Eleven PM, Saturday. I should be going to bed. Feeling hot and sweaty. Just clicked a link to a blog post Vic sent me. This one is by the Atlantic’s Meg McCardle.
Meg predicts that we are in for a series of new financial shocks this time in the commercial real estate world. A quarter trillion of possible defaults could take place each year for the next couple of years. It may not be the end of the world but its not got to be good.
This passage comes near the end of her post:
The best explanation for the calamity that has overtaken us may simply be that cheap money makes us all stupid. The massive inflows of international capital, which Ben Bernanke has called the “global savings glut,” poured into our loan markets, driving interest rates lower—and, since most real estate is purchased with borrowed funds, pushing up the price of property in both the commercial and residential sectors. Rising prices, in turn, disguised any potential problems with the borrowers, because if they ran into cash-flow problems, they could always refinance, or sell. Everyone was getting bad signals from the market, and outlandish purchases looked almost rational.
That answer isn’t quite satisfying, especially in the face of another financial meltdown. We don’t want ambiguity and complex systems; we want heroes, villains, and a happy ending. But by now we should all know that real-estate markets are rarely the stuff of fairy tales.
Read the whole thing but if you are not an economist or a commercial landlord you may have a hard time following it.
So having read it I’m all hot and sweaty. Why? Well, I wanted to be something of a political sage, like Gregory Peck in To Kill a Mocking Bird. I might be trapped in insane times but I’d personally stand up to the foolishness and do what was right. Well, I’ve not been very successful at that.
This notion of easy “cheap” money is much on my mind. Early on in my fight against the denial of a referendum on the Red Plan I ran across a UM Law Professor who was telling me about a book he’d been reading. The upshot was that bankers loved to have government borrow money because government in the US never goes bankrupt. All the state constitutions with the exception of one require that state’s never go into default. In Minnesota’s case ( and probably most other state’s cases) subdivisions like Cities that get into financial trouble can tell banks and bond companies to have the state pay up should they go into default.
Under these circumstances what banker wouldn’t lend government more than it could easily handle? And so Duluth’s school board got the biggest single school construction project in state history. It won’t save money on energy. It will cost double what the District told voters. The banks will be paid back by the taxpayers because that’s how it works. Easy money and everybody who is part of the project can hide behind school children and say Its for our city’s future.
I’ve been fighting two battles over the past three years having to do with the foolishness easy money provokes. The Red Plan is the first and its taken up three quarters of my energy. The other has been very personal and I’ve only alluded to it occasionally in the most veiled way. (more…)