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.

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.

Citigroup: The Great Unwind Has Begun

It sounds like if you are investing in a world where you can not determine probabilities then you are just willing to engage in high risk investments. This means that the investment strategy is based upon subjective values rather than objective values. Or, that there is a mix of objective and subjective risks that favor the subjective side.
This could also be caused by people having a lot of money after basic necessities so they spend it on things that are not as predictable as food and shelter.
Global warming related investments could be in this category. No one can make someone use all of the objective data at hand and some will not if they are already psychologically invested in the presumption that humans can make a signifigant impact on the temperature of the planet. I think we are over investing in education. If Mexicans can come up here with an average grade level of seven and a half years and find employment, maybe the educational componet is not as important as the work ethic or the despair that Mexico will ever provide opportunity in their lifetime.
My main area of interest is in transportation matters and I see this rejection of the objective facts driving public policy every day. The facts are there but it is easier to put the brain on cruise control and just do what feels right. Nostalgia, ignorance and assumptions that are clearly opposite to basic facts and even mathmatics are becoming leverage poits for bad public policy. No one fears the retrospective analysis of history since history is so easily revised, remolded and interpreted to fit the current subjective crisis. This is a world increasingly judged by intentions rather than results. Practically no responsibility for unintended consequences are ever enforced.