The Train They Call The City of New Orleans (Part 1)

It's time to discuss the good, bad, ugly, and the just plain stupid about what happened in New Orleans. We also need to look ahead at how this will impact our economy looking forward.

Before attempting to undertake that task, let me first send out some heartfelt condolences to anyone that has been touched by the tragedy we calmly name Katrina. Many people have lost their homes, businesses, livelihood, and even their lives in this tragedy. Anything that anyone can do to help out will be appreciated, probably in more ways than anyone of us not affected can imagine.

Let's first dispense with the good. This is easy because quite frankly there isn't any. Oh sure, some material supply company or some refiner stock you own might rise in price but at best that will be a temporary gain. Point blank, no matter what economic cheerleader clowns such as Joe Battaglia on CNBC are saying, there simply is no good that comes out of these disasters. If there was a net positive affect, we should all be wishing for more hurricanes.

If you want serious economic commentary I suggest following Paul Kasriel at the Northern Trust. This is what Kasriel had to say in Hurricane Katrina Had No Silver Lining!

Inevitably, some perky economic analyst is going to say that despite the death and destruction Hurricane Katrina visited on the poor souls who populate Gulf coasts of Alabama, Mississippi and Louisiana, it had a “silver lining” as it will stimulate economic activity via new building, clean-up, etc. Balderdash! Katrina contained no silver lining. Firstly, there is never any silver lining to the death and injury of human beings. Secondly, although there will be expenditures made to clean up the mess and rebuild damaged/destroyed structures, there will be other expenditures not made that otherwise would have. I doubt that folks will be going to the movies or on vacation as much now that they have to spend more on rebuilding. There will be a change in the composition of spending, not in its total. Government disaster aid represents a redistribution of income. So, the givers of aid spend less and the receivers spend more – net, net, a wash. Thirdly, there has been a loss of real wealth. Katrina represented accelerated depreciation. Structures and other tangible assets were destroyed. That means that the services or “income” these tangible assets produced – shelter, transportation – have disappeared. The production of capital assets entails the postponement of current consumption. So, some people are going to have to defer current consumption so that finite resources can be used to reproduce capital assets. If hurricanes or other natural disasters contained economic silver linings, we wouldn’t have to wait for Mother Nature’s serendipities. We could create man-made ones. Short of wars, which destroy not only physical capital but human capital, too, we could blow-up neighborhoods after giving residents a “heads up” to gather their mementos and vacate their homes. Wow! Think of all the economic activity we could generate. This concept of man-made disasters as good for the economy sounds silly, doesn’t it? No sillier than the analysts who will declare that there is an economic silver lining in Hurricane Katrina.

I doubt Paul Kasriel even had time to finish that piece before stupidity from Joe Battaglia and others was gushing from every orifice. Speaking of stupidity, let's now skip to the "Just Plain Stupid" section of tonight's commentary.

$Ben "Helicopter Drop" Bernanke, chairman of the Council of Economic Advisers and perhaps next in line to replace Greenspan as FED chairman had this to say:

"Even the worst-affected states like Louisiana and Mississippi should see some benefits in time". "Reconstruction will add jobs and growth to the economy".

Does anyone want "benefits in time"? Should we all be praying for such benefits? Bernanke is quite frankly clueless. What that means is that unless someone even more clueless can be found, he will most likely become our next FED chairman. Of course there could be an accident and someone competent might actually be nominated but I would not count on it.

Speaking on stupidity let's take a look at our priorities: This is what Walter Maestri, emergency management chief for Jefferson Parish, Louisiana; New Orleans Times-Picayune, had to say way back on June 8, 2004.

"It appears that the money has been moved in the president's budget to handle homeland security and the war in Iraq, and I suppose that's the price we pay. Nobody locally is happy that the levees can't be finished, and we are doing everything we can to make the case that this is a security issue for us."

"But the cost of the Iraq war forced the Bush administration to order the New Orleans district office not to begin any new studies, and the 2005 budget no longer includes the needed money".

According to the above link the US Senate was seeking to restore some of the SELA funding cuts for 2006. Lovely. We have wasted $300 billion in Iraq, with no end in sight, with no benefit to anyone but Halliburton and other companies on no-bid government contracts (and the president had to lie to get Senate approval to do it), and in the meantime we cut funds that might have save the City of New Orleans from devastation. Now if that is not the height of stupidity what is?

In 2001, the New Orleans district spent $147 million on construction projects. When fiscal year 2005 wraps up Sept. 30, the Corps expects to have spent $82 million, a 44.2 percent reduction from 2001 expenditures.

In The FEMA Phoenix an article about the Federal Emergency Management Agency (FEMA), the Washington Monthly reports:

Because FEMA had 10 times the proportion of political appointees of most other government agencies, the poorly chosen Bush [Sr.] appointees had a profound effect on the performance of the agency. Sam Jones, the mayor of Franklin, Louisiana, says he was shocked to find that the damage assessors sent to his town a week after Hurricane Andrew had no disaster experience whatsoever. "They were political appointees, members of county Republican parties hired on an as-needed basis....They were terribly inexperienced."...The difficulties of coordination seem to indicate we've returned to the bad old days where the FEMA administrator position is given away on the basis of political favor, rather than hard experience.

Gee it seems we did not have an exit strategy for either Iraq or New Orleans. Then again the FED does not have one for the housing bubble either. We just keep blowing bigger and bigger and bigger bubbles hoping for some kind of miracle down the road. It should be very clear by now that we have a genuine shortage of "exit strategies". I suggest Wall Steet hop on that idea since there is probably billions of dollars that can be made off it. The beauty of it all is that none of them even have to work!

Mish telepathically receives another question: What Hurricane forces were these levees designed to protect against? WOW. That sounds like a good question so let's take a look.

Here is a Q&A to the US Army corp of engineers .

Q.2 Why did the levees fail?
A.2. What failed were actually floodwalls, not levees. This was caused by overtopping which caused scouring, or an eating away of the earthen support, which then basically undermined the wall. These walls and levees were designed to withstand a fast moving category 3 hurricane. Katrina was a strong 4 at landfall, and conditions exceeded the design.

Q.3. Why only Category 3 protection?
A.3. That is what we were authorized to do.

Not doing that levee work makes you wonder what New Orleans might be like today if we'd been spending billions of dollars a month right here in the United States instead of Iraq. One can only wonder what else are we not doing that's going to do here but waste elsewhere that will eventually come back to bite us in the ass.

Bear in mind there is another side to this story so I will present it. Building on a flood plain in a hurricane zone is just plain stupid. New Orleans was a disaster waiting to happen. Now taxpayers are going to bail out another government stupidity and that stupidity is called flood insurance. There should be no government sponsored flood insurance. If people want it they should pay for it at market prices. It's high time we stop allowing the building in flood zones but if anyone insists, then it is high time it is 100% at their sole risk.

This disaster there is a perfect example of the hubris inherent in man trying to control nature. In attempting to control river flooding, we caused the destruction of flood plain marshes and islands that would have helped prevent the hurricane flooding that we saw. As a direct consequence of our attempt to control mother nature, New Orleans actually sinks a fraction of an inch every year. Over time that adds up.

DrStool on the CapitalStool had this to say

As a commercial real estate analyst, I would say for sure that NO will not be rebuilt.

There is nothing there to rebuild. It would be completely infeasible to rebuild tens of thousands of living units that do not pay enough rent to cover the cost of construction.

The Federal government is already broke. It cannot foot the bill for the hundreds of billions, perhaps trillion, that would be required to rebuild the areas that have been destroyed. First of all, they haven't even stopped the basin from filling up. Assuming they can solve that problem, just exactly how are they going to drain a huge lake that's below sea level, when the pumps have all been destroyed.

New Orleans is only part of the problem. There's Biloxi, Pascagoula, Mobile, Gulfport etc., etc. etc. As the magnitude of the problem and the fact of our inability to adequately cope with the idea of a couple million homeless refugees here within our own borders becomes clear, there will be a sober re-evaluation of what the future holds for all of us in the US.

New Orleans is ruin. It may forever remain a monument to man's monumental stupidity.

DrStool is a bit more pessimistic than me but he has a point. Unfortunately it is an unpopular point. Point blank there is no economic justification for rebuilding a city on a flood plain subject to not only river flooding but hurricane flooding. Furthermore, prevention of the former is at the expense of more damage down the road from the latter. The proper solution, that undoubtedly will not be taken since it makes economic as opposed to sentimental sense, is to keep New Orleans a port subject to periodic flooding by the river, remove the levees and let the river return the silt marshes that protect the city from hurricanes at the expense of more periodic river flooding. Only those structures that are safe from periodic flooding should be allowed to stay. Perhaps portions of New Orleans can be saved but anything that was 50% destroyed or more should be abandoned to nature. I say let’s rebuild, but do it somewhere else. Remember this was a category 4 storm when it hit not a category 5 storm. To attempt to rebuild New Orleans when it is sinking every year in such conditions is foolhardy. Like it or not, it’s time to cut our losses and move on.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/