New Orleans is frighteningly close to another calamity, but this time, it’s not the result of a breached levee or corrupt politics. This potential disaster has to do with the economy: Without a recovery of the credit market, the city could be unable to complete the redevelopment of four desperately-needed public housing projects torn down after Hurricane Katrina.

The impending threat made itself known last fall when the investor and insurer AIG fell on “hard times” and bailed on a multimillion-dollar promise to buy the tax credits that would finance the redevelopment of one of the city’s sprawling brick complexes, a Central City development officially called C.J. Peete (referred to by locals, including former resident Juvenile, as “Magnolia”).

Fortunately for the thousands of New Orleanians who have been waiting three years for it to be rebuilt, the housing project was salvaged this winter when Goldman Sachs bought the credits from developer McCormack Baron Salazar, providing the needed financing. The first shovel hit the site’s soil earlier this month.

But Goldman Sachs’ rescue doesn’t mean the city is out of the danger zone. Juvenile’s proving ground was just one of four public housing complexes demolished after Katrina. The January 7 groundbreaking, attended by U.S. Housing and Urban Development Secretary Steve Preston, was only the second such start on public housing redevelopment, following a December groundbreaking on the site of the St. Bernard project in the city’s Katrina-battered Gentilly section.

The other two developments remain in flux, both struggling with fallout from the collapse of the tax credit market. While Lafitte developers Providence Community Housing and Enterprise Community Partners have secured investors to buy one of the project’s tax credits, the team is still struggling to balance new budgetary constraints created by the perilous 30-percent drop in the credits’ value. The team expects to break ground by the end of the month, but planners say that sacrifices of design elements, including a few greening measures, will have to be made to move the project forward. The other public housing project’s developer, KBK Enterprises, still has not secured buyers for the tax credits funding their $250 million rebuild of the B.W. Cooper complex. Six months after construction was expected to begin, former residents remain mystified at the lack of progress at the debris-strewn tract of land a short ride from the Superdome (KBK Enterprises did not return phone calls from Next American City).

Preston says he’s hopeful that all four housing projects will be ready for partial occupancy by the end of 2010, a deadline for the use of the federal tax credits. But he also says that the poor condition of the tax credit market may necessitate a deadline extension. Affordable-housing advocates say that there is a risk the project will be thwarted if the market doesn’t pick up soon. “C.J. Peete was lucky, but there is never a guarantee, particularly right now,” said Annie Clark, a researcher who studies Louisiana fair housing for the think-tank PolicyLink.

The difficulties the Crescent City is experiencing as it rebuilds its public housing reflect a major failure on the part of both federal housing officials and the free-market strategies that are increasingly the answer to this country’s social welfare problems. People in New Orleans need homes, regardless of the appetite in New York for tax credits.

New Orleans was having trouble rebuilding affordable housing even before the market tanked. Now things are looking downright gloomy. In the fall, the Louisiana Housing Finance Agency was forced to recapture $18 million in tax credits from proposed housing projects that had not been able to close on loans or complete the financing needed to move forward. The recapture translates to 1,248 housing units that will not move forward until other sources of funding are found. More than half of the units were to be built in the greater New Orleans area.

“If we don’t do something now, the capital market crisis is going to rob Louisiana of affordable units that are desperately needed,” LHFA president Milton Bailey said in November.

Owners of small rental properties are also having trouble securing financing to rehabilitate the thousands of apartments destroyed in Katrina. According to the Louisiana Recovery Authority, only 713 apartments have been put back on the market through the state’s rental rehabilitation program. Holding things up has been banks’ resistance to issuing the construction loans needed to get renovations started.

There are no easy answers, except of course, the Obama economic stimulus. Everyone from City Hall to the mud-covered yard where Juvenile learned to rhyme is crossing fingers, hoping New Orleans will receive the funds needed to get more shovels in the ground. But even if the federal money does come, who knows how much of it there will be, or what it will be earmarked for. The needs here are great and many. The housing units are not.