From a small northwestern observatory…

Finance and economics generally focused on real estate

January 20, 2009

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I’d planned to start this on January 1, but that didn’t happen.  (Actually, January 1, I was in Charleston, SC, at Renaissance Weekend, recovering from the parties the night before.)  Given all that, it’s probably not a bad idea to start on the first day of Barack Obama’s presidency. 

First, by the way, my congratulations to our new President.  I’m available for ambassadorships to smaller, peaceful countries located on or near the tropics with good, indigenous rum and liberal attitudes toward Norte Americanos.  Barbados comes to mind.  Do we have an embassy in St. Barts?

Seriously, though, as I write this (4:30pm EST), the Dow Jones Industrial Average is closing down 332 points at below 8000.  It naturally begs two questions — what impact does all this have on real estate, and what can be done about it?

To the first question, the markets generally realize that the Obama presidency does not imply a quick fix to anything.  We’ll be lucky — extremely lucky — if the markets don’t get any worse before they get better.  Consensus opinions — and I like the Livingston Survey from the Philadelphia FED — are that 2009 will be a muddled mess and 2010 will be the recovery year. 

The biggest problem right now is in the credit markets.  The government is simultaneously telling banks to tighten down on credit (so as not to make anymore “liar loans”) and to make more loans.  Great.  The banks need to find their most credit-worthy clients and give them unlimited lines of credit.  It sounds good, but even at zero percent interest, money won’t get borrowed if the transactional costs exceed the returns.  Imagine a homebuilder with a great line of credit (none of those exist today, so we have to imagine).  If s/he built houses and no one could buy them, then “free” money from the bank is still w-a-y overpriced.

What do we do about it?  Our economy is a series of cogs/wheels which interact with one another.  If one or a few clog up, then it’s like a very small bird flying into a very big jet engine.  (Readers of this blog a dozen years from now will miss the analogy — google USAIR 1549 and see what you get.)

Assuming “google” still means something a dozen years from now.

Anway, what do we do about it? The system really needs some support from the ground-up.  The recent $700B or so (I’m losing count) was spent in a top-down effort to shore up the institutional structure.  It wasn’t badly spent money, on the contrary.  If we hadn’t spent that money, or at least something like it, then we’d be spending several times that in the first quarter of ’09  to re-create a financial system.    Now, comes phase two — individual market participants have got to feel some safety and security in their jobs and homes before they’ll become market participants again.  The stimulus package being discussed in DC is heartening — it spends a lot of money locally which has the promise of creating jobs, rather than just directly dumping money into consumption.  Don’t get me wrong — consumption is good, but only if there is a fundamental jobs-based economy to back it up.  We could put everyone on welfare and print enough money for everyone to shop to their hearts content, and our economy would grind to a halt pretty quickly — that’s basically what third-world dictators do with THEIR money.  Hyper-inflation and total economic collapse generally follow that sort of strategy.

I think we’re moving in the right direction, but it will be a slow walk rather than a fast sprint. 

Is there anything individuals can/should do now?  I have a few ideas, but I”ll leave those until tomorrow.

Written by johnkilpatrick

January 20, 2009 at 8:12 pm

Posted in Economy, Real Estate

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