There is no place like home: stress test zoning decisions, not just banks ... by gimleteye

I am certain the following opinion will be waved like a red flag, sending up shouts of objections and alarm through the supply chain feeding into banks and the developer lobby, but what follows needs to be said. Please click 'read more'.

Economists agree that the collapse in housing markets in the United States created a global financial flu that has plunged world economies into the worst crisis since the 1930’s. The principle blame is assessed to a shadow banking system that flourished in an anti-regulatory political atmosphere allowing simple mortgages for all kinds of real estate to be spun into confections of debt and gambles against default of the pyramid scheme incorporated in each mortgage backed security that investors bought, blessed by rating agencies connected to issuers by a culture of greed and excess.

First, to staunch the bleeding economy, the administration quickly moved to inject trillions of taxpayer guarantees into the banks and, hopefully, unfreeze locked credit markets. Second, it assembled a taxpayer bailout of key financial institutions that could not survive once the shadow parts of their enterprise were disclosed as essentially worthless. Called “too big to fail”, it was really a case of resetting the assets of a few supersized financial institutions—wiping out shareholders and many bondholders, too—so that the crumbling net worth of all Americans could retain an appearance of value, while jobs are created, inventories restocked, the economy revived and all good people woken from the dream like Judy Garland’s in the Wizard of Oz.

The restoration of real value is what the “stress test” of banks, required by the Obama administration, is all about. But it is being performed with a wink and a nod: no longer are financial institutions required to “mark to market” all their toxic assets. It is eerily similar to reporting out the pandemic flu but giving up on statistics because there are too many cases to count and too few to count them.

But this top/down governmental response is divorced from the source of so much economic pain: underlying zoning and land use for construction and development that is the fertile soil from which so much bad debt and poor judgment flowed.

Federal regulation of banks and financial institutions recognizes economic activities that link the interests of all Americans. It is imagined, or taken for granted, that land use activities are local concerns or solely the province and jurisdiction of states. The disconnect is so profound and ingrained that all sorts of constituencies simply accept as though a form of life-giving oxygen that “one size fits all” when it comes to federal regulation of banks and insurance companies but that control of private property is whatever owners can persuade local government to allow. And that is exactly what the American landscape looks like: an unfettered opportunity for speculators to commandeer the US Treasury by arbitraging the inefficiency of laws connecting the banking and insurance system to what is built in your town and mine from confections of debt.

One the one hand this sounds complicated and on another hand, it is the simplest expression of greed. Today, for example, the Florida legislature has spent its entire session—not solving the state’s enormous budget crisis on account of plunging real estate values—but eliminating what poorly funded state protections exist for managing growth. Moreover, the GOP majority is seeking to maintain its lock on political power by imposing election “reform” measures. It is the pure expression of real estate developers, their supply chain, and land speculators taking advantage of confusion now and the appearance of relative calm in stock markets to harden their bunkers before citizens decide to take up the pitchforks.

These interests are perfectly aware that the absence of regulations in financial derivatives marched hand in hand with the blushing bride: an empty, hollowed out regulatory structure that has failed to protect Floridians’ quality of life, environment, and communities. On the national scale, from California’s Central Valley to the suburbs of Las Vegas and Phoenix, the marriage was called “the ownership society”.

Today’s news if filled with portentous stories about whether or not to disclose the results to the public of “stress tests” for banks. What is forgotten, or ignored, is that these toxic assets all have physical addresses. They are sprawling, platted subdivisions that sit half-empty and weed strewn, or, condos and strip malls and other commercial space that was built out into wetlands in the last gasp of the artificial boom created by mortgage backed securities that only served the purpose of flippers and speculators when the cost of money was dirt cheap.

A truer scenario for economic recovery would impose a stress test on zoning for land development, incorporating a much higher set of hurdles than “concurrency” models that turn local zoning decisions into a game of counting angels on the head of a pin.

A case in point: Miami’s homegrown production homebuilder, Lennar Corporation. Lennar’s local vice president is president of the Latin Builders Association; the building trade group that has dominated Miami politics and by extension, zoning, for decades. The directors of the trade association are virtually indistinguishable from the banks that make loans for construction and development.

In the midst of the worst housing markets in a century, Lennar is promoting zoning changes in Miami-Dade farmland—a multi-thousand unit development called Parkland-- outside Miami-Dade’s Urban Development Boundary, close to the Everglades. The company wants the zoning change now, even though it doesn’t plan to come to market for five years.

At the very same time, the corporation is trying to offload stale inventory of past developments at fire sale prices. It recently took out this full page advertisement on in the Miami Herald: “Builder Closeout: Every Condo Must Be Sold” in bold red, white and black graphics. No longer, at least in the case of these two enormous developments called the Colonnade and North Bay Village, is Lennar trying to lure buyers with the promise of protection if the buyer loses his or her job. Now it’s a “Sealed-Bid Auction: Your Best Price Plus Zero Dollars Closing Costs!”

Developers complain about the costs of zoning, of running the hoops of state and local environmental agencies, but what they have succeeded in doing is building a regulatory structure that compounds its own difficulties by ratiocination and constantly promoting the erosion of laws intended to protect the public interest. What is missing is wisdom and judgment; ironic, because what the industry has promoted for decades is the “wise use” of private property. Look at the result it achieved.

There is nothing vaguely mystical about the deals and hand-shakes between developers and officials charged with zoning decisions that lead to so much carnage in farmland, on waterfronts where public access was routinely denied. There has been nothing like “wise use”. The pattern of low density suburban sprawl has wrecked aquifers, destroyed natural habitats and, at a time of “family values” torn apart families by imposing huge costs on commuters and consumers. If “wise use” worked, why have American taxpayers been forced to shoulder the trillions in debt, underwriting the horrendous miscalculation of risk that rained a shower of wealth from Wall Street down the supply chain of developers and production homebuilders like Lennar and into the lined pockets of local city and county commissioners?

A “stress test” for local zoning should be created to protect American taxpayers from a system of investment in development that is in key respects the kind of Ponzi scheme that could be subject to RICO prosecution. Put another way, a top-down approach to stress testing financial institutions will not lead to any kind of recovery—because the revolving door of engineers, planners, government agencies, lobbyists, and elected officials is utterly committed to reviving a failed economic model of growth.

The Obama White House has been as careful in addressing the banks, hedge funds, and insurance companies as a snake tamer in a darkened viper pit. Banks should be subject to stress tests. But more, much more could be gleaned by subjecting zoning for property development to stress tests, helping to channel economic growth according to values that benefit society instead of speculators. Indeed, there will be no economic recovery until a public interest test is applied to local land use decisions in a way that stops the deliberate and willful miscalculations of risk involving the fate of every taxpayer.