Peter Pays Paul

From the Square Feet Commercial Real Estate Blog

The Mercury News reported yesterday on a proposal by the Bay Area Air Quality Management District that could require some housing developers to go study air quality as part of their entitlement process. According to the article, developments within 1,000 feet of major transportation corridors seem to be those affected.

The Bay Area Air Quality Management District is the group in charge of regulating the pollution of the air in the San Francisco Bay Area. They are responsible for “Spare the Air” days that prevent private home owners from burning wood, wood pellets or manufactured fire logs on Spare the Air days.

Mike Shedlock from Mish’s Global Economic Trend Analysis has a great article about the potential for municipalities across the nation to file Chapter 9 bankruptcy.

Mish’s Global Economic Trend Analysis: Massive Surge In Municipal Bankruptcies Coming.

John Moorlach, the accountant who predicted the 1994 Orange County bankruptcy sees Up to 10 Municipal Bankruptcies in Coming Year

Even more infuriating than the policy makers inability to demonstrate fiscal responsibility is their willing to stick both of their hands in the dole. Mike quotes the St. Petersburg Times article Double dipping rises despite outrage.

This year some of Florida’s public officials are giving a whole new meaning to the phrase “home for the holidays.”

It’s a new crop of double dippers, taking advantage of a loophole in state law that allows them to “retire” by taking 30 days off and return to work in their old jobs with a salary and a pension. Many also collect a lump-sum “retirement” payment that can reach hundreds of thousands of dollars.

It is sad that we live in an entitlement culture. Everyone thinks that society owes them something.

As Margaret Thatcher said of “society”,

There is no such thing! There are individual men and women and there are families and no government can do anything except through people…”

Politicians and people that demand something for nothing are holding back the more productive members of our society.

At many of the networking functions I have attended I have heard about “The money on the sidelines”. The speaker is always referring to the investors that are waiting for the bottom of the market to be declared (I’m not sure who will make this announcement) and will jump in with their barrels of money to make acquisitions at incredible prices. Thus they have “money on the sidelines”.

Dianne Crocker has written a great article about this on her blog about the same topic.

Are There Really $$s on the Sidelines?

Crocker writes:

Whether investors move dollars into play on their own or whether the government will see fit to intervene as it did with the RTC during the savings and loan crisis remains to be seen, but what I do know is this: Prices are still falling, dollars are being mobilized to take advantage of deals, and those who are willing to put their money down will be seeking clarity before closing on deals. Fear has replaced greed and paralyzed our market, but greed will return. Until then, unfortunately, we live in limbo as the uncertainty continues.

My suspicion is that when the market turns, we will see a flurry of activity. Deals will come together at a rapid pace.

Crocker’s article sites Brett White CEO of CB Richard Ellis as saying that CBRE has raised over $5 billion (with a ‘B’) to strike when the time is right. There could be as much as $50 Billion waiting to swoop in and make purchases.

I believe a few things need to take place prior to the sideline money jumping in:

1. Lending needs to stabilize. The pendulum has swung from over exuberant to paralyzed fear. Some of the buyers will pay all cash, but most will want to leverage their investment. Leverage requires lenders.
2. Government handouts/bailouts need to stop. Why? Banks do not like losing money. As long as they think that Uncle Sam will bail them out by buying bad assets at above market rates, they will be unwilling to unload them at market prices. Once the perceived safety net is removed, the banks will unload assets and take the hit.
3. The inauguration needs to take place. Many people want to see how the President-elect Obama handles his duties. How will he govern? What reforms will he make? Will he pass a stimulus? All of these factors have investors and owners nervous.

The year 2009 will definitely be interesting and exciting.

This article is very important read for all citizens to realize the costs associated with our benefit programs. Somebody always pays the price, and usually it is us.

Children are selfish. Not because they are unkind (though many are) but because they believe in cost-free transfers. They do not understand that providing the toys and other amusements they demand imposes a cost on their parents. Children live in a fantastical world where Barbie dolls and trips to the zoo can be delivered without depriving their parents of something they might have enjoyed, such as a bottle of wine or a few extra hours off work.

A free lunch for you is a painful cost for someone else | Jamie Whyte – Times Online.

I’ve written before about the government’s unintended consequences.

Today we read:

As we mentioned yesterday, a bit of a fight has broken out over whether it is irresponsible for journalists and others to advise homeowners about the options that the government’s bailout programs are opening up to them. But the fact is for a lot of homeowners it makes perfect sense to stop payments on mortgages…and it may even pay to stop any overtime work or have one of the earners in your household quit.

You Might Want To Think About Stopping Your Mortgage Payments and Reducing Your Income.

(HT:Tom Vanderwall)

One of the major reasons that capitalism is successful and socialism or communism fails is that it takes into account human selfishness (sinfulness).

Each individual, barring some major spiritual catharsis, is going to do what is in their own best interest. The economic theory of capitalism takes this into consideration. Socialism denies this and believes that those in the central government WILL not act selfishly or shortsightedly.

Richard Thaler and Cass Sunstein argue that one of the major causes of this catastrophe was a failure to consider human weakness.

We think their mistake was to neglect the role of human nature. To prevent future catastrophes, regulators should focus explicitly on how to provide safeguards against two all-too-human frailties explored by decades of work in behavioural economics: bounded rationality and limited self-control.

Read the article..

Thomas Cooley and Lee Ohanian argue that the road out of the cycle we are in should be marked by less regulation and less restrictive policies based in the reality of history and not the fiction of theory.

Obamanomics | Print Article | Newsweek.com.

Brian S. Wesbury and Robert Stein detail some of the unintended consequences that government intervention has had in the current economic strain.

Take, for example, the extension of unemployment benefits enacted in June. Normally, jobless benefits are available for 26 weeks. The extension, which will last temporarily through early next year, added another 13 weeks. Following this, between June and October–in only four months–the unemployment rate has risen from 5.5% to 6.5%, a full percentage point.

What’s odd about the jump in the jobless rate is that it has been accompanied by an unusual increase in the number of people who say they are looking for work. Normally, when the unemployment rate leaps upward we see a decline in the share of the population either working or looking for work (what economists call the participation rate).

…

Another example of unintended consequences is the new ability of the Fed to pay interest on bank reserves, a policy it has long wanted to implement to give it more accurate control over monetary policy. Regardless of how much sense this policy may make over the long term, it may be undermining the growth of bank lending right now. Excess reserves by deposit-taking banks typically hover at about $2 billion. In October, these excess reserves were at $268 billion. So with one hand the government is injecting capital into banks to boost lending, but with the other it is enticing banks to hold extra cash as reserves.

The Law Of Unintended Economic Consequences – Forbes.com.

During my morning reading two articles in the Wall Street Journal stood out to me and indicated that credit is not flowing the way that it had in the recent past.

I believe that this is a sign that the economy is deleveraging itself. We are likely in for a period of economic deflation followed by a period of inflation due to the governments massive printing of money.

First, this article regarding asset backed bond woes. These asset backed bonds are car loans, credit card loans, student loans, etc. wrapped up into bundles and sold to investors as a rated bond.

In October, only one deal of $500 million was sold, compared with $50.7 billion done the year before. That is a huge decline and means that far fewer consumer loans are being made. We should see a drop in consumer discretionary spending in the coming months.

Second, this article highlighting the rise in requests for trade financing to boutique firms. These boutique firms are thriving with the slow down in lending from banks.

One of the difficulties is that “They have no guarantee that the buyer’s bank will accept the seller bank’s credit because of solvency issues…”

Currently, banks don’t trust one another and do not want to lend to one another.

Government Intervention’s Role

I believe that the government’s intervention has added to the problems.

The Fed began the term auction facility in December of 2007. This allowed banks to borrow from the Fed without other banks knowing who was borrowing. Borrowing from the Fed in the past had been seen as a last resort and a cause for concern to other banks. With transparency removed, banks become distrustful of one another and slowed interbank lending.

I mentioned here that banks are lining up to get TARP funds because they don’t want to have a negative public opinion, and not necessarily because they need or want the funds.

Until the government takes a “hands off” role to the current financial system, there will be fear, mistrust, and hesitancy that will prolong the economic downturn rather aid it.

When governments intervene into private contracts it has long-term unintended consequences, and usually they are negative.

Read a blurb regarding the research from the St. Louis Fed on the downside of a moratorium on foreclosures.

Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties, Wheelock argueded. “Although the economic and societal benefits of lower foreclosure rates are difficult to measure,” he said, “research shows that the foreclosure moratoria of the Great Depression imposed costs on future borrowers.”

Future borrowers were faced, according to the analysis and cited studies, with a restricted supply of loans and sky-high interest rates, because lenders needed to compensate for the possibility that their right to foreclose on delinquent loans would be constrained. Under the nation’s current turmoil, policymakers are scrambling to enact similar regulations as were made during the great depression, in order to limit the highest foreclosure rates since (what else?) the Great Depression.

Here is the link to the HousingWire.com article.
History Warns Against Foreclosure Moratoria: Study : HousingWire.

Here is a link to the St. Louis Fed report.

Update (HT: Tom Vanderwell)