Curing The Recession

How we can get OUT of this 2008-9 recession - part 1.

I can’t make this as exciting as a rescue with Steven Segal, but please
hang in there with me.  It was not a simple set of circumstances that
got the US economically where it sat in the Fall of 2008 and it will not
be a simple set that gets us “home sweetly.”

It seems logical to start off by finding out how the U.S. Recession and
Depression of the late 20's to mid 30's ended and to see what we can associate with what we already know about the 2008s and 9.

Hall says in the 20's and 30's, the federal Reserve in D.C., and the Bank of England, were the main reasons for the depression, adding horrible government policies, no insurance for depositors and the unemployed, mixed together–with the fed not asking American experts what they would do to cure things.

Since we are off the gold standard and we don’t care one iota about sterilizing gold, those two components can be put to sleep right off the bat.

Hall further says all other European countries imported the depression.
This could be true.  When both a nation’s people and its different levels
of government change policies from weak, perhaps harmful ones to strong, logical, helpful ones, everyone wins.

The US and top European bankers were often more politically powerful than the federal reserve.

And still–while many bankers had no idea of monetary policy–raised interest rates when commercial paper [loans] was rarely being “brought in” to lend against and lowered it when the paper was there from friends who wanted the best rates–forgetting the consequences to the rest of the economy[p52].  They did not understand the purpose of the Supply of Money.

These federal officials did not know how to define credit, nor distinguish between deposits and credit in analytical terms.

Since those people are all now dead, supposedly our treasurer and fed chair are more knowledgeable and skillful and action oriented so that we can climb out of these severe doldrums.  We know some positive actions have been taken: banks have been lent money [unfortunately, most took it just to pump up their books not to lend out.  And the fed, instead of raising interest rates, lower them!]  

The gold and silver standards, export rules and import rules world-wide.
–Those problems are solved.

Middle class and higher college kids caused this nation’s laws and mores to become what they did.

McComb says that middle income consumers have cultural purchasing habits.  Thus, our savings and spending habits were pretty born from the habits of college students of this era.

As our 2009 Dr. Phil has stated many times, when we have habits that
no longer —serve our purposes [excess spending, inadequate savings] we need to change our habits-behaviors.  We are doing that now, albeit a bit
too aggressively.  Instead of slowing down our spending, we seemed to
have almost stopped same.  We need to add back more than just
grocery shopping.

The US is a consumer/consuming society and a lot more! We are inventors, educators, sharers and a lot more.  So, we consume while we live. We learn while we live, etc.

So, we make things to sell and we provide services to sell or we are operators of municipalities whose services are paid for by taxes.

What needs to change here is simple; we need to absolutely listen better
when our customers tell us what they want to buy!  The ford expression
of “we will sell any color Ford a person wants as long as it is black” is over.

Economics is the analysis of how businesses needs and consumer needs mesh and how the government gets involved to protect within the economic world.

Part of this meshing comes the legal protection our constitution and
different laws give us, that Communist nations do not provide [hint hint
for those wanting to expand their operations to setting up shop in China]

Within these sciences comes the critical service of banks.  Our banks
are mysterious systems in that their time frame for lending is excessively
long and their definitions of risk is archaic.  We need banks that do not
act like power brokers.  And banks that think “speed.”

Anytime we have people involved in things, we have both the totally ethical, the partially ethical and the unethical.  When the totally and partially unethical get together or simply ply their focus individually, we get economic storms of varying sizes and strengths.

In the past 36 months, we have had several focused “problem creators.”  

We had banks making stupid loans and we had a new type of gambling
or risk taking; we had an organization [AIG] that took simple
securities that were made up of notes against real estate and that
company played on the gambling tables of math designers to create
a mysterious game with those assets.  Fewer things are more absurd.

...All we need to do to fix that is to stop the additional gambling with the notes and keep them as assets.

The next story is the difference between “toxic assets” banks foreclosed on
and reasonable value real estate.  NOT hard to explain and thus, find solutions.

Lets say that 50 of us get together and buy some fantastic fully occupied
office buildings in NY City.  4 cap properties.  4% return plus tax benefits.
Absurdly low return but excellent for one’s ego!  Let’s now see how
something logical and historically good for a team of investors can become “toxic.”  Let’s say the bloody Chinese come in and buy 10 buildings for 15% greater than their current value–just to become one of the new guys on the block and to flex their economic muscle.  Immediately, all the other property in a 1-3 mile radius become worth more–while they just sit there doing nothing more–because of the science component of appraising called “comparables.”  

It is a given in real estate, that any parcel is worth whatever someone will pay for it.  It is assumed that the buyer has done his homework and finds that he can get a “decent” return for it within a few years.  While the purchasing methods used are step by step stipulated by law, the values assigned to the property are value judgments and not scientific at all–nor can they be.  They are, judgments.  The disclaimer in all appraisals I have seen states “this appraisal is a reasonable estimate of the value of this propetry based on .....blah blah, all are either disclaimers or explanations why this estimate is what it is.  

Is the block of buildings just bought, selling for a fair, and reasonable price,
or at an inflated price?  That could be considered the $64,000 dollar question
[old game show and expression.]

Yes and no.  IF a lender were to sue a buyer for non-payment, the lender could bring up the argument that the property group was not worth what was paid for it.

There is no absolute clear cut response to that–but there is a single formula
that some people–including this paper’s author, follow if it is guessed that
someone is over-paying for a property–the cost approach.  A builder has
a right to charge whatever he wishes–that is a given.  However, the average
builder seeks a 20% RETURN on his properties.  Average builder, average
property, average this and that.  Thus, if we revert to the cost to build
that block of Chinese bought office buildings, we would find quickly that
they were over paid for my a factor of 1.5. [My arbitrary number here.]

If the Chinese authorities had to dump these properties in the followingyear or two they would find it difficult to get back even ½ of what theypaid!  It is not that the properties lost REAL value, it is that they wereover paid for using the cost approach.  If there were note holders on thosepurchases, those notes would have lost value ON THE PREMISE THAT THEY ARE not being paid on.