The most revealing moment in Martin Scorsese's new film Bringing Out the Dead comes at the start. Nicolas Cage stars as a New York City ambulance driver is own disintegration is matched by the disintegration of the city around him. His New York is a literal hell, a crazed netherworld where the fires homeless people have all lit to warm themselves cast a ghastly light over rotting tenements and burned-out cars.

In this urban wasteland the streets (piled with garbage) belong to whores and junkies. The ordinary people who intrude on the scene soon descend into madness themselves.

If this is New York, it seems to have gone the way of gaslight and gangsters in loud plaid suits and dove-grey fedoras. Bringing Out the Dead begins with a curious disclaimer: "This film takes place in New York City in the early 90s." The 1990s, that is. In fact the film is set in a hallucinatory New York and exist only in Scorsese's imagination a city that corresponds most closely with the setting of his acclaimed film taxi driver, maybe 1976.

The images don't fit the reality. Scorsese's city of dreadful night is being sanitised so rapidly that some sophisticated residents now call it McHattan.

The streets of midtown Manhattan are drearily safe, it seems, and now that the message has spread, New York is besieged by tourists. In the 1980s, one used to hear of visitors so overwhelmed by New York that they hunkered down in their hotel rooms until they got into a taxi to go back to the airport.

I regret to report that those days are gone. Last year 35 million visitors clogged its streets, and more are expected this year. It seems visitors prefer the place now it is turning into a kitsch suburban version of itself, the New York brand without the frisson that gave it its edge – New York as imagined by bunch of marketing executives: a live-in mall with cobblestones streets here and cleaned-up ethnic enclaves there to distinguish its Gaps and Tower Records and Banana Republics from those in Des Moines or Dubuque.

Now Hillary Clinton wants to be elected as one of the states two senators, jaded New Yorkers observe that they are being given a choice between a carpetbagger from Arkansas and a man about as popular as ptomaine: New York's Republican mayor Rudy Giuliani (the more likely winner). The mayor occupied City Hall – a building he barricades against the public – as New York was doing the unthinkable: getting ordinary.

On a recent visit, I came across Ellen's Stardust Diner, on Broadway, a few blocks north of Times Square, and stood staring. It was like being transported to a corner of middle America, complete with cornball karaoke. Karaoke! Gimme a break. The eponymous Ellen used to have a cafe and bakeshop where old-time New Yorkers ordered wedges of cheesecake you couldn't jump over. Now Ellen had been themed, so to speak.

Instead of an echt New York diner occupied by hollow-eyed waitresses with bunions in their shoes plonking down lentil soup that smelled like perspiration, the brand-new Stardust with its shiny red booths had been made to resemble a diner from the set of an Elvis Presley film in the 1950s.

Smiling waiters dressed in Mitchell blue and Presley purple sang along with curly-headed moppets from vacationing families who looked like doubles the cast of Happy Days. Such people wouldn't visit New York a few years ago, and here they were in its rancid Centre, soaking up the bogus atmosphere of a theme restaurant.

I lived in New York from 1978 until 1991. One week was enough for me to decide New York's fearsome reputation was much exaggerated. Once I learned there weren't muggers lurking around every corner, I wandered about freely. I didn't expect to get mugged and I wasn't, though I took the subway at all hours. The little edge of danger made me feel more alive, I guess.

Manhattan was far safer than the south Bronx or Bushwick in Brooklyn (where a young Afro-American couple I interviewed one evening led me to their apartment by walking down the middle of the street, in case someone leaped out of an abandoned building), but the most muggings per metre occurred around Times Square. The disgusting Times Square subway station was the city's inferno.

People warned me that I wouldn't believe what had happened at Times Square in the past few years. But by chance, the first thing I heard when I emerged from the subway right there, on Broadway and 42nd, on a cold blue morning late last year was a blood-curdling scream.

I looked around hopefully. It sounded like the old sort of carnage. I played with thought that Times Square had resisted the irresistible, then I saw the boom mike coming up like periscope and noticed the film crew across the street. They were making an advertisement.

I should have guessed. Times Square was unrecognisable. There was a Disney store on one corner and a Gap store on another. Billboards flashed from every point of the compass, neon piled on blinding neon. Even the subway was advertising itself, the word subway picked out in bright lights.

These days Times Square is lauded as a centre of family-friendly commercial entertainment. Imagine a cartoon rendition of Deck the Halls with Holly playing over the loudspeaker system in the Disney store and you start to get the picture. Thousands love it, though. You're more likely to be knocked off your feet by the crowd than threatened by a mugger, and the redevelopment (in a Disneyish style meant to conjure up the 1940s) will bring thousands more to enjoy more gormless family fun.

Just going to Times Square used to be excitement enough. You'd see a crowd on a corner and clutch your handbag a little tighter to your bosom because there were sure to be pickpockets circling the crowd watching someone getting fleeced at three-card monte. Now the crowds on street corners wave signs and paint their faces because they want to get on television. Hi Mom.

There is generally a crowd outside the Good Morning America studio on 43rd and Broadway and another crowd outside the MTV building a few blocks on. "I entering these premises you hereby consent to the cablecast, exhibition and any other use of your name, voice and likeness," said the sign on the police barricades on the street below. Outside MTV's glass-walled studios squealing fans desperate to get on telly wave shirts and caps the air.

New Yorkers used to pride themselves on being blasé about sites that make other Americans hyperventilate, whether it was Woody Allen waving his clarinet around in a jazz club or a TV crew cluttering up the neighbourhood. You could tell out-of-towners; they'd be pointing and gasping. The real New Yorkers were consulting their watches, itching to start shrieking if they were held up another instant, and then they'd be off, without wasting a glance on the real life celeb or the stiff on the sidewalk.

Other New Yorkers continue to perform with nothing more than a security camera trained on them. "I'm dead," the stocky young man with the buzz cut bellowed in the Disney store at Times Square, striking himself in the chest. His name with Jim Dudley; he was a 29-year-old computer technician from Staten Island, he said, before resuming his frenzied searching. Real New Yorkers like to overact, and Dudley was no exception.

"I'm dead," he said again. "She's gonna kill me." His wife, away on a business trip, had deputised him to keep up her collection of pins of cartoon characters. He had forgotten the previous week and now he couldn't find Steamboat Willie. "I'm dead," he said.

It may be that people have to manufacture some of the excitement missing from their lives now the city that never sleeps seems to be tracked on Valium.

"This is tamer than London," said a friend of the friend, a costume designer who hadn't visited New York since she was a student and seemed almost disappointed to find her fears were groundless. Fear of crime has fallen even further and crime itself. Rather than being forced to explain the crime rate, New York police are complaining about the number of people claim they were mugged just to pocket the insurance.

In some quarters, fear of crimes has been replaced by fear of the cops, who have been known to shoot poor black people because they feel like it. For plain-clothes cops shot a young man from West Africa 41 times last awesome though he was so innocent couldn't even concoct a story about it. New York's finest have been let off the leash by Giuliani. Pressed to condemn the police who shoot innocent civilians, Giuliani refused, instead saying police should show people respect.

"He means the police should say 'excuse me' before they shoot you," said one wit quoted in the media. But tue mayor wants to hear more "excuse me's" all round. As if New York is not boring enough nowadays, Giuliani insists that New Yorkers must be more polite.

You might imagine it a lost cause in Gotham, surely the one place on Earth where they have to install police officers at certain intersections because the pedestrians won't stop to let cars through.

Some see incidental comedy in the idea is that it is Giuliani, is mean-spirited a man as you could find in a month of Sundays, sponsoring ca ampaign to make New Yorkers nice. When the media went feral last November because a homeless man had critically injured a passer-by, bashing her in the head with a brick, police swept the homeless of the streets. "People sleep in bedrooms, not on the streets," Giuliani said. Like much else the mayor says, this piece of nastiness was aimed at impressing the conservative voters upstate before November's election.

Between times Giuliani keeps up the entertainment quotient by sacking anyone who stands between him and a camera, like the police commissioner he fired in 1996 for getting the credit for failing crime figures.

In fact, bringing out the dead (due to open in Australia mid-year) had no sooner opened in the US than people claimed Scorsese said his film was set in the early 1990s only because he didn't want Giuliani on his case. For his part, the film-maker admitted he had (so to speak) antiquated New York with piles of garbage and graffiti. But it wasn't as if the homeless to exist any more, he said. What else could he say? The homeless appear in every other scene of his picture, like wraiths in a Victorian painting.

In real life they've been swept under the carpet (or into the overflowing prison system). The gradual retreat of the homeless has been more evident each year. Though it improves the ambience, New York seems diminished, like a friend who exposes an unexpectedly nasty side.

While some of the homeless have drifted about the city since the state emptied out its mental hospitals, these lost souls are no longer allowed to hang around in the Port Authority bus terminal or Grand Central Station.

They haven't disappeared exactly, they've just disappeared from warm public spaces. Those who refuse to go to shelters have encampments on the freezing overpasses of the disused West Side Highway and on the disused railroad tracks along FDR Drive.

In the daytime, in winter, they stay on the move to keep warm. I was in SoHo outside a store called Reinstein Rocks ("since 1985") when a wiry man weaving through the crowd shouted "aliens among us, aliens among us" . I laughed and he noticed. In the old New York you would have left your face a mask. "Why would I lie?" he asked in a reasonable tone of voice, as if even mad people have been made to behave themselves.

In short, you still see poor people in New York, even now unemployment is down to 12.7% (more than twice the national rate). You see poor people, immigrants from West Africa, who deliver supermarket groceries for $2.50 an hour. You see poor people minding rich people's translucent children and poor people minding rich people's dogs. The dogs are so well-behaved that you imagine someone somewhere is breeding a Manhattan dog that will clean up its own poop (before climbing back up on its $US400 ($640) doggy sofa from Beastly Furnishings).

New York always had its rich and it's poor, of course. In his 1991 book Low Life, writer Luc Sante reports that tramps used to call it "The Big Onion" or "The Big Smear". The present trends merely formalise the indifference to inequality typical of our intermittently wretched age.

"People living round here don't have a sense of what goes on in New York – there're so rich they only see the good part," said Vanessa Britez, 20, and raven-haired beauty supporting herself through college. She gets $2.90 an hour plus tips working as a waitress at the Stardust Diner. "People that grow up in Queens and Brooklyn see more of the crime, more of the poverty, more of the homelessness" she said. "In Manhattan, it's covered up."

Much the same thing is happening in Sydney with the planning increasingly looks towards shaping the city around the needs of corporate culture, a trend accentuated by the Olympics, even as poverty in outlining out playing areas becomes more entrenched.

At Sydney may be getting more interesting, for the moment. Not so new York, home of the "World's First Internet Burger King. New York has accomplished the impossible: it grew more colourless even as its whites were dying out. John Mollenkopf, director of the Centre for Urban Research at CUNY Graduate Centre, said the most noticeable change in New York in the 1990s was the number of native-born whites (that is, the children of immigrants who arrived early in the last century) declined by 25 per cent. The exotic blend of new immigrants who replaced them hasn't succeeded in arresting the cultural levelling of the city.

When I first moved there in the 1970s I was dazzled by New York. Now and then I felt I was stepping into the pages of book I first read as a girl. But the real-life version, New York's improbable cultural miscellany, was richer and more diverse than anything I had imagined. If New York had an essence it was that – and now it is being stamped flat.

"This neighbourhood is one of the few places left that retains some of the charm, diversity and unexpectedness of the old New York," said Lisa Green, a television news producer being fitted into a Scarlet O'Hara party dress in a little store on Ludlow Street on the Lower East Side.

A century ago the Jews arriving in the neighbourhood in their thousands were squashed like ants into tenement buildings now inhabited by Puerto Ricans and Dominicans. It was one area immune to gentrification even in the real estate boom of the 1980s. It isn't immune any more.

Nearby Orchard Street, former mecca of markdown, is dotted with funky boutiques that sell dresses made of burlap rags and plastic triangles. Shops like that are the outriders of gentrification; indeed the first few stores with dresses that cost $1000 and more have just appeared among the little bodegas and the butcheries selling goat meat. Come back in 10 years time and place will be like SoHo, the cast-iron district 2km-3 km away, where the rents rose until the art galleries that gave the neighbourhood something of its style were replaced by Gaps and Starbucks.

Before I left New York again, I was in a midtown cafe with a friend who is 62 when we fell into conversation with the tourist from Liechtenstein. The tourist, who was 30 something, wished to convey her pleasant surprise at finding New York so innocuous. "New York is a very good city for the elderly to walk around in," she told us encouragingly.