The Streets Were Paved with Gold (14 page)

Over many years, the city Board of Education has complained that the state school aid formula discriminated against densely populated areas. Because the formula was pegged to attendance rather than registration, large cities with high absenteeism receive proportionately less aid than suburban school districts.
Article IX, Second 1d
would have switched the formula to school registration, generating hundreds of millions of additional dollars for the city.

Admittedly, nothing is free. Since city taxpayers are also state taxpayers, additional state costs would have entailed some additional city costs. But those costs would have been spread over the broader tax base of the state, resulting in significant city budget savings.

Jean Loretto lives on a lovely Manhattan block. So lovely that West 105th Street, between Riverside Drive and West End Avenue, was declared a city landmark in 1973. But when Jean Loretto sought refinancing for her five-story brownstone, she found that the banks thought her block an unlovely investment area. It was considered too far uptown, too near
them.
“I was turned down cold,” she told Tom Rosenthal of the weekly
Westsider.
“One banker told me I had invested in the
Titanic.
Another banker said that a person who lives in the city must have a summer home, and must send their kids to private schools. These bankers all have suburban mentalities. They all live in the suburbs and take the train in and never see an area like 105th Street. They all think we’re crazy to live here.”

Though her building generated ample rents, Ms. Loretto was turned down by three neighborhood banks. Her travail is common. Beginning in the late sixties, neighborhood residents throughout the city—particularly in Brooklyn and the Bronx—encountered difficulty wrangling mortgage money for homes and stores or new
insurance policies. Financial institutions, including the Federal Housing Administration–sponsored loans, were saying no or making the terms prohibitively expensive. As money dried up, the process of neighborhood decay quickened; more residents fled to the suburbs, poor people moved in, stores closed, buildings burned.

This denial of mortgage and insurance money is called redlining, a process whereby a financial institution is said to draw a red line or quarantine around a neighborhood, declaring that neighborhood unworthy of investment. Community groups complain that financial institutions are not using economic criteria—Jean Loretto’s building is a sound investment—but instead rely on arbitrary geographic and social criteria. Lending institutions deny this, claiming that as profit-making institutions their decisions are economic, whereas many neighborhood loans are not.

Whether or not a conspiracy exists, it is clear that city neighborhoods have been devastated by disinvestment. A thick 1977 report from the state Banking Department to the legislature offered compelling evidence. Surveying the entire state, they dryly reported: savings bank assets rose by $21.5 billion between 1970 and 1975, yet only $3.9 billion of this sum was earmarked for residential mortgages within the state. During the same period, residential mortgages on out-of-state properties
increased
by $4.8 billion. Within the city, mortgage loans as a percentage of local savings bank deposits was just 15 percent. In Nassau County, it was 62 percent. A case study revealed that between 1970 and 1976 fourteen Brooklyn savings banks increased their deposits from $10.1 billion to $16.8 billion. Yet in 1976: “Brooklyn mortgages were 11.2% of Brooklyn deposits.” The Brooklyn banks studied had 23.5 percent of their total residential mortgages in Brooklyn—and 51.7 percent in the surrounding suburbs. Money, like people and jobs, was fleeing. “Redlining is happening in New York, not only in the bombed-out areas, but in areas where there seems no rhyme or reason for it,” J. Robert Hunter, acting Chief of the Federal Insurance Administration told a city public hearing in early 1978.

There are many reasons for disinvestment. Banks and insurance companies are not charitable institutions. They are in business to earn a profit. In many blighted or declining neighborhoods, profits are precarious and losses are great. One of five FHA multi-family insured mortgages in the New York metropolitan area was in default in 1978, and the city number was higher. The state banking study showed that between 1970 and 1975 savings bank home
mortgage delinquencies in the city rose 400-fold to 2.37 percent. The maze of city rent control, housing and mortgage regulations is also to blame. Because of tight city and state regulations on rents and conversions to tenant-owned cooperatives, smaller landlords often do not generate sufficient revenues to justify secure loans. Insurance companies do not start fires or rob stores, and as vandalism grows so will insurance rates. The state arbitrarily set the mortgage interest rate at 8.5 percent—below the prime rate of 9 or so percent—so banks could make more money out of state. The bottom line for financial institutions is profit.

The bottom line for New Yorkers is declining neighborhoods. The economic price of disinvestment is no greater than the psychological. In fact, they go together. When residents sense that a neighborhood is slipping, when investment money dries up, decline becomes self-fulfilling. The result is abandonment. Middle-income homeowners are replaced by poor renters, with welfare often paying the rent. Because landlords can usually collect higher rents from welfare than from the free market, the result is blockbusting. More poor people means more youth gangs. More youth gangs means more arson—often subsidized by landlords to collect on an old insurance policy and get out; sometimes encouraged by welfare recipients to collect a relocation allowance and get out. Bushwick is the result. Or Coney Island. Brownsville. East New York. Harlem. The South Bronx. Maybe Corona?

How redlining starts is hard to trace; the results are highly visible. No doubt, this issue, like so many others in New York, underscores how uneconomic it is to do business in the city. Storekeepers can’t afford the insurance premiums; profit-making companies can’t afford the risks. Savings banks, however, are nonprofit institutions, and in many neighborhoods with ample local deposits, they are still not making loans. Curiously, Citibank—very much a profit-making commercial enterprise—announced on November 21, 1977, that it intended to make more liberal home mortgages in three Brooklyn neighborhoods, with down payments of 10 rather than 25 percent required. Asked why, a vice president of Citibank, who requested that his name not be used, said, “We think that in the short run there will be some opportunity cost for the bank [a loss or lower profits]. We think this loss is relatively modest compared to the ultimate social gain.” Well, was this a public relations decision? “I would quantify it as being 20 percent public relations,” was the answer. “Ten percent good intentions, and 70 percent a belief
that, in the long run, there will be a return on the investment.”

Presumably, in years past, Citibank and others could have made the same decisions, accommodating both their bottom line and neighborhood mortgages. They didn’t. And Jean Loretto was not the only one to pay.

There were two sets of posters in the 1968 and 1972 Presidential campaigns. The first—“Nixon’s the One”—was paraded by his supporters to extol his record. The second—“Nixon’s the One!”—was paraded by his opponents and featured a pregnant woman pointing mockingly to her stomach. Nixon will, no doubt, be remembered as “The One” who gave us Watergate, Cambodia, Chile, the saturation bombing of Vietnamese villages and a spate of awful books, including his own.

But New Yorkers should also remember him as the President who, in historian Richard Wade’s words, “abandoned the notion of compensatory spending for our cities and instead switched to per capita aid, which favored the burgeoning suburbs.” The heart of the Republican party is suburban, and that’s where the Republican President redirected federal aid. Richard P. Nathan and Paul R. Dommel of the Brookings Institution show how:

Under Nixon, the federal government refused to spend funds approved by the Congress and declared a moratorium on Section 236 housing subsidies.

During the Kennedy and Johnson administrations, the federal share of city budgets jumped from 4.5 percent in 1961 to 14.6 percent in 1969. In 1967, federal aid to New York City leaped by 87.3 percent. Contrary to popular New York mythology, during most of the Nixon and Ford administrations federal aid continued
to grow. But much more slowly. When taking inflation into account, the Temporary Commission on City Finances found, for instance, that the “overall adjusted growth rate of 12 percent for the 1971–1976 fiscal period was about one-tenth the real rate of increase experienced during each of the two previous five-year periods.” The federal government’s share of the city’s budget actually declined in fiscal 1974 and again in Ford’s last year. (The state’s did, too.)

Federal aid, ironically, contributed to the city’s own downfall. As aid multiplied in the sixties, and as the local economy was expanding, the city could come up with the matching funds required. But when federal aid slowed and the local economy nosedived, New York was trapped. “A critical series of decisions was the acceptance of federal programs forced on us during the Johnson years,” observes former Deputy Richard Aurelio (1969–71). “In the liberal euphoria over these programs, little attention was paid to their long-term costs.” A 1976 letter to Congressman Edward Koch, then Secretary of the New York delegation, from Deputy Mayor John Zuccotti explained just how the city was trapped:

Obviously, it’s not just Nixon’s fault. The mood of the country shifted—Nixon did, after all, carry every state but one in 1972. Much of the federal spending was wasteful, and the public wised up. And, one suspects, federal spending could have soared and New York would still be in trouble because local spending would have tried to keep pace. Parkinson’s law—work expands to fill available space—has its home in New York. In this sense, New York, not just Nixon, is to blame. New York refused to adjust to the new nogrowth federal reality. And, as we will see, it did not adjust to the reality of its own declining economy.

“How would you like to be remembered?” I once asked Alfred Eisenpreis, Mayor Beame’s first Economic Development Administrator.

“I don’t know,” he said. “I’d probably want to be remembered as something ‘In Progress.’ That’s very corny, maybe. But, in many ways, that’s not untrue.”

“But how could you have ‘In Progress’ on your tombstone?”

“And why not?”

“Because you’re dead!”

“How do you know?” he said, a satisfied look settling over his otherwise impassive face.

For years, the city government acted as if it did not know it was bleeding to death. Beginning with John Lindsay, the city government ignored the hemorrhaging of its economy. The nation’s economy rebounded from a recession in 1969, but the city’s did not. For the first time in history, its economic performance did not mirror the nation’s. As the country gained jobs, the city lost them—more in the next five years than it had gained in the previous fifteen. As America’s population grew, for the first time the city’s total population declined, with 300,000 mostly middle-income residents fleeing between 1970 and 1975. As the nation’s median family income went up, the real median income of city families went down by 6.1 percent between 1970 to 1973—among blacks it fell 17.4 percent. Yet as Nixon put his foot on the federal spending brake, the city pressed down on the accelerator.

It’s not as if there were no warnings. As early as 1962, the Bureau of Labor Statistics was reporting job losses in four of the city’s major industrial sectors. By 1970, their reports showed an absolute decline in employment. On July 20, 1969, the Citizens Budget Commission issued a study—
The Financial Outlook for New York City
—describing “a picture of gloom” and warning that the city faced “choices between what is wanted and what can be afforded.” Bureau of Labor Statistics chief Herb Bienstock summed up those years: “No one paid any attention.”

One thing John Lindsay paid attention to was dedication ceremonies, like the one to christen the new McGraw-Hill building in March 1973. Before the clicking cameras, the Mayor took to his side a Columbia University professor, Eli Ginzberg, who had just
published a book with the silly title
New York Is Very Much Alive.
Holding the book aloft, Lindsay boomed that it put the lie to those who claimed New York was declining. No, the Big Apple was alive and well and this book proved it. The press feasted on the good news.

While Lindsay played Candide, that same day a brief
Times
story carried this headline:
JOBS IN CITY DOWN 3RD YEAR IN A ROW
. The story noted that the Bureau of Labor Statistics reported the city lost 68,000 jobs in 1972 and 252,000 jobs since 1969. Questioned about this three days later, Lindsay told the
Times
he had “some hope” the job market would expand in 1973 because there was a slight gain in the closing months of 1972. But in 1973 the city lost an additional 95,000 jobs.