[A full year's Month in Review available here: Dec 09, Nov 09, Oct 09, Sep 09, Aug 09, Jul 09, Jun 09, May  09, April 09, Mar 09, Feb 09, Jan 09.]

A blog is pointillist – sparkly bits of insight (we hope) collected by the roving eye of an intellectual crow.  Yet step back from the dots and you may see a pattern, and patterns are what make ecosystems out of the rhythms of life. 

Fascinating … and logical

That’s what calendar increments like decades are for – to let us take stock.

I opened the new decade by looking back at the old one, with the longest and most substantive post I’ve ever written, seven parts on the decade’s biggest invisible stories:

All of them are important, and if there is only one post of mine you read in its entirety, it should be that one, but as I despair of receiving the undivided attention of our ADD/ Twitter generation, I will succumb to market forces and provide sound bites, starting with Part 1, the perpetual-motion credo:

By no stretch of the imagination was Mr. Raines unusual in the Aughties – nearly every financial wizard, on or off Wall Street, was similarly enraptured with the wealth machine that was the decade’s global capital markets.  It was all driven by the belief that risk could be quantitatively controlled by hedging strategies – a deeply seductive belief.

Tell me again how default risks are not correlated

For that, one needed an unwitting wizard.  Cometh the willful disbelief, cometh the formula.  As I wrote [Posted March, 2009]:

The E = mc² of financial engineering

Guaranteed perpetual motion!

Suppose I offered you a free lunch?  Would you take it?

Between Li’s formula and Raines’s willingness to believe it and massively bet on it with the country’s money for his stockholders’ and his own profits, we were ready an asset boom.  That was amplified by two other forces documented in Part 2, yield starvation and dematerialization of global capital:

When I was a kid, financial capital was represented tangible: gold, silver, currency.  Bonds were bearer bonds, stock certificates.  Actual pieces of paper (that’s not an oxymoron) with embossing, stamping, engraving, or certification of authenticity.  Possession of the scrip was critical to proving no-questions asked credit.

Money, though an intangible concept, through 1999 had a tangible expression.

During the Nineties, many indicia of status dematerialized.  Airplane tickets went electronic (when was the last time you saw a paper one?); so did driver’s licenses.

My identity is an illusion, as is everything else here

Most significant in this dematerialization was that of capital.  From having once had a tangible existence, by the time the Aughties opened, capital was evidenced by matching sets of numbers contained in bank and financial institution computers, making a mockery of the old how-to-steal-a-million caper movie that was a screen staple when we were growing up.

From this vision of money …

… to this, art replacing cash

Now there was plenty of financial-asset demand globally, and the potential for an expanded supply domestically.  To that tinder we needed wizards to strike matches, with they did, as documented in Part 3, tangles in the financial web, with FIN 46 (shielding companies from the dreaded ‘consolidation’) and allowing the explosion in Credit Default Swaps:

Along with thousands of others, I can testify how much accounting brainpower was consumed defining the maximum perimeter of entities in which the Parent had a big economic stake without the dreaded FIN 46 consolidation.  This still goes on today, consolidation being the Thing To Avoid At All Costs.

Simple, isn’t it?  Vinot Kothari’s FIN 46 flow chart

As you can imagine, this led to contortions by which entities sought to avoid having to consolidate.

A total of 470 participants from the US and Europe participated in the survey. Most also felt that the market will adapt itself with new structures which simply cosmetically re-engineer SPEs to fall out of the definitions of the Interpretation.

That was the invisible story.  FIN 46, which sought to make things more transparent, in fact made them more opaque.  While investors basked in the illusion of transparent consolidation, in reality they were absorbing ever more risk.

Our structures have a firm foundation

By mid-decade the economy was humming merrily away, and it seemed the party would never end, but as covered in Part 4, the 2006 crest, two things should have tipped us off: FAS 157 was issued, and Angelo Mozilo began cashing out:

During 2006 Angelo Mozilo, Countrywide’s founder, CEO, and largest stockholder, began selling his positions; in fact, Mr. Mozilo “modified the executive sales plan in late 2006 to accelerate his stock sales. Critics say he sped up them up because he was aware of problems at Countrywide.”

Problems?  What problems?

By mid-2007, Mr. Mozilo was coming under fire, although at the time the smoldering appeared merely fumes and not a conflagration.

[Snip]

Regarding his stock sales, I thought Mr. Mozilo’s explanation credible, said so at the time.  Later I came to feel a complete chump for having done so.  But here’s the invisible story – as far as I know, despite the stock price sliding, there was no more detailed investigation into Countrywide’s business model and finances, if only to rebut the presumption that Mr. Mozilo was cashing out while the cashing was good:

[In 2009] the SEC released emails in which Mozilo referred to certain mortgage products as “poison” and “toxic” at the same time Countrywide was making riskier and riskier moves with its lending operations.

Don’t paste this label on the product, okay?

At the time, Mr. Mozilo’s actions were scrutinized; FAS 157 was overlooked.  That opened the window for the last mover (Fannie Mae) before the world inverted.  As covered in Part 5, the wrong zags, the capping folly was that, as Angelo Mozilo was beetling out of subprime, Fannie Mae (under Daniel Mudd, Raines’s Mister-Clean successor)  was gobbling it up:

Moreover, shifting to riskier securities – moving up the risk curve – meant that the companies could increase their profits by increasing the risk to us taxpayers.  That’s what they did – just at the moment that many (like Angelo Mozilo) were dramatically reducing their exposure to subprime lending, the GSEs increased theirs. 

Where Angelos fear to tread …

[Snip]

Mr. Mozilo, who was closest to the action, was cashing out of Countrywide and cashing Countrywide out of these loans.  Fannie Mae and Freddie Mac, who were further from the risks and from the touch on assets necessary to evaluate and manage those risks, were aggressively buying them from aggressively selling Mr. Mozilo.

Somebody had to be wrong.

They couldn’t all have been right at the same time: Johnson, Raines, and Mozilo

By 2007, we were looking unhappily at a risk curve hit by a seismic shock, with sudden paper writedowns of virtually every financial situation in the world.  That led to the first of many responses.  As described in Part 6, rule changes with the game in progress, to the volatile mix we added new uncertainty:

2007: Repeal of the uptick rule

During the summer of 2007, as the credit crunch deepened and the decline in asset values started to accelerate, the SEC inexplicably did the equivalent of severing the runaway automobile’s brakes [Posted December, 2008]:

Who repealed the uptick rule?!?!?

[Snip]

Aftermath.  Realizable values of structured assets collapsed to fire-sale prices.  Those discounts became the bludgeons of FAS-157-driven writedowns.  One by one Wall Street’s financial pillars – Bear Stearns, Lehman Brothers, AIG, and Fannie Mae – suffered bear raids.  Billions of capital disappeared even as some capital migrated to the raiders.  Finally, in April, 2009, the SEC restored the uptick rule.

Finally, in Part 7, effects not yet visible, I listed the two big invisible stories of 2009 whose importance wouldn’t surface until this year.  One of them (Chairman Bernanke’s reappointment) proved a bit more contentious than I expected – although really, they never laid a glove on him – and the other, although small at the time, is like that first corn kernel to pop in the pan:

2009: California’s shameless IOU issuance

In July, the state of California did an extraordinary thing: it repudiated its debts.

Why pay debts when you can print money?  A California IOU

Instead of paying its bills with cash, the state printed paper, backed by nothing, and ordered people to accept it.

If you or I did that, we would be summarily hauled into court and our property potentially seized. 

Oh, wait – it was the court itself that was welshing.

To be sure, the state dressed up this reneging on its debts with flowery language:

[Snip]

We are living in interesting times.  The decade upcoming promises to be no less interesting.

Does this mean danger/ opportunity?  

With the Chinese holding $800 billion of our paper, we’re about to find out.

With that as the forest, let’s plunge into the trees:

Enlightenment’s in there

[Continued tomorrow in Part 2.]

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[Continued from yesterday's Part 2 and the preceding Part 1.]

In using the New York Times’s superficial examination of the Ingersoll and Whitman public housing properties in New York City to bring out the challenges facing not just these two large properties but the entire legacy public housing inventory, we have so far listed:

If only we could see them that clearly

Challenges facing Ingersoll/ Whitman

1. Illegitimate birth.  The properties were temporary housing turned over to New York by the Navy after World War II.

2. Decades of non-reinvestment.  Our whole public housing delivery system is a Gordian knot catching the properties in a dependency trap: starved for resources.

3. Warrant-of-habitability risk.  A landlord that rents a substandard apartment is liable to the resident for damages, and housing authorities are uniquely vulnerable to such litigation.

4. Brass-ring capital planning mentality.  Scarcity of funding prevented incremental improvements over time, leading to obsolete apartments needing a comprehensive and expensive overhaul.

5. Funding cuts after housing authorities’ plans were made.  Funding promised at one time would be unpromised later, necessitating painful reductions in scope even as costs rose.

Ingersoll and Whitman face three additional challenges:

Getting out of these bond covenants is just the first problem

6.         Resident-relation complexities

Public housing residents are government customers.  Years and decades of observation have taught them to expect promises from their government, and then to be disappointed. 

Anxiety remains high at Whitman and Ingersoll, tenants, elected officials and community advocates said, because unoccupied units have been used by drug dealers, vandals and squatters, and so many apartments have sat empty for so long.

Public housing residents have unusually powerful political voices:

They attributed the delay to … the complicated process of relocating hundreds of tenants with different housing needs at different times.

It’s always easier to renovate a property if the residents are moved safely off-site, but so powerful is the distrust and paranoia within the public housing community that most authorities have long ago acquiesced to the enormously more tortuous procedure of rehabbing with the residents in place, by shuttling them about on the same site:

New Orleans public housing tenants: maybe wrong, never silent

The first tenants were relocated years before construction started. Residents could transfer to other apartments in their developments or elsewhere in the city, or receive a federal voucher that would allow them to move into subsidized private housing.

One would think that a generous offer – move out of a crumbling, decrepit apartment to other public housing apartments (that you approve), or receive a portable voucher and move to an apartment that will take a voucher.  But wait, there’s more!

Lynn Godfrey, a Housing Authority spokeswoman, said the agency had tried to minimize the disruption, in part by paying moving expenses.  “Given the huge mass undertaking and what we will accomplish at the end, the hope is that people will feel that it was well worth it,” she said.

All of this is entirely for the current residents’ benefit, but as we know no act of generosity goes unquestioned:

Yet skepticism — and a lingering suspicion — remains. “It looked more to me like they wanted to get the people in an exodus, to move them out of here as quickly as they could,” said Edward Carter, 76, a longtime tenant at Whitman.

Activists from Community Voices Heard, New York City

That’s utter nonsense, of course.  The property is encumbered by a permanent deed restriction that can be lifted only with HUD consent.  Nevertheless, paranoia strikes deep, fostered by the enemies within.  Here, for instance, is a comment about Ingersoll from August, 2007:

There is a HUGE rumor mill about anything regarding these projects (or any projects). A real estate broker trying to sell a desperately overpriced building across from projects told a friend that, “It was okay to speculate because the Jews had bought the projects and everyone was going to be moved out.” This is a freaking quote.

Seventeen years ago when my daughter was born, my hospital roommate lived in the Whitman houses and she told me – in all seriousness – that Chase was buying out tenants but they were trying to force people out and she knew people who refused to move whose windows had been shot out by the bank.

Another friend, who lives in projects out in Coney Island repeated the same rumor – almost word for word – several years later about the buildings she resides in.

It’s a scary rumor mill anywhere else.

These rumors are ineradicable.  As the Times notes:

An area on the rebound: Fort Greene, Brooklyn

[The renovation plan] has fueled rumors, repeatedly denied by the agency, that low-income residents are being pushed out to convert the buildings into private luxury housing as Fort Greene gentrifies.

Where Fort Greene’s upwardly mobile want to live

Even long-delayed good news barely makes a dent:

Residents received some good news last month, when the Housing Authority held a ribbon-cutting for a $7 million community center on Myrtle Avenue. It had been expected to open in 2004.

7.         Promises made before funding was rock-solid

Confronted with the brass-ring challenges mentioned before, NYCHA elected to proceed with some of its plan:

So far, 611 units have been renovated and are occupied, with construction under way in some buildings but not yet in others.

A 2006 report by the city comptroller, William C. Thompson Jr., found that thousands of apartments at Whitman, Ingersoll and five other developments remained empty longer than necessary because the agency removed units from the rent rolls “well before it had a clear idea of how or when it planned to proceed” with construction projects.

Comptroller Thompson speaks after the fact

That’s easy to say after the fact; I have a more sympathetic view.

People are not numerate; they hear financial changes but have no tactile convertibility between the numbers and the changing scope and expectations.  Thus, when NYCHA promised to do such-and-such provided so-much money came through, people heard only the dish, not the price.

The project was announced in 2002, and work began in 2006. 

More than likely, when NYCHA started, it thought the money would be there. 

The Housing Authority told residents in October 2004 that the renovations were expected to be completed in five years. This past April, officials said the project was instead scheduled for completion in February 2012.

When bad things happen to good economies, the result is scope shrinkage, something residents and the general public want not to hear.

I’m sure I don’t want to hear what you’re saying

Apartments awaiting renovations at both complexes have been vacant for an average of four years, according to the housing agency.

That’s what happens when funding is interrupted.

8.         The pure-public ownership model

We know who should fund it; who should own it?

I’ve written extensively before about the essential housing authority, into which today’s housing authorities should evolve:

Effectively a publicly accountable charitable institution, a housing authority receives public subsidy, via the indirect collection agent of government — if it doesn’t, the system breaks down completely — and deploys it for the public benefit of affordable housing and healthy low-income communities.  That’s the essential function:

We can expand this single goal into a short menu of activities:

Everything else is a technical function, which means it can be contracted, and if it can, it should.

Thus the essential housing authority is a holding company:

Yet today’s typical housing authority is anything but a holding company.  Instead it’s an insular expanding universe unto itself. 

I am a universe unto myself; everything is encompassed within me

The future essential housing authority will be a publicly accountable Mission Entrepreneurial Entity, one that can finance its own improvements, buy and sell its own properties, and contract with private entities to do things at which private developers excel – like construction:

The agency is spending more money to renovate the two low-income complexes than a developer recently spent building a $152 million condominium tower nearby known as Toren.

Much of this difference is explained by the handicaps under which NYCHA operates – an argument to contract out those functions.  It’s much easier to avoid picking up unfunded mandates when you have restricted the government’s role to its essential functions, and outsourced the rest to the private sector.

Michael Kelly, the housing agency’s new general manager, said it had “turned the corner” on the project, which is being accelerated with $108 million in federal stimulus money and which comes at a time when public housing authorities across the country have chosen to demolish, rather than preserve, many of their buildings.

“This level of reinvestment suggests that NYCHA is committed to providing public housing resources for folks for generations to come,” Mr. Kelly said.

If anybody can move NYCHA out of its legacy of command-and-control functions toward its future essentiality, it’s Mike:

Seeing corners around the bend? Mike Kelly, new general manager of NYCHA

He has his work cut out for him:

Challenges facing Ingersoll/ Whitman

1. Illegitimate birth.  The properties were temporary housing turned over to New York by the Navy after World War II.

2. Decades of non-reinvestment.  Our whole public housing delivery system is a Gordian knot catching the properties in a dependency trap: starved for resources.

3. Warrant-of-habitability risk.  A landlord that rents a substandard apartment is liable to the resident for damages, and housing authorities are uniquely vulnerable to such litigation.

4. Brass-ring capital planning mentality.  Scarcity of funding prevented incremental improvements over time, leading to obsolete apartments needing a comprehensive and expensive overhaul.

5. Funding cuts after housing authorities’ plans were made.  Funding promised at one time would be unpromised later, necessitating painful reductions in scope even as costs rose.

6. Resident-relation complexities.  Public housing residents’ fears about being relocated or gentrified cannot be placated except by rehabbing with them in place – adding to the costs.

7. Promises made before funding was rock-solid, leading to painful and poorly understood reductions in rehab scope.

8. The pure-public government ownership model, instead of reinventing into the essential housing authority.

Eight challenges are enough, aren’t they Magic 8-Ball?

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[Continued from yesterday's Part 1.]

Yesterday we visited Ingersoll and Whitman Houses, two large public housing properties in Brooklyn’s Fort Greene neighborhood, where the New York Times showed the obligatory photographs of empty apartments and broken windows before giving an assemblyman a platform to spout complaints about the invisible ‘administrative management’ that makes such a convenient whipping boy.

As an elected official, I wield the flail on whom I choose

Yet, overlooked by the Times and by the fulminating assemblyman, Ingersoll/ Whitman are emblematic of the challenges facing US public housing, which go far beyond one bureaucrat, one property, one city, or even one era. 

Yesterday we identified:

Challenges facing Ingersoll/ Whitman

1. Illegitimate birth.  The properties were temporary housing turned over to New York by the Navy after World War II.

2. Decades of non-reinvestment.  Our whole public housing delivery system is a Gordian knot catching the properties in a dependency trap: starved for resources.

These two are bad enough; what follows makes it even more difficult.

More problems for a pure-public owner

3.         Warrant-of-habitability requirements

While more than 130,000 families are on the waiting list for a city public housing apartment, hundreds of units at the Ingersoll Houses and the adjacent Whitman Houses are vacant — 923 out of nearly 3,500 units, according to the landlord, the New York City Housing Authority, the city’s public housing agency.

Obviously, this is a terrible shame, but for many of these apartments, NYCHA has done the right thing, in view of the warrant of habitability risk.  Simply stated, in New York:

Tenants are entitled to a livable, safe and sanitary apartment. Lease provisions inconsistent with this right are illegal. Failure to provide heat or hot water on a regular basis, or to rid an apartment of insect infestation are examples of a violation of this warranty.  (Real Property Law §235-b)

A vacancy at Ingersoll

If a landlord breaches the warranty, the tenant may sue for a rent reduction. The tenant may also withhold rent, but in response, the landlord may sue the tenant for non-payment of rent. In such a case, the tenant may counter sue for breach of the warranty.

Actually, for landlords it’s worse than this; breach of the warrant of habitability allows enterprising public-interest lawyers to sue for damages.  Housing authorities are a sitting duck defendant – they cannot leave, they cannot file bankruptcy (they’re an arm of the city), they cannot plead insolvency.  NYCHA is confronted with apartments like these:

Someone had pried open the metal door of an 11th-floor apartment at a public housing complex in Brooklyn with what appeared to be a crowbar, leaving a gash near the lock.

Teenagers who broke into a vacant unit in the building recently left the door unlocked.  One evening, there was a bicycle next to the refrigerator, gang graffiti on the walls and a condom wrapper on the floor. The light in the kitchen still worked.

An apartment that suffers too much interior damage goes past the point of operational reparability, known in the lingo as a down unit.  It has to be secured, and often it is cannibalized – fixtures removed to repair other apartments.  With half a century of under-maintenance, it would be surprising if NYCHA didn’t have a significant inventory of down units.

NYCHA’s Chelsea-Elliott housing property

That leads to …

4.         Brass-ring capital planning mentality

When a public housing property’s problems compound beyond its ability to solve them, the housing authority pursues a comprehensive revitalization: one massive upgrade of everything, all at once:

Agency officials defended their handling of the renovations and their oversight of the vacant units, and described the work as the largest public-housing renovation project in the country.

They attributed the delay to the broad scope of the project, which has included combining some apartments in developments that are more than sixty years old ….

)

More of Roosevelt’s legacy: Archdale Village, Boston

Brass-ring thinking is imprinted in public housing authorities because of their dependency schema.  Public housing has no replacement reserve; its properties generate no positive cash flow (that’s why it needs operating subsidy).  It has no ability to borrow long-term and finance improvements.  Thus it is operating sixty-year-old high-rise buildings.  Built before we worried about lead-based paint, much less asbestos, radon, or mold.  Built before broadband, before the personal computer, before television even.  Public housing has not kept up with the evolving modern home.  These properties have missed a half-century’s worth of trends in affordable housing.  Electrical circuitry is beyond obsolete; so too plumbing and piping.  

Now comes the magic moment when just possibly we might get funding.  We have to do everything at once: the physical reconfiguration, the upgrades, the operational improvements. 

The original renovation plans included improving elevator service, adding floors to buildings and reconfiguring some apartments to add space by reducing the number of units per floor.

I knew I’d grasp it eventually

The scope expands, and with it the cost, and the timing, and the complexity:

The Housing Authority told residents in October 2004 that the renovations were expected to be completed in five years. This past April, officials said the project was instead scheduled for completion in February 2012. The total cost has now reached $248 million, nearly triple the $83 million the agency said it would cost in 2004.

Once one has committed to a complete repositioning, not just fixing some down units, arises the next challenge: residents in place.

5.         Funding cuts after housing authorities made plans

Because of their dependency schema, housing authorities basically have no money of their own. 

How the other half lives: Riis Houses, New York City

Anything they need for large-scale upgrading or renovation must come from Uncle Sugar, which exercises the sovereign’s prerogative of insisting on approving the plans in detail.  That’s a challenge because gut rehab of occupied apartments is much more complicated than building new:

The agency is spending more money to renovate the two low-income complexes than a developer recently spent building a $152 million condominium tower nearby known as Toren.

Partly this is due to governmental self-imposed restrictions like union rules, Davis-bacon, and prevailing wage.  It’s also because of protracted delays:

The majority [of the vacant units – Ed.] are unoccupied because of a costly, long-delayed modernization project that has forced ['Caused' is more likely – Ed.] hundreds of tenants to relocate.

I expect that, in anticipation of funding – which was probably promised – NYCHA in turn made promises to residents and began prepping the buildings for renovation by relocating residents on turnover.

Who promises more wins … doesn’t he?

The original designs were changed because of a lack of financing, and the plan to add floors was dropped.

Each time one redoes the design, some sunk costs become unrecoverable, and the overall project cost expands.

Some non-recoverable costs there …

[Continued tomorrow in Part 3.]

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What bureaucrat can we blame for this?

The New York Times story inspiring this post follows the time-honored journalistic formula for spotlighting a problem to deplore: start with an incontrovertibly deplorable problem, chase it with a provocative quote, and skate superficially through the background. 

It’s simple, class; to publish, you must write

Someone had pried open the metal door of an 11th-floor apartment at a public housing complex in Brooklyn with what appeared to be a crowbar, leaving a gash near the lock. No one was home. But then, no one is ever home: Apartment 11D was vacant. So was 1E — insulation covered the door’s missing peephole — and at least two dozen other apartments in the 11-story building at the Ingersoll Houses in Fort Greene.

 “This is a classic case of administrative mismanagement,” said Assemblyman Joseph R. Lentol of Brooklyn. “It’s really pathetic when you think about how long this has taken and how administratively they could have done it better.”

Assemblyman Lentol knows who he wants to blame

While Mr. Lentol is of course entitled to his opinion, he’s wrong.  His explanation fingers the convenient whipping boy of faceless bureaucracy, rather than seeing Ingersoll and Whitman as archetypal of what’s wrong with the Gordian knot of our whole public housing delivery system, and how rehab deferred is rehab denied.

To give Mr. Lentol his due, the situation is utterly unacceptable:

At Ingersoll, the windows of a few empty units have been shattered.

Empty windows are invariably broken, and broken windows invariably lead to broken rules.  A streetscape of physical neglect leads to a society that neglects its laws.

Teenagers who broke into a vacant unit in the building recently left the door unlocked. One evening, there was a bicycle next to the refrigerator, gang graffiti on the walls and a condom wrapper on the floor.

Ingersoll in Fort Greene, Brooklyn

Like many New York City public housing properties, Ingersoll is large:

Raymond V. Ingersoll Houses in Brooklyn has 20 buildings, 6 and 11-stories tall on 22.9-acres with 1,802 apartments housing some 4,532 residents. Completed February 24, 1944, it is bordered by Park and Myrtle Avenues, Saint Edward’s and Prince Streets.

And it’s named after an inspiring figure:

Raymond V. Ingersoll (1875-1940) served as Parks Commissioner and Brooklyn Borough President and was a staunch advocate for Public Housing. He also championed broader public use of parks, playgrounds and beaches. He was instrumental in the consolidation of the subway systems, creation of health centers, a central library building, the Brooklyn College campus, Brooklyn Civic Center site, and better roads and parkways linking Brooklyn to the other boroughs. He was a member of the State Commission which revised tenement and housing laws in 1928-29. Ingersoll strongly advocated non-partisan municipal government. He once wrote: “The dreamer dies, but never dies the dream.” Ingersoll Houses is in Brooklyn.

Dreams notwithstanding, empty apartments are temporary houses of crime; they invite neighborhoods to become slums.

At Whitman, 17% of the units are vacant. At Ingersoll, nearly 35% are empty.

To form a viable civil society, properties need high occupancy.  Anything above (say) 15% vacant has probably double the security risk.  Anything above 30% vacant is asking for a crime plague, and it becomes essential to board up the buildings to prevent vermin human and animal.

“As these renovations have been taking place over the last several years, Whitman and Ingersoll have had a ghost-town-like feel to them,” said Assemblyman Hakeem Jeffries of Brooklyn.

Assemblyman Jeffries worries about ghost towns

No question about it, that much vacancy is a threat

A woman who lives in the Ingersoll building with the vacant unit with the missing peephole said it had been used recently by crack dealers. While crime has increased slightly at Ingersoll and Whitman — with 58 felony assaults and other serious crimes reported this year, as of November, compared with 49 in the same period last year — Paul J. Browne, the Police Department’s chief spokesman, said there was no “crime trend” related to the vacant apartments.

No trend, just chronic crime, and it will persist until Ingersoll is substantial improved.  Will it be?

Michael Kelly, the housing agency’s new general manager, said it had “turned the corner” on the project, which is being accelerated with $108 million in federal stimulus money and which comes at a time when public housing authorities across the country have chosen to demolish, rather than preserve, many of their buildings.

An optimist after thirty years: Mike Kelly

I’ve known Mike Kelly many years; in that interval, he’s run the Washington DC Housing Authority, and before that, the Housing Authority of New Orleans (HANO).  Not only is he a centurion of public housing, he’s among the most capable and  best-respected executives in housing authorities nationally, and currently president of the Council of Large Public Housing Authorities (CLPHA, rhymes with laffa).

A noble motto: wish it were truer

“This level of reinvestment suggests that NYCHA is committed to providing public housing resources for folks for generations to come,” Mr. Kelly said.

How did Ingersoll and Whitman get to this sorry state, with these protracted delays and unfulfilled promises?  The inter-related causes are emblematic of public housing’s challenges.  Ingersoll and Whitman demonstrate why, if we do not comprehensively remake the delivery system, and enable entities like NYCHA to become essential housing authorities, all of public housing will face the Ghost of Christmas Yet to Come with futures like theirs.

The reasons are legion.

1.         Illegitimate birth

Ingersoll and Whitman were developed in haste:

Ingersoll and Whitman are among the city’s oldest public housing developments — both comprise a total of 35 6-story, 11-story and 13-story red-brick buildings completed in February 1944.

What Brooklyn looked like when Ingersoll and Whitman were being developed

They were built amidst emergency:

The upgrade is long overdue, as the buildings have been out of compliance with the buildings code ever since they were transferred by the US Navy to the city. Did you catch that? The city has been running the complex for decades under conditions that it would never allow a private owner to. The shortcomings include everything from a lack of real kitchens in some units to insufficient light and air levels.

New York City family, 1944; the little boy at lower left grew up into …

Hector Elizondo, age 73 in 2009

2.         Decades of non-reinvestment

For the first decade after their completion, Ingersoll and Whitman probably received little upgrading, because New York was in the midst of a major demographic and real estate boom driven by returning GI’s eager to start families. 

Agency officials have said the units were built as temporary housing, with many providing cramped living space, like kitchens in living rooms or hallways.

As I’ve previously written, temporary structures can become permanent; housing constructed mainly for emergency shelter can petrify into the residential landscape:

The temporary usually becomes the permanent, as our humble Quonset Huts show:

The Quonset hut of St. Patrick’s Catholic Church served as the center of Catholic life in Barrow until 1993. The church replaced the hut with a wood-framed structure.

With some adaptability, and possibly some easy-disassembly features, reusable shipping containers could represent the embryo house, giving people a nexus around which to establish a tenure and tenancy and gradually improve and personalize their homes.

Martie Rozkydal and her granddaughter, Julia Nesslage, beside the hut they painted together, 2003

After World War II, New York City adopted rent control as a ‘temporary emergency’ measure, and it remains today, a harmful anachronism that I’ve analyzed and criticized in many other posts.  Public housing’s funding structure is equally anachronistic, as I detailed at length in public housing’s dependency trap:

Public housing in the United States was established in the 1937 National Housing Act. Way back then, there were no state housing finance agencies, no GSEs, no FHA mortgage insurance, no specialized business of affordable housing, virtually no mission-oriented sponsors. Back then, affordable housing meant slums, rooming houses, or tenements.

Chicago, 1910

Like many a chief executive elsewhere around the globe, facing failing urban housing markets, Roosevelt decided to put the Federal government directly into the housing business, so the 1937 Act established a four-point structure:

1. Public ownership. Direct public ownership of the housing.

2. Local ownership. Even if funded from Washington, each property to be owned by local housing authorities.

3.  Up-front grants, grant-based funding of all capital costs, therefore no debt.

4.  Cheap rents, set at the cost of operations.

Later, when it became clear that the poorest of the poor could not afford even the cheap rents, two more planks were added:

5. Mean-tested rents, set at a percentage (initially 25%, today 30-32%) of each household’s income.

6. Federal operating subsidy to bring Net Operating Income back up to zero. (Later, realizing that zero NOI also precludes capital improvements, HUD added the concept of modernization funds.)

For the last forty years, these six elements have formed public housing’s operating paradigm.

Whitman today: recognizable to Roosevelt

In such a structure, and with public housing’s deliberate and unconscionable Federal under-funding over the last decade and a half, public housing has been starved for resources for which no amount of scrambling for short money could compensate.

[Continued tomorrow in Part 2.]

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 [Continued from yesterday’s Part 6 and the preceding and Part 1,  Part 2, Part 3, Part 4, and Part 5]

As 2009 opened, virtually the entire credit-crunch tidal wave had sloshed through the financial markets. 

At least we’re still here

Single-family home prices appeared to be bottoming, albeit at lower levels and with much lower volume.  Homeowners who owed more than their homes were probably worth stoically hunkered down to make the payments, waiting for recovering prices and the inevitable looming inflation to put them back into the black. 

Yet even if residential prices were slowly recovering, the globe itself was still ill, this time with a worldwide recession.

As we’ve seen, plenty of time can pass between the invisible causes and the all-too-visible effects.  While the quickest (HERA’s cornucopia of GSE powers) hit us in the lickety-split interval of under ninety days, most problems lay seemingly dormant for two to four years.  In 2009 we have two invisible causes whose damage has yet to surface, so what follows are technically not reconstructions but predictions.

I predict you will be satisfied

Even so, I’m really confident of them.

2009: California’s shameless IOU issuance

In July, the state of California did an extraordinary thing: it repudiated its debts.

Why pay debts when you can print money?  A California IOU

Instead of paying its bills with cash, the state printed paper, backed by nothing, and ordered people to accept it.

If you or I did that, we would be summarily hauled into court and our property potentially seized. 

Oh, wait – it was the court itself that was welshing.

To be sure, the state dressed up this reneging on its debts with flowery language:

1. What is a registered warrant?

A registered warrant is a “promise to pay,” or an IOU, that is issued by the State when there are not enough funds to pay all of its General Fund obligations. Registered warrants bear interest and are redeemable by the State Treasury only when the General Fund has sufficient money.

Translation: “I will pay you when I have the money – not before.”

Now make that ask at the barrel of a gun

If the Legislature and Governor fail to enact budgetary solutions that provide enough cash for the State to pay all of its bills by July 2, the Controller will begin issuing registered warrants. Assuming there is adequate cash in the Treasury, those warrants may be redeemed on October 2, 2009. 

Translation: “You may think you’ll be paid by October 2, but I may make you wait again.”

At the time I thought this utterly outrageous and nothing more than genteel extortion.  I still think so.  When a government filches money from its citizens, merely because it can, there is no bright-line distinction between that and paying the mafia protection money.  Both are obtained by use of fiat force, without law and without remedy. 

Statutes?  Statutes?  We don’ need no steenkin’ statutes!

Though I’m no Constitutional lawyer, California’s action ought to be unconstitutional under the Fourth Amendment (unreasonable seizure) and the Fifth Amendment (taking of private property for public use without due process and just compensation).  That’s little comfort now, for California has simply converted or confiscated the property.  (The state subsequently compounded its action by doubling the mandatory withholding, explaining blandly that taxpayers would recover the money some months later – without interest, of course.) 

When the history is written, California will be seen as only the first state to snatch money from its counterparties – citizens, lenders, and investors.  Dozens more will follow (New York is likely on deck.)

What do you mean we can’t afford it?

Why did California go to such extremes?  Because it is bankrupt.  As I wrote over at CAS Financial, my for-profit US consultancy [Posted December, 2009]:

Every American state, and most American municipalities, will face service cuts as the rosy asset-based revenue projections they made in prior years fall short. 

Dubai and the California will each go ’shadow bankrupt’ – a term I’ve just invented to describe slow unacknowledged insolvency. It used to be we had zombie banks; now we have zombie states.

As a thought experiment, California has already met the standard “Event of Bankruptcy” definition contained in most partnership agreements – acknowledgment in writing of inability to pay its debts via the issuance of those questionable IOUs.

“Now, California, you’ve got to ask yourself one question”

California has also started unilaterally taxing its citizens without legislation, administratively doubling employers’ required withholding of state taxes (a compulsory interest-free loan). Other states will be driven to similarly dubious measures.

“Do I feel … lucky?”

As I posted some weeks ago in the context of Dubai World, bankruptcy is an important invention, a valuable construct in a healthy financial ecosystem.  Just as death of individual creatures helps the ecosystem flourish by allowing for periodic refreshment and renewal, and survival of the fittest, bankruptcy is the unpleasant but final resolution of an unsuccessful financial creature.   When the sovereign is involved, however, the bankruptcy has to have clearly defined rules to which the sovereign adheres, otherwise failure to pay degenerates into a primitive tussle. 

If a state uses its police power to elude accountability for its own inactions, then the state is operating not under a rule of law but a rule of might and privilege.  This is one of the myriad reasons why I hate rent control – it is the state using police power to confiscate people’s economic property without compensation, and in the process to undermine urban neighborhoods.

Once the rule of law is broken, capital flees and hides, all the faster now that capital has de-materialized; see Part 2.  The foundations of global finance totter.

Dubai World’s announcement of its unilateral suspension of debt service payments of over $50 billion in Islamic-finance bonds will be a globally seismic event.

Communism fell because capital is uncoerceable; capital (and the productive people who grow an economy) must be coaxed and wooed.

Top marry a prince, miss, one must kiss a lot of frogs

The globe’s real pandemic is not H1N1 but the gross overextension of social welfare benefits (medical, retirement, unemployment, the whole safety net) beyond state’s current ability to pay.  During the next five years, hundreds if not thousands of cities, states, provinces, and countries that are now technically insolvent are going to have to reel in their spending habits.  They will choose from the following unpalatable and limited menu:

Overtly, through legislative changes announced to their citizens.

Coercively, through involuntary taxation or confiscation.

Abruptly, through default and bankruptcy.

Underhandedly, through conscious inflation.

Ruinously, through hyperinflation.

But the insolvent governments must do something.  The Law of Economic Gravity will not be denied.

Expected aftermath.  As with so many trends, California is merely the first.  Other states and nations will follow – next up, New York City and New York state. 

In the 21st century, the principal differentiator between states that prosper versus states that decline may well be how they deal with their insolvency.

Be careful out there, okay Uncle Sam?

2009, August: President Obama’s reappointment of Ben Bernanke

Last August, in the middle of an otherwise sleepy summer haze, President Obama did a startling thing.  Calling an impromptu press conference, tieless and with his tieless nominee, he pledged to appoint Federal Reserve Chairman Ben Bernanke to serve a second term:

I’m focused on continuity with Ben

The President was under no deadline pressure.  The nomination could not be formally submitted until December and Mr. Bernanke will not be reconfirmed until January.  Nor was Mr. Bernanke’s appointment inevitable: former Treasury secretary and now Obama economic advisor Larry Summers was widely believed to be interested in the job.  Chairman Bernanke had no ties to Mr. Obama: he was President Bush’s choice, you will remember, himself appointed on a platform of continuity:

“If I am confirmed to this position, my first priority will be to maintain consistency and continuity with the policies established during the Greenspan years,” Ben S. Bernanke said today.  [October 24, 2005 – Ed.]

President Obama acted when he did to calm the financial markets with the virtue of not changing horses [Posted August, 2009]:

As I’ve posted at length before, I believe that the Paulson-Bernanke-Geithner triumvirate’s aggressive actions in spring 2008, banking on value, basically staved off the Second Great Depression. It was a coup over three days, a coup both in the sense of masterstroke and that of power grasp, and it was essential, because the world was watching Washington.

Megalomaniac? Me?

Ever since then, Mr. Bernanke’s been managing against depression, and he’s been a money-supply expander.

When will he reverse?

“Now Ben, I’m showing you this courtesy, you’ll remember it, won’t you?”

If the economy recovers as anticipated, Mr. Bernanke is expected to move – probably not until next year – to raise interest rates and tighten credit to avoid inflation. History suggests that moment will arrive sooner than many elected politicians and White House advisers prefer.

Like Supreme Court justices, the Fed chairman is independent once appointed, but must be appointed. Unlike Supreme Court justices, Fed chairs serve for a fixed term (four years) that often straddles a change in presidency.

Moreover, with another four-year term in hand, he may feel he has a freer hand to take actions the White House and Congress don’t support.

Of course he will. In fact, I – and probably most of the financial markets – am counting on it.

You think I’m expanding … maybe I’m contracting

As many including the clever Tyler Cowen have pointed out (snips removed), both inflation and interest rates are suspiciously low:

It’s all about screwing my future, isn’t it?

Right now banks are earning their way back into profitability by playing the spread.  They’re paying close to zero on deposits and earning fair sums on long-term loans.  Perhaps this term structure is sustainable because people are expecting little inflation in the short run but moderate inflation in the longer run, plus there is some risk on the loans.  Here is the key point: from the bank’s point of view, what is the correct measure of the real rate of interest? 

When you’re near the bankruptcy or nationalization constraint, it’s often nominal profits that matter (relative to fixed nominal liabilities, accounting standards, capital standards, etc.), not “real profits” defined relative to the CPI.  In sum, maybe three percent expected inflation conflicts with the desire to rapidly recapitalize banks through maintaining a wide interest rate spread.  Maybe we need that zero nominal short rate, or at least the Fed thinks we do.

It means that “Main Street” is paying for “Wall Street” (forgive me the use of those awful terms) in at least two ways: high unemployment and inability to earn much on one’s savings.  If the bank mess isn’t cleaned up soon, heaven forbid.  The spread, as a means of restoring bank profitability, won’t last forever.

See those huge real interest rates 1981-85?  They’re coming back … soon

Expected aftermath.  Long, long ago, an investment professional in whom I’ve always had confidence told me, Adjusted for inflation, no government bond has ever yielded above par.  That is, no matter what rate the government pays you on its bond, the value of those future payments is less than the cash you started with.  The reason is simple – government influences the inflation rate.  So while it may pay you the stated interest, it has always deflated the value of those payments faster. 

Chairman Bernanke is way too smart and too well informed not to know this, and in fact to be quietly counting on it.  He’s lying low now – all the descriptions are affable, mild-mannered, non-confrontational – because like his predecessor Alan Greenspan, he knows the Fed chairman’s world is divided into two periods: when one is seeking appointment, and the rest of the time.  In the former, one plays nicely with the other children and does nothing to offend or call attention to oneself.  In the latter – which is most of the time – one acts as one thinks best with neither warning nor justification. 

Chairman Bernanke wants to preserve not just his job, but also its clout – meaning the Fed’s independence.  Once he has that, I believe he will set out to raise interest rates, and inflation, as the sole means of curtailing our overextended government:

Those are CBO projections, meaning non-partisan and probably a tad optimistic

Those debt projections are inflation-adjusted

For all our sakes, I hope he succeeds – in reconfirmation, in preserving the Fed’s independence, and in putting the spurs to interest rates and inflation as the essential means of protecting the dollar, the public fisc, and the US’s national economic health. 

I think he will.

Summing up.  It was an eventful decade: ten years’ events, fifteen huge invisible or underappreciated contributory causes:

It took all three hands to count the fifteen causes

We are living in interesting times.  The decade upcoming promises to be no less interesting.

Does this mean danger/ opportunity? 

With the Chinese holding $800 billion of our paper, we’re about to find out.

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