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The Inconceivable May Happen

By Joel Ross

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Even Berlusconi, who spends his time chasing young girls and fighting off four legal claims, and the Greeks, the French, the British and other committed socialist countries with coalition governments, have been able to figure out they need to cut spending. But the country that is claiming to teach the Arabs and others how to run a democracy can’t even get close to doing the same. Pelosi continues her idiotic ranting about how any budget cuts will hurt the old, the poor, the children and any other politically appealing group that the media will happily repeat. The irony is Nancy is quite wealthy herself, yet she rails against the very people she and her husband are. Clearly she just says whatever she deems is good for her to regain personal power, and is completely uncaring of the damage it is doing to the budget process and the country. It is all about personal aggrandizement. Obama puts forward a “framework”-translation –let’s have another committee to study it just like Simpson Bowles, the Gang of six and Biden’s group. Classic Washington- make believe. He has never put forward a specific budget with cuts defined.  The teachers unions, who have done far more damage to the future of America by failing the children, try to claim the children will suffer unless teachers get even bigger pay and pensions. The Tea party idiots claim we should let the government default just to teach Obama a lesson. Stupid does not even begin to define those people. They are the same ones who thought TARP was bad and would have let the banking system collapse just to make a political point. Then we add Ron Paul and his numbscull son demanding the Fed be abolished. If this is a functioning government, then Europe looks good by comparison.

For all of us who have spent our careers in the real estate or the capital markets, it is inconceivable that the US government will possibly default. Treasuries were the one thing we all could count on. First there was Arthur Anderson, then GM, then Bear, Merrill and Lehman. I guess Treasury was the next logical step if you stand back and see the trend. As all of you know well, everything we do is indexed off Treasuries in one way or another. Even if we use Libor, that will go out of kilter if Treasuries are deemed not safe. Spreads above Treasuries will widen as the risk premium on everything will have to widen and for many years to come. Forever people will say, if you cannot be sure of the US government then you cannot be sure of anything. Put the extra risk premium spread on top of added spread on Treasuries and Libor, and suddenly all those deals that were looking good at current borrowing costs will be underwater. The implications for the future of real estate borrowing could be terrible.

I have been told that Geithner has said they will not let any Treasury security default. There is sufficient cash inflow to meet all rollovers and interest payments.  Instead they will play politics and not pay social security and the military. I think he horribly misses the point. While Treasury securities will not be in default, the implications of such a failure to reach meaningful agreement are horrendous. They will most likely just kick the can again, Obama will not really agree to make needed cuts, and the damage will have been done. Badly needed tax reform will not happen for years.

Spending as a percent of GDP has basically been under 20% of GDP since WWII, or only slightly above once. We don’t need a balanced budget  amendment. We need all new people in Washington who can think and act like adults. All they need to do is cut spending to 20% of GDP and stop all of the wasted programs instituted by Obama which has driven the spending to 24% of GDP. Spending can be cut back to where it belongs without anyone going hungry, uncared for, or unprotected. If they did that, and reduced corporate taxes to worldwide averages, then business would invest all those trillions they have squirreled away and tax revenues would go up dramatically, jobs would get created, and real estate and stock market values would move up substantially. It  is really not that hard. If Nixon and Mao could figure out they needed a way forward in the early seventies after all military battles in Korea, and all the invective hurled across at each other, then surely these bozos in Washington who are all supposed to be representing the same government can agree to cut the grossly over-inflated budget.

I am in the market for the ultimate real estate deal. I am looking to buy a large island, or a nice principality, where a group of my friends and I - both left wing and right, can start our own country. To be a citizen you have to pass a special SAT test to prove you have an IQ over 110, you are able to actually think, and you have to prove you can act like an adult and sit in a room and find solutions to problems that both sides can accept. If you later fail to meet these tests, or if you are caught making stupid partisan political speeches on either side of the aisle, we chop off your head. No messing about for us. If anyone has such a parcel please let me know. We pay in gold bars.

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