The Fed Must Get Capital Out of Real Estate

September 9, 2010

Letter to the Editor, The Wall Street Journal, This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Government and Fed policies drove substantial overinvestment in useless, completely
unproductive commercial and residential real estate development, pushing it to $45 trillion
before falling by $15 trillion (we note the U.S. stock market totals only $14 trillion). The excess
real estate burdens our economy, draws wealth from individuals, and traps capital in banks
and developers.  In “What Should the Federal Reserve Do Next?” (op-ed, Sep. 9), none of the 6
authorities addressed this fundamental problem.

Any Fed strategy should be focused on getting capital out of real estate so that it can be
invested in the new, Internet-based, asset-light economy. Instead, we keep capital in real
estate with TALF, PPIP, the $8000 home-buyers credit, and the Fed’s purchase of $1.5 trillion
of mortgages. But, at the same time, we shouldn’t let real estate values go to zero as they are
heading to now all across the country.

We should solve the real estate problem at its source. Create a $200 billion+ land bank though
the banking system to help finance the acquisition of excess commercial properties and convert
them into parks and raw land held for future development. The Fed can buy LBS’s (Land Backed
Securities) instead of more of those MBS’s which helped create the problem. This would create
liquidity in the real estate market and stabilize property values. With bad loans removed from
their balance sheets, banks would make new, productive loans.

The Fed should make creative use of its balance sheet not to “extend and pretend” within the
old economy but to right-size our real estate market and economy for the future … and maybe
help finance some great, new Central Parks.

 

Mike Messner
Partner, Seminole Capital
212-838-6055
New York, NY