this extensive post, I’ve been positing that one should ignore all the warm words emanating from the emirates, which are mere palliatives, and instead look at the brutal facts:

1. Dubai World has repudiated its debts and announced a monetary default.

2. Abu Dhabi is not making any commitments to guarantee the shortfall.

3. Creditors have miserable alternatives since they cannot repossess the collateral and will have to sue the sovereign.

4. The enforcement provisions of Islamic finance are untested.

How much cash is that worth?

Scarcely a week later we got a partial answer, as posted in Dubai World: flinching or maturing?:

Capital is the world’s fastest asset, even faster than people.  By announcing its intention to repudiate the debts of its offspring, Abu Dhabi and Dubai are telling the entire world they are tricky counterparties.  People who have choices, and the capital they have, will flee.

Last week, the Islamic capital markets stated clearly that they were fleeing:

We’re afraid of the gnus

Dubai rocked world markets in late November when it requested a freeze on $26 billion of debt payments by Dubai World in order to restructure the conglomerate.

“I think Abu Dhabi saw the adverse market reaction to Nakheel debt restructuring news play out over several days and perhaps decided they had seen enough,” said Saud Masud, head of research at UBS AG in Dubai.

Clearly the AHI blog post was the tipping point.

If David writes one more word …

Analysts said Abu Dhabi’s decision to provide a further $10 billion to Dubai restored confidence in the federation.

With the default, Dubai World had been trying the same trick that George IV tried with his creditors: borrowing against the bond of blood, and seeking to welsh by denying the bond’s validity.

Though many in the capital markets relaxed, in our view it was just the Tip of the iceberg: Part 1, hitting submerged deficits, and Part 2, sinking the currency?:

Ay, there’s the rub – is there any reason to believe Greece will do so?

You should believe that I will lose weight after I eat

The treaty on monetary union banned bailouts of euro members, but senior European officials say there are ways around it.

Rules you don’t enforce are worse than useless.  If the EU does bail out Greece, it will have zero fiscal credibility, and who is to say that Iceland, Ireland, or Portugal will not feel like chumps for their not asking for a bailout? 

One option would be a loan from a financially strong country such as Germany.

Oh, they’d love that.

Sure, let’s lend money to Greece, okay chief?

Another constituency hoping to tiptoe away from accountability is the rating agencies, whose role in all this has been thoroughly documented and who are now hoping to Wriggle out: Part 1, what should happen:

Making this so exasperating is that the solution lies at hand, if only we had the wit to see it and gumption just to do it.  Capital markets are a large multi-player game with ever-changing participants.  Games have rules, and rules must be interpreted, adjudicated, and enforced by referees.  Referees, in turn, must be capable, disinterested, and accountable. 

The rating agencies could be the Referees of Risk Assessment, if their business model were circumscribed to make them capable, disinterested, and accountable.  Like this:

Simple, isn’t it?

It’s easier to remember that way, too

We do need rating agencies:

and Part 2, why it won’t:

Is that milquetoast soft enough for you?

Could you make it less scary,  please?

Academics and former rating agency employees who have been warning lawmakers about the Big Three for years say Congress is tiptoeing when it ought to be charging ahead.  

“I’ve had a few hedge funds call and ask me what I think of the rating agencies as investments,” said Frank Partnoy, a professor of law and finance at the University of San Diego School of Law, who has written extensively on the rating agencies. “If the dysfunctional regulatory structure stays put, the rating agencies soon will be back to business as usual, which will mean a continuing monopoly and sky-high operating margins approaching fifty percent.”

Partnoy’s complaint: so rotten it’s gotta be profitable

Translation: they’ll wriggle out of any meaningful punishment or restrictions.

Can nothing be done?  Look to unlikely heroes:

While Congress may be happy with cosmetic surgery, law enforcement officials are getting more aggressive. Dozens of lawsuits have been filed against the rating agencies, including a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud.

Though it’s hard to believe, I’m rooting for the tort lawyers.

Here’s for the tort lawyers!

At the other end of housing’s spectrum, we dealt with the simplest of questions, like how can we cost-effectively provide public toilets, in the battle of Wetware versus hardware:

Public toilets are the epitome of two classic problems in economics: the free-rider problem and the tragedy-of-the-commons risk.  Port-a-potties are sometimes unavoidable, but no one’s favorite:

Man’s best friend indeed – above and beyond the call of duty

New York City, the cradle of American apartment living, also served as the setting for two other posts:

[Continued tomorrow in Part 2.]

Send post as PDF to