split level ponzi
July 5, 2011, 11:58 pm
Filed under: betaCITY, Cities, Suburbs | Tags: , ,

It was only a matter of time before someone linked sprawl in America to a Ponzi scheme.  Today, cheap gas and free roads  and the rejoinder to ‘drive till you qualify’ are the bedrock values of the home ownership culture in America.  How did we get here? – is the very topical question niggling the minds of thinkers, planners and economists.  Ponzi schemes – limitless space and stuff bought with funny money loans – is an obvious culprit as the article excerpted below makes clear.  But there is an additional reason for our great diaspora:  our suspicion of the often difficult but mostly sustainable locus of civilization, the city:  its social and economic life, its laws.

In no uncertain terms the American suburb has become the largest public money grab in North America and an experiment in social engineering unparalleled anywhere in terms of scope and foolhardiness.  And certainly, the grease on the wheels of this vast expanding machine drew people outward but also convinced them to mistrust the core.

A Ponzi scheme is a company with no real business.  It is sustained by successive waves of investors who pay the dividends promised to prior investors further up the food chain.  The trick is to maintain a constant supply of new investors to keep the money flowing up.  And of course, like a house of cards, it will fail because the promise of return will always be greater than the total real money in the system.

Beginning in the 1950’s American housing worked just like a Ponzi, according to the article below.  Three instruments were established to kick it off:  government transfers, utility and transportation subsidies and mortgages.  Then all that was needed was investors, and there were plenty of them:  men and women emerging from two lost decades of depression and war, eager to buy into the new structures set up to ensure the good life.

The system has lasted for 60 years or three generations.  It got a terrific shot in the arm when Clinton and Greenspan sat down to reengineer the economy after the tech bubble burst in the 1990’s.  They confirmed the new ponzi should be housing, because no self respecting American would default on a mortgage – a limitless supply of investors clambering to enter the lower tier of the scheme.  And Wall Street went to work.

Beside Ponzi structures, there is a second critical reality that stimulated the 20th century evacuation of America’s great cities:  aversion to law.  Ponzi structures made the suburbs cheap, law aversion made cities undesirable. Cities in history have been places of equanimity and even refuge due in large part to the centrality of law in their respective societies.  However, American cities were experiments in modernism with their skyscrapers and grids. One can argue that they were established in a milieu that had rid itself of the great pre modern institutions – whose mandates facilitated fraternity and equality to their citizens – which made them less livable than their historical counterparts.

Of course the synonym for law aversion in the American scene is ‘freedom,’ and the irony of applying this freedom carte blanche to our laws and environments is loss of real freedom as we are seeing in a half century of laissez faire development that has resulted in personal and government debt and foreclosure.

Fleeing the city is literally an act of removing oneself from social entanglement.  My great great grandfather – I think it is two greats – moved his family to upstate New York after being ‘ruined’ by Philadelphia lawyers.  That’s just one story among millions that tell of people looking for a simpler life.  Our post war leaders believed that it was a good use of tax money to help people to live in places far from city centers.  The part of the story that isn’t being told – which is equally destructive to the way we live – is that for cities to be livable, the difficulties of city life need to be tempered; they simply can’t be left to the whims of ‘freedom’ and ‘market demand.’

Here is the excerpt from the post on suburbs and Ponzi schemes:

What we have found is that the underlying financing mechanisms of the suburban era — our post-World War II pattern of development — operates like a classic Ponzi scheme, with ever-increasing rates of growth necessary to sustain long-term liabilities.

Since the end of World War II, our cities and towns have experienced growth using three primary mechanisms:

  1. Transfer payments between governments: where the federal or state government makes a direct investment in growth at the local level, such as funding a water or sewer system expansion.
  2. Transportation spending: where transportation infrastructure is used to improve access to a site that can then be developed.
  3. Public and private-sector debt: where cities, developers, companies, and individuals take on debt as part of the development process, whether during construction or through the assumption of a mortgage.

In each of these mechanisms, the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.

The American Suburbs are a giant Ponzi Scheme, Charles Marohn, Grist

Further reading:

Sprawl Costs, Robert Burchell, Anthony Downs, Barbara McCann, Sahan Mukherji

Once There Were Greenfields, Kaid Benfield


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