CRE Has Their Hand Out

According to the WSJ this morning we find that commercial real estate now needs free money.

Big property developers are asking to be included in a new $200 billion loan program as a surge in commercial mortgages comes due.

These firms managed to leverage up too much and now are in a world of hurt. For some property developers extensive use of leverage was the business model. The (poor) choices by the management needs to run its course. Bankruptcy moves the underlying assets to the hands of people who are more competent business managers. If bailouts are given then we, as taxpayers, are allowing profits to flow to the owners in the good times while the loses flow to the taxpayers.

This is not capitalism.

The tacit moves towards the nationalization of so many industries is making me apprehensive. This is the sure way to establish more government intervention and inefficiency. An extreme example is North Korea of what happens when the government manages resource allocation (I don't expect that for us). What this means is in the years ahead we can expect much weaker economic growth as resources are allocated poorly. The problem with this outcome, lower growth, is that you can't see the growth we didn't get.

Also expect to see substantial increases in both interest rates and inflation in the years ahead especially as more bailouts (money printing) comes. This could have a serious cost to our currency as the world's reserve currency. The temptation to print away all this borrowing by the Fed is going to be strong.

The more the government bails the more drag that puts on future growth. Keep in mind that the government cannot create jobs the way private business does. The simplified explanation is that any money the government spends must come from any of three sources which means a decline in assets for investment elsewhere. If they tax income, it comes from the productive class (aka the entrepreneurs) and results in more asset hiding and less business creation/investment. Borrowing by the Treasury takes money from what may have gone into other investments, say corporate bonds, which may have expanded plants and equipment. The last possibility is "printing" money or credit which causes inflation. High inflation is a tax on everyone but particularly those with least access to money and credit. This is much to simple an explanation of the impact but hopefully your further research will help the understanding of the bailout cycle and it's effects, intended and unintended.

17 Billion is Not Enough

The auto suppliers are already clamoring for their own bailout! The ink for the Chrysler/GM bailout is not even dry yet.

U.S. auto-parts suppliers want aid from the federal government, now that General Motors and Chrysler LLC have gotten approval for a $17.4 billion lifeline.

"The next critical phase is the supplier community, which is facing the exact same financial crisis as the manufacturers," said Neil DeKoker, CEO of the Original Equipment Suppliers Association in suburban Detroit. "We're requesting assistance from the presidential transition team."

The game to play is "Who gets the bailout?" Where the player try to guess the industry or company seeking a bailout next. My pick is the states and municipalities are next but I may be early on that. Their bailout will come in the form of the Pelosi stimulus package that Obama supports.

Too Big To Fail

I posit that if all of these firms being bailed out are all too big to fail (AIG, Citi, GM, more coming) then should there not be effects to parcel these firms into smaller units?

Ludwig Von Mises, Socialism, p45

If the State takes the power of disposal from the owner piecemeal, by extending its influence over production... then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State.

Addicted to Low Interest Rates?

So the Fed is slashing interest rates to try and "stimulate" our way out of this recession, and it's not completely impossible that we'll see a Fed Funds Rate of zero percent. Then comes the news that the incoming administration wants to have the Treasury Department throw its financial support behind Fannie and Freddie, with the stated goal of lowering 30-year mortgage rates to an amazing 4.5%. Now the EU and the Bank of England have slashed their rates as well, by 0.75% and a full 1% percent, respectively. The Bank of England's rates are now at their lowest level in over four centuries.

I'm guessing that the unstated goal of all this rate-slashing is to "re-inflate the bubble" ... political and financial leaders are suddenly a lot more worried about deflation than they are about inflation. And with leverage controls certain to be tightened up in the near future (and rightfully so), lowering interest rates is the only way to prevent a collapse in the global money supply. But now I'm wondering two things. One, doesn't this mean we're trapped ... essentially, "addicted" to low interest rates? They're being pushed to such a low level that they're losing their effectiveness as a macroeconomic control. And two, is this a bad thing? Or at the very least, won't it mean a major shift in the way money, capital, and debt is allocated?