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Why Real Estate Is A Drag on the Economy

In the final analysis, the most productive loans are those to business operations, particularly small business, that not only produce goods and services, but also create jobs.

This is not the most desirable kind of lending, however. Business ventures often fail, meaning that merely re-possessing the machinery and equipment probably will not make the lender whole. On the other hand, a successful business absorbs more loans in the future, in a virtuous circle of goods and jobs creation.

An apparently safer type of lending is in real estate, specifically the real estate that houses businesses, large and small. Then the lender is protected by the value of the real estate, rather than the value of the business. If one business goes belly up, a new set of tenants can be brought in to rent the real estate.

Then danger arises, however, when producers focus on real estate, at the expense of creating underlying businesses, as has been the case in the past twenty years. Then you don't have enough business activity to support the real estate. No business, no demand for property.

Any given lender can say, let others make risky business loans. I'll just make "safe" real estate loans. But they can't all do this, or no one would be lending to the businesses that occupy the property.

In contributing to the overbuilding, both residential and commercial, lenders were putting the cart before the horse. Their motto seemed to be, "Build it, and the demand will come. But the fact of the matter is that they should have tried harder to build the underlying demand.