Monthly Archives: March 2009

The People Whose Decisions Are “Well Nigh Conclusive.”

        

          Today’s newspapers are overflowing with displays of indignation about the failed insurance conglomerate, AIG using the gazillions of dollars it got from the feds as a bailout, to – are you ready? — sub-bail out foreign banks and to hand out $1 million to each of 73 people in its financial products unit that (in the words  of the New York Times) was “responsible for creating the exotic derivatives that caused A.I.G.’s near collapse.” That sounds pretty bad, but you ain’t heard nothin’ yet. These payouts have been defended as “retention” bonuses whose purpose is to retain the best employees who otherwise might quit and go somewhere else, although why anyone would want to retain this particular bunch of jerks who brought this calamity about is a mystery. See Jackie Calmes and Louise Story, 418 Got A.I.G. Bonuses; Outcry Grows in Capital, Mar. 18, 2009, at p. A1

It turns out that 52 people at AIG who received a total of $33.6 million in such bonuses have left the company anyway. So much for “retention.”

And while all this plundering of public funds has been going on, our Glorious Leaders in the federal government, who have been the source of all that loot (pun intended) tell us that they didn’t know nothin’ and it never occurred to them that AIG would use the taxpayers’ funds to hand out bonuses as it always has, so they took no preventive precautions. Reminds us of Sergeant Schultz in “Hogan’s Heroes,” who would roll his eyes and say “I know nosing. Nosing!” Yeah. Right. It just plumb never occurred to the aforementioned Glorious Leaders that AIG might hand out bonuses out of the money it received to keep it from going under. Your tax money at work.

         And those are the government folks whose decisions relating to the use of eminent domain are impervious to review because, as we are told by our betters,  they are “well nigh conclusive.”

 

Follow up. It turns out that the press coverage on which we relied in the above post was wrong. So what else is new?

         A completely different story has now come to light in the form of an op-ed by Jake DeSantis (formerly with the AIG Financial Products Unit), entitled Dear A.I.G., I Quit, N.Y. Times, March 2009, p. A25. DeSantis explains that the people responsible for the AIG disaster are not the ones who are being pilloried in the press. According to him, some good people who had nothing to do with the creation of those “toxic assets” were asked to stay with AIG and do what they could to clean up the mess. It was in consideration of their agreement to make their best effort in that regard that they were promised those “bonuses.” We use quotation marks because if this is true then these payments were not bonuses (which we define as discretionary payments rewarding outstanding performance) but rather agreed-upon and contracted-for compensation.

         We strongly suggest that you read DeSantis op-ed. If true, it amounts to a stinging j’accuse directed at Congress, the press and the new AIG CEO who first negotiated those “bonuses” and then threw those who took on this thankless rask to the wolves.

Quotable Quote

         “Eminent domain is being used as the tool to shoehorn in density that would not be achievable under normal circumstances. The fact that these three examples [The New York Times and Bank of America Towers as well as the Atlantic Yards project in Brooklyn] are current era projects separated by only a few years bespeaks something of the new proclivity to use eminent domain to force private owners to transfer their property to other private owners. Often the transfers being forced involve the new, after-transfer owners making similar or identical use of the land as the original owners even though the original owners’ actual buildings might be torn down.” Noticing New York,   newyorkblogspot.com January 11, 2009.

How Dahlia Lithwick Got It All Wrong

            Years ago, after we got our sea legs as a journeyman-lawyer, and as such gained an understanding of the ways of eminent domain law, we noticed an interesting phenomenon. Whereas people harbor all sorts of ideas of right and wrong, and understandably hold opinions on how a particular legal controversy should come out, lay folks are usually reluctant to get into the technical intricacies of the law. But not when it comes to eminent domain. Here, everybody is a maven. Case in point, Dahlia Lithwick, senior editor at Slate  on-line magazine. The New York Times Book Section of March 15, 2009, at p. 17, carries Ms. Lithwick’s review of Jeff Benedict’s new book LITTLE PINK HOUSE, that tells the tale of Suzette Kelo’s fight against New London, Connecticut, when the latter took her home – the iconic “little pink house” – in order to implement a municipal plan “to turn her neighborhood into a vast corporate playground for Pfizer, Inc., complete with a luxury hotel, a health club and sleek condos.”

 

            Benedict’s book has already received considerable attention, so we won’t rehash it here all over again. This is just to observe how our betters in the big-time media can mislead their readers. In Ms. Lithwick’s case it’s done by omission. In no particular order:

 

          Most important, Ms. Lithwick fails to inform her readers that the New London redevelopment project that was the cause of all this foofaraw, has been a gigantic, money-squandering boondoggle. It never got off the ground. For all the “careful planning” that New London sold to the Supreme Court in justification of this taking, nothing has been built on the Fort Trumbull redevelopment site (except for the renovation of a Coast Guard facility, which is a classic, unobjectionable “public use” within the meaning of the Fifth Amendment). The redeveloper was not even able to get financing – and that was before the crash. Over a decade after it was launched, and four years after the Supreme Court decision, the project area is a razed, vacant swath of urban blight that after destroying a well-maintained lower middle-class neighborhood, consuming over $80 million of state and city funds, and removing a 91-acre waterfront tract of urban land from the public tax rolls, has produced nothing. Zero. Zip. Nada, Bobkes. See our earlier blog, Lessons Learned in New London? Hardly. March 6, 2009.

 

         Second, she makes it appear as if the decision reached by the Supreme Court was the simplest, most cut-and-dried application of law imaginable. She chides Benedict because in telling the Kelo story, “the law itself barely gets a walk-on bit.” Which is hardly surprising because Benedict didn’t set out to write about law – by the time his book came along, reams of legal commentary had already been published, so he wisely stayed away from all that and focused on the human story instead. What could be wrong with that? Ms. Lithwick also conveniently overlooks that the Kelo decision, far from being a routine, cut-and-dried application of old-hat law, was the subject of a fierce disagreement among the Justices, and that the stinging criticism directed at the paper-thin 5-to-4 majority view came not just from those with a partisan stake in the outcome of this litigation, but also from four Supreme Court Justices. So maybe, just maybe, there was more of a legal controversy here than Ms. Lithwick lets on, but something that her lay readers are unlikely to discern from her review.

 

           Third, she criticizes Benedict for “fram[ing] legal questions as epic battles between haves and have-nots, between passionate humans and out-of-touch jurists.” But isn’t that exactly what happened? Wasn’t this a case of the city trying to benefit Pfizer, Inc., and its well-paid well-educated employees at the expense of the indigenous, blue-collar residents of the Fort Trumbull area? Didn’t Justice Stevens, the author of the majority opinion, all but offer a public apology in his remarks to the Nevada Bar Association, shortly after the Kelo decision came down? Didn’t he suggest by way of introduction to his remarks that some cases decided by the Justices call for “taking a mulligan”? Besides, hasn’t urban renewal been historically what comedian-turned-activist, Dick Gregory, aptly characterized as “Negro removal.”?  Hasn’t urban renewal been historically displacing hundreds of thousands of poor and lower middle-class city dwellers annually to make room for upscale, urban shopping malls, office buildings, car dealerships and even gambling casinos? For that story, check out Bernard Frieden and Lynn Sagalyn, Downtown, Inc. – How America Rebuilds Cities. And isn’t it universally accepted by people  knowledgeable about the ways of eminent domain that (as Columbia’s Professor Thomas Merrill put it) in American law, just compensation means incomplete compensation, with owners of businesses displaced by eminent domain left entirely uncompensated for the value of their businesses that are destroyed in the process, and cannot relocate?

 

         Finally, in a tour de force of something or other (we’re still groping for a suitable, printable characterization) Ms. Lithwick concludes by telling us that this was all a dispassionate application of state law, and she doesn’t mention that the controversy had nothing to do with state law – the U.S. Supreme Court lacks jurisdiction to decide issues of state law.  No, this was a federal constitutional issue, an interpretation of the meaning of the Fifth Amendment’s term “public use.” State law was only involved to the extent of deciding whether it met that “public use” constitutional limitation.

 

         So if Ms. Lithwick believes that “to turn [a] neighborhood into a vast corporate playground for Pfizer, Inc., complete with a luxury hotel, a health club and sleek condos” is any kind of a public use, it’s no surprise that her position is at odds with the vast majority of Americans who recognize such stuff for what it is: a private activity benefiting chosen private interests with public funds, and not any kind of “public use” that the Constitution requires.

Home Demolition, Chutzpa and all that Jazz, at Home and Abroad

          Our newly minted Secretary of State, Hillary Clinton, has just completed another hegira to the Middle East in quest of the elusive “peace process” that over the past half-century has reliably produced much process but little or no peace. Which is understandable when the folks you want to make peace with insist on their “right” to blast you with what the press likes to call “homemade” rockets, as if they were cooked up by Grandma Yasmin in her kitchen between batches of falafel, rather than constructed by Abdul the Bomb-Maker.  

          The Los Angeles Times reports that on this trip, Madame Secretary expressed disapproval of the Israelis’  demolition of some fourscore Arab homes in Jerusalem, some for an archaeological project which she digs (no pun intended), and others because they were built without permits. Much could be said here on this topic, and much has already been said about the bona fides of it all. In a nutshell, the Arabs contend that they, poor babies, simply have to build illegally because they plumb can’t get any building permits, don’t you see. As it happens, that is not true, but it makes for good, tear-jerking propaganda which is dutifully repeated by the American press that back home wouldn’t even consider printing such crap, much less presenting it in a favorable light.

          In fact, the municipality of Jerusalem has been issuing permits in both Western (Jewish) and Eastern (Arab) parts of town, though obviously not everybody gets a permit – same as here. The Arab population of Jerusalem has been growing at a faster rate than the Jewish population, without the folks on the Arab side having to forgo housing, and having to camp out in the streets a la Calcutta. Some of the largest, most luxurious homes in Jerusalem are Arab-owned. 

          But be all that as it may, it should not come as news to our readers that unpermitted construction of buildings, whether here or there, is, well, illegal. In fact, the Israelis have been demolishing homes built illegally by Jews as well as Arabs (David Rudge, Ten Illegal Jewish Homes Demolished in Galilee, Jerusalem Post, Nov. 23, 2001). 

           So rather than referee the hotly contested dispatches from the Middle East – a clearly unrewarding endeavor – we might perhaps gain some perspective if we inquire into what happens right here at home, when people build stuff without valid permits, in defiant disregard of zoning and land-use laws. Any guesses?  

          Take a look at Golden Gate Water Ski Club v. County of Contra Costa (2008) 165 Cal.App.4th 249. In the court’s words,

The Club purchased Golden Isle in 1966. By 1970, without obtaining any land use or related permits, the Club had built or installed at least 15 residential dwelling units on the island in the form of cabins and/or travel trailers, plus decks, docks and other related structures. On July 1, 1970, the County’s building inspection department notified the Club its use of the island violated the County’s land use requirements and was not permitted. The Club did not cease its use of the island nor did it remove the dwelling units and other structures. To the contrary, still without obtaining any land use or related permits, the Club added to the development, so that by 2003 the development on Golden Isle had grown to 28 residential dwelling units, 28 docks and various outbuildings.”

Bottom line: the club’s claim that forcing it to demolish its unpermitted, illegally built structures was a taking of its property was rejected, and, the club was ordered to tear down its improvements. 

           And in Freduniak v. California Coastal Commission (2007) 148 Cal.App.4th 1346, the landowners were innocent purchasers of residential property that, in violation of a California Coastal Commission open space easement, had been landscaped to include a three-hole pitch-and-putt golf course. The golf course, visible from the street, had been in place for 18 years and the plaintiffs purchased the property because of it, believing it to be legal. But then the Commission learned of the violation of its open space easement and issued an order requiring removal of the golf course and restoration of the land to its natural state – an expensive proposition. The owners protested but the Court of Appeal refused to apply the doctrine of equitable estoppel, notwithstanding the owners’ reasonable reliance on their belief that at the time of purchase the golf course use was allowed. No laches either, in spite of the failure of the Commission to act for 18 years, and in spite of the substantial expense to the landowners of restoring the land to its natural state. 

           And who can forget Broadway, Laguna etc. Ass’n. v. Board of Permit Appeals, 66 Cal.2d 767 (1967), where a San Francisco developer had to give his 11-story building a “haircut” by reducing its height even though he had acted in reliance on a city-issued variance that the Supreme Court held to be invalid because it purported to authorize an illegal floor-area ratio?

            We could go on — there are other cases like that, both in California and elsewhere in the United States. But we’re sure that by now you get the point, and that point is that the Israelis’ enforcement of their land-use laws, is not some sort of exotic Middle East atrocity as suggested in the Times story, but rather a process of assuring compliance with local land-use regulations that are no different from the ones right here at home. It is a safe bet that if a California builder started to put up homes without a permit and had the chutzpa to try and do so on top of an archaeological site, you could safely bet serious money that he would be enjoined before you could blink an eye, with the Los Angeles Times cheering the government and denouncing the scofflaw on its editorial page.  

         So if Secretary Clinton is of a mind to hector government entities for enforcing their land-use laws that require the issuance of valid permits before construction of improvements may proceed, she need not travel far – she has her work cut out for her right here at home without the need to consume precious energy and hasten global warming by flying to far off places to lecture foreigners on the wickedness of doing what we do routinely and lawfully right here in the good ol’ U.S. of A.

           That’s not quite all. In a separate story (Richard Boudreaux, Defiant In the Face of Demolition, L.A. Times, 3/7/09, at p. A22) the Times featured an Arab gentleman, one Hashem Jalajel, who bitterly complains that those wicked Israelis won’t let him and his sons build on an archaeological site without a permit. Imagine that! Though Jalajel is depicted by the L.A. Times as a sympathetic character, there is more to this story which turns out to be a towering achievement in breathtaking chutzpa. The 80-year old Jalajel who lives in the Silwan-City of David neighborhood of Jerusalem, is a retired Jordanian  Army officer. Our gray-haired readers may recall how in 1948 the Jordanian Army (then known as the Trans-Jordanian Arab Legion) invaded the newly established State of Israel, conquered Judea and Samaria (rechristened by the press as “the West Bank”), including the Silwan-City of David area. There they expelled all Jews from their homes, destroyed their synagogues, desecrated their cemeteries and turned their homes over to Arabs. If you do a little arithmetic, it becomes quite possible that the 80-year old Jalajel who served in the Jordanian army may have been involved in these events at the time. But now, he complains – oy, how he complains – that even though he and his sons got to build homes in open defiance of municipal permitting requirements, those wicked Israelis won’t let him build additional illegal structures, and want his old structures demolished because they had been build without permits atop an archaeological site slated to become a part of a new public park.

           To get the full extent of these folks’ chutzpa, in the words of the Times: “[Arab] residents said they were summoned to a meeting with city officials last month and told that” – are you ready? – “they would be offered housing elsewhere before bulldozers destroyed their homes.” Do you suppose that Americans who get caught building without permits are also offered substitute housing? If you do, get in touch – we’ll give you a great deal on the Brooklyn Bridge.  

         

The New York Times Learns About the Workings of the Market the Hard Way

          It seems like only yesterday that New York condemned a city block in Manhattan, at 43rd Street and 8th Avenue, for a new New York Times building. It was supposed to help revitalize the Times Square area, and yadda, yadda, yadda — the usual stuff. It’s now a couple of years later, and we learn that things haven’t quite worked out as expected. The New York Times is strapped for money and has just sold its interest in that new building, retaining the area it occupies as a tenant with an option to repurchase it. See Russell Adams, New York Times Does Sale-Leasback Deal, Wall St. Jour., 3/10/09, at p. B6. 

         We also learn from that article that the Times sold its old building for $175 million, and the buyer resold it later for three times that amount. Who knew, says the Times,  that a short-lived boom in Manhattan real estate was coming. The Times’ partner in the new venture, Forest City Ratner, is having problems of its own and just took out a $640 million mortgage against its portion of that new building.

        The moral of this story: as we never tire of reminding our readers, urban renewal, no matter how semantically disguised, is nothing more than a real estate venture that runs the risk of failure when times turn bad, or even when they don’t, for other rasons. We don’t want to rejoice in the Times’ misfortune, but it can’t go without noting that there is a strand of poetic justice here. When the Supreme Court decided the wretched Kelo case in 2005, the Times was one of only two major national newspapers (the other was the Washington Post) that cheered the court’s decision on its editorial page. Well guys, turnabout is fair play, and he who would live by the sword runs the risk that the sword will turn into a wet noodle when the economy turns. Business involves risk, and calling it by another name does not make it any less risky.

Who Done It? Guess.

          A friend has favored us with an old New York Times clipping, Steven A. Holmes, Fannie Mae Eases Credit To Aid Mortgage Lending, N.Y. Times, September 30, 1999, and it contributes to our understanding of who is responsible for the economic disaster we are in. You can get the whole article on Nexis, but here are two passages that say it all without need for comment, even though forgoing one is a tour de force of self-restraint on our part.

“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and morderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

                                       *    *    *    *

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-susidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”

“Why Can’t We All Just Get Along?”

           You’ll have to forgive Dahlia Lithwick, senior editor at Slate. She, being a fully credentialed girl, just doesn’t understand what boys learn at an early age. Namely, that if you pick a fight with some plug-ugly, and he starts beating the daylights out of you, it is highly unlikely that he will desist if you ask him to be nice instead because it doesn’t matter who started the fight. It’s a guy thing. When a guy gets belted it’s not surprising that he tends to respond by saying, “You started this fight, and I’m going to finish it for you,” and then goes on and does just that – usually to the cheers of the audience. 

          Case in point, Ms. Lithwick’s op-ed piece in the Los Angeles Times (We Need Judges, Not Partisan Fights 3/8/09) which admonishes us to stop all that nasty, partisan quarreling about judicial appointments and let our new President do his thing. After all, that Blue Meanie, George W. Bush, got to appoint one-third of sitting federal judges, so now it’s the democrats’ turn. According to some Democrats, Ms. Lithwick tells us, the existing situation “requires strong medicine” with some of them calling for the appointment of “a small army of fiery, ideological judges.” 

           Ms. Lithwick’s call for peace in our time stresses that who started the fight over judges doesn’t matter. According to her, now is the time for everybody to play nice, and never mind that former Senator Barack H. Obama  voted against the confirmation of John Roberts who (whether you like his ideas or not) is about as well qualified a Supreme Court [Chief] Justice as we have seen in our lifetimes. And as for all that “borking” business, says Ms. Lithwick – that was then and this is now. And now that the Democrats have control of both the White House and the Senate it is time for bipartisanship and sweet reason. How convenient.

          Make no mistake, the sort of bitter partisanship that has become the norm in the judicial selection and nomination process in recent years is bad stuff. Judging and interpreting the law under which we must live is too important for that. Though there were no “good old days” for judicial selection, things have grown a lot worse lately – nastier, more overtly ideological and more partisan. But like it or not, sic friature crustum dulce, as the Romans used to say  — that’s how the cookie crumbles. This is only one application of the fundamental principle that ideas have consequences, and that once you set an ideological precedent you have to live with it. Telling free people “we can do it to you but you can’t respond in kind” is a sure-fire prescription for social strife, and by that we don’t mean just Senate filibusters. It was all explained to those of us who would listen, by the ancient Greek tale about Pandora’s box – once you crack open its lid and the nasties inside escape, there is no coaxing them back into the box.

           And so, it may not be inappropriate to remind our readers how this Pandora’s box was cracked open in the first place. It was the sainted FDR, the liberals’ iconic figure who planted the seed from which this nasty weed has grown. Remember your history. Recall that when faced with Supreme Court rulings striking down as unconstitutional his 1930s vintage New Deal legislation, FDR announced that unless the Supreme Court started ruling his way, he would pack the bench with additional Justices selected for their commitment to New Deal ideology, and thus gain judicial imprimatur for his legislation. It didn’t come to that. Faced with that threat, the mighty Supreme Court backed down, and started approving New Deal legislation. Still, though FDR did not have to go to the mat on that one, the idea of overtly shaping the bench specifically to further an ideological agenda gained a measure of respectability because now it became the stuff of presidential policy rather than the cry of rabble-rousing political extremists. We were taught all that in our high school history courses, with no one, to the best of our recollection, ever admonishing us that FDR was a Blue Meanie for thus tampering with the integrity of judicial decision-making. Mind you, we’d rather that none of that had happened. But nobody asked us. 

          Now it’s almost three-quarters of a century later, and by degrees the brave new way of picking judges has become routine: to seek out openly biased individuals as candidates for the bench, provided their biases match those of the appointing authority. Bummer. Still, if you are going to let judges set social policy, and find stuff in the constitution and statutes that no rational English-speaking person, untutored in lawyers’ mumbo-jumbo, can discern from reading these documents, and to make up stuff as they go along, you shouldn’t act surprised when the people who, after all, believe that they live in a democratically-based society, decide to take a hand in judicial selection on the seemingly sensible theory that if they can pick legislators who set policy and make laws for them to live by, they should also have a say in the selection of judges who are going to do exactly the same thing and then some. 

          The moral of it all: Judicial independence – a good thing – is inversely proportional to the extent of prevailing judicial activism. If you want a bench filled with judges who are out to make “social revolution” as California’s late Supreme Court Justice Mathew O. Tobriner once exhorted in the pages of the California State Bar Journal, you shouldn’t act surprised if the people on the short end of those revolutionary judicial rulings set out to make counter-revolution. 

            So it turns out in the end that as far as results are concerned, we are in harmony with Ms. Lithwick – give us bipartisanhip when it comes to judicial appointments any day. But not if the price of that bipartisanship is to find ourselves ruled by that “army of fiery, ideological judges,” who are alienated from our traditional civic and societal values that for all their flaws, warts and pimples, have stood us in good stead and have made us the great nation that we are.  

Follow up.  Funny coincidence department. Within a couple of days of Lithwick’s Los Angeles Times op-ed, the New York Times informs us (Neil A Lewis, Obama’s Court Nominees Are Focus of Speculation, 3/11/09, at p. A17) that folks within the Obama administration are gearing up to start announcing their judicial nominees. And get this: “Gregory S. Craig, the White House Counsel told Democratic Senators that the White House would rely on the Senators’ recommendations to fill the district court [vacancies]. But he said that while Mr. Obama would welcome their advice, he warned that filling the appeals courts was largely a presidential prerogative. . .” Yeah, man. The Senators will just love that one. Stay tuned — if this story is true, it should be quite a donnybrook.

Taps for Atlantic Yards?

         The Wall Street Journal of March 7-8, 2009 (Julia Vitullo-Martin, A Hole Grows in Brooklyn, at p. A9) reports that the grandiose $4.3 billion Atlantic Yards redevelopment project in Brooklyn, that was the subject of the U.S. Court of Appeals decision in Goldstein v. Pataki,  shows new signs of coming apart. We blogged about that case on March 22, 2008 (Another Big Redevelopment Project Down in Flames?) — check it out.

        Says the Jounal: “The projected December 2008 ground-breaking for the [new Nets’] arena came and went without a shovel hitting the dirt. The chances that the Nets will be playing in Brooklyn for the 2009-10 season, as promised, are nil. Architect Frank Gehry has laid off his entire Brooklyn staff, and Mr Ratner’s company (Forest City Ratner) has renegotiated its loans. Financing to finish the project has dried up amid a global financial meltdown.”

         And so it goes . . .

Lessons Learned In New London? Hardly.

            The Day, the New London, Connecticut newspaper has devoted considerable space this week to the aftermath of the Kelo case. An Editorial dated March 6, 2009, is entitled Lessons Learned From Fort Trumbull Controversy, but unfortunately it promotes the wrong lessons. According to The Day, those lessons are: (1) never pass the power of eminent domain to a non-elected entity, (2) there are times when cities, which lack open space, need to use eminent domain to obtain property for economic development, (3) when disputes heat up, never close the door to compromise, and (4) the city [of New London] needs to see successful development in the Fort Trumbull peninsula when the economy rebounds. In other words there is not a hint of remorse or concession that New London screwed up morally or fiscally. Rather, these folks make it clear that next time they mean to do the same thing, only more efficiently. 

         So let’s take a look at the Day’s laundry list. Item (1) is all about municipal politics. Item (2) babbles about “Open space.” What open space? The Kelo condemnation was filed ostensibly to rectify the adverse economic conditions in New London, and to build private commercial facilities that would hopefully generate more taxes, not any freakin’ “open space.” Item (3) easily makes the Top 10 list of outstanding bromides, and item (4) is an expression of an obstinate commitment to the immoral and in this case failed concept of redevelopment.

         What’s missing here is any consideration of the immorality of setting out to take the property of A to give it – and we do mean give – to B for the latter’s profit, while undercompensating A. Whatever the motivation of people doing that may be, it stinks to high heaven. Missing also is any acknowledgement that “economic redevelopment” is an entrepreneurial activity that, like other business activity requires investment of money and the undertaking of business risks. But in these cases the people who undertake the risk have no “skin in the game” – they are risking other people’s money. We believe that the best comment on such doings was delivered by Associate Justice Macklin Fleming of the Califorina Court of Appeal in Regus v. City of Baldwin Park, 70 Cal.App.3d 968, 982 (1977), and we can do no better than to repeat it here: 

         “[U]nrestricted use of redevelopment powers fosters speculative competition between municipalities in their attempts to attract private enterprise, speculation which they can finance in part with other people’s money. When the extraordinary powers of legislation designed to combat blight and renew decayed urban areas are used as a fiscal device to promote industrial, commercial, and business development in a project area that is merely underdeveloped rather than blighted, competitive speculation may be turned loose. By misemploying the extraordinary powers of urban renewal a redevelopment agency captures pending tax revenues which it can then use as a grubstake to subsidize commercial development within the project area in the hope of striking it rich. Such schemes contemplate borrowing money by issuing bonds on the strength of assured future tax revenues, money which is then used to acquire, improve, and resell property within the project area at a loss as an inducement to business enterprises such as K-Mart to locate within the project area rather than in neighboring communities. In essence, tax revenues are used as subsidies to attract new business. The immediate gainers are the subsidized businesses. The immediate losers are the taxpayers and government entities outside the project area, who are required to pay the normal running expenses of government operation without the assistance of new tax revenues from the project area. * * * 

           “The promoters of such projects promise that in time everyone will benefit, taxpayers, government entities, other property owners, bondholders; all will profit from increased development of property and increased future assessments on the tax rolls, for with the baking of a bigger pie bigger shares will come to all. But the landscape is littered with speculative real estate developments whose profits turned into pie in the sky; particularly where a number of communities have competed with one another to attract the same regional businesses. 

          “At bench, City’s projected redevelopment plan possesses a particularly speculative cast in that the businesses it hopes to attract through redevelopment are primarily those of consumption rather than production, businesses such as hotels and shopping centers whose acquisition does not increase the total wealth of a region as a whole but merely redistributes the existing supply by capturing business from rival communities. The success of such strategy assumes the absence of effective counter-measures by rival communities targeted for displacement. Private enterprises may embark on such speculative competitive enterprises. Under present laws, public entities may not.” 

           So if the New London movers and shakers mean to engage in such ventures, let them do it with their own, not the public’s, money. Let them pay the true cost of doing business, and refrain from sticking the hapless taxpayers with the tab for their failed venture. Or at least, let them reimburse the public when their half-baked notions of development that, adding insult to injury, they sold to the U.S. Supreme Court as “careful planning,” fail as did this one, and turn into “pie in the sky.”

 

         And let’s not hear any excuses about how it’s the fault of the declining economy. The Fort Trumbull project failed before the economy started faltering in 2007. Besides, prospects of a failing economy are some of the business risks that would-be entrepreneurs have to face.

 

Follow up. It turns out that this story is being peddled on the Internet as a case of New London’s remorse. Hah! Don’t believe it. Check out that The Day story for yourself and you’ll see that there has been no expresssion of remorse on the part of New London officials for doing what they did — rather it’s a case of feeling sorry that their ploy failed, and an expression of intention to do it more efficiently next time.

 

Second Update. The Day (the New London newspaper) reports that in a recent public forum on post-Kelo New London, Tom Londregan, the New London City Attorney  “made no apologies for the city’s support of eminent domain by the New London Development Corp., and said if he were in the same position again, he’d pretty much advise the city similarly.” Ann Baldelli, He’s OK Wearing Brown Shoes, The Day, March 15, 2009 (Editorial columns).           

First, They Screw Things Up, Then They Want to Do It Again

          By now, it has become painfully clear that the economic disaster that is facing the Nation originated in the housing market. Whether you assign primary blame to greedy bankers, reckless mortgage “bundlers,” irresponsible rating agencies that assigned AAA ratings to junk, or to greedy and at times dishonest home buyers who succeeded in deluding themselves that buying a house is a big-time investment rather than an acquisition of a family home, the fact is that in recent years too many homes were sold at prices that were way too high. That necessitated financing using mortgage loans that the home buyers simply could not service, leading to the ongoing mass foreclosures. So what are we to do? You’d think that bringing home prices down to a reasonable level, so that once the dust settles people can continue buying them without going broke, is the way to go. Right? Not if you listen to our betters who (after wreaking havoc on the American banking system) presume to lecture us on how to – are you ready? – do it again by bringing back high housing prices. 

          It turns out that the folks who gave us the unfolding economic debacle, believe that what we need is a “recovery in residential real estate prices.” So says a Grand Poo-Bah identified in a full-page ad in today’s N.Y. Times (3/4/09, at p. A7) as Chief North American Economist for Bank of America and Merrill Lynch. But wait a minute! Wasn’t it the high level of home prices that led directly to the excessive borrowing by home buyers, that in turn led to the ongoing mortgage meltdown and foreclosure epidemic? Do we really want to go back to that unfortunate state of affairs as a means of resuscitating “the next bull market”? What utter nonsense.

           So here is our advice to the Big Finance Pooh-Bahs: No guys, you’re wrong. Maybe a return to high housing prices will resuscitate the bull market as you say (in which case the investors in that market will deserve whatever they get when it inevitably collapses again). But what the country needs is housing that Joe Sixpack can buy if he is so minded, without going into unmanageable hock up to his eyeballs. Is that so unreasonable? Doesn’t seem that way to us. But what do we know? We didn’t run Merrill Lynch into the ground while collecting gazillions of dollars as a “bonus.” All we have to offer is common sense – a commodity that is evidently sorely lacking among the financial movers and shakers. 

          We could stop here, but we won’t. There is another matter implicated in the past couple of decades’ insane run-up in home prices, that needs to be addressed. How did housing prices reach those stratospheric heights? Just to say that home prices were bid up by buyers is to describe the effect, not the cause. A number of reasons could be advanced, but one major one is government land use regulation  policy. Check out the book by Dartmouth’s renowned land economist, William A. Fischel, entitled REGULATORY TAKINGS: LAW, ECONOMICS AND POLITICS (Harvard U. Press 1995), particularly Chapter 6 which demonstrates how California’s repressive land-use laws limiting construction of housing, and that state’s courts’ eagerness to enforce them in a draconian manner, led directly to a rapid escalation of home prices. It was a case of limiting supply while demand grew apace. This engendered a belief on the part of would-be homebuyers that if they didn’t get in on the gravy train today, they would not be able to do so tomorrow, to say nothing of the fact that California courts neither saw, nor heard, nor spoke evil when it came to reviewing local anti-growth, anti-this and anti-that regulations that were thinly disguised efforts to raise the drawbridges into desirable upscale communities. Thus, it was no secret that this system would necessarily bring about higher and higher home prices. As Fischel put it, a rising tide lifts all boats but in California the unfortunate regulatory climate blew the boats right out of the water – even those “little boxes” that sold in the 1950s for $10,000 a piece were fetching around $400,000, ostensibly providing their working class owners who bought earlier with undreamed-of retirement nest eggs. Or so it seemed.

           And Fischel was hardly alone. Two Presidential commissions on housing came to the conclusion that it was the NIMBY syndrome (and the judicial acquiescence it regulatory excesses even when property owners’ constitutional rights were at stake), that was implicated in the unreasonable escalation of home prices. See e.g., “NOT IN MY BACK YARD” – REMOVING BARRIERS TO AFFORDABLE HOUSING, Report of the President’s Commission on Housing, at 177-181 (1991). The causes of growing unaffordability of California housing were obvious to anyone who would take the trouble to look. You don’t believe us? Check out the dissent of California Supreme Court Justice William P. Clark, Jr., in Agins v.Tiburon, 598 P.2d 25, 35 (Cal. 1979) presciently noting that extreme judicial deference to restrictive local land-use regulations would inevitably lead to unreasonable escalation of home prices in desirable areas and produce a socio-economic cleavage between the haves and the have-nots. 

          And so, the escalation of home prices to unaffordable levels grew out of the land-use regulatory regime which led to the disaster that is unfolding now. Any suggestion that we should go back to the state of affairs in which the housing prices “recover” their unaffordable status as our economic salvation, is simply absurd. But what can you expect from the people who gave us the ongoing disaster in the first place?

 

Two updates. First, check out Tim Padgett, Despite the Crash in Prices, Affordable Housing Still Lacking, TIME, Feb. 25, 2009: “Even as a backlog of hundreds of thousands of newly built and foreclosed homes are languishing on the moribund housing market, more than 750,000 families [in Florida] are in need of affordable housing.” That doesn’t seem like evidence of a need to bring home prices up, does it?

 

Second. Don’t miss the op-ed in today’s New York Times (John D. Geanakoplos and Susan P. Koniak, Matters of Principal, 3/5/09 at p. A27), arguing that instead rescuing the improvident lenders, the federal bailout should benefit the under-water homeowners who are still hanging on to their overpriced houses. Why? Not because of altruism. It’s because market data show that “monthly default rates for subprime mortgage and other  non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home.” Homes with mortgages that are 160% of the estimated home value have an 8% monthly rate of defaults, while homes that are worth 60% of their mortgage balance suffer only a 1% rate of default. So it’s economically sensible to give those folks a manageable stake in their homes  rather than foreclose on them and kick them out, leaving the lender with abandoned, unsaleable homes, which means that everybody is worse off. So it may be better for the lenders to take that “haircut” and reduce their mortgage balances instead of foreclosing.  And if the government is going to choose whom to benefit, most of those homeowners seem more deserving than the bankers who are presumably big boys who knew or should have known the risks they were taking on.

 

Follow-up. Will miracles never cease? The New York Times of March 8, 2009, at p. 2 (Business Section) quotes Treasury Secretary Timothy E. Geithner as follows:

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing market.”

 

Now it remains to be seen how Secretary Geithner proposes to accomplish that.