Sometimes, okay oftentimes, we find there are people who can express a topic better than we can. On occasion, we hand over the mic and simply let them speak for themselves, and this week will be one of those times. This past week, we received an email from Ethan Penner, one of the sharpest minds in the business. He is the Founder and Chief Investment Officer of a fund that focuses on real estate credit called MOSAIC Real Estate Credit (MREC). It is through this lens that he shares with us some thoughts on the free markets and their ability to lift all ships in the long-term, especially when allowed to move freely through their natural cycles. Without further ado, here is Mr. Penner’s thought-provoking piece.
DETROIT: THE FREE MARKET WORKS (December 5, 2019)
I don’t think I’ll ever forget the Republican Presidential debate in 2008 when the moderator asked the candidates what they would do to “run the economy.” Senator McCain, the front-runner and eventual nominee gave a response typical for career politicians about how he would do this or that. As the moderator pivoted to the other candidates Congressman Ron Paul was gesticulating wildly, literally pleading to be allowed to address that question. When he did get the opportunity, he spoke words that revealed a uniquely deep insight for a politician into the workings of an economy. He said he would do nothing. As the jaws of his rivals, especially McCain’s, and the moderator, dropped in shock he went on to explain that the economy’s health is not capable of being manipulated without significant consequences that would completely undermine the sought-for benefits – not by the President nor any politician. He explained that there are natural cycles that are inherently self-correcting, and that politicians and central bankers, with the best of intentions, can only cause harm by attempting to influence things artificially. I can still recall McCain and the others with puzzled looks on their faces during this incredible moment.
In 2008/09 facing an immense financial industry collapse, our political leadership, working with our central bank, decided to intervene aggressively and not allow the natural cycle to occur. They obviously feared that the pain that would be experienced broadly would be so bad that it could have unpredictable massive consequences that they didn’t wish to risk allowing to occur. In the end, one might rightly say that Messrs. Bush, Paulson, and Bernanke were not true believers in the workings of the free market. Or, perhaps they feared that the pain inflicted by that free market would alert the masses to the mistakes made under their watch that led to the pain; mistakes which may have bordered on criminal negligence and surely ineptitude.
In any event, that decision to not permit the free market to self-correct, as had happened for so many cycles prior, was a watershed event for the U.S. in that we’ve now become a society that expects no negative consequences to bad decisions. We have become so complacent about all sorts of warning signs – surging and untenable debt levels, unsustainable reliance upon government spending that creates trillion-dollar annual deficits, and major political figures openly embracing Socialism.
I recently visited Detroit, which serves as a terrific example of how well the free market does work. In the 1990’s the city completely collapsed. There was no economic vibrancy; decent homes could be purchased for as little as $10,000; crime festered; and the city became the butt of jokes on the cruel and cynical late-night TV circuit. Very few would have imagined that a recovery would be possible, and yet here we are today, and Detroit is doing amazingly well. Real estate is selling and leasing, businesses are growing and creating jobs, and the city is fun and is attracting youth from all parts of the nation.
What inspired this turnaround? Was it a government loan? Nope. How about a government tax avoidance scheme like the current Opportunity Zone plan to induce investors to invest there? Nope, not that either. What worked, and what always works, is that cheap prices induced investors to give the place a shot. Yes, the free market worked! There is nothing more attractive to investors than cheap prices. Also, when failure is allowed to occur many lessons are learned, not least of which are the lessons of humility and appreciation. In the wake of a massive failure people recalibrate their lives, learn to appreciate a good job, and understand how important hard work is. Complacency and an entitlement mentality get washed away in downturns. Detroit got to experience that and the mentality of its inhabitants now stand in stark contrast to that of the many elsewhere in our country, perhaps especially on the coasts, many of whose citizens were wrongly spared these lessons in 2008-2009.
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We hope you are having a blessed and fun holiday season! Please don’t hesitate to reach out if you want to discuss what you’ve read here or look at anything before year-end (that is coming way too quickly!).