Spend More, Save Less
Suze Orman, a popular financial talking head, recently opined that the end of the recession was at hand. Speaking on the Today Show last week, she argued that even though the road ahead would be bumpy, the worst of it was over. Certainly the Street is in full agreement as the Dow is up over 2500 points from the March lows, no doubt responding to the steady flow of corporate America's positive quarterly reports. Even though the reading of economic entrails by Ms. Orman and others foretells the possible end of the Great Recession, there are unaddressed problems in real estate which have the potential to sidetrack the recovery process.
A combination of world events, governmental intervention and free-market creative destruction moves the business cycle. Central banks in democracies are predisposed to enact policies that mitigate the harsh effects of economic corrections as these institutions do not operate in political vacuums. Free marketeers argue, perhaps rightly so, that these activist policies reduce economic growth over the long term and interfere with the normal course of business cycles. This time around, Western leaders argued, the combination of globalism and over-leveraged debt had created a perfect storm, so intense that an unprecedented level of centralized intervention was required. This Administration, whether you agree with them or not, has broken new ground by semi-nationalizing several corporations and banks. The body politic has gone along with this, fearing deflation and depression far more than wannabe watered-down socialism. While I applaud these bold efforts, they are doing little good for real estate. Unless that crisis is directly and specifically addressed, much of the stimulus efforts could go for naught; the real estate business is a major player in job creation and retention and it makes little sense to continue to ignore this segment of the economy.
Federal stimulus packages have targeted troubled businesses, banks and industries in the hope that the broader economy would benefit from saving individual businesses. This is a form of trickle-down economics and does not seem to be working. The beneficiaries of this taxpayer largess have continued not to loan and not to hire. Not surprisingly, no bailout benefits have flowed down to troubled real estate.
Granted there is no easy method to de-leverage and re-value real estate bought or refinanced during the past three to four years. Political rhetoric and pledges of good behavior from the financial sector will not get the job done. The lending community says one thing and does another. This disingenuous behavior serves no one.
Nowhere is this problem more evident than with residential short sales and loan modifications. The lack of results is to be expected given our national ambivalence about what should be the proper consequence of personal economic mistakes. Since the Great Depression we have had an ongoing political debate between the worlds of Franklin Roosevelt and Charles Dickens. The current debacle has brought this family feud to the fore. There is probably not a broad political consensus regarding saving imprudent homeowners, after all who is to say who was foolish?
As unsettling as home foreclosures are, they by themselves will not sink the economy. Commercial real estate is another story. Banks, like consumers, have embraced John Maynard Keynes' Paradox of Thrift. For the economy to grow, and support the aggregate debt load of commercial real estate, banks and consumers need to spend more and save less. Both are saving too much and in doing so are making matters worse. Banks, in spite of much Federal jawboning, are continuing to fatten balance sheets (stashing cash and rescue funds instead of spending money on loans) and are particularly loathe to make commercial loans. Commercial projects will continue to fail at an accelerating pace unless banks, and consumers, save less and spend more. Unchecked, these forces have the potential to wreak havoc on one of the most important parts of our economy, small and medium size commercial enterprises.
The Federal Reserve and the Administration have the ability to loosen credit for these troubled sectors but commercial real estate appears to have little priority in Washington. This has the potential to wreck all of the fine and expensive work done thus far for banking and autos. Those in the beltway need to pay more attention to the bit players on the front lines. Perhaps this neglect reflects the lack of any clear national consensus on who should be able to get in the lifeboat and who should drown. In Victorian England there was no confusion; the penalty for an economic misstep was swift and brutal. America is an entrepreneurial hothouse and job engine, precisely because traditionally money has flowed freely from savers to risk-takers via the banks. As middlemen, the banks have failed miserably and nationalization should be considered. This may be the only way to avert the other shoe from dropping.