Harvard Panel on the Financial Meltdown 9-25-2008

Basically, there are two drivers to the current problem, one of which affects Trenton and the other one, not so much.

First, the one that doesn’t. In the early part of the decade, home prices were bid up due to the ripple effect of the tech bubble. That momentum induced the mortgage industry to relax lending criteria in the face of a rising market. The more lending, the more demand and the higher the prices went. That ponzi scheme eventually collapsed.

At roughly the same time, and especially in 2003, Fannie Mae and Freddie Mac loosened their lending criteria for affordable housing programs. They, along with NJHMFA, poured money into places like Trenton at sub-prime rates, 100% financing and balloon loans. They were bottom fishing, but again, as long as housing prices went up, no problem.

In a very sick and cautionary way, the two root causes are related.  Congress put pressure on Freddie and Fannie to subsidize affordable housing partially in response to higher housing prices.  It’s quite possible that if these lower income buyers had not received subsidization then two things would have happened: 1) Freddie and Fannie wouldn’t have failed, and 2) those same buyers would be waiting on the sidelines to buy up homes when prices fell, thus allowing the financial system to unclog itself and work like it’s supposed to.

According to the S&P/Case Schiller national house price index, home prices peaked in 2006 and since then have dropped an average of 21% nationally.  In some markets, like Las Vegas, they are down more than 30%.  Oddly, Charlotte NC has seen a small rise in the same time.

Not all markets have been hurt the same.  Perhaps Trenton could have been among the more mildly affected.  Who knows?

The only thing Mayor Palmer could have done to save Trenton people from themselves would have been to revitalize the city so housing prices continued to go up in the face of a national decline.  Of course, he could have discouraged sub-prime and 100% financing for low income residents.  Instead, along with the state government, he encouraged it.  Ooops!

Revitalization remains the only thing Mayor Palmer can do to help going forward.

Government folks hate comparing their revitalization projects to my hypothetical suggestion. They like to point out that the funds they propose to spend are restricted in nature and aren’t available for my crazy scheme. OK, I never said they were, but they shouldn’t argue that those funds are for the purpose of revitalization unless they can be shown to at least approach the simple benefit of the down-payment grant.

Let’s remind ourselves what revitalization means

Revitalization is somewhat in the eye of the beholder. In fact, that’s one of the problems. Our government officials shy away from specifying what they mean by the term.

I propose increased per capita income as a single clear and measurable standard for revitalization.

Economists and sociologist consistently link improved per capita income to better housing and education and to lower crime. Furthermore, it’s a statistic that the Census Bureau measures for us. A city with a high per capita income is better able to afford schools, the arts, charity for the poor and lower tax rates. It will also spend proportionately less on police and fire protection.

The down-payment grant is a good hypothetical way to spend $100M

The down-payment grant is a simple revitalization idea. The program would pay the down-payment, up to 10%, of a newly built or renovated home in the target area. While there may be a couple of restrictions like living in the unit for a year, that would be all. There would be no income restriction or home price restriction. The owner would have to qualify for financing on his own and even come up the down-payment on his own, as the grant wouldn’t be paid for a year.

Such a program could turn $100,000,000 in funding into $1,000,000,000 in taxable property and increase per capita income. Here’s my math:

• Assume an average $200,0000 per home and a 10% down-payment
• 5000 new homes would be built.
• At 2.2 people per home, 11,000 new citizens would move to Trenton.
• Given a $60,000 household income required to finance the home, our per capita income would go up
• Trenton’s current is per capita income is $15,000
• New residents from the program would average $27.3
• Assume property tax on $1B at a 60% assessment and a 4.5% tax rate
• Trenton’s tax revenue would increase $27,000,000 per year.
• That’s a 4 year payback on $100,000,000

My assumption is that $20,000 is enough of a bribe to encourage 5,000 people to give Trenton a try.

There is no similar payback calculation for the ballpark, arena, tunnel, Riverline, train station or even the hotel.

My revitalization plan isn’t practical for government

There are a lot of problems with the plan. For instance, there is no state department in charge of spending revitalization dollars wisely. My plan can’t be funded by the Dept. of Transportation, Environmental Protection, NJ Transit or any other government agency with a track record of spending vast amounts of money. The death knell for the down-payment grant is that I don’t favor the poor.

Also, the plan might not seem fair to suburbanites who would wonder why their homes haven’t been subsidized (though they didn’t blink when we spent $1.1B on a train to nowhere).

No, I don’t expect the down-payment grant to be an actual program. However I do expect the people who propose to spend “other people’s money” to at least try to justify their expenditure in as clear a way as I have.

Don’t hate me because I’m rational

Trenton has the opportunity to attract several big chunks of NJ state government money over the next few years.

• NJ DOT is proposing vast sums to undo the mess it made of Rt. 29
• The state is also proposing to spend $87M on park in downtown Trenton
• Finally, the state has proposed up to $200M in tax credits for development around the train station

The greedy pro-Trenton property owner in me wants to make sure I help sucker the fine people of NJ into dumping as much of their hard earned cash into Trenton as possible. If they don’t care what the proposed or actual revitalization outcome is, why should I?

The rational pragmatist in me still wants their money, after all it’s largely the states fault that Trenton is such a mess. However I prefer to spend the money as wisely as possible and at least be honest with my suburban neighbors about what the money will accomplish.

It’s easy to shut me up about wasteful spending

There are many worthy justifications for big government projects. Perhaps they reduce oil dependency or improve our quality of life as measured by some index. Ballparks, arenas and parks are nice to have. And while they don’t necessarily lead to directly to revitalization, they may have indirect effects. Similarly train stations lessen car travel and that’s a good thing but they don’t automatically lead to revitalization.

It’s easy to shut me up on revitalization spending, just do the math. Show me what you really mean, how the project achieves it and how you measure the achievement. Just don’t call it revitalization if it really has some other purpose.

I admit to not understanding how politicians justify massive project spending

I admit to naiveté on state politics, but surely in these hard economic times, the governor and our representatives would do well to not just to spend some money on Trenton and other urban districts, but to spend the right money.

For that matter don’t call spending on the poor, education or the arts revitalization unless you can show the math. For instance education spending is extremely indirect and time shifted.

NJ and Trenton voters have reason to be skeptical about claims government spending will ever lead to revitalization. In Trenton, so far, it hasn’t.