The federal government has spent billions on New Orleans’s immediate recovery, but it’s clear that Congress and the Bush administration aren’t quite sure how to proceed on supporting long-term reconstruction. Certainly the White House’s recent approval of $6 billion in block grants to be disbursed by Louisiana’s state government is not the right course, since the feds will have insufficient control over whether state authorities spend these Great-Society-style billions wisely. But the Bush administration recently rejected the most comprehensive plan that’s been presented thus far for retaining some rational federal oversight of the complex rebuilding undertaking: a Louisiana Congressman’s proposed federal buyout of New Orleans’s ruined properties.

Instead of a blanket dismissal, the White House should consider working with Representative Richard Baker, the conservative Republican from Baton Rouge who introduced the buyout bill last year and will pursue it again this year. Baker has shown himself willing to modify his bill in response to reasonable criticism, and the administration could help him perfect his plan by asking him to change it to place more financial responsibility for rebuilding flood-wrecked properties in the hands of exiled Big Easy homeowners. Such a move would join reasonable federal supervision with the power of the ownership society that President Bush rightly values.

Under the Baker bill, a new federal public authority, the Louisiana Recovery Corporation, would purchase any and all of about 200,000 wrecked homes in the state offered for sale to the government by their owners. The LRC would compensate homeowners and mortgage lenders, but not in full. Mortgage lenders would receive about 60 percent of the value of each home’s pre-Katrina loan, and owners would receive about the same percentage of their equity. The feds would then prepare suitable land for redevelopment, and would auction such property off to private developers for rebuilding and resale, with the first option to purchase going to displaced residents. The LRC also would work with homeowners who don’t want to sell out to help them refurbish their properties.

Baker’s original bill seemed to suggest that lenders would be paid off in full; the 60-percent provision is the Congressman’s reasonable response to criticism that such a bailout of banks that loaned billions to people who invested in property below sea level would create an intolerable moral hazard. Skeptics might ask: Even at the 60 percent rate, wouldn’t the LRC still create a massive moral hazard by retroactively indemnifying homeowners and lenders for the risk of investing in a flood-prone area without adequate insurance?

But the moral-hazard issue here is not as clear-cut as it seems. New Orleans residents understood that their properties would flood sometimes, but not catastrophically; they thought, reasonably, that the levees designed and built by the U.S. Army Corps of Engineers in response to previous floods would protect their homes. Those levees, of course, gave way after Katrina, due in part to failures on the part of the Corps as well as on the part of state and local officials, who were responsible for maintenance.

Now the first responsibility of top federal reconstruction official Donald Powell is to decide—and state clearly—which parts of the city the government’s floodwalls can reasonably protect. If it’s not possible to protect citizens in some areas—such as low-lying Eastern New Orleans, including the Ninth Ward—it’s time for the feds to let evacuees know. If this is the case, the government should officially condemn New Orleans’s most vulnerable tracts, offering property owners and mortgage lenders some compensation for the loss of their land along the Baker model.

Top federal reconstruction officials—not the local authorities or FEMA through its flood-insurance program—must decide this matter, because they retain responsibility for rebuilding levees and floodwalls to the strength needed to protect New Orleans’s lowest-lying neighborhoods reliably. If the federal government lets New Orleans make the decision on where to rebuild, the decision falls prey to yet another moral hazard: the city might let people rebuild everywhere, in order to avoid the political fallout of permanently redlining whole neighborhoods, knowing that Washington will bail homeowners out if the levees fail again.

But if it is possible to rebuild some, or all, of the low-lying parts of the Big Easy with reasonable assurances of safety, then it’s time to get to work. Washington can pave the way for reconstruction by working with New Orleans to build adequate levees, of course. It should also work with local authorities to set out clear and non-negotiable reconstruction standards. No house will be issued a permit for occupancy unless its main living quarters are elevated enough from the ground to withstand future floods. Properties must be built to wind- and flood-resistant standards, as has happened in vulnerable areas of Florida.

The White House needs to press Baker to reshape his bill in one further area. Handing off thousands upon thousands of acres of land to federal contractors for long-term site preparation can’t possibly be the best way to rebuild a major city, when the land is currently owned by individuals who have a stake in their neighborhoods.

Government ownership and resale of large swaths of New Orleans would be prone to intense political interference at the local level, especially since the LRC would leave much of the actual decision-making about which areas to rebuild and which to return to nature in the hands of local officials. The region’s Democratic caucus, egged on by national pols, would contort the redevelopment process to make sure that the remade city retained its exact pre-Katrina racial and political demographics. Mayor Ray Nagin has already promised exiles that the Big Easy will remain a “Chocolate City” (that is, majority black), and Senator Hillary Clinton has snidely mused that the White House doesn’t want to rebuild New Orleans because “all those Democrats might come back.”

Worse, if local officials retain oversight over areas to be sold off to developers after site preparation, as the Baker bill proposes, it’s quite possible that all of this federal funding would result in the kind of massive 1950s-style urban-renewal failure that often emerges when politicians and politically connected developers design large-scale construction schemes. As urban-planning guru Jane Jacobs observed, tracts planned and built up all at once rarely succeed; urban areas need unplanned diversity.

Baker’s bill can address these criticisms. Instead of offering to buy out the homeowners who have obvious stakes in New Orleans’s rebuilding, the bill should treat exiled homeowners as assets who can be leveraged for the city’s recovery.

Some exiled from New Orleans are eager to return. “My parents worked too hard for this house for me to give it up,” said Melvina Valentine, lately of Houston, of her flood-damaged home in the Carrollton area of New Orleans. “We want to rebuild ourselves, but we need help,” said Hortense Langs, who owns a home in the Bywater neighborhood; Langs is living in Houston now as well.

Longtime New Orleans homeowners like Valentine and Langs can help jumpstart the hard work of rebuilding New Orleans’s neighborhoods. Indeed, some pioneer homeowners are already gutting and reconstructing their homes one by one, with practical help on the ground from volunteers.

Once the feds set clear rules, they could build on the modest work that residents are already doing. Baker could modify his bill so that federal money goes toward homeowners in suitable areas—not to buy out their property, but to give them the money to rebuild it themselves.

Congress and the Bush administration could award funds to homeowners to hire approved contractors to rebuild individual homes to the new standards, or give the homeowners the funds to do the work themselves, releasing the money on a rational block-by block reconstruction schedule, with clear deadlines for work completion in specific neighborhoods (builders who can’t conform to standard deadlines and costs would be dropped quickly from the program). Under this plan, citizens could return to their neighborhoods and recommit to New Orleans with their labor, consumption, and tax revenues—with the city taking responsibility to ensure that the level of public services increases incrementally with each rebuilt block. Homeowners who don’t plan to return to New Orleans could accept government money to rebuild their homes anyway, to sell the property later and to avoid some of the loss on a foreclosure (or they could rent their rebuilt homes out, taking advantage of New Orleans’s newly tight real estate market).

What if a homeowner— one without much equity in his home, say—chose not to participate? A year or so after the program’s launch, it would be time for the local and federal governments to step in—condemning properties that remain abandoned, and awarding property owners (and their mortgage lenders) an amount based on what the rebuilt area is worth at the time of the buyout. The government could sell these individual properties—not vast tracts—to new developers, helping to fund its own program.

No, this program wouldn’t be cheap. But awarding more money to individual homeowners and less money to local and state governments via large-scale federal grants will minimize political waste. Giving homeowners the resources to rebuild their neighborhoods block by block will allow citizens, not the government, to rebuild the Crescent City—and they’ll do it better and faster than the pols ever could.


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