(NEW YORK, NY) - The events of the past week have, without doubt, marked a definitive turn in the evolution of American capitalism. The shocks delivered to us in "Black September" have been the most profound since the Great Depression in the late 1920s and 1930s. This has prompted the Secretary of the Treasury, Henry Paulson and Fed Chairman, Ben Bernanke to propose the most significant government intervention since the Depression. This was all done to avert systemic economic devastation. And the repercussions to our real estate market are numerous. What will happen to unemployment and capital availability? Unemployment has the most profound effect on our real estate market fundamentals. It affects office occupancy rates, residential occupancy rates and residential for-sale unit volume. The lack of capital availability has stalled the institutional quality building sales market. The problem is that no one really knows where we are headed.
The volatility of the Street has had significant consequences. Gone is the conviction that the free market is the most efficient route to prosperity. The thought that the financial markets should be unleashed to allocate capital, absorb risks, enjoy profits and realize losses has been suppressed. Erased is the thought that when the markets are inefficient they will correct themselves. Also scrapped is the thought that the government's role is to minimize its involvement, limiting itself to protecting small investors and consumers, establishing the rules of the game and stepping in only when necessary to cushion the economy from shocks like the stock market crash of 1987 and the instances where large institutions like Long Term Capital Management collapsed in 1998.
Many politicians today claim that the problem is that the regulation system is antiquated. Indeed it is as many of the parameters were established in the Depression era. But the larger problem is that financial instruments have become so complex that most people who are trading them don't even understand them. Who really knew what the potential risks were if MBS securities went wrong? If anyone really knew the risks, wouldn't at least one of the companies holding these securities sell all of them when they could have to save themselves? They didn't do it because they were not aware of the risks and ramifications. So if you had regulators overseeing what these issuers were doing, would they even know what to look for? I don't think so. Regulation sounds good in theory but the regulators would have to know more about the financial instruments than the creators of the instruments because, clearly, even the creators did not fully understand the ramifications of their innovation. An inevitable result of this crisis will be an attempt of more control by government of our financial system.
In the last two weeks, the US government which has been the supporter of the free market system and champion of private enterprise has: