“I do not recall feeling this way since the Depression era…this is the greatest change I have witnessed in years!” My grandfather recently made this comment and I thought about fellow members of my generation and the feeling of uncertainty that our current economic cycle might be causing. Personally, I lived through the S&L crisis of the 80’s and the subsequent real estate crash of the early 90’s. However, in 1989 I was 10 years old, so it’s unlikely I understood the reality of what was occurring in our country. Therefore, it’s only right for me to claim this downturn in our economy as my first and true experience. When you consider the average 18 year old in our country today was born in 1990, it becomes critical that we educate our younger generation about the past and the solutions that worked to rescue our country. As you may have noticed, the youth are more eager to participate in the political process this year than in any other point in American history.
Recently, I watched with amazement as people lined up outside of a failed IndyMac Bank to withdraw their money. This was a milestone in history for me and any other person in my generation, because an American bank has not failed since the early 80’s. Even the long-time warriors of Wall Street are not safe from the current crisis in the capital markets, which was proven when JP Morgan Chase was called in to bail out Bear Stearns, an 85-year old investment bank. Equity markets are in “bear” territory, which means share prices are 20% off the highs set in October 2007. Other financial institutions, such as Lehman Brothers and Wachovia have virtually lost their market value and require more capital to aid in devaluing assets on the balance sheet and fatten reserves for future loan losses.
Over 30 years ago, our U.S. Congress created Fannie Mae and Freddie Mac, government sponsored entities (GSE) that own or guarantee $5.2 Trillion in domestic mortgages, which equates to 50% of the total market. Investors are dumping their shares and bonds as they worry about the uncertainty in the real estate market and the ability of people to continue paying on their loans. Without fresh capital, these mortgage giants will have a hard time buying and guaranteeing mortgages, which will cause even greater pressure in a weak housing market.
Pundits from CNN to Fox are busy convincing the media audience that we should allow these institutions to take their “thumpin” and clean out the markets. True, many investment banks took on too much leverage during the boom years, the amount of assets held by most firms is 30 times more than shareholder equity, or net worth. I agree these firms must reduce their leverage, but to do so, they have to raise more capital or sell assets.
Recent proposals to increase the capital gains tax rate, impose ordinary income tax rates on carried interest, and raise taxes on the highest income earners comes at a terrible point in history. Doubling the capital gains tax rate at a time when the economic engines of this country, bank and corporations, are in desperate need for fresh capital will have dire consequences on a fragile marketplace. We cannot rightfully call on the investors in our country to place capital in cash strapped institutions while simultaneously exposing them to more taxes on the money they earn from making these risky bets.
There are early indicators that real estate investors are uncertain about the agenda of the next administration and might begin to sell properties in a down market to take advantage of a favorable tax environment. More supply in a crippled housing market will only lead to further weakness, and as commercial property values slow and in some areas decline, more buildings on the market for sale will begin to cause havoc in select markets.
The American people will experience real “change” when Congress reduce government spending and eliminate waste in the system. Slashing the corporate tax rate from 35% to 25% will help our domestic companies become more competitive against their foreign counterparts and put the American worker back to work. Our elected leaders need to understand what many families are now learning…you have to spend less than you earn. Now, if we can get leaders in Congress to understand that axiom, then that will be “change we can believe in.”
