Wanna buy a property cheap? I mean, for $40,000 you could buy a property that was worth $100,000 only a year ago, and may be worth that again soon. Maybe you could buy it for $30,000 if you bargain hard. Hold out, and perhaps that price would drop to a low, low $25,000.
That’s the kind of deal you could get from the Resolution Trust Corp. in the early ’90s. You remember the RTC? It was created in the midst of the savings and loan implosion. The RTC is often credited with clearing out the smelly air, but it is also blamed as engineering one of the greatest wealth transfers in history. It essentially took properties that had been foisted onto taxpayers and dumped them, sometimes for pennies on the dollar, to those shrewd enough to recognize a bargain.
The reason I bring up the RTC is that the federal government seems destined to repeat its RTC mistake with the so-called Wall Street bailout. After all, it’s pretty much the same situation: The government will acquire a huge number of properties and other assets and sell them back to the private sector.
I know they say they won’t dump properties, but that promise is about as good as the one from presidential candidates who vow not to go negative.
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After all, the government has close to zero incentive to hold onto properties and make a slow, orderly sale. It has every incentive to unload them quickly. The problem with dumping properties, such as houses, is that they drive low prices even lower. And the low prices attract not just those who want to live in them but scads of speculators who want to rent them out. Or just sit on them and wait for the rebound.
Southern California is particularly vulnerable to house dumping. This place is becoming the Grand Bazaar for foreclosed properties. And last time around, thanks to the RTC, the Inland Empire was particularly hurt.
Patrick Morris, the mayor of San Bernardino, was quoted in the Wall Street Journal last week saying that after the S&L crisis, “Our city was so impacted by the drama that we moved from a city of owner-occupied homes to a city of renters.”
That’s why a variety of officials in the Inland Empire are supporting a bill that would allow businesses and local governments to buy up some of the properties that will fall to the Treasury Department under the bailout plan, according to the same article. It’s a little hazy about how it would work, but the aim would be to let local private-public partnerships have more control over the disposition of properties. That way, they could head off a crippling fire sale.
There are many things not to like about the several bailout plans: the failure to neutralize the ruinous mark-to-market accounting rule (which would cost taxpayers close to zero); the reliance on asset purchases instead of loans; and the government taking equity stakes in businesses. (On that last point, just wait for congress members to shout, “Not in my district, you don’t!” when a business tries to sell a doggy unit or lay off employees.)
But the worst one for the Southland is the possibility of a government-orchestrated house dump accompanied by low, low prices that speculators can’t pass up.