One of the most consequential threats to our business is political volatility. Newsflash? Hardly. It’s a threat hiding in plain sight. We know it’s there; we even periodically dredge it up for a bit of worrying. Nonetheless, our awareness of the damage that political diktat and policy volatility can cause seems to be muted, perhaps by its shear ubiquitousness. A threat lost in the ambient cacophony of bad news. We’ll worry about bad policy when it really begins to bind but, let’s be clear, that’s often too late.
I made a comment in the last round of our CREFC sentiment survey that the risk of policy volatility might be one of the more important and overlooked risks facing the commercial real estate finance business. The more I thought about that off the cuff remark, the more I thought there’s something here worth paying attention to.
It’s not that we’re blind to it. Good heavens, as an industry we give money to our political action committees, we hire our fair share of lobbyists and we take meetings with politicians and leaders of the administrative state regularly to build bridges, to explain how our industry works, to explain the impact of bad policy and to help craft good policies.
Nonetheless, I am of the view that the scale of our efforts to militate against adverse policy change is disproportionately small in light of the seriousness of the risk.
There are loads of risks attendant to running a business in the commercial real estate finance space. We think about the demand for space and its supply. We think about insurance, taxes and other costs of managing commercial real estate. We think about recession risk. We think a lot about how the bond market will perform and how it will impact the cost of money. What we often fail to really appreciate is the fact that most of these things are first derivatives of decisions made by our politicians and their apparatchiki. Many of these decisions are made without regard to their potential impact on commercial real estate or finance and are often made with no mindfulness whatsoever that they could even impact our business. I’m not suggesting that we ignore the obvious policy outputs, but am suggesting we pay more attention to the inputs. Don’t only watch the dummy and ignore the ventriloquist.
Why especially worry now? What’s the difference? Our politics is getting more populist, more radical and more tribal. The velocity of change is accelerating and the vasty scale of our overmighty governmental Colossus makes everything happening in Washington more consequential.
Radicalism, populism and tribalism are a toxic triptych. Our major political parties are being captured by their wild eyed fringes. The centripetal forces of tribalism are facilitating the wingnut takeover of our polity. Radicalism serving populist goals is the lief motif of the age. It is not a failing of only the left or the right. Both partake. Both embrace. Taking a page from the great Barry Goldwater (in ancient times, an actual real conservative) that extremism in the service of populist causes is no vice, our politics grow more and more radical. Pandering is no longer an embarrassment; it’s just your average Tuesday. Promise anything that the folks might buy, but go large.
Politicians of both parties are enthralled with this new way of doing business. If it won’t make the news, and incremental and balanced changes rarely do, it’s really not worth a politician’s time and energy. Go big or go home! Everyone is shouting all the time. Shouting is the antithesis of thoughtfulness.
So what makes the news? Stuff almost always thought to be outrageous by serious and thoughtful people, at least initially. Boot out all the illegals (or at least the brown ones)! America First! Require or eliminate voter ID! End our progressive income tax! No Senate! Fourteen Supremes! Puerto Rico and DC as new states! Work from each according to his abilities (or perhaps just desires) and to each according to his needs (catchy, isn’t it, but might need to be updated for the new generation)! Demonize the other side! Embrace everyone’s victimhood!
We’ve stripped away structural impediments to radicalism. Do we deserve what we got? The primary system is perhaps the primary villain. Back in the day, candidates were generally vetting through a process in which the grandees of our two great parties would drink bourbon, smoke cigars, roll the logs, rub bellies and come up with candidates that represented the views of a majority of the members of the caucus. In pursuit of “pure democracy,” we now have embraced the primary system which has facilitated the capture of our major parties by their most activist wings. The activists, the radicals, the populist, the noisiest, vote in primaries. The rest of us stay home. They call the tune and pick the candidates. No one worries about getting primaried from the unremarkable middle.
Now, a shout out to the Supremes. In the Humphrey’s opinion this year we made the appointment and dismissal of all our quasi-independent commissioners (think FTC, SEC, etc.,) subject to the whim of our overmighty executive (with the exception of the Fed where constitutional law was indeed trumped by practical thinking). Now, with each change at the White House, all these agencies which would have provided some level of continuity will change in lock step.
We keep doing this. We keep making it worse, always in the mistaken service of more democracy. Take a moment to reflect on the perspective death of the filibuster. If the Republicans don’t get rid of it, the Democrats will (or the Republicans will when they’re back in control). Without the filibuster, even the Social Democrats may conclude they’ve achieved their goal of functionally eliminating a constitutional branch of our government.
Any level of compromise appears to be viewed as a moral surrender. The country may be split 50/50 on most issues, but our politicians seem to see every election as a new mandate. Back when the two parties stared at each other from the middle left and middle right, the sort of change that each election ushered in was generally modest. Now when they stare at each other across the great divide, the empty center, change itself becomes radical. The pendulum wildly swings back and forth.
Just look at the massive changes we’ve seen between the Biden and Trump Administrations. We saw huge changes under Trump at the SEC, the FTC, the CFPB, in Treasury, at the IRS, at the BLS, the Education Department and almost every aspect of our government. These are huge discontinuities. My guess is that if we see a Democratic administration by 2029, almost all these changes from Biden to Trump will revert to something more Biden-like. The needle pointing at dead north is spinning madly.
Radicalism almost always serves populist causes today. Populism toggles in only one direction. It toggles in the direction of insensitivity to risk and insensitivity to the price of the policies championed in the service of populist nostrums. Even better, even though the risk and price might be pretty obvious, politicians are practiced at making you not notice. Who cares if lowering interest rates when the economy is already overheated creates inflation? Well, it won’t cause the problem tomorrow, and today’s lunch is about as far into the future as I ever plan. Moreover, if it arrives, hell, we’ll just give out some goodies to distract the folks.
Our reflexive tribalism makes all this worse. While the days of political grandees telling the folks in their cohort what to do have long gone, a weird sort of new discipline has taken its place. You have to stick with your team on pretty much everything. No cavils, no dissent. Put up with stuff you’d only admit was a loony idea to yourself (or jot down in your diary, if you’re a fan of Dr. Fauci’s approach of perjury management). Expressing even modest concern about views expressed inside the tribe can get you ostracized (just ask poor Senator Fetterman), and indeed primaried (same Senator, same question). Mr. Trump is not the only one over-fascinated with questions of loyalty. You hear our politicians say that their party is a “big tent.” Well, in that big tent, once you let the camel’s nose into the tent, the rest of the camel follows no matter how troubling or even odious it is or how much baggage it carries. Members of the tribe contort themselves to avoid offending their most radical fringes. Normalization becomes possible when fringe ideas are constantly repeated on podcasts, in hearings, television talk shows and on the stump. If repeated often enough, even deeply flawed and wrongheaded ideas somehow begin to creep from the fringe into the mainstream.
To make matters worse, politics is becoming more important as the remit of our government grows and grows. When our government was small, its errors were small. When the government’s footprint is as large as it is today, it is absolutely certain that mistakes will become consequential to our economy.
Look, my purpose in dragging you through this litany of woe is to make the case that we need to pay more attention to politics than we have in the past. We can’t afford to treat it like the weather, something just to be tolerated.
We’re not going to change the new radicalization of our political classes. We’re not going to reverse the embrace of populism. We’re not going to make the major parties less tribal or reduce the scale of government and its ability to intrude into the economy, but we do need to develop new tools in the toolbox to deal with it and spend more of our already overstressed bandwidth thinking about DEFENSE.
Step one is to see it coming.
Much of this stuff on first blush appears to be well, silly. Regrettably, it’s not. Just because Tucker Carlson or Hasan Piker thinks something is either horrific or wonderful and shouts about it at the top of their lungs in a more than slightly deranged way doesn’t mean it can be dismissed. We need an early warning system (remember George Carlin as the Hippy Dippy Weatherman? If not, take a moment and look it up on YouTube.). Bad ideas that are scurrying around the basement of our intellectual life need to be identified before they well up and earn the respect of government types who begin to actually take them seriously.
Look how fast it can happen. I’ve got to tell you; I didn’t really see the risk to the single-family rental business until it was pretty much on our doorstep. If I’d have been listening to Senator Warren and her ilk, maybe I would have had more of a headstart and be able to come up with better responses. Or how about what’s happening in the data center world? Again, I didn’t really expect to see our politicians rapidly harnessing the inchoate anxiety about the cost of energy, pollution and use of water, etc. to drive their agendas.
I’m calling for the creation and generous funding of the Serious Americans Looking Around the Corner For Really Bad Ideas Institute (take this an outreach for a considerably better name and a really cool acronym). The job of this enterprise would be to identify really bad ideas before they get normalized and help us develop strategies to address them. All our trade organizations with skin in the game can perhaps put up the seed capital.
Let’s also agree that we need to recommit to political action and invest more time, energy and money (yes, I’m talking money…CREFC members take particular note) in our political action committees, the efforts to make our case to the legislatures and regulators and do so forcefully with patience and persistence. We need to make this case not only to those sitting in the seats of power, but the wannabes who will be there when the pendulum swings back and this set of bums is sent packing to be replaced by a new set of bums. When the motif of our political class is if they liked it, we don’t, it’s important for us mediate that reflexive response through educating wannabe policymakers in an effort to bend some of their worst ideas toward more acceptable outcomes.
Finally, maybe we need to understand that we should consider shortening up our planning cycles. The rules under which we begin to plan are unlikely to be the rules under which we execute the plan. Build exit ramps. Spend more capital to hedge risk. Reduce the chortling about the upside and spend quality time thinking about the downside risk of policy change. What happens is the GSEs go away or are made massively larger with a broader remit? What happens if Federal mandates radically changed the structure of how property taxes are imposed and measured or the availability of property insurance? Wealth tax, anyone? What happens if you built a business plan at the invitation of the government around the expectation of continued governmental subsidies and they go away? (Think electric cars.).
In short, I’m suggesting we make more room in what we consider the core conduct of our business for identifying and attempting to moderate and modify current and perspective bad policies and think harder about how to incorporate a world where more radical changes are common into our business planning model.
Just keeping a pair of golashes handy is not going to cut it.