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Irish Diversion

This week I had planned to finish up the traditional neighborhood versus suburban development discussion we've been hashing over here all month. I spent an inordinate amount of time last week tending to my primary obligation -- my family -- and had to spend the weekend getting caught up on everything I'd missed. I don't want to short change this topic so I'm putting it off slightly. Check back later in the week.

In the meantime, I wanted to share a video exchange between a reporter and an ECB official regarding Ireland and it's obligations to pay back bondholders. This needs a little bit of setup, and for that I'm going to turn to Michael Lewis, knowledge I picked up from his book Boomerang: Travels in the New Third World, and a piece he wrote on Ireland in Vanity Fair

The first paragraph of the Vanity Fair piece sets the table perfectly:

When I flew to Dublin in early November, the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

He describes in Boomerang exactly what happened. As the cheap credit was flowing, banks in Ireland took on enormous amounts of borrowed money to loan out, largely to Irish citizens who themselves were getting rich in housing and real estate development. When the artificial housing bubble burst and property values started to decline, these banks went from being illiquid (lacking cash to fund operations) to being insolvent (having more debt than assets) very quickly.

To understand what happened next, it is important to understand who these Irish banks owed money to. Much like our banks here in the United States, the money they were playing with was private money. Shareholders (of which the country of Ireland was a significant one), investors, pension funds, etc... In other words; private investors. Some were senior bondholders that would be paid first and some were subordinate, meaning they were the first to take losses.

And losses they should have taken. But they didn't. Unlike their neighbors in Iceland, which let their banks fail and re-established a reality-based banking system, the Irish government bailed out their banks. All of them. Nobody took losses, even those with subdominant (very risky) debt. All of these massive liabilities -- something like 35% of GDP -- became the government's.

And where did the government get the money? They are in the Euro and so, unlike the United States, they can't simply print the money to essentially tax everyone by diminishing the currency's purchasing power. The Irish government had to borrow the money from the banks. Not Irish banks -- that would have been absolutely ridiculous -- but from German banks, French banks, etc... 

This shell game was done to "save" the financial system. Interesting thing happened though. After turnng the private debt into public debt by borrowing from the private sector, the financial system promptly turned on Ireland. Since the country now had such high debt levels, they were a higher risk for default. A higher risk for default means a higher interest rate and higher borrowing costs. Higher borrowing costs makes them a higher risk for default. And on and on and on.

To be protected from default, Ireland needed a bailout. They needed the International Monetary Fund (IMF) and the European Central Bank (ECB) to come in and buy their debt from the private sector, thus removing the private sector and making a high percentage of the resulting debt public. This stabilized interest rates.

Now that things are stable, the Irish people can go about the decades long process of austerity and stagnation necessary to service this enormous debt. What started with crazy lending by a handful of Irish banks has become the indentured servitude of the Irish people to German banks and the European Union, the latter an institution that was supposed to help create prosperity in Ireland.

I guess it is the kind of prosperity you get from a credit card binge at Walmart. The cheap junk all breaks before the bill is even paid off and the only ones truly richer are the Walmart execs and the Chinese.

Now here's the video I started with. What you are going to see is an Irish report named Vincent Browne ask ECB official Klaus Masuch (country of origin unknown to me, but the undertone of nationalism creeps in the conversation ever so slightly). His question: Explain to the average Irish citizen why this debt should be paid, why Ireland shouldn't just default.

Incidentally, this isn't a question just for taxi drivers and curmudgeon reporters but one that is being asked at the highest levels of finance.

And it isn't a question that is ultimately going to be asked only in Ireland either.

One other thing to point out here. The cheap money high started when Ireland began using the Euro in 2002. Check out the following graph of Irish GDP. Project out the pre-2002 growth trend and compare it to what actually happened. I'm not suggesting that is a rigorous economic analysis, but one has to ask how much of the underlying bubble has yet to burst. Who knows -- I certainly don't -- but it is clear that the system has been divorced from sound economics for some time. 

The brilliance of Jared Diamond's incredible book Collapse: How societies Choose to Fail or Succeed, is how he studies complex systems by examining natural experiments in history to identify commonalities and trends. Michael Lewis has done for national finance what Jared Diamond did for anthropology. His verdict for larger systems that continue the present course is no less damning.


If you find this material interesting and would like to know more about how to apply this thinking to your community, join us at the Strong Towns Network, a social enterprise for those working to implement a Strong Towns approach.


Friday News Digest

TGIF. This has been a thoroughly miserable week, and while no terrible tragedy has befallen me or any of my loved ones, it has been just bad enough where it has become almost comical.

Last weekend gave me a massive, splitting headache that lasted into Monday. I actually fell sound asleep at my desk Monday afternoon, went home and went to bed. Fourteen hours of sleep later -- headache still in effect -- I find out that I had slept through a really important meeting with a community that I dearly love with a project I am passionate about (but behind on). I had thought the meeting was Tuesday evening. Credibility hit.

Wednesday went better, but that evening my seven year old daughter came to the bedroom door to say, "I think I'm going to be sick." Unfortunately for my wife and me, she was far too prescient as moments later she was sick all over the floor. This prompted another (unproductive) day home on Thursday with sick child. Remember that city whose meeting I missed on Tuesday? Well, I missed a lunch meeting with that city's mayor on Thursday. He called -- "where you at, dude" -- sitting alone at the restaurant when I was helping sick child. Additional credibility hit. Fortunately he later discovered my email and phone call and we will reschedule. (Slight credibility restoration.)

Then to top it off, I left the office today to head to another important meeting and discovered that I had locked my keys in the building. I had to call my friend and personal savior, Justin, to let me back in, but I was still 45 minutes late.

And while the entire time my email and phone message banks are filling to capacity, I have this sinking feeling that any minute I'm going to remember that absolutely critical thing that I was supposed to have done but overlooked. If you're waiting on something from me, a friendly reminder is called for at this point.

I would have actually taken the Friday off except for the fact that the very sweet Susan Traver last week wrote on our Facebook site that she lives for the Friday News Digest. How can I possibly fail to deliver with that type of anticipation?

Susan, enjoy the news.

  • Next week I am headed to Mason City, Iowa, for a Curbside Chat that was arranged by Marty Walsh, director of Main Street Mason City. If Mason City is just a fraction as cool as Marty is enthusiastic about it, this is going to be awesome. This week it looks like we've scheduled Chats in San Diego and Modesto, California, as well as in New Mexico, with final details to be worked out in each. It is really invigorating to see such passion for spreading the Strong Towns message.
  • Closer to home, a friend forwarded me this blog post on the Mn/APA's website. My response: "You've got to be kidding me?" I'm not a prophet, but for crying out loud.... The crazy thing is that I know they're reading our stuff over at city hall the moment it is published. I guess I'll take it as a positive sign that we're impacting them and, if nothing else, they are starting to ask some important questions. Hopefully they won't go to the same place for advice that they went last time.
  • In last week's Friday News Digest I mentioned Nate Hood's take on Cape Coral, Florida. I'm trying to get Nate to CNU20 in West Palm Beach and I had hoped to head over here with him for some on-site reporting, but it seemed a little to far for the value added. All the same, congratulations to Nate for having his find become Jim Kunstler's Eyesore of the Month for January. And if you want more Nate, you should read his latest piece on his decision to abstain from sports overconsumption. From JHK:

Get a load of where our heads are at in the USA as 2012 arrives on the scene. Family Fun Walk on a nine-laner, anyone? Welcome to the Enviro Nirvana of Cape Coral, Fla. Costs $42 million, by the way. As if you needed any more reason to think that the state of Florida is absolutely fu_ _ed. 

Happy New Year, everybody, and don't let those Mayan priests clutter up your weltanshauung!

Thanks and shout-out to Nathaniel Michael Hood for sending in this humdinger.

  • Instead of building $42 million auto highways that create no value, some cities in Sweden are building a $4.1 million bike "superhighway". It has four lanes, on and off ramps, no intersections, wind protection and periodic service stations. (Want to bet you can't buy a Big Gulp and Twinkie at that service station?) I had a city council member recently argue that adding sidewalks to streets was "social engineering". What would he call a society where 60% of the population bikes or takes public transport? Who knows, but as a fiscal conservative keenly aware of our fiscal and energy problems, I would call it "resilient". Probably some pretty good looking people, too.

The proposed bicycle superhighway would, in addition to four lanes (2 in each direction) have exits but no intersections, two types of wind protection (low bushes as well as solid fencing) periodic bicycle service stations, and would take eight years to complete.

Total cost of the superhighway is estimated to be about 50 million Swedish crowns (US$ 7.1 million).

We already know that building bicycle infrastructure is magnitudes cheaper than building new car roads, and better for our health and our air quality. So, what will the first U.S. cities be to build this type of interurban.

  • Good thing it doesn't get cold in Sweden -- we all know you can't actually bike in the cold. Like here in Minnesota. Brrrr..... No way. (This girl is just too cute -- I put this in for you, Justin. If she can do it, so can we, right?) 

  • Someone on this site linked to Strong Towns in the comments section and it prompted me to read the article, which prompted me to take a baseball bat to my chair and then to sob uncontrollably and, finally, to collect my thoughts and write a coherent word of advice. Putting a gas station in the middle of a traditional neighborhood is just another example of the financial backtracking I've been talking about so far this year. Here was my comment:

Just from the one photo I can see that this neighborhood has good bones. There is so much that could be done here. This article and the comments reveal more than a tinge of desperation. Good long-term decisions require long-term thinking.

It would be very sad to believe that the highest and best use of this property is a gas station. The amount of revenue created from a gas station will not come near to justifying the amount of public infrastructure in place here, and that is before you take into account how it would devalue the neighborhood.

It should also be noted that a “food desert” is not a naturally occurring phenomenon but a byproduct of an unproductive and warped land use approach. Doing further damage with a gas station is not going to be the long-term answer. Restoring the traditional development pattern that this neighborhood was built to prosper with is a more sophisticated and complex approach, but will ultimately be more successful.

I wish you all the best of fortune.

  • Crossover knowledge utterly fascinates me. I deeply admire people who can take gained wisdom from one arena and apply that knowledge to a completely new endeavor. This was the genius of Steve Jobs, for example, who who took design and mashed it up with technology. I came across an article recently by Victor Ginsburgh, a professor of Economics of Art and Culture (which sounds really cool, actually) who looks at studies of "experts" and their inability to predict success and failure or identify quality. Applying these insights to ratings agencies, he asks the simple question: why should we expect them to be any better?

In artistic skating, evaluation depends on the incentives and the monitoring faced by judges. Lee (2004) points out that they face an “outlier aversion bias” because they may be excluded from further competitions if they cannot explain why their rating is at odds with the mean of other judges. Therefore, they manipulate their ratings to achieve “a targeted level of agreement with the other judges,” which essentially implies that their judgement is based on previous achievements, and not on the one that is unfolding, since they have to cast their votes a couple of seconds after the performance of each skater.

  • And for those of you that believe that the American economy is stable, that we are out of the depths of recession and headed for recovery, that our banks are solvent, that we can overcome Europe's failings, that Middle East instability is a significant concern but not a mortal threat to us, that our debt levels don't matter all that much, and that we should just continue on with the Suburban Experiment confident with the knowledge that we are a great nation, you probably won't care that our top creditor and major producer of imported goods is not the stable, unified and homogonous country we like to think it is. Pass the freedom fries, dude.

sorry....the online magazine Foreign Policy will not let me excerpt a quote, but read the article anyways

  • And finally, some new Nassim Taleb that was just uploaded in 2012. I can't get enough. Hope you find value in it too.

Have a great weekend, everyone. Next week I'm going to try and wrap up the series on the two different blocks -- traditional and auto-oriented -- by talking about how to fix the situation now. See you Monday.


If you find this material interesting and would like to know more about how to apply this thinking to your community, join us at the Strong Towns Network, a social enterprise for those working to implement a Strong Towns approach.


Residential maturing

One thing I did not clearly state on Monday (Why decline is not normal) was how the "maturing" process is capable of happening in the traditional development pattern, but not in the suburban pattern. The traditional grid and all its variations is an amazing platform for different intensities of development. In comparison, when you build a strip mall on a frontage road, there is no natural progression for that building other than decline. When you build a traditional neighborhood, an entire palette of possibilities is available.

Before I go any further, I need to let you know that the images in today's post are from the library of Steve Mouzon, one of the people I most admire in CNU. If asked to sit down and write out a list of people I'd like to have over for dinner, Steve would be high on that list. But you should know that his amazing library of photos is not something reserved for his pals and acquaintances (and those that pester him, like me). All of these photos and more are available online for purchase at a ridiculously low price. I sometimes just go there to browse when looking to complete a thought visually. Check it out.

So how does a residential neighborhood mature? It is simple. Over time, as value is added to a neighborhood, natural market forces put pressure on properties to expand, redevelop and intensify. This is not coercion and it is not something that needs to be subsidized. When done in a healthy neighborhood, the progression is incremental, smooth and welcome. This stands in stark contrast to our current approach, which is often a random effort, completely out of scale and resisted by the neighborhood.

So a traditional neighborhood is established. The first natural iteration would be the single family home. Now being from Steve's library, this is a very nice home. It doesn't have to be this big or this nice. A small single family would be just fine in most infant neighborhoods.

Copyright Steve Mouzon

As value is added to the neighborhood, the underlying land value will increase. Once so much value is amassed (let's say, for example, because it is within a couple of blocks of a great downtown or a block from a transit stop), there will be a natural demand for redevelopment. From a mathematical  standpoint, when the improvements on the lot are less than 3x the value of the land, there should naturally be redevelopment pressure.

As an example, if you have a lot worth $50,000, a stable investment is a home worth at least $150,000 for a total lot value of not less than $200,000. Let's say that the house remains static but the land becomes worth $100,000. There will be natural market pressure to improve the structure -- either through an addition or some type of redevelopment -- to be worth at least $300,000. This would give a stable value of $400,000.

Now understand that the pressure is not on the homeowner, per se. Your property doesn't go up $10,000 and you suddenly feel the pressure to spend $30,000 on granite counters and new flooring. But as properties change hands and the market turns over -- which is an incremental process that happens slowly over time -- the people buying the lot will take this into account. The further the property is below that 3:1 ratio, the higher percentage of developers that will be interested in it (assuming it is a healthy neighborhood with appreciating property values).

What will a developer then do with it? In a healthy neighborhood, that developer might be the person next door. Or it could be someone from out of town. Either way, the lot is not going to have increased in value enough to support a high rise apartment (which wouldn't fit in the neighborhood anyway). But a duplex would be just fine. It is a small incremental change, allows the property owner to get more value out of it (could perhaps be half owner occupied and half rented) and is compatible with the adjacent neighborhood.

Copyright Steve Mouzon

Nobody reasonable is going to be offended by that house popping up amongst a bunch of single family residences. And if it is simply an expansion of an existing home to create a duplex, nobody is going to mind that either. This is a great neighborhood and everything is working well. 

But let's say that even more value is added. Not only do you have a great downtown and a transit stop, but you now have a great park and a lot of cultural activities going on in and around this spot. Not only that, but the downtown is growing too, some really chic retail has crept in to some formerly-residential spots up the block and the transit line has been connected to a major hub. Wow, we've built some value here! Time for more intensity.

Copyright Steve MouzonAgain, you can see how a couple of neighboring duplexes could be purchased and, instead of some ridiculous apartment or condo complex with a big parking lot, the traditional pattern calls for something that would fit right in. If you're living in the duplex across the street, are you going to object to the eight unit row house going in? Probably not because it fits right in. If you want to see some great pictures of a neighborhood at this maturity level, check out the piece I wrote on Frederick, Maryland.

I am going to pause now before going on to the next step and reiterate something important. I know there are those of you reading this right now, sitting at the kitchen table of your nice single family home, saying, "There is no way on God's green earth that I'm going to allow a set of row houses across the street from me. Who does this Strong Towns guy think he is?" Fair point, and the reality is that most neighborhoods will not grow beyond the single family stage. That's okay too, at least as long as the public infrastructure and services stay scaled to that investment level.

But some neighborhoods will. And even if you object today, what's to say that your kids will object two decades from now. When they inherit the house, they're going to have lives of their own. Their own homes with their own memories. Yes, your house will have personal value to them, but it will also have real financial value. In a healthy redevelopment scenario, it will have lots of value. Again, we're not talking about coercion like we use today in eminent domain. We're talking about a natural cycle that would compensate you and your family very well for voluntarily selling your property at an opportune time. 

And this is not a subprime-induced bubble. This type of value creation is the hard work and vision of a community. It is resilient. (Note to planners: Doing this is actually your job, not all that zoning baloney).

So now we have a bunch of row houses, but up the block is 5th Avenue and the other way is Central Park. So what happens next?

Copyright Steve MouzonThere is one last thing I need to address here, because there are housing advocates that are rushing to click on "comments" so that they can curse me for being pro-gentrification. I plead guilty. Improving the value of a broad swath of properties is part of what a well-functioning local government does, at least one that wants to be around for a while. And while I acknowledge that, in today's system, this tends to drive poor people out of neighborhoods as wealthier people move in, that is not the way it has to work. And I don't think that is the way it would naturally work if we didn't have the zoning and transportation policies we have. 

You'll notice in every iteration of building I've presented here -- from single family to duplex to row house to apartment -- we are building things that would generally be called more "affordable". Now it wouldn't necessarily have to be that way -- an apartment in Manhattan is not likely to be affordable, for example -- but it could be. In reality, the palette of home designs I've presented here defy price range. Literally any of these could be internally configured for any price point. In other words, building valuable places will solve affordable housing problems, not make them worse.

There is no simple short cut to building a truly Strong Town. Understanding the power of the traditional development pattern and how it allows a community to create value and mature over time is a critical first step.


If you find this material interesting and would like to know more about how to apply this thinking to your community, join us at the Strong Towns Network, a social enterprise for those working to implement a Strong Towns approach.