Get rid of bad, non-productive assets and build good assets – PARKS
My name is Mike Messner.
I first want to thank Catherine Nagel and the City Parks Alliance. I like to make charitable contributions the same way I make investments, expecting very high returns. And, I believe my contributions to the City Parks Alliance will ultimately generate enormous returns.
Thank you all for coming as well. Your input today and tomorrow should help the City Parks Alliance and others determine if we really can remake America.
So why am I here?
I was trained as a civil engineer and actually was interested in urban planning early on in my studies.
But, when I needed a job, I migrated into finance. I never went to business school and don’t have an advanced degree in economics. I don’t understand much of this new discipline called financial engineering.
But, one thing I do know is how to invest. How to make sure something built or purchased today will pay major dividends in the future. And, I do know, after some good investments in the 1980’s and ‘90’s, this country has made some really bad investments over the past 10 years.
In the early 1980’s, just as I was finishing graduate school, the PC was introduced. Then came the cell phone and the internet. These technologies started an unprecedented revolution in information processing that substantially increased the productivity of the U.S. and the world. Real wealth was created.
But, when technology stocks peaked in early 2000, the financial engineers on Wall Street thought they could create wealth from paper transactions.
Wall Street, with the help of The Federal Government through the Federal Reserve’s easy money policy, the SEC’s acceptance of some questionable accounting, and the expansion of Freddie and Fannie, encouraged way too much investment in commercial and residential real estate. The investment paper had many acronyms: MBSs, ABSs, CDSs, SIVs, MSRs, CMBSs, and ARMs. Rating agencies labeled much of this paper AAA. Each time some security was created and sold, and then resold, somebody’s bonus was increasing. There was not much thought for the outcomes of these investments on Main Street as long as the bonus pool was increasing on Wall Street.
The country was building 3 million homes a year, when maybe 1 million were actually needed. Retail space was growing at 10% a year, when the underlying GDP was increasing 3% or so a year. Leverage was encouraged. Eight trillion dollars of residential and commercial mortgage debt was created and sold in just 8 years from 2000 to 2008, 30% more than total mortgage debt outstanding in 2000. How big is $8 trillion: you can build 53 million new homes with $8 trillion, or build 3.2 million big box stores (whether you need them or not).
So, now it is apparent we have too much of this stuff. Housing prices are down 30% from the peak and are only leveling off in the short term due to major actions by the Federal Government to keep rates low and new buyers interested. (Read the front page of the Wall Street Journal of September 14 about how the Federal Government continues to be the housing market’s savior.) Over 10% of retail stores are vacant and vacancies are increasing at a very rapid rate. And, wait until the rest of the country shops like my internet savvy wife …the last time she went to the Short Hills Mall, about a mile from our house and one of the best malls in the country, was two years ago to return something she had bought on-line.
How are we solving this problem of too much development…by supporting and backstopping the bad paper, and supporting the firms and bankers who created and distributed the paper. We’ve added new acronyms: tarp, talf, ppip, tglp, cap, tip, and amlf. Fannie and Freddie are now owned by the government, and the Fed is buying $1.5 trillion of mortgages. The estimates are upwards of $14 trillion has been committed by the Federal Government to keep the financial system solvent.
But, these actions just kept us from going into a financial depression. They don’t solve the problem of the bad physical investments that are draining resources from our economy. The buildings need to be heated and cooled, costing energy dollars; they need to be protected, using police and fire resources; they need to be maintained, utilizing workers who could be allocated to other projects; they need to be financed, costing capital that would be freed for other investments. These excess real estate assets are dragging down neighborhoods, local businesses and responsible homeowners. We can learn from the U.S. railroad industry: more assets don’t increase wealth. It’s the utilization of assets that increases wealth. This country has eliminated 55% of the track in the last 60 years, 200,000 miles worth, enough for 30 cross-country double track lines. Yet, rail tonnage handled is up 5.3x, resulting in a 12 fold increase in rail productivity. Railroads have never been more profitable and efficient than they are today.
As a country, we don’t need to accept the status quo. We can get rid of bad, non-productive assets and build good assets – PARKS. We can use the mistakes of the past ten years to create a legacy for the next 100 years. We can build parks!!! A $1 trillion federal program, say $200 billion a year, to buy underutilized properties and build parks would accomplish some major goals that the country is trying to address separately:
Capital would be available to buy underutilized retail space and vacant homes providing much needed liquidity in this sector. Homeowners wishing to "cash out" of their housing investment would have new buyers for their assets. Excess commercial real estate could find alternative uses. Construction jobs would be re-ignited as demolition work and landscape architecture would turn into growth parts of the economy. With more parks for exercise and outdoor play both children and adults would lead healthier lives. It would be a stimulus citizens could see and enjoy.
The changes would be dramatic. In sunbelt cities like Atlanta, Dallas, Miami which have grown dramatically since the 1960's without substantial regard for public spaces, multi-year land-use plans could be developed, and areas could be identified that could make the cities more livable. Older cities could be remade. New great parks designed and built by local citizens for themselves would blossom around the country.
The stimulus would be transformational. Those empty strip malls of the 20th century could become the Central Parks of the 21st century.
Thanks again for coming. I look forward to a successful seminar.
Mike Messner, September 15, 2009
Seminole Capital Management