MarketSpeak

My previous post bravely announced the achievement of a second recovery milestone - if the first milestone was the recovery of Wall Street, the second milestone would be the beginning of the recovery of Main Street.

Since then, two interesting events occurred. First, the Obama (read Pelosi) health care bill passed in Congress and, second, a real estate developer in large projects told me that the bubble in commercial real estate has yet to burst and should do so later this year.

This sounds like one step forward and two steps back. But to counter-balance this a little, I just read on the Marketwatch web site that Bank of America is looking at some of its hom loans in distress and considering taking write-downs on part of the principal on these mortgages to offer distressed home owners some relief.

So what does this all mean?

For small business, the news is very worrisome even though the ill effects are postponed for two years. At some point in the health care debate, there was a threshold that was established, if memory serves correctly. If a business had less than a certain number of employees, it would be exempt from mandatory health coverage for its employees. I wonder where that went? Currently, competition is rising because many unemployed professionals find it to be the only way they can get a job, rents in proportion to gross sales have more than doubled, mainly due to the fact that sales are off, generally, over the past three years, and banks still don’t get it when it comes to lending to small business. For example, I know someone who is paying 15% interest on a revolving line of credit. When this person applied to get a 0% interest credit card in order to transfer the balance, they were refused. How does this help small business?

Government really needs to step in and make lenders review their practices in lending to small business and really needs to think about the impact of implementing universal health care at the lowest point in economic history in this country except for the Great Depression. A suggestion would be that in addition to creating state-level health plan exchanges, small business should be given tax incentives for the first 5 to 6 years in order to absorb this new cost into their cash flow and do so in a time when we would reasonably expect to be in a phase of economic expansion.

As for the real estate developers prediction of a crash in commercial real estate this year, it for businesses generally because this would offer an opportunity for greatly reducing rental costs and could spur renovation and expansion through redevelopment at a lower cost. The thing to keep in mind, here, is that there are two opposing forces at plan. Hopeful renter-entrepreneurs looking for a low-cost opportunity to get in at the ‘right time’ and property owners wanting to maximize rental income. With depressed sales revenues on the part of business owners, their entire cost structure shifted downwards and the first place that business owners can right-size is payroll. Everything else is pretty much out of their control. The only way the rest of the income statement can adjust is if other parts of the environment drop their burden on small business, including rental costs and leasehold improvement and maintenance costs. The only way out of this economic vice is through lowering costs to something that the market will bear.

If landlords are too leveraged to be able to absorb the reality of the tenants current economic situation, bad things happen. They lose tenants and, due to loss of rental income, can face losing their properties. Unfortunately, the tax system does not support preservation of the economic cycle in such instances. At some point, the landlord benefits from interesting tax write-offs to keep buildings vacant or divest altogether from a losing position. This is another place where government, in concert with financial institutions, can step in. A controlled deceleration in commercial real estate could be good for everyone but government needs to play a role in setting up the right conditions for this.

In conclusion, Main Street fails in supporting soft landings and downward economic adjustments because it is based solely on profit-taking. And, profits are generated through growth. And, in turn, growth is not always rooted in the public interest. In such times, growth-focused mechanisms fail to do the right thing because they devolve the whole societal ecosystem in which they exist. We need a stabilization mechanism. This is not normally where Wall Street excels. So, where do we turn to for help? And, by help I mean setting the levers of the economic and social process to foster stability in order to set a new foundation upon which growth can return? It’s a tricky balancing act of meeting basic short-term societal needs and responsibly setting up for long term growth. If Wall Street’s only premise is that in such times only the strong should survive and that this cathartic process is fundamental to prompt recovery, then most of us face dire circumstances until the few strong ones can return us to growth. Given that the few strong can support only a small percentage of Americans, then we have a shortage of capacity to support the country’s population in employment and basic services. Such thinking is what got us into the Great Depression.

The vicious circle of negativity needs to be broken and the easiest way to do this is through a return to near-full employment. But if growth is not possible, then how do we ‘make do’ until growth returns? Enactment of social programs while simultaneously stimulating economic growth in key new industries seems to be our best way out. Basic products and services as provided by small business help on one end while spurring development of new technologies and alternative energy, on the other, builds new large enterprises. Keeping a low dollar to stimulate exports seems like a good idea for the next 2 to 3 years while keeping interest rates low until any commercial real estate bubbles explode and until small business and home owners get onto more solid financial ground can stabilize the domestic situation. Interest rates can rise when confidence returns and more businesses require loans and more people want to buy homes. In short, if demand is low prices should be low, on everything. As demand rises, prices can rise.