Daniel Nairn at Discovering Urbanism brings up a great point about cul-de-sacs. Are they public goods, or truly unnecessary “socialism in its most extreme form”?

Take the standard cul-de-sac that serves a handful of households. The purpose of this design is to exclude the general public from passing through while serving the automotive needs of a small number of individuals. Does it pass our intuitive sense of fairness to declare that the entire public, say the local municipal citizenry, ought to foot the bill for what could essentially be considered a shared driveway? Perhaps a more important question: How does the government’s decision of where to draw the line between public and private encourage or discourage the connectivity of the road system?

image from Discovering Urbanism

Dan discusses that Virginia’s DOT is looking at shifting funding away from roads that don’t play a significant role in the transportation network, by using a very well defined metric:

The link-node ratio is calculated by dividing the number of links (street segments and stub streets) by the number of nodes (intersections or cul-de-sacs). A perfect grid of streets will have a link-node ratio around 2.5 and a network of complete cul-de-sac or dead end streets with only one way in and one way out will have a link-node ratio of 1.0. It is suggested that a ratio of 1.4 will provide adequate connectivity in many situations.

The link-to-node ratio seems like a very rational approach to determining public roadway funding, if one chooses to concede that roads are a public good.

Unfortunately, owners of homes on cul-de-sacs have grown acustomed using their publicly-funded, communal driveways, and would suffer from decreased funding for roads they are entirely dependent upon. A viable solution would be for the municipality to grant the cul-de-sac roadway and land to the owners of the homes. The home owners could then use the street land per its highest-and-best use, and maintain their private communal driveway at their own expense. Observing the rise or drop in the value of those homes, we’ll then see if cul-de-sacs add value to the community, or are jsut sinkholes for public funds that benefit only a few home owners.

Related Posts:

• September 12, 2008 — Another On “Conservatives” and Urbanism (4)
• July 24, 2008 — Boudreaux: Roads Don’t Need New Taxes (0)
• July 23, 2008 — Conservatives and Urbanism (1)
• July 20, 2008 — Urbanism Legend: Density is Bad for the Environment (7)

Alex Tabarrok at Marginal Revolution - Now is the Time for the Buffalo Commons:

The Federal Government owns more than half of Oregon, Utah, Nevada, Idaho and Alaska and it owns nearly half of California, Arizona, New Mexico and Wyoming. See the map for more. It is time for a sale. Selling even some western land could raise hundreds of billions of dollars - perhaps trillions of dollars - for the Federal government at a time when the funds are badly needed and no one want to raise taxes. At the same time, a sale of western land would improve the efficiency of land allocation.

Alex suggests using the funds to buy cheaper land in the plains for The Buffalo Commons, the world’s largest nature park. I haven’t looked into the nature park idea, but I would like to see the Federal Government unload much of that land.

The MR post links to an article at a blog called Strange Maps, which uncovered the map from Stanford Magazine. Strange Maps explains:

This map details the percentage of state territory owned by the federal government. The top 10 list of states with the highest percentage of federally owned land looks like this:

1. Nevada 84.5%
2. Alaska 69.1%
3. Utah 57.4%
4. Oregon 53.1%
5. Idaho 50.2%
6. Arizona 48.1%
7. California 45.3%
8. Wyoming 42.3%
9. New Mexico 41.8%
10. Colorado 36.6%

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Congestion pricing schemes, touted as environmentally-responsible at the time of $4 gas, were defeated in New York City last Spring. However, as the market turmoil threatens to wreak havoc on tax revenues, fiscal necessity has lured New York State and New York City politicians to re-examine the political viability of charging tolls to drivers entering Manhattan.

The NY Times City Room blog discusses the history of tolling on New York City’s East River bridges, but much of that history features plans to reinstate tolling and the popular resistance to those plans. How East River Bridges Stayed Toll-Free:

On numerous occasions, politicians have tried to reinstitute tolls on the four bridges — the Brooklyn (completed in 1883), Williamsburg (completed in 1903) and Manhattan and Queensboro (both completed in 1909). After all, the Brooklyn Bridge charged horse-drawn carriages a toll from the time it opened. But by the Depression, the tolls were a thing of the past.

The history shows that officials have failed again and again to revive tolls on the four bridges. (Other major crossings, including the bridges run by the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey, already charge tolls.)

Tolling being “the third rail of of New York City politics”, it will be hard enough to institute in the face of voter sympathy for road socialism. So, we shouldn’t hold our breath for the ideal solution, full privatization of the bridges and transit, anytime soon, but tolling may be a step in the market direction. Or is it??

Is tolling just away for politicians to let themselves off the hook for their irresponsibility, and will just result in another new tax? Or can we hope it will soften the resistance to market-based solutions.

[thanks to loyal Market Urbanism reader, Benjamin Hemric for the tip]

Related Posts:

• August 20, 2008 — Block on Road Socialism (0)
• July 8, 2008 — Ikea Provides Private Transportation, Santiago-Style (4)
• June 10, 2008 — CATO Podcast: Transportation (7)
• May 10, 2008 — Private Streets in Brooklyn? (3)

Matt Yglesias is one of the best mainstream bloggers on land use/transportation that I know of. As one blogger (who I don’t recall right now) once said, his urban planning and transportation posts could be blogs in their own right. However, it’s puzzling that in an article for Cato Unbound, he comes up with such a pathetic rejoinder to the O’Toole/Cox/Poole “vulgar libertarian” transportation cabal, who don’t seem to have ever met a road they didn’t like:

Or consider the fact that Randall [sic] O’Toole is indignant about the prospect of public expenditures on mass transit systems, but appears to have little to say about public funding of highways. This, too, looks more like a case of narrow business interests than sterling free market principles.

While Yglesias’ instincts are right – current transportation markets in America are highly distorted – the reason they’re distorted has little to do with the ways highways are financed. Based on some basic figures, Randal O’Toole concludes that the vast majority of road funding – over 80% – comes out of user fees. Now, of course there are still some subsidies there, but it’s really nothing compared to the subsidies that mass transit systems receive, which in America never even come close to covering operating costs, never mind capital expenditures. Now, there are some problems with the 80% number, such as the government’s favorable access to bond markets and the legacy of infrastructure that wasn’t paid for with user fees, but all in all, it’s hard to argue that roads have a subsidy advantage over mass transit.

However, that’s not to say that Yglesias doesn’t have a point when he says that libertarians and conservatives have blind spots when it comes to how they see transportation. But the real government benefit that the road/car system has over mass transit is density: there are innumerable regulations at every level of government in the United States which favor low-density, single-family detached housing over the denser forms that dominated non-rural areas before the 20th century. Successful roads as we have in America require this low density to remain (almost) financially solvent – it would be very difficult to cope with people’s road needs if they were allowed to build as densely as they would without maximum density zoning rules and minimum parking regulations.

As a thought experiment, imagine your local town/neighborhood with twice the density. Chances are, the roads would quickly become very congested. They would have to be widened, which would require money, and even more money than normal, because the government would have to purchase valuable land next to existing roads. (That is, assuming that eminent domain is not used.) The gas tax would have to be raised, and soon the costs would get out of hand. On the other hand, mass transit would become more profitable rather than less, because much less track needs to be laid to satisfy the same demand, and mass transit systems have much more excess capacity than roads. If densities are limited, though, then this alleviates both stress on roads that go through valuable urban property (which are expensive and difficult to widen) and forces people to drive farther, thus paying more in user fees.

There’s a legitimate case to be made against American transportation and land use policy, but condemning highway subsidies ain’t it.

This post was written by Stephen Smith, who writes for his own blog called Rationalitate.

Related Posts:

• November 6, 2008 — Reason’s Commenters Put Reason’s Contributers to Shame on Urbanism (2)
• August 29, 2008 — Weekend Reading: Jane Jacobs, Agglomeration, Farms, NIMBY Songs (6)
• July 8, 2008 — Ikea Provides Private Transportation, Santiago-Style (4)
• July 7, 2008 — EconTalk Podcast on Public Transportation (0)

New York State’s Assembly is now in Democratic control.  On many legislators wish list is to end the vacancy decontrol provisions that allow landlords to remove a unit from rent control if a tenant moves out and the unit rents for more than $2,000 per month.  (for those of you not in New York, apartments over $2,000 per month is actually almost all apartments in Manhattan and desirable locations of Brooklyn & Queens)

Crains - Change in state Senate control could hurt landlords

“Roadblocks to considering such legislation have been removed,” says Ms. Rosenthal, who represents the Upper West Side. “This will be at the top of many people’s agenda come January.”

Of course, this is going to scare the crap out of landlords and renters of market-rate units.

“With all of the current uncertainty, why would you throw another obstacle in the way of even more investment in housing in the city,” asks Steven Spinola, president of the Real Estate Board of New York. Mr. Spinola is also confident that Senate Democrats will not act quickly on housing laws.

“They’re going to have enough trouble dealing with fiscal problems,” Mr. Spinola says.

Maybe our wise legislators will take the time to learn about the microeconomics of rent control…

Related Posts:

• October 15, 2008 — Retail Rent Control (8)
• September 19, 2008 — WSJ: Rent Control Is the Real New York Scandal (2)
• July 15, 2008 — Rangel Now Only Hoards Three Rent Controlled Apartments (0)
• July 14, 2008 — Congressman Rangel Legally Plunders $30,000/year in Four Rent Controlled Apartments (2)

Reason Magazine, the Reason Foundation, and Cato are generally pretty okay libertarian standard-bearers, but they lose serious libertarian cred when it comes to land use. In those areas, they’ve been completely co-opted by hacks like Randal O’Toole, Wendell Cox, and Robert Poole, who take every opportunity to bash the budding New Urbanist movement over its support of anti-sprawl land use regulations, without recognizing that the biggest part of the New Urbanist agenda is to repeal the highly restrictive minimum density zoning laws, minimum parking requirements, and other regulations that limit the sort of unregulated, organic growth that we see in the oldest and most desired parts of American and European cities today.

So anyway, it was totally unsurprising to see this article by Cox referenced in reason.com’s blog, where he blames the recent subprime meltdown on New Urbanism. But what I was surprised to see is the incredible outpour of knowledge in the comments section, where various commenters methodically rip Cox’s argument to shreds. Reason ought to look into its land use and transportation coverage, and instead of relying on these tired one-trick ponies, perhaps hire some of the commentators. They, at least, recognize that New Urbanism is nothing compared to the already-entrenched pro-sprawl regulations that have been in place since the advent of the automobile.

This post was written by Stephen Smith, who has his own blog called Rationalitate.

Related Posts:

• November 12, 2008 — Matt Yglesias fails to make the right case against highways (4)
• August 29, 2008 — Weekend Reading: Jane Jacobs, Agglomeration, Farms, NIMBY Songs (6)
• November 18, 2008 — Cul-de-sacs - Privatize ‘em (8)
• September 12, 2008 — Another On “Conservatives” and Urbanism (4)

By Sandy Ikeda

Last week I spoke to a standing-room-only crowd of students and faculty about the current economic and financial turmoil.  I shared the podium with three of my colleagues, who range all the way from far to the left of Barack Obama to very, very far to the left of Barack Obama.  Needless to say, they all blamed, to a greater or an even greater degree, “the free market.”

Now, I do think it’s possible in principle for wide-spread mal-investments to occur in an unfettered market.  (F.A. Hayek writes about the possibility in his Monetary Theory and the Trade Cycle, which you can read online here.)  But enormous speculative bubbles, of the sort we’ve just witnessed in the housing market, are typically the result of government interventions and policies.

So in my talk on this highly complex issue I tried to make three points:  (1) the immediate cause of the financial panic on Wall Street was the housing bubble with its sudden rise in mortgage defaults; (2) the free market, which stands for minimal government and the absence of privilege or discrimination, did not create this bubble; and (3) government (and Fed) policy and pressure did, by undermining lending standards across the board and pushing lending rates artificially low.

This blog has already referenced Russell Roberts’s fine collection of blog posts on the problem, and if you’re already familiar with the issues then obviously there will be nothing new here for you.  But I think it might be useful to have a list of “names and dates” that make the above case.  The following is not meant to be exhaustive (e.g., it doesn’t even mention important international factors), but is only an outline of the major legislation and policies relevant to the housing bubble.

(Caveat:  My expertise in economics is not in finance, but I did study a lot of this stuff at one time.)

***

LEGISLATIVE & POLICY TIMELINE

1913:    An act of Congress creates the Federal Reserve System, America’s first true central bank, to act as the government’s bank and as a lender-of-last resort for its members.

1920s:    The Fed quickly discovers that by buying and selling Treasury obligations (i.e., “open-market operations”) it can increase and decrease the supply of money and credit and thereby manipulate market rates of interest.  The Fed inflated the money supply by 60% in the 20s, which resulted in economic boom as well as systemic malinvestment, and rampant speculation on margin on Wall Street.  (Sound familiar?)  The best account of the episode is Murray Rothbard’s America’s Great Depression.

1929-33:  As we know, the economy then crashed and burned.  But that was a necessary stage in the economic recovery from the previous decade’s massive malinvestments, as producers tried to re-align their decisions with consumer preferences.  Unfortunately, a slew of policies, such as the Fed’s 30% contraction of the money supply, and legislation, such as the Smoot-Hawley tariff, delayed recovery for twelve years.

1938:  FDR creates the Federal National Mortgage Association (“Fannie Mae”), which is charged with buying and insuring residential mortgages in order to lower interest rates and promote home ownership.  Home ownership rises from 43% in 1949 to 62% in 1960.

1970:  Congress creates the Federal Home Loan Mortgage Corporation (“Freddie Mac”) that, together with a re-constituted Fannie Mae, bundles home mortgages into “mortgage-backed securities” (MBSs) for sale to investors.

•    Fannie and Freddie are known as Government Supported Enterprises (GSEs).

•    By 2008 Fannie and Freddie had issued more than 60% of MBSs, of which they themselves held $1 trillion and insure about 50% of all MBSs.

•    The perception that the federal government guarantees Fannie and Freddie’s viability further lowers the cost of risk and increases their profit margin, on the order of about $2 billion per year, as estimated by the Congressional Budget Office and the Treasury Department.

•    This implicit guarantee is realized in part, when beginning in 2006 rising loan defaults jeopardize Fannie and Freddie and prompts President Bush to nationalize them in August 2008.

1975:    Congress passes the Home Mortgage Disclosure Act (HMDA), requiring lenders to provide detailed information about mortgage applicants.

1977:  Jimmy Carter signs the Community Reinvestment Act (CRA), requiring banks to conduct business across the entirety of geographic areas in which they operate, in an attempt to combat “redlining.”

1991: Bill Clinton expands HMDA to include comparisons of rejection rates by race.

1992:    The Boston Fed promotes the government’s mandate to increase home ownership, specifically among minorities, by advocating a relaxation of lending standards, including:

•    Eliminating a lack of credit history as a barrier.
•    Permitting a lower share of income than the standard (28/36) on mortgage payments.
•    Permitting lower down payment and closing costs.
•    Nontraditional sources of income are OK, including unemployment benefits.
•    Banks can be punished by fines if HMDA data show higher rejection rates of minorities.

(One of my colleagues at this point accused me of blaming minorities for the housing crisis.  Be very careful, people will play this card!  Clearly, the responsibility for the crisis lies not in the intended beneficiaries of the CRA, but to the CRA itself and to the lax standards that it later encouraged across the entire mortgage market, both prime and sub-prime.)

Beginning in 1992:  Fannie and Freddie were encouraged to purchase “affordable” mortgages from banks – i.e., mortgages that followed “flexible lending standards” to promote the goals of the CRA.

•    Pressure from Congress and presidents Clinton and Bush helped promote the “subprime” market.  (Note:  You could underwrite subprime paper even before deregulation of 1999.)

•    Congress and the Administration pressure Fannie & Freddie to accept a growing percentage of their portfolios in subprime mortgages and also MBSs, of which by 1992 they held over $1 trillion.

•    Home ownership rises from around 64% in 1994 to 69% in 2005.

From 1998 to 2006:  There’s a great housing boom in the US.  Prices rise from just under $60K to over $90K (in 1983 dollars), owing in large part to “flexible standards” and the Fed’s interest-rate policy.

•    The “Federal Funds Rate,” which the Fed targets by using open-market operations, plunged from around 6% in January 2001 to 1% in January 2004.

•    While this was largely in response to the recession and 9/11, it also reinforced Congress and the President’s goal of expanding home ownership and fueling the ongoing housing boom.

2006:  In the third quarter of that year, defaults and “foreclosures started” began their sudden climb for prime (from around 0.16% of loans made to 0.43% in Q4 2007) and subprime mortgages (from around 1.5% to 3.7%) AT THE SAME TIME.  Thus, contrary to conventional wisdom, subprime defaults did not precipitate the prime-market defaults.

•    Stan Liebowitz shows that it was in the market for adjustable-rate loans, particularly in low-income areas, that foreclosures were the most dramatic.  These are the kind of loans that speculators prefer because of their low initial rates (with low or no money down owing to the “flexible standards” which were becoming the practice across the industry) and because speculators expect to re-sell (or “flip”) the houses before the rates were set to increase.

•    In percentage terms, the increase in foreclosure rates was significantly higher for prime adjustable loans (69%) than for subprime adjustable loans (39%).

2008: Investment banks and other financial institutions that, after years of encouragment from the government and GSEs, hold a significant part of their assets in MBS with defaulting loans — such as Bear Stearns, Lehman, AIG, Fannie and Freddie — see their asset values plummet and go belly up. Panic races across the rest of the Wall Street, the Dow Jones crashes again and again. In the midst of the panic, the government nationalizes a significant and ever growing percentage of the financial market.

So here’s the short version:  (1) Government legislates and the Fed helps to implement flexible standards in the mortgage industry in conformity with the CRA.  (2) Throughout the 1990s and early 2000s, government pressures Fannie and Freddie to purchase an increasing proportion of MBSs and subprime loans (based on flexible standards), while at the same time (perhaps unintentionally) loosening traditional lending standards across the board.  (3) From 2001 to 2004 the Fed deliberately drives interest rates down (as much as 5 percentage points).  (4) This all fuels in a speculative housing boom beginning in 1998, financial innovations on Wall Street based on MBSs and other derivatives in the early 2000s, and a housing bust in 2006.  (5) This in turn precipitates an historic financial collapse and equally historic bail-out in September 2008.

Greed and speculation are obviously an integral part of this story.  (They are as constant as gravity in ANY politico-economic system.)  Given the scope and depth of involvement in it by government institutions and policies, however, blaming our current woes on “the free market” is nonsense.

***

I drew on many sources in putting this timeline together, but the following were my principal ones:

Stan Liebowitz, “Anatomy of a train wreck.” [pdf]

Roger Congleton, “Notes on the financial crisis and the bail out.” [pdf]

Related Posts:

• September 23, 2008 — Russell Roberts on Government Intervention in Housing (0)
• October 10, 2008 — Market Meltdown and Bailout Videos (0)
• July 18, 2008 — Reason.org’s Staley Not in Favor of Property Rights if… (3)
• July 7, 2008 — Urbanism Legend: Greedy Developers (0)

When the New York Sun decided to shut down its press, the biggest loss to the blogosphere was Sanford Ikeda’s Culture of Congestion blog. At the Sun, Sandy blogged about cities, economics, politics, and related subjects.

Sandford Ikeda is an Associate Professor of Economics at SUNY Purchase. Professor Ikeda is the author of Dynamics of the Mixed Economy: Toward a Theory of Interventionism, involved with the Katrina Project at the Mercatus Center at George Mason University, and Past President of the Society for the Development of Austrian Economics.

Much of Sandy’s work and blog posts has overlapped with Market Urbanism’s topics, and viewpoints. Sandy is also a fellow resident of Brooklyn, and admirer of cities. Naturally, I was very honored and excited that Sandy accepted my offer to publish his posts at Market Urbanism while he explores the many options available to him in the blogging world.

I am certain Market Urbanism readers will enjoy Sandy’s contributions.

Related Posts:

• October 5, 2008 — Sun Sets on Culture of Congestion (0)
• November 13, 2008 — Tolling NY’s East River Bridges Back on The Table? (0)
• November 6, 2008 — Could NY Democrats Revive Rent Control? (0)
• October 15, 2008 — Retail Rent Control (8)