Business: Hurricane Recovery Plans

Washington Post business columnist Steven Pearlstein was online to discuss Gulf Coast reconstruction efforts. In today's column , he writes that Congress is in session, Katrina relief is on the agenda and special interests are drumming up schemes to help themselves under the guise of helping others.

An edited transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

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Best Solution?: I really enjoyed your column this morning. It has gotten me thinking as to what is the best solution for cities affected by Katrina such as New Orleans. In your opinion, what is the best solution that would get New Orleans up and running while at the same time making sense from a financial and business standpoint?

washingtonpost.com: Today's Column: Don't Let Industry Win With Disaster Bailouts

Steven Pearlstein: I'm not sure I can give an omnibus solution, but a couple of principles seem to make sense. First, the federal government should pick up the full tab for temporary shelter, food, health care, transportation, unemployment insurance, etc. Second, the feds should pick up much of the tab for rebuidling of public infrastructure like major highways, sewer and water systems, schools, etc. Third, the governmetn should set up a reconstruction authority to issue Katrina bonds to finance this. Fourth, local governments and federal agencies (SBA, FHA, VA, etc) should be able to come to the lending window of this authority to borrow money on favorable terms to handle programs dealing with the hurrican damage and reconstruction. Fifth, don't get into clever solutions that distort markets or tax codes for the rest of the country.

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Washington, DC: Thanks for your outstanding column today.

First we had Enron, Global Crossing, etc. Next, the no-bid contracts in Iraq and now here post-hurricanes, in which the coffers are opened to Administration cronies with no apparent oversight. Now, you tell us how insurers, lenders and banks are scrambling to protect their bottom lines at taxpayer expense. All in all, totally disgusting.

How bad does it have to get before people wake up and demand change, or at least some real enforcement of existing laws and business ethics (if the latter isn't just an oxymoron)? Is Eliot Spitzer a lone crusader? Do people realize what's going on in this country? Thanks for listening.

Steven Pearlstein: I think you're being a bit unfair. Lots of industries, including the mortgage industry by the way, have chipped in to help or are offering forebearance and understanding to people and businesses in the affected area. I also think too much has been made of no-bid contracts: if we want the government to move quickly to help people, we can't expect them to go through lengthy contract bidding and review processes. As long as the contract contains clauses that prevent excess profits and allow government auditors in to check their expenses, no-bid contracts may be a good idea here. It may be unfair to some companies that don't get the contract, but that is less important goal then getting things done quickly, in my opinion.

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Bowie, MD: Mr. Pearlstein, I have over the past few months become a regular reader of your column. I wanted to thank you for your analysis of issues through the prism of economics. It is a breath of fresh air compared to the usual emotional party rhetoric that you see in most commentary. I always get a chuckle when you throw in some economic concept like "moral hazard." It makes me glad I stayed awake in econ class.

In the past, I have not been a regular reader of the Post's Business section as I generally read the Wall Street Journal for business news. This is no slam on the Post. It's just that by the time I got through the News sections of the Post, I had little time left for the Business section, save for Dilbert. Keep up the good work.

washingtonpost.com: Past Steven Pearlstein columns are online here .

Steven Pearlstein: Thanks, Bowie.

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Mt. Lebanon, PA: I'm a greedy, self-absorbed, anything-for-a-buck opportunist. Where do I get in line for special favors and public-trough financed handouts from the Bush administration?

I may not know from either end of an Arabian horse but I'm willing to learn. Not a right-wing-nut but I can fake sincerity. Not a frat brat, well-heeled connected plutocrat type but ready and willing to party down and send my kids to Choate.

So, "please sir: Can I have more?"

Some?

Any?

BTW: Weren't the Republicans supposed to be the party of small government, correct public conduct, law enforcement, and CEO-style accountability, efficiency, and effectiveness? I may have the two parties confused. Sorry.

Thanks much. HLB

Steven Pearlstein: Funny. But be careful. Republicans never said they were against government helping people following catastrophe. That's an unfair rap. And this is a common misperception among liberal Democrats, I find. They think Republicans are heartless and uncaring. That's actually not my experience. They are just very skeptical about the efficacy of government programs. Its a danger, I think, when you view your opponents as evil, selfish and inhuman.

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Centreville, Va.: The article in this morning about Carnival Cruise Lines made me see red. I know I will never again consider Carnival for a cruise. I just don't know how a business can ever justify their greed in the face of a disaster. Your comments?

washingtonpost.com: $236 Million Cruise Ship Deal Criticized

Steven Pearlstein: I'm not sure I agree. The president of Carnival pledged he wouldn't make any more money than he would have otherwise. That's how he calculated his fee. And if the contract holds him, in the end, to his no-windfall promise, then we really don't have anything to complain about, do we. After all, this is a guy who risked offending thousands of already paid-up customers to help the government when it called. There will be expenses he will have to incur in making good to them, reimbursing them for their other expenses associated with their rescheduled cruise or giving them a refund if they demand it. I don't think we know the full story on this one yet.

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Sims, NC: Shouldn't contracts be given to local companies within the state where the storm did the damage. Once again the president's friends are making money off of the misery of others. How much will Cheney make in deferred compensation for Haliburton's sweetheart deal?

Steven Pearlstein: Look, this Halliburton stuff has really gone too far. There are a select number of engineering/contracting companies in the country big enough to handle big jobs quickly, whether they be in New Orleans or Iraq. All the others have received similar contracts as well. I think Dick Cheney can be criticized for all sorts of things, both as a lousy leader of Halliburton and as someone who pushed our country to war based on a lie, but this is not one of them.

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Maryland: If all homeownners are required to have insurance, including flood insurance, then wouldn't insurance companies be liable for most rebuilding efforts?

Steven Pearlstein: Well, in the case of flood insurance, the federal government is the insurer. But if all homeowners with mortgages were required to have flood insurance, and if the premium for that insurance were risk-adjusted (which it is not now), then that would be the economically most sound and efficient outcome.

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Washington, D.C.: I am writing to take issue with Steven Pearlstein's article in today's Washington Post, which suggested that large mortgage lenders are seeking a bailout. Nothing could be further from the truth.

Numerous homeowners are wondering whether they can ever go back to their devastated communities. Flood damage to their homes is not generally insured unless there was flood coverage. Many homeowners did not have flood insurance because FEMA did not view their areas as being in a flood plain. The repair and clean-up, which would be a tortuous years-long process even if everything was fully insured, may be impossible without it. These families' lives have been torn asunder, and every day our members are working with their customers, providing assistance, and trying to find ways to help them through this crisis. These families are worried about a foreclosure ruining their credit.

Mr. Pearlstein has an answer for their tears: "tough luck." His approach of foreclosure and sale of the properties at fire sale prices would lead to the largest displacement of American families since the 1930s, and the possible elimination of the communities that existed prior to the storm. For those communities that survive Mr. Pearlstein's proposal, the homeowners' real estate values would remain depressed for many years to come.

We know the federal government is going to provide substantial assistance to Katrina-affected areas, and we believe it makes sense to consider approaches to use existing programs to provide assistance in ways that allow - and even encourage - people to rebuild their communities and to maintain their good credit notwithstanding a disaster of this magnitude. The alternative is for all these homeowners to suffer needlessly. Homeowners should not have to wait for Mr. Pearlstein's new federal bureaucracy to be created.

Mr. Pearlstein knows that his dark intimation of an industry "bailout" is completely absurd. In addition to the consumers who have been so hard hit by the storm, the business entities that will suffer the great losses on the mortgage loans are the pension funds, money market funds, and similar investors who own them. The mortgage lenders do not hold this risk. Mortgage lenders want to continue to lend in the affected communities, but if investors will no longer be willing invest in loans in these areas, consumers will pay much more for loans in the future. Mr. Pearlstein would, in essence, draw a gigantic red line around these states.

Lenders are actively working with each of their customers who are victims of these disasters to help them through this crisis. Our members and others in the industry are committed to customers and the communities in which they live, and that is the reason we are open to exploring any proposal that will bring stability to a region, and to people, that have been so traumatized.

Sincerely,

Anne C. Canfield

Executive Director

Consumer Mortgage Coalition

1401 H Street, N.W.

Suite 560

Washington, D.C. 20005

(202) 544-3550

Steven Pearlstein: Anne was very kind in laying out her position to me this week. I didn't agree. But I'm glad to have her reply here, which speaks for itself. I don't quarrel with the goals of helping people rebuild their lives, their homes and their communities. But I would also respect the mechanisms we already have to handle a situation when a property is destroyed, which is to let the mortgage go to foreclosure, let people bid in at the foreclosure auction, etc. After that, and the lenders have taken a haircut, as they say in business, then we can talk about helping out the homeowner rebuild.

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Great Crossing, Ky.: Given the near absolute pro business climate that pervades both congress and the executive branch, is there any reason to believe that poor business decisions made by those mentioned in your commentary won't be rewarded with billions in deficit funded taxpayer dollars?

Steven Pearlstein: Yes, that is the risk. The businesses argue, by the way, that they relied on the government to tell them which houses should be required to have flood insurance and to maintain the levees. Since the government failed in those tasks, they argue, the government should help them out. I'm not convinced by that argument.

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Washington, D.C.: The NYTimes had a story yesterday about the new bankruptcy law coming into effect in a few weeks and how that might hurt consumers and business owners from Katrina-afflicted areas.

Do you think there ought to be a special dispensation for these people (letting them file in the jurisdictions to which they've been displaced, for example)? Or is that unfair to everyone else having to file bankruptcy?

washingtonpost.com: Looming Bankruptcy Law May Hurt Victims of Hurricane (The Washington Post, September 7, 2005)

Steven Pearlstein: You should read the equally fine story by Caroline Mayer from the Post two weeks back. In that story, the argument is made that judges have enough flexibility under the new law to consider the special circumstance of Katrina victims. I think that's probably right.

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Washington, DC: Where do reporters get there information regarding FEMA's contracts? Can the public view these contracts? How do we know 80% are no-bid.

Steven Pearlstein: My guess is that we know either because they are all listed on some database or website, or we asked them and they told us. Believe it or not, we don't make this stuff up. Its not good for business.

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Washington, DC: Really interesting column this morning. Nice work.

What do you think the chance is of the Consumer Mortgage Coalition's proposal resulting in legislation and ultimately law?

Steven Pearlstein: If the authorizing committees are allowed to be a part of this process, then I am confident a lot of the worst ideas can be weeded out. The danger is that someone will try to tack these things on as riders on appropriations bills that get no airing or hearing. The appropriators live in a world unto themselves, and do a lot of mischief when given the chance.

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UpMo, MD: "under the guise of helping others"... Can you be just a bit more cynical? How's about: Private companies are lining up to suck the lifeblood out of the US Treasury in a greedy grab to provide recovery services to the Gulf Areas. These money-grubbing, hateful, capitalist pigs will make million$ in their quest to steal as much as possible while providing slipshod services..." Oh wait, you said that so much better in only six words!

Steven Pearlstein: I appreciate the compliment but I wouldn't say it the way you did even if I didn't care about efficiency of words. You've overstated that a bit, at least as it relates to the two proposals I wrote about today. However, if you really want to see piggy behavior, check the proposals of the Louisiana sugarbeet industry, the most protected and subsidized farm group in American, which not only wants to be held harmless from the hurricane but will fight to the death to allow more sugar imports to replaced the lost crop and keep the already inflated price of sugar from skyrocketing. These are very, very, very greedy people who epitomize the culture of dependency in the agricultural sector.

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Silver Spring, MD: Great column. While the liberals are bemoaning the state of the poor the business types can be raiding the larder for their own needs.

I think this is an excellent time to require flood insurance and make it private. This would factor the costs into the homes. The decrease in building should improve the situation with diminishing wetlands.

Steven Pearlstein: You can only make it private if the industry is willing to write it, which they may be if it is a required national feature of all mortgages.

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Arlington, Va.: Your colleague, Jeffrey Birnbaum, writes today that many lobbyists are using the storms as an excuse to win long-sought legislation, even when their plans relate only tangentially to the hurricanes. What's the most outrageous example you've seen?

washingtonpost.com: Lobbies Line Up For Relief Riches

Steven Pearlstein: Where else: the farm lobbies.

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It may be unfair to some companies that don't get the contract, but that is less important goal then getting things done quickly, in my opinion. : Yes, but what about LOCAL companies that are not allowed to work and rebuild in their OWN states? What about LOCAL WORKERS who are denied $30 an hour jobs? It DOES make a difference.

Steven Pearlstein: Companies like Halliburton are the prime contractor. They have to rely on local subcontractors to do most of the work.

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washingtonpost.com: Birnbaum will host a discussion on lobbying efforts in the wake of the Gulf hurricanes at 1 p.m. ET.

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Washington, DC: Is selling New Orleans back to the French an option? I think it solves a lot of problems...

Steven Pearlstein: Yeah, but have you considered the economic consequences of having an entire state take the entire month of August off and retiring at the age of 55.

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Laurel, Md.: Same song, verse uncountable: we save people's lives, but only prevent statistics. The 55 speed limit saved 8,000 people's lives a year, but nobody can name one. Something like 25,000 Americans won't die this year because they stopped smoking in the 70s. Again, we don't who they are.

The Times Picayune told us the levee wasn't safe. The Boston Globe reported in 2000 that Logan airport screening wasn't stopping the bringing of dangerous articles onto aircraft.

But they didn't "have flames."

Steven Pearlstein: Good points all.

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Flagler Beach, Fla.: How can we minimize fraud and corruption and still respond in a timely manner to the citizens of the Gulf Coast?

Steven Pearlstein: The way you do it is to have aggressive auditors out there that catch a bad guy -- and then make a real example of him. The non-lethal version of a public hanging. That won't discourage all the bad guys, but it will a lot of them. They have to know that there will be a better than even chance that they'll get caught and lose their businesses, their reputation and their money.

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Arlington, VA: Dear Steve,

It is my impression that the scope of money the federal government is spending on storm refugees is extremely high on per person basis. Is it true that the DC Armory spent several million dollars in order to temporarily house up to 400 refugees? That sort of funding will fully pay for at least 7 months of nice apartment living out in Chicago, and perhaps even longer in other cities. Also the millions of dollars they're spending on leasing Carnival cruise lines for the same purpose further underscores my complaint. Any thoughts?

Steven Pearlstein: Its a good thing to do these calculations. But be careful: the speed and special-use nature of these services makes them inefficient. Comparing them only to the cost of renting an apartment in a huge, stable market under one-year leases isn't exactly an apple to apple comparison.

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Alexandria, VA: I'm torn re: the efforts to rebuild. NBC keeps showing Habitat for Humanity building new homes for those who lost theirs due to Rita and Katrina, but what's the point of replacing one wood-frame home with another? In South FL after Andrew hit, FL changed their state construction laws so any new construction has to be hurricane-proof (as much as possible) and any modifications to existing homes must meet w/ the new hurricane specs. While Habitat for Humanity's efforts are admirable, if they're not building newer sturdier (concrete block) homes, the same thing will happen again. Do you know if LA and MS will change their laws as FL did? Construction companies along the Gulf coast have much to learn from those in south FL.

Steven Pearlstein: Isn't there a story about three little pigs that might be relevant here? You make an interesting point.

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Maryland: Would relocation be more cost effective than rebuilding in some areas?

Steven Pearlstein: Undoubtedly.

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Potomac, MD: Is it true that in some areas of the nation (areas prone to flooding) only the Federal Government sponsored flood insurance is available? If so, isn't it another example of a moral hazard?

What exactly is the status of municipal bond holders in Louisiana and Mississippi? Are they in a position to stop any debt restructuring (especially when fresh money is pouring in) and demand their debt paid first?

Steven Pearlstein: There's a reason I didn't go to law school. But we have experiences with bond swaps that have the effect of making the bondholders take some sort haircut, either in reduced or delayed payments. And there are sometimes clauses in bond convenant that allow recalls, swaps and changes that can be approved by some supermajority of holders. Or, there is the cruder option of default, which in this case I think would have very little impact on the rest of the municipal bond market, because everyone realizes the very special circumstances here.

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Washington, DC: Steven: You note that Halliburton is one of the few companies with enough expertise to manage large construction contracts. I suppose the same could be said of Bechtel and a few others that also are politically connected. My question is whether we should have this sort of expertise in-house in the government. I think the Iraq reconstruction precedent should make us reconsider the balance between reliance on contractors and having government capable of managing the deployment of resources. Finally, can't resist one cheap shot - if Bechtel ends up rebuilding levees, I hope they make them more waterproof than the Big Dig tunnel!

Steven Pearlstein: All the big construction engineering companies have political contacts. That's a core competency is surviving and thriving in their business.

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Reston, VA: Seems to me there's some parallel with Congressional tries at aiding farmers in disasters. As a nation, we've tried federal crop insurance. We've tried disaster payment programs (1970's). We've tried to phase out federal crop insurance in favor of subsidized private crop insurance to cover all disasters (1980's). We've tried ad hoc disaster programs (1986 and subsequent). We've tried requiring farmers to have crop insurance (1990's). Over the years the scope of people helped has greatly expanded (from field crops to specialty crops to aquaculture to whatever). Congress can't resist the opportunity to help their constituents and people can resist the idea that their damages justify federal help.

Steven Pearlstein: You got that right. Now we have the worst of all worlds -- subsidized crop insurance AND disaster relief AND price supports AND import restrictions. Talk about belts and suspenders! The effect of this is to encoruage overproduction, which encourages will more subsidy and protection, which encourages more production...Moral hazard is just one form of market-distortion that occurs when the government intervenes in these ways.

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Olney, Md. : The Red Cross and other charities may well collect more than one billion dollars. Does this supplement insurance coverage? How will that money be used?

Steven Pearlstein: Most of these agencies provide immediate services to the displaced and homeless. I doubt there is much overlap with insurance coverage. I suspect Habitat for Humanity is smart enough to confine their help to people with UNinsured homes.

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False equivalence: You're absolutely right about the "vilifying everyone on the other side as evil". That being said, this false equivalence between the two parties is really lazy "conventional wisdom" thinking. Let's do a compare and contrast.

President -

Rep - Lied the country into a war. ~2K US troops dead so far, and remain trapped in a quagmire. Pulling out will destabilize the entire Arabian Peninsula.

Dem - Lied about a consensual b*** ***.

Reactions? The Reps impeached the b******, and handed medals of freedom to the war lies.

Bureaucracy -

Dems - Unfairly may have fired minor positions in the travel office to hand to cronies.

Reps - Did appoint utterly unqualified people into critical disaster positions at FEMA. When forced to remove one of these, they immediately hired him back as a consultant to analyze how he screwed up emergency response (this will now officially replace the "orphan" story as the definition of Chutzpah).

Lobbying and Congressional Corruption -

Dems - Kited some checks on the house bank, and stole some postage. Massive cleaning of House by resignations and election losses.

Reps - Duke Cunningham sells Defense contracts for ever bigger houses and boast paid for by recipients of defense contracts. Abrahamoff runs a de-facto illegal GOP slush fund to multi-millions. Increasingly likely done with Mafia assistance, culminating in an associate's gangland killing in Florida. The K-street project. An energy bill written behind closed doors by industry lobbyists. DeLay associates pulling illegal tricks in TX and elsewhere...DeLay & GOP shut down House ethics committee before investigation can be run.

Etc...

Uh...equivalence?

Steven Pearlstein: I'm not sure you haven't carefully selected your examples. I have no reason to believe that venality or incompetence is concentrated in one political party or the other.

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Washington DC: Do you believe that washing New Orleans' many distressed residential properties through foreclosure is the best way to allow the poorer areas of the city to be rebuilt? It seems unlikely that a foreclosure auction scheme will preserve the heritage and culture of these neighborhoods and also give these areas' less-well-off residents a chance to return.

Steven Pearlstein: My suggestion was to have the federal government in there buying up foreclosed property and either retiring it from use (because its in a flood zone) or handing it back to homeowners or small business at no cost to redevelop. That sounds consistent with your goals, don't you think?

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Steven Pearlstein: That's it for today folks. See you next week.

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