The long road to recovery

American and world investors are heaving a sigh of relief at this morning's strong stock market recovery. After a sickening 42% drop from last year's market peak, the Dow Jones this morning surged back over 9,000.

It is not over yet. Just last Friday, the Dow swung an unprecedented one thousand points in a single day's trading. There will be more bad news as the credit crisis continues to ripple through the economy with mounting job losses and bankruptcies. But for now panic has abated and free fall in the markets has been halted.

This pause should give an opportunity not only to assess what went wrong, but to think clearly about how to move forward. "Rescuing" an economy in crisis is different from curing an economy of unsustainable practices. We spent too much on the wrong things and we will be paying for it for a long time. The solution is not to artificially reflate the bubble with borrowed taxpayer money, but to build a new foundation under our nation's economy.

No where does this make more sense than in the real estate market where this crisis originated. Not only did unscrupulous banks and brokers lend to people who couldn't afford the loans, banks and institutional investors bankrolled unsustainable sprawl development that has cratered, virtually freezing new housing development, especially here in California.

New urbanist author and Oceanside city planner Peter Katz has a thoughtful blog column on the subject here. He lays out a familiar critique of the folly of endless tracts of new homes at the far fringe of metropolitan areas, subsidized by massive public investment, especially in highway construction. He raises the provocative question of whether this pervasive "market failure" doesn't call for tougher national standards to protect the taxpayers who are paying for the $700 billion plus "bail out":

"Maybe it’s time, even as the billions of bailout dollars flow, for official Washington to get tough. It’s emerging as lender of last resort, asset manager for the wounded American taxpayer, assuming the responsibility for thousands of toxic mortgages on property that more diligent local planners might never have allowed to be built. So why could Washington not advocate — maybe even require as a price for the potential subsidies and loan insurance it may offer — compliance with planning rules aimed at promoting more economically robust, resource-efficient communities?"

Neither of the presidential candidates has addressed the underlying unsustainability of suburban sprawl. But any comprehensive effort to restore our economy must ask the question: are we going to invest massive taxpayer subsidies in propping up an unsustainable pattern of growth or are we going to direct those subsidies toward a more sustainable future.

Building houses no one can afford out where driving fuels our dependence on foreign oil, aggravates global warming and undermines the health of American children and families is not sustainable. Before we get back to lending money in the real estate markets, public policy must change to ensure that money is invested in a better -- and more prosperous -- future.