With any luck you’ll die soon: Part 1, Not dying on schedule

August 27, 2015 | Actuaries, Bankruptcy, Cities, Doublethink, Illinois, Investment, Municipal bankruptcy, Pension funds, Principal-agent risk, Real estate taxes, Speculation, US News | No comments 170 views

By: David A. Smith

‘Tell me,’ he said, ‘how soon will they shoot me?’

The longer a retiree lives, the more he or she should save for retirement, so if you’d like to save less today, plan on dying sooner tomorrow?


“I’m not scared of dying?”

Principal sources used in this post

The Wall Street Journal (2 June 2015; brick red font)

New York Times (8 July 2015)

New York Times (July 10, 2015; forest green font)

Even better is to talk someone else into funding your retirement, as long as you want to live, based on that person’s belief you’ll die soon, even if you know you intend to live longer.  The moral hazard risks of this have dawned on even the New York Times (8 July 2015):

Bad Math and a Coming Public Pension Crisis

By Mary Williams Walsh

Busted US governmental entities appear to be Ms. Williams Walsh’s beat: she’s written regularly on Puerto Rico, Illinois, and pension issues.

When Jim Palermo was serving as a trustee of the village of La Grange, Ill., he noticed something peculiar about the local police officers and firefighters.  According to pension tables, they were not going to live as long as might be expected,


Why would the police and firemen be projected to die so rapidly?

Mr. Palermo has stumbled into the land of pension-fund doublethink.


And I’ll never grow up, either

Doublethink depends on horizons beyond which one is allowed not to think and where the sun never shines. 

Important sources relevant to public-employee pension funds

California’s self-tying knots (February 27, 2012; 5 parts)

[San Bernardino] Innumeracy precedes insolvency; December 4, 2012; 4 parts)

[Detroit] The fall of the Roamin’ Empire (September 25, 2013; 5 parts)

Stock-taking (October 15, 2014; 2 parts)

[Detroit] A fleeting miracle? (December 31, 2014; 2 parts)

[Detroit] Doublethink pension funding (January 5, 2015; 10 parts)

In re City of Stockton (pdf, also available in text here), issued February 5, 2015

[Stockton revitalization] Folly or catalyst? (May 13, 2015; 3 parts)

[Stockton: The curse of the gray PERL (June 9, 2015; 9 parts)

For the doublethinker, the horizon is information.  Any doublethinking will be encoded in jargon – comprehensible to other dialect-speakers but unintelligible to outsiders – that under no circumstances may be translated into plain speech.


So far, so good

For the beneficiary, the horizon is temporal, the unpredictable (and therefore unquantifiable) future.  If no catastrophe is certain within the temporal horizon, why worry about anything beyond that?


Nothing to worry about, as long as you feed me

For both groups, all future catastrophes are implicitly equivalent, so one might as well choose whatever works best, right here, right now.


I’m Walter Blunt – right here, right now

That mentality prevails until those who have to pay run out of money, or until they wake up to the imminence of inability to pay.

After Mr. Palermo dug into the numbers

Mr. Palermo’s no yokel; he’s “a director and securities analyst with Chicago Equity Partners,” which is “a multi-asset class investment platform with approximately $10 billion in assets under management.”


Advising on $10 billion of other people’s money; now advising on his own

– he found that the actuary — the person who advises pension plan trustees about how much money to set aside — was using a mortality table from 1971 that showed La Grange’s roughly 100 police officers and firefighters were expected to die, on average, before reaching 75, compared with 79 under a more recent table.

How would you feel if, after you’d taken out your loan, the bank wrote you saying it had decided to extend the loan’s maturity four more years, and you’d be making the same payments, just 48 more of them?


Four more years?

As we saw when exploring France’s en viager housing arrangement, annuities are the temporal mirror image of mortgages:


Turn a mortgage inside out and it’s an annuity

Like a mortgage in reverse, the longer the annuity runs, the more you need up front. 

When actuaries calculate the numbers for a pension plan, mortality rates are a powerful hidden factor. If an actuary predicts the workers will live to an old age, it means they will be drawing their pensions for more years. That, in turn, means the employer should set aside more money up front, to keep from running out later.

For public-employee retirees, the annuity’s term is the same as the en viager resident’s – the rest of your natural-born life.

Assuming shorter life spans reduces annual contributions and frees up money for other things, like bigger current paychecks.

Shenanigans like Detroit’s gratuitous thirteenth-month bonuses, San Bernardino’s benefits boosting, or anything to do with CalPERS.

And if the plan bases pensions on pay, as those in most American cities do –


Not trusting her readers to know what a ‘defined benefit’ plan is, Ms. Walsh chooses to skip over that after the emergence of ERISA (which doesn’t apply to public entities), private employers all shifted to defined-contribution (like everyone’s 401k), while the public employee unions clung to their defined-benefit plans – almost as if they knew they were getting something better than they should.

– shortening the workers’ life spans on paper could lead to both fatter paychecks now and bigger pensions in the future.

Pay me now and pay me later – what’s not to like?  Especially when it wasn’t the employees’ risk, it was the taxpayers – and the taxpayers didn’t know they were taking this risk.

In La Grange’s case, those four years meant tens or hundreds of thousands of dollars to each retiree.

To each retiree means from the taxpayers.

But if more workers are retiring and not dying on schedule –

Retire earlier, live longer; isn’t that what they’re encouraged to do?


– it can be a recipe for financial disaster.

Who could have been so dumb as to let the village agree to this?

The recommendations made by pension actuaries, like which mortality table to use, are largely hidden from public view, but each decision ripples across decades and can have an outsize effect.

As we saw in California, CalPERS made very sure that the public employee unions who were its economic bosses would be able to choose the actuaries, and that no one could remove them – thus guaranteeing that they could overload the pension system at will. 


You can’t remove us

On Thursday, a panel of senior actuaries will consider whether to update, or elaborate on, the existing actuarial standards for public pensions.

Belatedly, the numerate have groggily awakened to the many-hundred-billion-dollar fleecing they have allowed to happen to them.


Oh, my god, what did I sign last night?

The pension-fund madrigal

A fraud for many voices

[To be sung slowly, with rising triumphalism]

[Actuary] We defrauded you on the cost of making promises.

[Fund manager] We defrauded you on your ability to pay for future promises.

[Public employee unions] Based on our frauds, you made the promises.

[Accountants] Then you caught on to our fraud]

[Public employee union lawyers] Too bad you can’t rescind your promises.

[All]  Ha ha.  Ha ha!


And ha ha ha!

And ho ho ho!

You’re doomed and damned

And now you know

[Continued tomorrow in Part 2.]

Double-entry urbanization: Part 3, 1J = 1A + 1C

August 26, 2015 | Affordability, Apartments, Berlin, Cities, Economic development, Homeownership, Housing, Infrastructure, Land value, Markets, Rental, Supply and demand, Urbanization | No comments 83 views


By: David A. Smith

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

Any object, wholly or partially immersed in a fluid, is buoyed up by a force equal to the weight of the fluid displaced by the object.

 – Archimedes’ principle of buoyancy


Urban displacement is inevitable

While Philip Oltermann, Anglo-German correspondent of The Guardian (11 February 2014) [Author’s loaded phrases in boldface red , occasionally compared with a journalistically appropriate alternative in boldface green] either was ignorant of the First Law of Urbanization and Economics – rising city yields rising property values – or despaired of its consequences, and that blinded him to the Second Law, whose implications are unquestionably worse – falling property values = declining city – even though the city about which Mr. Oltermann wrote, Berlin, is a perfect century-long laboratory of a city on the rise, its fissure, its fall, and now its rebirth.


For nearly two centuries, people have been misunderstanding what I wrote … are you any different?

Multiply the First Law’s impact on Kopenhagenerstrasse 46 by several hundred other properties, and the result is a Hegelian synthesis that demonstrates the Third Law of Urbanization and Economics:


The back courtyard at 46 Kopenhagener Strasse, Berlin. Under the guise of ‘renovations’ to make buildings more environmentally friendly, landlords are pushing up rents.

4. Successful economies require continuous affordable housing investment

Unlike the First and Second Laws, which are primarily descriptive, the Third Law contains an implied imperative of action:

The Third Law of Urbanization and Economics

1J = 1A + 1C

Add +1 Job to the economy = Add +1 Apartment and +1 Commute

In a rising city, jobs are being added, and as they are, government must enable that growth to be sustainable by adding affordable housing and effective affordable transportation. 

According to Hanover’s Pestel Institute, the German capital needs an additional 500,000 affordable homes, but the city hasn’t built new social housing since the early 2000s, and at the current rate it would continue losing around 4,500 [affordable] homes a year.

The homes aren’t being lost, they’re being upgraded, and when that happens, they are gained by middle and upper-income people; they are lost only to the poor.

Currently, the city senate claims to have found funds to support the building of around 1,000 affordable homes this year. But whether they will be in the centre or towards the Brandenburg outskirts, remains unclear.

Of course they’ll be where it’s cheaperon the outskirts – unless the Berlin government has the good sense to develop a proactive and well calibrated inclusionary zoning or linkage policy.  Now’s the time to do this.

Berlin’s social housing stock is falling just as the demand is rising.

That is not a ‘just as’, it’s the compound outcome of the First Law and Third Law acting together.

Now many parts of Prenzlauer Berg look more modern than those in the old west of the city.

It’s called ‘urban renewal.’


Last squatters’ building before renovation during “Careful Urban Renewal”

The real threat facing Berlin at the moment, says Andrej Holm, a sociologist who writes a blog on Berlin gentrification, is not gentrification, but “gentrification without a rise in living standards”.

Being a sociologist, Mr. Holm can be forgiven his ignorance of the First Law, and I am confident he would embrace the Third Law and its imperative: Growing societies need affordable housing.  And as affordable housing does not exist in economic nature, it is created only when government plans for and funds affordable housing.

“The danger for Berlin is not that it will become like London, but that it will become like Paris, with the poor and elderly carted out to the edges of the city”, says Andrej Holm.

Mr. Holm can also be forgiven for not understanding Paris’s urban-housing dynamics or the history of its public housing high-rises.  They were built in the periphery as Paris expanded, so while the poor wound up in hideous isolation, they got there on move-in, not through urban renewal.

In upcoming areas such as Prenzlauer Berg, Neukolln and Kreuzberg, there have been numerous reports of landlords abusing the “energetic modernisation” rule: flushing out old tenants by announcing expensive renovations, only to then immediately put the flats on the market at a higher price without having made any significant improvements.

Since a number of these cases have gained attention in the media, the German government has promised a crackdown on such practices.

If Mr. Oltermann has his facts and his law correct (I’m skeptical because this sounds like oral history, which is always embroidered), then that is fraud and should be prosecuted.


Of course, such fraud possibilities are usually a side-effect of an overly-regulated system designed to suppress the market, and thus likely to be laws nullified more often than they are observed, but even so, if it’s the law (even an unwise one), it should be enforced.

The coalition agreement between Angela Merkel’s Christian Democratic Union party and the Social Democrats includes a pledge to bar landlords from signing new leases with rents that are 10% above the neighbourhood average, according to the guide to rental rates, the Mietspiegel (literally meaning “rent mirror”).

That’s a curious form of ‘soft rent control’, in that it will act (potentially) to slow the rate of increase per change, but probably result in shorter-term leases resulting in more frequent rent increases. 

Another cap would limit the period over which renovation costs can be passed down to tenants to 10 years – currently they can be passed down indefinitely.

Sunsetting rent increases approved to fund capital improvements is a step on the road to perdition (judicial rent control) because it makes no investment sense; it treats money being spent not as adding to the useful life of a building but as a maintenance surcharge, based (insofar as it has a logical basis) on the notion that after the ten years, the improvement will have ‘been paid for’ and will keep running, without obsolescence, without maintenance.  It would also be a nightmare to administer and track, as different improvements would overlap in time, and would entangle the city government in constantly oversight and quibbling with landlords and tenants.  Even New York City knows that (1) if you want affordability, provide government incentives (such as 421a tax abatements), and (2) such incentives should have a long running period (like 25 or 35 years).

Whether such proposals will solidify into legislation remains to be seen. Both investors and gentrification critics like Holm remain sceptical. They predict a gradual decline of the German tendency to favour renting and a growth in home ownership, especially in trendy areas such as Prenzlauer Berg.

Good God – homeownership?  Is nothing sacred?


Finally Mr. Oltermann stumbled upon the right question:

The poor and the elderly will be unaffected by the new rent cap – what they need is housing which is not at, but well below, the neighbourhood average.

As a consequence of the Third Law of Urbanization and economics, affordable housing always costs money – and that money must come, at scale, from government.  The sooner Berlin acts pro-actively, rather than reflexively, the better. 

NB: On Jun 29, 2015, Mr. Christmann posted that:

Just 4 month after sale launch, the last apartment in Kopenhagener Strasse 46 found new owners.  

Gotta love that circumlocution, as if the apartment was a lost soul desperately hoping to be adopted by a charming family.


Yes, we’re taking you to live with us in our magic castle at 46 Kopenhagenerstrasse

We congratulate our customers and are happy to handover the first finished apartments already in September.

Ignorance of the fundamentals of double-entry urbanization invariably leads populists (whether citizens or elected) into foolish first reactions, as the Guardian (1 June 2015) reported last month:

Berlin has become the first city in Germany in which rent-control legislation has come into force in a bid to put the brakes on some of the fastest rising rents in Europe.

From Monday, landlords in the capital will be barred from increasing rents by more than 10% above the local average. Such controls were already in place for existing tenants but have now been extended to new contracts.

Though the law may buy time for the City of Berlin to develop appropriate land-use and housing affordability incentives, if it’s regarded as a solution rather than a stopgap it not only won’t work but also will make things worse.

If the accounts do not balance, “that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you.”

– Luca Pacioli,


It says so right here in the ledger

Double-entry urbanization: Part 2, DPV = DI + DM = DE = DC

August 25, 2015 | Affordability, Apartments, Berlin, Cities, Economic development, Homeownership, Housing, Infrastructure, Land value, Markets, Rental, Supply and demand, Urbanization | No comments 263 views

By: David A. Smith

[Continued from yesterday’s Part 1]

For every action, there is an equal and opposite reaction.

– Newton’s Third Law of Mechanics


It used to be so cheap to live in London – not any more

As we saw yesterday, the first law of urbanization and economics proves that when a city is rising, so too are its property values, a phenomenon which came as an unpleasant surprise to Philip Oltermann, Anglo-German correspondent of The Guardian (11 February 2014), [Author’s loaded phrases in boldface red , occasionally compared with a journalistically appropriate alternative in boldface green] even as he likewise proved himself unaware of its contrapositive, the se4cond law of urbanization and economics:

2. DPV = DI + DM = DE = DC

Just as rising city creates rising property values as an eventual outcome, when the same forces are operating in reverse, the essentiality causality also reverses.

The Second Law of Urbanization and Economics

DPV = DI + DM = DE = DC

Declining property values = declining incomes and declining maintenance = declining economy = declining city

Urban property values decline only if the income the owner can receive (directly as a landlord or indirectly in occupancy cost a homeowner ‘pays to himself’ in the form of mortgage and real estate tax payments) drops, and when that happens the owner cannot keep maintaining the property, so it too declines.

The endgame is property with negative value that is eventually bulldozed into urban fallow.

In the rest of Europe, Berlin still enjoys a reputation as a renters’ paradise. Without an appropriately sized airport –


It’ll be super great … whenever it finally opens

Even today Berlin is shy a global airport, through what many are calling a Greek-level fiasco.

– and a financial industry to drive up house prices

Gee, and here I thought the financial sector created high-paying jobs.  Imagine my surprise at discovering it actually exists simply to drive up house prices!


It all makes sense now

– the German capital has for centuries been a cheap place for Europe’s bohemian and artistic avant garde to live.

I don’t believe Mr. Oltermann’s assertion; rather, Berlin has been a cheap place to live for the seventy years solely because it was forcibly divided, then dethroned as the nation’s capital in favor of Bonn, ‘a small town in Germany,’ and left behind in the Wirtschaftswunder by which West Germany rebuilt its economy in Krupp’s former empire


The German arms dealer photographed by the American Jew

– so that in 2011, Matt Yglesias of Slate wrote:

During the Cold War, it was doubly-built as the industrial center of East Germany and as a subsidized showpiece of the superiority of capitalism in West Germany. Then comes reunification and it turns out that all the business in Germany is conducted in Frankfurt or Munich or Hamburg or the Rhine-Ruhr area and now you’re left with this massively overbuilt city. The result — extremely low rents compared to the western world’s other major capital cities and a vibrant/ innovative food/ tech/ scene that’s the envy of the world.

This is all true, as far as it goes, but it’s worth thinking a little bit harder about.

For one thing, if legacy structures and low rents per se were the key to success then Detroit would be the best city in America.


Historic structure, downtown Detroit: for rent, cheap!

As Matt deduced, it’s all about the economy, or to be more precise, what has the economy done for us lately?


Not only did the partition of Berlin severely wound the city’s former economic model, it mortally wounded East Berlin, with the result that reinvestment did not slow, it stopped dead.

Twenty years ago, parts of now trendy Prenzlauer Berg used to have streets without streetlights, apartment blocks that only had outdoor toilets, and flats heated with coal ovens.

Thanks, Communism!


Even if we were open, we wouldn’t have anything you’d want to buy

Ottmar Mayer, a 73-year-old pensioner who lived in the rear building, used to pay around €370 a month for his three-bedroom flat – now he was suddenly looking at over €1,200. “Well people, shouldn’t we just accept this very humane offer and finally live in a luxury home like normal people?”, he wrote on the apartment block’s own blog in September.  His sarcasm may have masked a genuine anxiety.  A month after writing his blogpost, Mayer died from the result of a long-running heart problem.  Neighbours say he had been having trouble sleeping.

Maybe he’d been freezing to death from an unheated flat, or from visiting the outdoor toilet each night.

Stories like Ottmar Mayer’s are neither new or rare. Many elderly men or women who are forced to move out of their three-bedroom flats because of “renovation” measures realise that they can’t afford a one-bedroom flat in the same area.

Mr. Oltermann’s use of score quotes around renovations calls to mind those rent control’s lucky perchers who rationalize their antiquated plumbing and lack of amenities as ‘therapeutic’ or who darkly suspect that a landlord wanting to improve his property is simply a stalking horse for his real motive – evicting tenants just for the fun of it.


Never forget, darling, that De Ville means ‘of the city’

3. You can’t get what you don’t pay for

Because people value only what they pay for, including their government, they tend to forget that what you can’t get what you don’t pay for.


I can’t always get what I want?

Mortgages have traditionally been hard to come by in Germany –

I know very little about the German housing finance and delivery system; I do know they are inordinately proud of their bausparkassen system, which I understand is akin to the old pre-national-baking model of local S&Ls with deposit-based lending.  The result is highly safe (which Germans like) but also leads to constriction of credit, making home ownership more difficult.  Whether that’s a bug or a feature depends, I suspect, on the system in which you grew up and how that affected your perception

– and tenants are still relatively well protected by the law.

In East Germany, those are legacies of socialism; in West Germany, I suspect that the low homeownership rate led to the emergence of a strong ‘public utility’ model of long-term rentals – and we know that high-density growing cities have much higher proportions of rental accommodations than homeownership, which makes more sense in suburban and especially rural settings.

Accordingly, home ownership rates, already low across Germany, are even lower in the capital: in 2011, 15.6% of Berliners owned their own place, compared with 49.5% in London.

Recall too that for nearly half a century, Berlin wasn’t Germany’s capital; it was a cloven relic of a defeated reich. 


Red Army troops waving the Soviet flag atop the Reichstag, May 5, 1945

Communism sought to kill the grand old Berlin –


Beating the second attempt to kill Berlin: C-47’s flying supplies in on the airlift, 1948

– and the city was liberated twice: once from the Nazis in 1945, and then from the Communists in 1990 (at a cost of somewhere between $1.5 and $2.5 trillion).


If we can’t kill Berlin, perhaps we can destroy its economy

Nearly a half-century of un-investment and disinvestment left the former East Germany in a sorry state, and while Berlin’s revival is to be welcomed, with that revival comes the First Law of Economic Urbanization: as the city’s economy rises, so does its built environment, and that built environment’s property values:

At 46 Kopenhagener Strasse, such measures are likely to come too late at any rate. A few tenants have rejected the owner’s renovation measure and may end up facing their landlord in court.  

With the benefit of hindsight, we know that the renovation went through:

Others won’t have the stomach, or the financial means, for a big fight.  

They may well also have had no legal case to stand upon, in a hundred-year-old building whose systems hadn’t been upgraded in six decades.

Last weekend at No 46, the first family decided to move out.

A shrewd developer would have lubricated the turnover with relocation payments – and a shrewd government would recall, and act upon, the Third Law of Urbanization and Economics:

[Continued tomorrow in Part 3.]

Double-entry urbanization: Part 1, RC = RE = RI + RR = RPV

August 24, 2015 | Affordability, Apartments, Berlin, Cities, Economic development, Homeownership, Housing, Infrastructure, Land value, Markets, Rental, Supply and demand, Urbanization | 1 comment 198 views

By: David A. Smith

A = L + OE

– The fundamental accounting equation

As first documented in 1494 by Frater Luca Bartolomes Pacioli


The father of accounting, or so they say

Nothing in the universe acts without impact; all actions have consequences; and all changes to one side of the ledger likewise impact the ledger’s opposite side. 

Despite this concept being self-evident, people have a magnificent capacity to forget it when inconvenient, such as in the relationship between a city’s physical desirability (its built environment) and its economic desirability (its cost of living), which will come as a surprise to Philip Oltermann, Anglo-German correspondent of The Guardian (11 February 2014):


You could not possibly surprise me

Kopenhagener Strasse is a quiet street in the Prenzlauer Berg district, just a few metres east of where the wall used to run.

Because Mr. Oltermann (born 1981) is too young to remember life beforehand, his casual reference to ‘the wall’ treats as both abstract history and uncaused effect the state of Prenzlauer Berg at the time his story begins – and in so doing, he is oblivious the convenience of his choice of neighborhood to typify what he believes is a GAIA (God-Ain’t-It-Awful) trend.  I went looking for the neighborhood’s history, and in three minutes found what I expected to find:


Third right, fourth left’

Prenzlauer Berg is not just ‘any neighborhood in Berlin,’ it may well be the neighborhood most poised for dramatic appreciation in Berlin, and by extension in Germany, because it has been emerging from half a century of disinvestment:

Most of the tenement houses that flank the cobbled street here were built during Berlin’s big push for industrialisation in the late 19th century.


An expanding city for Bismarck’s and Wilhelm’s envisioned reich

In fact, if the Wikipedia (likely translated from the German) is correct, Prenzlauer Berg went through exactly the same urbanized overcrowding that is endemic to slum formation following rapid urbanization:

While Hobrecht asked for the front-buildings to be designed for upper- and middle-class people the backyard buildings were mostly strickened with low sun-light conditions and poor ventilation.

The situation was worsened in the Gründerzeit times –

Germany’s first big industrialization economic boom fueled by the Franco-Prussian War and ending with the Panic of 1873.

– with housing construction running too slow so that the population density rose beyond 1,000 inhabitants per square kilometer – in many backyard rooms there were 2 to 3 men per room and a modern sewer system was not yet existent. That latter would be completed just in 1893.


Berlin reunited, with Prenzlauer Berg in its center


When there was a wall

After World War II, the Soviets obliterated several German cities: Konigsberg was so obliterated its name died, its German population entirely resettled, and out of its ruins the Russians built Kaliningrad, which even today is a little slice of Russia disconnected from the Eurasian land mass instead squeezed between Poland and Lithuania.  The Russians could not do that to Berlin, which was divided among four powers (yes, including France), so they did the next best thing: they built a huge and hideous wall not to keep the West out but to keep the East in:


The Berlin Wall shortly after its 1961 construction


Got to keep that freedom stuff out … the Wall in 1989

The Wall’s fall, the subsequent collapse of the Soviet Union, and the reunification of Germany collectively represent a triumph of not just liberal democracy but also market economics.  The Soviet Union collapsed, more than anything else, because it went bankrupt; its economic model failed so spectacularly that in the end not even its military, the physical industrial output for which everything else in the Soviet Union was sacrificed, could be sustained. 


Slicing right around Prenzlauer Berg

The Prenzlauer Berg neighborhood, which could have been the peer of Paris’s Hausmann boulevards (and for all I know, might have been more than a century ago), had the misfortune to fall on the wall’s wrong side, the side of capital starvation, so when the Wall fell, it but a shell of itself:


Prenzlauer Berg facades, photograph by Philipp Aldrup

With its collapse, markets and money flooded in to Berlin, and Prenzlauer Berg’s location went from one of the worst – close to the Wall, therefore a danger zone for any East Germans – to one of the best:


If I have this right, Prenzlauer Berg is just north of the river, just east of the Wall Memorial

That puts it right in the path of economic growth, which brings us to the fundamentals of double-entry urbanization that may have escaped Mr. Oltermann.

1. RC = RE = RI + RR = RPV

The First Law of Urbanization and Economics

RC = RE = RI + RR = RPV

Rising City = Rising Economy = Rising Incomes + Rising Rents = Rising Property Values

Though each piece of this multi-part equation is virtually self-evident when stated, and directly visible in Berlin and Prenzlauer Berg, the combined effect is always a surprise:


It’s a surprise only if you don’t know how it’s done

Cities are voluntary clusterings of people, more and more people immigrating to the same place, living next to each other and above or underneath each other, so that they must live in the sky and build structures that defy gravity and rise ever higher.  Urbanization always means verticality, and that means physics and technology and irreversible capital investment as economic nitrogen fixing.  So the expanding city is, and has always been, a place of growing economic activity, growing wealth creation, and growing incomes of the wealth creators.

Unlike some critics of Berlin’s growing appeal to tourists, Andrej Holm, a sociologist who writes a blog on Berlin gentrification, is happy to admit that Berlin has also benefited from gentrification.


Holm sweet Holm

The economically ambitious will pay more to live close to their self-chosen density because they can earn more (H + T = 60%), and as the economics of development enable additional verticality, rising rents find rising production.  All this natural eco-biology is something that the Guardian author dislikes, so his piece is peppered with consciously loaded phrases, which for reader clarity I’ve highlighted in boldface red and occasionally offered a journalistically appropriate alternative in boldface green.

One property, an apartment block on Linienstrasse in Berlin Mitte –

Which has now become ‘Berlin’s hipster neighborhood,’ its Park Slope, the place that ‘soars in price and coolness’ – precisely the type of place where ‘creative types who require Macs instead of TVs, breakfast on demand at any time of day and drinks long into the night’ can pound out pieces decrying the loss of affordability.


Linienstrasse 206, once upon a time

Many Berliners fear that the city’s status as young Europeans’ destination of choice is destroying what made it so attractive in the first place.

Perhaps what makes Berlin attractive isn’t its cheap rents but its potential for intellectual and economic advancement.


Linienstrasse 216, now

gives an alarming vision shows the transformation of Berlin’s future: its value has multiplied tenfold since 1997.

That’s 18 years, remember, and after capital improvements were put in:

Then sold for the equivalent of €700,000, it has passed hands four times since and was last on the market for more than €8m.

Mr. Oltermann must realize that for the property to be sold, somebody must have bought it, and that those who bought it could undoubtedly afford it for either commercial or residential use, meaning they had jobs.

These days, the houses on Kopenhagener Strasse are still not too far from meeting that ideal [white and blue collar workers under one roof].


The apartment block at No 46 Kopenhagener Strasse, Berlin.

[It’s also far from the nearest U-bahn stop and has a great many historic-preservation buildings, two factors that have retarded its appreciation. – Ed.]

At No 46, the front house is occupied by students and media professionals.  In the set-back building that curves around the communal yard, a nurse and her family live on the same floor as pensioners and artists.   Rent is still relatively low: one couple, who have lived here since 1962, are rumoured to pay €100 (£83) a month.

Rents in Berlin have risen by 28% since 2007 –

That’s 3.5% annually, hardly the stuff of panic.

– and are continuing to climb at almost twice the national average.

So are Berlin’s jobs.  Funny, that.

Incremental reforms of German tenancy law have enabled landlords to force through energetic modernisations [Note ‘scare quotes’ – Ed.] energy upgrades of their properties and pass down up to 11% of their costs to the tenants.

Though the 11% figure may seem exorbitant to Mr. Oltermann, think of it as a 9x multiplier on the capital investment’s hard cost, assigning a cost of zero to the owner’s labor, completion or performance risk, or market exposure risks.  Remember also that such improvements are likely to be saving the residents money in utility costs, which in old rattletrap buildings must be a huge amount.


Which way to the future?

Recently things have changed at No 46. A year ago, the apartment block was bought by Wulf Christmann, an investor redeveloper who already owns a number of properties around Berlin.

Four months later, a letter arrived: urgent renovations including a new central gas heater, triple glazing and upgraded insulation were announced – the kind of green measures the German government is keen to promote, and which local councils thus tend to wave through without hesitation.

And which the building undoubtedly needed.

The catch was hidden cost was reported at the back of the document: charges amounting to a permanent rent increase of more than 300%.

Temporarily leaving undisturbed Mr. Oltermann’s loaded statistic (percentage rent increase disconnected from the baseline), we can turn to the second fundamental equation of urbanization and economics.

[Continued tomorrow in Part 2.]

Mr. Punch and his regulatory slapstick: Part 3, No proprietary purpose

August 21, 2015 | Banking, Cities, Community Reinvestment Act, de Blasio, Deposits, Federal supremacy, Housing, Lending, New York City, Pre-emption, Punch and Judy show, Regulation, US News | No comments 186 views

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

By: David A. Smith

As we saw yesterday, after then-mayor Bloomberg vetoed the Responsible Banking Act, the City Council overrode his veto by a huge margin (46 to 5), and when they did, the members, such as City Councilor Albert Vann, were understandably triumphant:


“The strongest local community reinvestment law in the nation”

This override which you are about to do … it really enacts the strongest local community reinvestment law in the nation.

In those claims lay danger, about which the council had been warned – that their new law would be challenged and overturned.

Sources used in this post

Crain’s New York Business (5 August 2015: buff blue font)

Crain’s New York Business (10 August 2015)

New York Times (August 11, 2015; siena font)

Wall Street Journal (August 13, 2015; brick red font)

Judge Failla’s ruling itself (August 11, 2015, pdf; forest green font)

In all cases, the bloggeteer used a name substitution for entertainment clarity.

There’s plenty of merit in revising the Community Reinvestment Act – approaching forty, it’s long been rendered technologically obsolete by securitization, globalization of capital, dematerialization of capital, and mobile banking. 


Pre-CRA redlining (Philadelphia, 1937)

Back when all banking was local, nothing was securitized

But (that word again!) that’s irrelevant:

“The animating concerns of the City Council are valid, [but] the means by which it sought to harness banks to redress those concerns intrudes on the province of the federal and state governments,” the judge wrote.


Ima gonna let you regulate inna minnit

Indeed, Judge Failla spelled out categorically all the ways in which Councillor Vann was right in claiming the RBA was a city-level CRA:

Plaintiff contends that the RBA is regulatory because:

(i) The text of the RBA and its legislative history evidence a motivation to advance distinct policy goals.

(ii) It serves no proprietary purpose. (Pl. Br. 13-16; Pl. Reply 5-7; Pl. Opp. 8-14).

Defendants, in turn, argue that the RBA is not regulatory because:

(i) It furthers the City’s proprietary interests.

(ii) The decision of whether to designate or de-designate banks is vested in an independent administrative body (i.e., the Banking Commission).

(iii) The bulk of the RBA serves a purely informational purpose.

 (iv) It sets forth no compulsory requirements for banks. (Def. Br. 14-21; Def. Opp. 9-22; Def. Reply 2-17).  

[Order rearranged for clarity. – Ed.]

Of the city’s four arguments, Point 1 (proprietary interest) was totally weak, as the city’s proprietary interest under its banking laws was in safety and soundness, not the reverse. 

But Judge Failla noted that the law had nothing to do with getting a better deal on the city’s checking accounts and everything to do with broad social goals.

Point 2, the independence of designating body is a red herring.


It worked, too, didn’t it?

The city’s lawyer, Joshua Rubin, observed that federal authorities already require banks to provide considerable information about their dealings in poor neighborhoods; the city is merely asking for more.

So the city was arguing that, despite its mandatory reporting requirements, the law was merely voluntary, and informational, and who could object to that?


Mr. Punch’s lawyers argued that compliance was voluntary and the city is free to choose which banking services to purchase.

Those required to compile and then to make public the information, that’s who.

With respect to this last argument, Plaintiff counters that the RBA, even with its voluntary reporting requirement, indirectly regulates banks through coercing them to spend hundreds of hours complying with RFIs and wielding threat of reputational harm and de-designation as consequences for non-compliance. (Pl. Reply 8-12; Pl. Opp. 14-19).

Having considered each of these arguments, the Court agrees with Plaintiff: The RBA regulates banks.

The law regulates banks because it was intended to regulate them. 

As for the idea that banks didn’t have to participate, the judge noted that the law “secures compliance through public shaming of banks.”

Why the City Council thought it wise to pass such a law, except perhaps as political theater, for it was clearly pre-empted, is beyond me – and was equally beyond the judge:

Defendants’ argument that the legislative history “unequivocally” demonstrates that the RBA is not regulatory beggars belief. (Id. at 9). Numerous individuals with experience in municipal finance and community reinvestment testified at length regarding their concerns with the RBA’s regulatory aims.


I’m concerned, you’re concerned

Judge Failla found that the Responsible Banking Act is “preempted by federal and state law,” contains “unconstitutional provisions” at its heart and is “void in its entirety.”  


He’s void in his entirety, Jim

5. Consequences for New York City and beyond

Wherein Punch solves his marital conflicts once and for all.


Don’t; throw the banking baby out with the CRA bathwater

The city could appeal, though the appeal will be to a New York Federal appellate court:

If the city had prevailed, it’s conceivable that the New York City Banking Commission could have joined the state attorney general’s office and the state Department of Financial Services as Wall Street’s toughest sheriffs.

Not the sheriffs, the morality police.

Cities are free to use their proprietary power to select the best services at the lowest cost, but not to use this as a pretext for unrelated regulation of activity already governed by state and federal law.

And there’s the real motivation, for the ‘responsible banking’ movement came out of lingering post-crash anger at financial institutions from “labor, faith-based and Occupy activists”. 


Good citizens all

Robert Giuffra, attorney for the New York Bankers Association, called Judge Polk Failla’s decision an important precedent that could be used to challenge similar laws in Boston (also enacted over a mayoral veto), Cleveland, Los Angeles, Philadelphia, Pittsburgh, San Diego and Seattle.

I can certainly understand the desire to reform CRA, which is an important priority, but that’s hard to square with resentment over banks’ role in the Great Recession – for if the banks were so profit-motivated, why did they lend to people who proved unable to repay?  The defaults preceded the recession, not the other way around.

A spokesman said the city was disappointed with the judge’s ruling. It is reviewing its legal options. It has 30 days to appeal. “The city has a vital role in understanding the effect banks are having on the economic health of our neighborhoods,” the spokesman said.

CRA urgently needs a complete reboot.  Punitive city-level laws are not the way to do it; in fact, they’re counterproductive.

Nevertheless, I expect the de Blasio Administration will (fruitlessly) appeal:


Can’t I ignore the Constitution just this one time?