Monthly Archives: January 2010

Money Matters

Every now and then we permit ourselves to say something on subjects that seem of interest, even though not related directly to eminent domain or land use. Here is one.

Los Angeles Daily Journal

 Jan. 07, 2010 

PERSPECTIVE • 

The ‘Intergenerational Conflict’ Cuts Both Ways

By Gideon Kanner

 Conventional wisdom has it that the ongoing explosion in public deficit spending amounts to an intergenerational wealth transfer from young people who will have to pay off the growing public debt, to the old folks who are enjoying costly public services like Social Security, Medicare, and assorted private breaks and government subsidies. Even as grandpa enjoys life on the dole, goes the argument, his kids and grandkids will have to pay higher taxes, and suffer an inflation in the long run in order to foot the bill. But it is not quite that simple. As a local bank commercial used to put it during a credit crunch of some years ago, there is lots of money around, but if you want to borrow some you must do two things: first, you have to ask for it, and second, you have to pay it back. But that was then – this is now. Today, you can ask all you want, but the banks are not eager to make loans because they can do right well elsewhere. Also, the dubious prospects of borrowers paying back in these recessionary times motivate the banks’ reluctance to lend.

Of late, we have been experiencing low interest rates, the likes of which the country has not seen since the Great Depression, when safety trumped income. I remember how, in the 1940s, when things had already improved, a local bank in the small town where I lived at the time, proudly displayed a big, red neon sign that read “We pay 2 percent.” Today, you will be lucky if your friendly bank pops for 1.5 percent on a promotional money market account. A major bank recently informed me that the interest it pays these days on what it laughably calls interest-bearing checking accounts, is 0.05 percent.

If I were a suspicious sort, I might speculate that the Federal Reserve Barons are taking care of their big-buck buddies at the expense of the rest of us. First, the federal Reserve low-interest policies are a boon to the federal government, which can borrow with abandon at extremely low rates of interest it then gets to tax. Second, the big-buck boys who have invested in the stock market recently are making oodles of money (at least on paper, for the time being). They are in the stock market because they think they can handle the risk, and because the market is being driven up by desperate people trying to get any kind of decent return on their money. As the New York Times put it in a recent front-page story, “Many think the Federal Reserve is fueling a stock market bubble by keeping [interest] rates so low that investors decide to bet on stocks instead.” (Stephanie Strom, At Tiny Rates, Saving Money Costs Investors, N.Y. Times, Dec. 26, 2009). But if you are grandpa, and your nest egg is all you have, betting on anything, much less the market, is not a good idea. On the other hand, as the Los Angeles Times business columnist Tom Petruno observed, staying out of today’s market is “a fine idea – if you can survive earning 2 [percent] or less on your money.” And there’s the rub.

If you buy safe, short-term federal paper you axiomatically lose money – after adjusting the paltry 1 percent or so return for inflation and taxes, the net return is probably negative. Buying long-term federal paper might enable you to do better, but then you run the risk of inflation eroding your principal. True, you can buy a sturdy safe and invest in gold, which has done right well lately, but having to store significant quantities of gold where it is both safe and accessible, can be a bit of a problem. Burying your gold on the south forty of a remote desert cottage, and guarding it with your gun locked and loaded, is not a very appealing option either. There is no fun in that.

But what does all that have to do with that intergenerational conflict? Plenty. Even as the public debt skyrockets and threatens to put new financial burdens on future generations, today’s ordinary old folks who may have problems living on Social Security, and whose trashed 401(k)s, if any, have yet to recover from the recent debacle, are dependent on safe but income-producing investments, and are thus compelled to subsidize those low interest rates with their nest eggs. Those among them who lack lawful access to a printing press like the feds, or to the substantial resources (and risk-tolerance) of the aforementioned big-buck folks, have no choice but to invest their nest eggs in CDs and short-term government bonds whose income prospects at current rates of return evoke visions of grandma dining graciously on cat food a la mode in her golden years.

In other words, the younger folks may be facing future financial burdens, but for now, those of them who still have jobs (which means the great majority of them) enjoy bargains being offered by anxious merchants. They get to finance cars for peanuts (0 percent is not unheard of), and can get under-5-percent home mortgages with the ever-helpful Uncle Sam chipping in a few grand on the down payment. Not to mention Uncle Sam’s recent generous cash-for-clunkers program. What a deal! They get to do all that at the expense of the old folks who already have homes and cars, and are increasingly faced with having to invest their nest eggs at a paltry 1.5 percent or so. And to add insult to injury, as all that is going on, bankers get virtually interest-free money from the Fed, which they can then put into long term Treasury bonds that pay 3.5 percent to 4 percent, without investing any of their own funds. How $weet it is. They do it because they can, and it’s a lot better for them than lending to borrowers who in the current economic climate may have problems repaying their loans.

This strategy does not work for grandpa. Unlike the banks that have an indefinite life and employ those “masters of the universe” bond traders who can respond instantly to market fluctuations, grandpa can only watch and hope for the best. And of course, grandpa can’t get his hands on essentially interest-free seed money generously supplied by the Fed, while the banks can.

Oh, and did I mention that concerns over the banks’ large cash accumulations have grown to such an extent, that the Fed has proposed allowing banks to park their reserves at the central bank, to wean the economy “off extraordinary infusions of cash and curbing inflation” when the economy starts improving? (Javier C. Hernandez, To Inhibit Inflation, Fed Offers to Set Up Interest-Bearing Deposits, Wall Street Journal, Dec. 29 2009). The banks argue that they are accumulating cash in anticipation of the next wave of foreclosures. The New York Times anticipates several hundred bank failures in the next few years. (Graham Bowley and Eric Dash, Doubts on Regulation and Renewal Hang over Wall St., N.Y. Times, Jan. 1). So at the moment, the big boys are making money, and those of them who are in banking are again enjoying obscene, unearned, multi-million dollar bonuses, while grandpa is involuntarily subsidizing much of that via those puny returns on his shrunken nest egg.

So it isn’t just a case of an intergenerational wealth transfer from the young to the old; there is also an element of vice versa involved here. Maybe the country’s economy is kept afloat by federal borrowing that the next generation or two will have to repay, but the younger generation enjoys present financial benefits at the expense of grandpa’s retirement income. Does it all balance out? I doubt that – I leave that judgment to the number crunchers. But it seems clear that the intergenerational wealth transfer we hear so much about is not a one-way street.

Gideon Kanner is professor of law emeritus at the Loyola Law School, and of counsel to Manatt, Phelps & Phillips.

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© 2010 Daily Journal Corporation. All rights reserved.

 

Follow-up. It’s nice to note that the New York Times is singing our song. See the editorial of January 18, 2010. Click here:  http://www.nytimes.com/2010/01/18/opinion/18mon3.html?ref=opinion

Just Deserts for New London

An editorial in the Connecticut Law Tribune (Pfizer Closing Proves Nothing, January 7, 2010), has it that New London’s “careful planning” of the infamous Fort Trumbull redevelopment project was just dandy, and if it failed to produce the vaunted redevelopment, wasted a fortune, and only produced a moral, civic and economic disaster, … well, that’s how the cookie crumbles. For a description of the departure from New London of the Pfizer pharmaceutical company for whose benefit this redevelopment project was pursued, see http://gideonstrumpet.info/?p=324

Though that editorial concedes that the Fort Trumbull project was “a good example of how not to do it,” recall that New London sang a very different tune to the Supreme Court. There it touted the high quality of its “careful” plans and assured the court that the redevelopment project would produce new jobs and tax revenues.

The editorial has it that the people who have criticized Kelo and its aftermath are deluded victims of “the cult followers of Suzette Kelo” and the “pro-property rights cabal” who “are crawling back up on their high horses.” Is that so? Not really. American people in unprecedented numbers – by a stunning majority approaching 90% — have voiced their disapproval of the Kelo outcome as one of the all-time worst decisions by the U.S. Supreme Court. Also, a majority of states have responded to Kelo by enacting laws intended to curb similar government excesses in their back yards. Are they all “cult followers”? I think not. Lawyers know that when people argue a case by resorting to personal invective, that usually means that neither their facts nor their legal position hold water. And so it is here. It is understandable that lawyers fighting a client’s cause would be content to rest their case on legalities. But why would a newspaper located in another town, which ostensibly has no dog in this fight take such an invective-laden, ad hominem position on what it claims to be a legal matter? That just doesn’t sound right. Could the editorial have been the product of a partisan masquerading as an anonymous editorialist?

The editorial ignores the equities of the matter and purports to rely on legal precedents, conveniently ignoring the fact that being legal and being right – to say nothing of moral – are very different things. But the editorial ignores that and cites the Supreme Court’s Berman v. Parker (1954) and Hawaii Housing Authority v. Midkiff (1985) cases as validating New London’s performance. Very well, let’s look at how things worked out in the aftermath of those cases.

Berman v. Parker arose from a slum clearance project in Washington, D.C.. It was supposed to produce new, wholesome housing for the unfortunate slum dwellers whose plight figured so prominently in the court’s opinion. At least one-third of the new housing was supposed to be low-cost, renting for $17 per month per room. But what was produced instead was housing that was so expensive that within a few years it resulted in a rent strike by affluent tenants.

The Berman taking was also a paradigmatic example of the bitter, but unfortunately accurate line, “Urban renewal is Negro removal.” Was it legal? The Supreme Court said “yes.” But was it right?

Remember that according to the Supreme Court, the en masse imprisonment of innocent Americans of Japanese ancestry during World War II was also legal. So what?

The Hawaii Midkiff caper was equally bad. There, the state took a landlord’s interest in land leases, in order to convey fee simple home titles to the tenants. Why? Because according to the state there was a land “oligopoly” on the island of Oahu, and it caused high housing costs that would now be remedied by this title redistribution. This was absurd. There was no oligopoly; as the court conceded, there were over 70 participants in the local land market. The reason there was a shortage of buildable land was that the government owned (and still does) some 50% of the land on Oahu and it was therefore not available for construction of housing. Also, Hawaii building regulations are notoriously restrictive and they hinder the construction of housing.

More important, the Hawaiian legislation in question merely reshuffled titles from landlord to tenant, and thus could not possibly lower housing costs because it produced not a square inch of new buildable land.

But let’s look at the proof of the pudding: did Midkiff reduce or at least stabilize housing prices on Oahu? Quite the contrary. After Midkiff, housing costs on Oahu doubled within a few years. This was in no small measure due to the fact that after Midkiff, Japanese investors who until then had shunned leaseholds, snapped up the now-available fee simple titles from the former tenants in the best parts of town, tore down many of the acquired houses, and replaced them with luxurious mini-palaces which they then marketed to Japanese business tycoons as vacation homes. This actually reduced the number of available homes on Oahu, and unleashed a wave of speculation that boosted home prices throughout the island. To give you an idea of what went on, one Japanese investor, Genshiro Kawamoto, bought over 100 East Oahu homes without leaving the back seat of his limousine, thus becoming a mega-landlord and partially restoring the status quo ante.

The failure of the Midkiff legislation was predictable and it was predicted. When the Midkiff case was before the U.S. Court of Appeals, Judge Cecil Poole presciently pointed out in his opinion that the legislation in question could not accomplish its intended results because its means were antithetical to its aims. Ah, but – just as in the Fort Trumbull case – the Supreme Court surrendered its constitutional review authority, refused to look at the facts, and deferred to the “well nigh conclusive” decision of the state planners. The upshot: the former tenants made a killing, the people of Oahu wound up paying the price in higher housing costs, and the Japanese reaped a windfall. So much for “public use.”

We could go on like this. There is the case of Yonkers which condemned land for Otis Elevator that, like Pfizer, later left town, leaving the city holding the bag. There is Los Angeles which at a cost of $100 million condemned 17,500 acres for a new, grandly named “Intercontinental” airport that was unable to operate, and had to be abandoned (see http://gideonstrumpet.info/?p=283 ). There is Hawthorne, California, that built a mall as a redevelopment project only to see it go under — it is now abandoned and you can see its pictures on www.deadmalls.com.  There is South Carolina which subsidized Dell’s new desktop computer plant, only to see Dell shut it down. There is Indianapolis that spent a fortune on a new United Airlines maintenance facility, only to see United say “ta-ta” and split. Redevelopment failures have also occurred in Buffalo, Detroit, Cleveland, Bridgeport, Hartford, Philadelphia, Minneapolis, and North Hollywood, to name a few.

The moral of it all is that when courts shirk their duty to enforce explicit provisions of the constitution, they invite these calamities. Our system of government is supposed to be based on checks and balances, not on surrender of unfettered power over people’s lives and property to parochially-minded, frequently incompetent local politicians who waste fortunes in increasingly scarce public funds in order to subsidize favored business interests that care only for their bottom line — the Pfizer fiasco being the proverbial “Exhibit A.”

In the end, we are unable to improve on the words of California Court of Appeal Associate Justice Macklin Fleming who, in Regus v. City of Baldwin Park (1977), said: ”The promoters of such [redevelopment] 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.” And that is just what happened in Connecticut: Pfizer abandoned New London in favor of a better deal in Groton — which is how the cookie crumbles in the real world.

Development is not “public use.” It is a risky entrepreneurial activity. Attaching the prefix “re” to the word “development” and employing municipal strong-arm tactics to acquire land for favored developers, does not change this fact. More important, we live in a society whose reckless expenditures of public funds have brought it to the edge of insolvency. It’s time to put an end to it. Were the Kelo defenders supportive of requiring those who perpetrated this fiscal calamity, to reimburse the taxpayers, we would be willing to listen to their excuses. But they aren’t and therefore, they should have the decency to take their lumps like men, and keep quiet as the citizens of Connecticut and New London try to clean up the mess they made of things.

Bottom line: New London got what it deserved. That’s called justice 

Stadiums – Bust, Not Boom

 

The new York Times of December 25, 2009, brings us the dispatch that far from being sparkplugs of local urban economies, professional sports stadiums have been largely a disaster. The article (Ken Belson, Stadium Boom Deepens Municipal Woes) brings the news that stadiums built or subsidized with public funds are having financial problems.

“From New Jersey to Ohio and Arizona, the stadiums were sold as a key to redevelopment and as the only way to retain sports franchises. But the deals that were used to persuade taxpayers to finance their construction have in many cases backfired, the result of overly optimistic revenue assumptions and the recession.”

The article focuses on Cincinnati which intended to finance stadiums for the Bengals and the Reds with an increase in sales tax that would – so it was said – also “pay Cincinnati’s public schools and give homeowners an annual property tax rebate.” In the event, it turns out that “sales tax receipts have fallen so fast in the last year that the county is now scrambling to bridge a $14 million deficit in its sales tax fund.”

It’s a familiar story. The cost of the two Cincinnati stadiums – so it was projected when they were built – would be $500 million for both of them. As it turned out, the Bengals’ Paul Brown Stadium cost $455 million, and the Great American Ballpark (Reds) came to $337 million, for a total of $792 million – an overrun of $292 million or 58.4%.

 

Current projections indicate that that $14 million shortfall will grow to $94 million in 2014. What’s significant about that date? We’re glad you asked. That’s the year when the Bengals stop paying rent on their stadium.

 

In addition to Cincinnati, the Times reports that similar problems are afflicting Indianapolis, Milwaukee, Columbus (Ohio), Glendale (Arizona) and Newark.

 

You can find the article at http://www.nytimes.com/2009/12/25/sports/25stadium.html

 

Interestingly, the article is silent about problems of stadiums recently built in New York, that have consumed kings’ ransoms in public funds.

Detroit — Again

We came across some pictures from Detroit recently, showing, not the familar stretches of vacant land where homes once stood, but of interiors of once-grand Detroit buildings that have been abandoned and left to rot. If that is not a vivid picture of a declining civilization, we don’t know what could be. Here they are:

http://io9.com/5435724/the-grandiose-decay-of-abandoned-detroit/gallery/

We recommend that you click on each of the pictures, one at a time, to get an enlarged version of each photo. Amazing! Also depressing.

Follow up. For additional pictures of Detroit ruins, though not as vivid as these, go to http://www.forgottendetroit.com/

George Will Hits Another Home Run With His Column on Eminent Domain

 In case you haven’t seen it yet, we recommend George Will’s Washington Post column commenting on the Kaur case — Columbia University’s effort to acquire land for expansion, using the power of eminent domain borrowed from the City of New York. His column is entitled Avaricious Developers and Government Twist the Meaning of Blight, Washington Post, January 3, 2010. Here it is:

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/01/AR2010010101367.html

North of the Border

We Americans often tend to think of Canadians as being just like us. They may dress up their cops like Nelson Eddy, and they say “aboot” instead of “about” but basically, they’re like us. Right? Not really.

We came across a passage in the Canadian blog Law Is Cool that sheds an illuminating light on the differences between us:

“We do not have a right to property in Canada like we have a right to life, liberty, or security. And the Ontario legislature can’t just pass a law infringing on those three lightly like it can with property rights. The Charter forces the government to follow the principles of fundamental justice if it wants to imprison, kill, or endanger someone. The criminal process is extremely demanding on the government because of the Charter, and the Parliament can’t take these rights from us because it can’t change the Charter on its own. For these reasons, our rights guaranteed by the Charter are truly our rights. Everything else are just privileges granted by the government, including property and ownership. You can say that the government is not some evil organization to be feared and distrusted, and you will be absolutely right. Canada is a democracy but the democracy is nothing but the rule of a majority. The very reason we put some crucial rights away from Parliament’s reach is to protect them from the majority. History knows many examples when democratic majorities persecuted smaller groups of citizens.”

We rise above the dubious grammar of this quote because its importance lies in its substantive message.  So think about it: in Canada, the civilized land north of our border, the legislature can just strip you of what you own by a simple majority vote.

You can check it out at http://lawiscool.com/category/property/

High Minded Environmetalism, High Speed Rail, and “Voters’ Remorse” in the San Francisco Area

Last November, California voters passed a bond issue with which to finance the much talked-about high speed rail from Southern California to San Francisco. But since San Francisco sits at the northern tip of a peninsula, that means that the new railroad right of way will have to go throught the peninsula which just happens to be home to some of the poshest communities in California. By “poshest” we mean the kind of places where you’d be hard put to find any commercial uses, and where, when it comes to the cost of housing, it’s a case of if-you-have-to-ask-you-can’t-afford-it.

But those high class folks also tend to profess a strong committment to environmentalism, and so they voted overwhelmingly in favor of that high speed rail line. By now, you have probably figured out where this is heading. It turns out that the Peninsula locals may be all in favor of high speed rail in the abstract, but when faced with the reality of its operation in their own communities, it’s another story.

The on line Oakland Tribune ( insidebayarea.com ) of December 31, 2009, reports that as the reality of the high speed rail’s coming has to be faced, the local NIMBYs, having realized that they will have 125 mph trains roaring past their homes along raised, 20-foot high concrete structures, and worse, will have to surrender some of their land to eminent domain (in some cases literally their back yards) for the right-of-way, all hell is breaking loose up there. It’s a case of “voters’ remorse.” 

So at the moment, insults are flying back and forth — NIMBYs vs. rotten apples, etc.

What next? Stay tuned. This donnybrook isn’t going away. We expect round two later this year as the design details of the high-speed railroad become public.