Our understanding is enriched when theoretical principles are illustrated via concrete examples.
Take a look at these aerial photos over South Florida and the concept of economically uncompletable capital projects becomes as plain as a picture.
Source link: http://archive.mises.org/14171/see-it-believe-it-google-earth-reveals-malinvestment-in-florida/
See It. Believe It. Google Earth Reveals Malinvestment in Florida
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Cool! Too bad the liquidation has not been allowed to proceed freely.
But … but … they’re not economical! We just need to obey Scott Sumner, and print up money so that people can spend enough to *make* these projects economical, no matter how much it impoverishes them!
Looks like a circuit board.
I may be mistaken, but these houses are probably aimed at retirees. These homes were usually bought for cash – no mortgage involved. They were bought with proceeds from a previously owned house (sold at the bubble price). Now that the bubble has burst, many people do not have sufficient equity in their existing home to sell and buy these properties free and clear. Also, the drop in the stock market has eroded their retirement savings, so they are reluctant to put in more cash. Also, you will probably find that the bank who owns them is “waiting for prices to go back up” – they prefer to carry them on their books at full loan value, with 0% funding from the Fed, rather than drop the price to fair market value and realize a huge loss on the entire development when all loans in the portfolio is marked to market.
In a normal world, required cash-flows would dictate the owners of that property to slash prices and sell at whatever the market clearing rate is. People and businesses don’t have the luxury of holding onto non-liquid assets.
Unfortunately, we had TARP, so now they have the luxury of just sitting on those assets, allowing them to be removed from productive use for even longer. Malinvestment by another name.
In principle, they could sit on these assets indefinitely. However, there is a catch in Florida – the weather. Over a period of time, these brand new and partially completed properties will start to deteriorate. When they do decide to put these properties back on the market, they may find that they have $50,000 of deferred maintenance to contend with.
Weather or damage by humans is true in most areas. Many properties will be left rotting away while those who own them wait for prices to rise.
That’s only assuming they have other business activities to offset the cash flows of the organization, such as paying taxes and maintenance on said properties. Further, holding the properties would only make sense under the assumption that the realistic present values of the sale of those properties would exceed the present values and cash flows of other activities that the liquidation of the property could offer. Raw profits or loss on an individual item is not the goal of a healthy business. A prudent business will take a short term loss to ensure greater future profitability. Which is why the cut-rate clearance of all that property would have likely occurred had there not been TARP.
J.
The problem is that the banks were very highly leveraged. If they marked all their Real Estate Owned “REO” properties to market, they would not meet their Capital requirements and they would be shut down by the FDIC. So they, in collusion with the Fed, play the “extend and pretend game”. This is not the first time this has happened. This was done during the Latin American sovereign debt crisis – the legislation that was passed then is essentially what allows the Fed to hold “Kyle’s Margaritaville” as $6million dollar collateral. (See the appropriate South Park episode). Incidentally, the FDIC does not have the staff to shut down all insolvent banks, nor enough insurance to bail out all the depositors.
Only one of the posters on the site recognized that most of these photos were of 1970s era subdivisions of which there are still many more developed lots remaining un-sold than from the most recent failures. Most of the failed proposed subdivision sites from this recent go-around in Florida are undeveloped and still in a natural state. There are still platted subdivision lots from the 1920s Florida Land Boom that were unsold because they were the proverbial “swamp land” lots selling through newspaper adds to Yankees and went bust. Some people never learn.
Funniest comment on the site was blaming the credit expansion boom on tax cuts for the rich while calling people morons for not realizing it.
Please take down those pictures. Those pictures do not fit into
my model of keynesian equilibrium theory. If they are not in the model
then how could those pictures be real?
Sure they do – this a generalized Keynesian “digging a hole in the ground”. When the properties deteriorate and have to be bulldozed, this will be a generalized Keynesian “filling in the hole”.
Those look like excellent places to test the ability of a car.
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