Democrats more patriotic than Republicans

I don't know if any of us common citizens know the real details of the auto bailout but living and working in the midst of the auto corridor, I shudder to think what would have happened if it did not take place.

As for debating the nuances of my choice of words ( . . . significantly made it worse.), this does not remove all culpability by any means. It is more an argument against ignoring the realities of a mature economic cycle and present circumstances when criticizing his efforts.

 

No no no - it was your position that the economy was declining WAY before the collapse of Lehman Brothers. If I have an accusatory tone, it;'s because you have utterly failed to make your point.

Look, you wrote "2006 was the last good year, 2007 saw the beginning of economic slowdown, 2008 was a year like no other in recent history. All of my clients without exception stopped purchasing in unison by the end of 2008." Your position here is that the economy was falling way before the Lehman Bros collapse and the October 2008 disaster. Right? But now, you are backing away from that position! And hey, getting snippy about it just makes you look guilty.

I trusted you and responded in kind. I now revoke your trusted poster status and I ask that instead of blindly taking your word for it, I request that you back up your claims with cites. Understand?

 

Gomeza:

I like your commentary. Its mature, reasoned, long term, and not subject to the political histrionics that twist real economic discussions. They inspired me to find this current data source on office building inventory on the US: http://www.crcnationwide.com/File/View/6782905d-efdc-42cf-82cd-3d59ea22b2c7

Great source. Co Star has a monopoly on commercial real estate information. The business has been around since the 1980's. It does the best job of aggregating raw data, assembling it and presenting information.

I'd guess it has a report on industrial space. I bet it would be interesting to look at factory output, industrial financial and output statistics and correlate it to industrial space statistics over time.

I like the office space info. Office space is more expensive than industrial space...and frankly I dealt with both office and retail in a major market.

According to the Co-Star Report there is a little north of 10 billion sq feet of US office space and its average value is around $200/ft today...or roughly $2 trillion. The vast majority of that $2 trillion is leveraged.

If you look at page 16 on that report, it shows the growth of office space; a graph that is remarkably similar in change to the one I presented from a microcosm of office space (fairfax county Va). Fairfax is a large suburban market but tiny relative to the entire volume of office space nationwide. Similar to what occurred in Fairfax, was that more office space was delivered in the 10 year period of the 1980's than any period since...and the 1990's was a period of remarkable little office space delivery.

The office space vacancy info provided by costar only goes back to 2000...but as with Fairfax if it went back into the late 1980's or early 1990's it would show the highest vacancy rates over the long haul.

One other piece of background: Starting around 1980 US Savings and Loans (S&L's) were given the ability to make commercial RE loans (along with many other kinds of loans). Simply they went nuts making commercial RE loans. I saw that very first hand with 2 institutions in the DC area. Magnify that all over the nation....and you had $$$$ flowing into real estate from the finance side like never before.

That mirrors what occurred in the residential RE world from say the late 1990's through the mid 2000's with it accelerating year by year. I was involved in leases, land deals, building sales, etc.

Basically by the mid 80's none of the deals (the loans) would pan out or make sense. That is unless you were predicting you could sell the building for a big profit. But that didn't stop the institutions from making loans. The fees were great...the process was simpler...with more rudimentary checks than the huge variety of other types of loans that S&L's could make.

Now here is another stat. There were somewhere about 3,000+ S&L's making loans. Prior to the beginning of the 1980's not one of them had a single staffer experienced in making commercial RE loans, let alone existing credit standards, let alone staff evaluating the mixture of loans by the institutions. On top of that the fees were rich, and accounting standards for S&L's had been relaxed in the early 1980's allowing them to recognize profits on loan repayments way too early.

With the excess of development, extensive leverage, and growing vacancy rates for office buildings...by the latter 1980's you had a disaster in the making. Loans weren't being repaid.

It led to the S&L crisis of the late 1980's and early 1990's. The feds formed the Resolution Trust Company (RTC) which essentially took over failed and failing S&L's and their loans, primarily commercial RE loans and properties. Taxpayer money and debt fueled the RTC. By 1999 with the RTC winding down essentially close to $120 billion was counted as taxpayer losses and basically the number of S&L's was halved from in excess of 3,000 to around 1600 http://en.wikipedia.org/wiki/Savings_and_loan_crisis

While it cost a lot of taxpayer money the feds stepping in averted a more severe financial/entire economic crash and enabled liquidity to continue to operate. That was similar to the TARP efforts, that in my mind alleviated the financial crash in 2008, and which most independent financial experts acknowledge. When liquidity goes...everything else fails.

In my mind, some of what occurred in the 1980's and 1990's was replicated in the 2000's on the residential side.

Broadly...way too many loans were made by way to many lenders into real estate with very loose controls. Fees were HUGE compared to most other lending vehicles. In the 2000's a 2ndary element was that Wall Street was monetizing the residential loans, and reselling them to investors. That meant that lenders could continuously move them off their books and make more loans. The lenders had no skin in the game...could move $$$ around easily and focus on fees.

There were no controls. A huge volume of non regulated bank associated finance companies developed and they generated many of the crappy loans you referenced earlier. Similar to the S&L situation nobody from up top (ie the feds) was monitoring or watching or limiting the transactions.

If you simply evaluated total debt flowing into the residential real estate world you would have calculated that it was growing out of control. But that wasn't done. On top of that newish instruments with adjustable rate loans, interest only loans, etc....were flooding the finance and real estate markets. Way too much real estate/finance world debt. It was calculable.

Having experienced the commercial RE experience first hand, I have no idea why the US financial regulators don't turn off the spigot of money or tighten the spigot flowing into real estate. When RE crashes it creates incredible financial disasters.

I lived RE. I was a broker/an investor. I sat in on some deals being evaluated simply b/c I knew more than anyone in the lending institutions. I brokered sales, I made investments. I got crushed in the first debacle at the end of the 80's, and benefited from the incredibly low prices when the market started to rebound. I was both lucky and had more experience and knowledge than most investors b/c I was involved in the markets on a daily basis.

But the process is not one to be glorified or rewritten as some exemplary example of markets being superior to controls. The combinations of real estate markets and finance are a deadly duo. They tend to excesses. Ultimately real estate, once developed, is an asset that doesn't generate wealth and development like other assets. Cars, trucks, computers, machines, etc. create more value and economic development. Real estate houses all that stuff.

So I would put the blame on the feds. They could oversee the intermix of RE and finance. For political reasons, reasons wherein large financial institutions have sway over what governments do and say...the feds take a hands off attitude.

They shouldn't. When RE/finance goes bad it creates monstrously bad results that screw up everything.

Gomeza: Living in the industrial midwest you saw the impact on the auto industry. I don't know Canadian stats, but US new car sales went from 16 million/year every year to less than 10 million at the low point of this last recession. That destroyed jobs, destroyed economies, basically crushed the midwest.

there are no great stories that come out of RE/finance induced recessions.

my $0.02

 

I don't know what to make of your response unless English is not your native tongue. "2007 saw the beginning of economic slowdown" are my exact words, what part of that are you having trouble with? The timeline I chronicled is based on my experiences but every part of it is easily validated by what is now a matter of historical record: Here is another link to another article from that time period.

I am not backing away from anything and if you can disprove anything I have written, go for it. I also find it a bit humorous that you are now using terms like "guilty" . . . guilty of what? . . . I can tell you what I am not guilty of: any form of bias regarding the 2 major US political parties, which I think is at the core of why you have pursued this contention.

I simply don't care if the truth becomes inconvenient to anyone attempting to discredit their political opponents.

 

Your post was an interesting, informative read and I am in complete agreement that "When RE/finance goes bad it creates monstrously bad results that screw up everything" . Oversight and stricter guidelines are an absolute must for the financial and real estate sectors, both commercial and domestic. I am however a little confused on one point. Do you consider Detroit the "industrial midwest" from where you live?

As for how the decline in automotive production affected Canada, it is important to know the size of the auto industry in terms of our GDP. It is a much bigger factor than it is in the USA. Despite having approximately 1/10 of the population of the USA, Canada builds approximately 15% of the cars driven in North America. Parts production is extremely important as well. The low point of the recession was disastrous in this region.

 

I understand that Detroit is certainly part of it. I also know that there are factories throughout those states "the so called rust belt" ...but factories are quite widespread. At one point I spent considerable time around Milwaukee. Its definitely a strong industrial city as is much of Northern Ohio, Michigan and other areas...as I understand it. I don't know much about the Canadian elements of that area though.

 

Well the angle I'm taking is if i'm running a business that's making me a shitload then as it is I pay my minimum tax and accumulate great wealth each week etc. There's no incentive to grow my business any more. I'm now earning what I need to in order to live, and a lot more.

Then they put up my tax rate. I'm going to lose 25% of my current wage, if things don't change.

Am I going to just pay that if I have gotten away with not paying it for years? Not a chance in hell!

What I will do is instead of me personally buying a new car for myself, my company will buy the car. I'll go out and get a huge loan, possibly buy or move to nicer premises, that all must now be paid back, by the company. This straight away causes my business to have huge outlays, pure, pre-tax, outlays.

Do I lose that $5,000 per week or invest in a new million dollar printing press for the business to avoid it?

Now my business isn't making so much money because it has many more bills to pay.

Sure, my wage packet might not be as good (until my investments pay off) but I still have the best car on the block etc. The business is better, the premises is better, maybe even have a few more employees. My choice is do I pay a shitload of tax or do I work to make my business better.

 

You sort of lost me there with all of the ideas here.

What percentage of business owners do you think start a business “just to get by”?

No one I have known and spoken to has ever said something like this, just curious your thought process.

 

I didn't say just to get by, I said enough to live on and a lot more. We're talking about the rich yeah.

I'll try make it simpler, if I'm to get taxed on the money my business is earning then I restructure the business so it doesn't earn that much.

How to restructure? Easy, take out a few more loans, buy a few yachts, buy a footy team, expand the business, whatever I want. I put the company into heavy debt with my toys of choice. Now my company has a huge bill it needs to repay. On the books it hasn't made any money, it might even claim a loss.

 

Mate, are you trying to be a member of the hard right party an equivalent of the hard right Republicans here or the Neo-Cons. LOL !

 

Not at all, the right don't like taxes. I'm saying raised taxes would benefit all. I'm simply pointing out what the rich ones would do (or have to do) to avoid paying those taxes, and imho, is not a bad thing either as you lot need the jobs it would create right now. I would tax hell out of the rich as they'll be forced into spending it on their business instead of themselves. That way their 'trickle down' effect they keep promising may come true.

 

My mistake, Chicago and surrounding area is definitely the largest manufacturing region in North America but we were speaking of the auto industry where Detroit is the center of that industry. In the last 20 years or so a number of auto assembly plants have been built in other regions but the auto corridor from Detroit to Toronto, (which envelopes a great deal of Northern Michigan as well as just about every major center along the 401 highway due east from Detroit into Canada to Toronto and beyond) still produces the majority of cars used in North America.

Back in the mid 60's, LBJ and Lester B. Pearson signed the Auto Pact which removed most of the tariffs on all things associated with the auto industry. Initially it was a deal that heavily favored the US auto makers as they gained unimpeded access to the Canadian market. Since that time, a great deal of automotive production has moved across the border into Canada due primarily to 2 factors. The US dollar was for years much higher than the Canadian dollar and employee benefits in Canada are a fraction of the cost of what they are in the US due to our national health care.

In the late 80's Reagan and Mulroney signed NAFTA which removed all remaining tariffs affecting the auto industry which resulted in a significant increase in parts production for the 2 reasons mentioned earlier. Since that time the Japanese auto makers have moved in (Toyota, Honda, Suzuki in a joint effort with GM) increasing the size of the industry dramatically.

Now trouble is in the wind. The Canadian dollar is hovering around par with the US dollar and the US is making efforts to overhaul its health care system. Both realities do not bode well for the future of auto production in Canada. As I mentioned before; I shudder to think what would have happened if the auto bailout did not take place.

 

What you are suggesting is not realistic. The old mantra of "make the rich pay" has been proven through practical application countless times to actually mean "make the rich move". As in move their assets to more favorable jurisdictions. Carefully orchestrated tax incentives (different from outright tax cuts) on the other hand have had some success in recent years. For example: the current US administration has been busy closing tax loopholes and offering incentives to American companies with branch plants in other countries. In the small city I live in alone these efforts have re-repatriated at least 12,000 jobs (HP, GM to name but 2 American companies affected).

When the small increase in monthly Jobs numbers is announced in the news, what the numbers don't say is where those new jobs are coming from. It is not entirely due to economic growth.

Don't get me wrong, there may well be justification for a tax increase amongst higher income earners but that increase, if it takes place, will not necessarily translate into more jobs, at least not directly. There is a reasonable argument to suggest that the increased revenue from those taxes can be utilized for incentives and other programs but there is no direct correlation between increased taxation and job creation other than a negative one.

 

Gomeza: I'm basically a real estate guy with 2 decades as a commercial broker. Also an investor. It made me a huge believer in demand and supply. That is the core of virtually all business and always applicable to RE. My professional experience is in the greater DC region market, city and suburbs. As an office market it is one of the largest and most sophisticated in the nation. But the nation is huge. As large as the DC market is...it seems to account for 4-5% of the national market.

Real estate is the classic leveraged investment. When demand is low, vacancy rates increase, occupancy rates decrease. When vacancy gets too high....rental income doesn't pay for debt service (mortgages) let alone everything else. Properties fail. Investments fail.

I really don't believe in the "everything is about taxes" philosophy at all. That has nothing to do with demand and supply. In the US during the 1990's demand across the border grew dramatically. Tremendous changes and advances in technology, incredible upgrades in communication. Compared to the 2000's tax rates on individuals, investments and corporations were significantly higher. Yet on every single component of measuring growth and well being...the 90's were incredibly better than the 2000's. Low taxes are not the spur of development. Growth in markets spurs wealth creation.

That is true through history. In far earlier years in the US (the greatest economic engine in the world for hundreds of years) there have been periods of enormous growth incredibly tied to periods of high taxes.

When I was brokering aggressively in this golden fortunate large DC market with all of its advantages and there were enormous opportunities....most of the time I was looking, as were most of my colleagues, at individual tax rates of between 45-50% (state plus feds).

That never stopped anyone from working triply hard to earn as much as they could. Opportunities spurred economic activity....not tax rates. Frankly low cost easy money was also an enormous spur for activity.

If you are working and active and earning a lot...that work isn't going to stop with high tax rates. If you stop working and are living off of investments than the situation changes. Move. Move to a no tax country or a no state tax state. Big deal. You are no longer part of the engine. If you are wealthy and investing...you are in a different class. The working parts of the producing engine may take your investment money...they may take someone else's money. So what.

I don't buy into the "golden position of the large corporations and the large financial institutions that sway legislation" and decisions.

Meanwhile, I am no expert on your neck of the woods. I do recall though, as a kid, my family won a trip to the Indiana sand dunes on Lake Michigan. From there we traveled North into Ontario and East back to Niagra Falls and then south back to the NY metro region. I'm pretty sure the very first time I recalled having a "great meal" was at the Taffy Abel's steakhouse, which I believe was in Saulte Ste Marie, Ontario. Taffy Abel was an NHL star who has since passed away.

And that is about it for my expertise and knowledge about your neck of the woods.

 

How do you give them incentives if you got no money to work with? I think what they need, and i'm talking of, say people or companies earning above 5 million, is to have a huge 'federal' tax burden on earnings beyond that. Then you can lever that burden with your incentives and tax-breaks for conducting their business activities within America and even more breaks for pushing exports.

 

Have to do? Corporations offshore all their profits as it is with fancy accounting maneuvers like the "double irish" and the "dutch sandwich". The rich don't have to do anything but change their accounting practices, or perhaps their citizenship like Sergei Brin. I thought Gomeza summed it up nicely with this post:

The US already has the highest corporate tax burden on the planet. This is why you see Google and most companies off shoring all their profits. Re-read Gomeza's post. Increasing the tax burden is only going to accelerate that trend. There will always be a country on the planet willing to offer more a more favorable tax code, and as I said before, raising the tax rate on the rich to 100% would not close our budget gap.

The trick to raising more tax revenue is to create a welcoming climate for small business. You know, the ones who cant afford to pay for offshore tax havens. The ones who all those draconian tax rules end up impacting the most. Drop the corporate tax rate from near 40% to something around 25% and plug up the holes nearly all of the fortune 500 are using to offshore their profits and you will see tax revenues rise, not only from the fortune 500, but from the massive business and individual tax base that exists in this country.

 

I agree International companies use branches all over the world to claim the best rates. What stunned me earlier this year was Google took $1.1 billion out of Australia last year and paid us back just $35,000 tax. They're using their Ireland branch from here, and I think that should be illegal full stop. If it was paid here then it should be taxed here. We think we're paying Google Australia when we buy our adwords but we're paying Google Ireland.

I also think small business should be helped wherever possible, low taxes would be one step of many I would take.

I believe the government is there to help me get things done. At one point it owned enough businesses to run a lot of its affairs itself but the Liberals (Republicans) set the trend of selling them all off. Now its got to live off taxes mostly, just like your government. There's a few taxes I don't like to pay but I must admit i'm happy to pay most of them on the whole because I see the need. Mind you, I haven't earnt more than a million in any year either, yet.

 

Well, now you are just being a wise-ass.

That is only part of what you wrote.

Look, you wrote "2006 was the last good year, 2007 saw the beginning of economic slowdown, 2008 was a year like no other in recent history. All of my clients without exception stopped purchasing in unison by the end of 2008."
I'm looking for a cite from you on your claim that purchasing of capital assets slowed and then stopped leading up to October 2008. Telling me to research it myself is the same as admitting you are wrong. Screaming at me like a political extremist is childish. Show me a cite, please?

When I lived in Detroit that wasn't quite settled. The consensus of many people that grew up there was that Detroit was not in the "midwest", but to a New Yorker like me, it was.

 

Are you arguing now for the sake of arguing or are you just stupid? The key part of my statement as I chronicle a decline in business over that time period are the words "my clients" as in this is a testimonial of personal experience. I'm not about to show you my books from that time but as I mentioned, this scenario was not unique to just my own enterprise. Anyone involved in the sale of capitol assets and commercial financing during that time period will tell you the exact same thing and even if personal experiences vary, every last person in that industry saw a dramatic decline in orders like no other era in recent history.

Now to finally shut you up and put a stop to your ridiculous challenges HERE is a series of graphs from a reliable source (The Wall Street Journal, maybe you have heard of them?) . . the relevant graph at that link is entitled: Non defense Capitol Goods orders, Ex Aircraft. . . if you are capable of understanding what you are looking at, this should be the end of this discussion.

I won't be responding further in any event.

 

Gomeza: I understood what you were initially describing. It wasn't complicated stuff. Businesses see sales slow down over time....they stop buying expensive stuff. Not too complicated at all.

Further businesses purchase capitol goods as investment. That is by definition. I went and looked at your website. Some of that stuff is mighty expensive.

Look, if I buy a $50,000 or a $380,000 tool I better have a lot of sales to pay for that stuff. If sales have fallen off I'm not buying the equipment.

That mirrors everything written and experienced about the scope and size of this recession and past recessions....let alone business investment.

When sales fall off you don't invest in the business.

Not complicated at all.

Often I find Corwin's comments to sound quite babyish. The recent commentary is of that category.

The one thing you did was bring maturity inside these discussions and pulled a discussion of business cycles outside of the stupid political conversation that dominates these comment sections.

I salute you for having brought sense and maturity to the discussions. Don't let one persons immaturity stop your commentary. You can ignore the babyish whining.