Danny Newton

Elephant in the Stress Test Room: Commercial Real Estate Loans

Does anyone know the time frame for the stress test ? Is the stress test modeling five years , ten years out??
I think a major holder of empty and unused commercial property is county and city governments that have built speculative buildings to attract the next factory. The state of Tennessee has over 84 square miles of land and there are at least 1200 properties that have existing buildings that are advertised. Most of that is going to be paid for by tax money. One County in Tennessee just bought options for a 1630 acre mega park at a cost of over a million dollars a year. The options are about 6% of the asking price. This massive stock of land and buildings is in competition with privately held properties and is depressing both leases values and purchase prices.

Hempton's Law of the Conservation of Subsidy

I think Hempton should be nominated for a Nobel Prize. The state of Tennessee made subsidies illegal in the post civil war era, when Railroads were subsidized in order to make sure they either came through town for economic development purposes. The result was massive local public debt. The state constitution still forbids loaning the local governments credit to corporations or taking ownership of the company. The state has reconstituted government subsidies at all levels by ignoring the Constitution.

Some cities and counties have bought train right of way and gotten loans to upgrade track to modern standards. They plan to let the trains use the track like the trucks use the Interstate, but so far, I can see nothing like a rail or cross tie tax. Even though most manufacturer's are experiencing a capital expense of 4% of total unit cost, state and local governments are practically giving away property or at least selling it a below market price to keep their industrial base. Industries need help with people costs, not capital costs.

I see no difference between a subsidy and a tariff with respect to what is going to be accomplished. The subsidy keeps the weak in business and that inefficiency is passed to the customer through higher prices. Higher prices will reduce disposable income just as well as a tax.

Industrial productivity is running at more than twice the population growth. That means that there will be a loss of industrial floor space per person going well into the future. It also means that not everyone is eventually going to get their factory if they just wait long enough. History is repeating itself in Tennessee but there is no valuable lesson to learn because the wisdom of subsidies is sung at every Chamber of Commerce Meeting and at every legislature.

Will the Geithner Plan Work? Let's Hope Not!

I think the next bubble is going to be in energy. The government is already driving it harder than they ever did the Fannie Mae and Freddie Mac Mortgage deal. Those bad assets were a fairly small fraction of the total. Already people are building power lines that will be underutilized because they are going to be hooked up to goof ball underperforming energy sources. The effect will be a high cost per unit produced. The subsidies can not be sustained and the cost will have to be socialized in the same way that the Fannie Mae and Freddie Mac Subsidies were socialized.

U.S. Economy: Golden Dreams, Fallacies and Nightmares

There is good stimulus and there is bad stimulus. The governemt should be stimulating the economy all the time by assuring property rights and doing only those things that magnify productivity and opportunities for the greatest number possible. They used to call this getting the greatest good for the greatest number. Not all infrastructure projects meets these requirements. Money to a bad project has to go down the line before it can find a beneficial use and by then it has been degraded by taxes and other consumptive forces. Not all projects will have the same multiplier and to get the money, you have to take it away from some other activity that might have been better. We always hear about the multiplier effect but never seem to worry about the divider effect when government action diversts resources AWAY from beneficial activity.