[author: Rick Jones]
I’m sure you know the allegory about the camel’s nose under the tent, right? First it’s the nose, then it’s the humps. A camel takes up a lot of room. They’re smelly, they make an appalling din and while they may be useful in their way, they are not at all amiable company. Pretty tough to do business with a camel in your tent. Think of our governmental as a camel. Once invited in, humps follow nose, and trying to do business with a camel stomping around in your tent becomes almost impossible. And remember, once invited in, camels (and governments) rarely back out.
We should be mindful of this when we ask our government to solve a problem. The government clearly has the capacity to do great good. The United States government is the largest business enterprise in the world. It is powerful. It has endless deep pockets. It controls so many levers of power. Our government is chock full of folks who believe with nearly religious fervor that there are no problems they cannot fix, no situations they cannot make better by the beavering of its herds of bureaucrats and lawmakers often itching to get involved…to help, as they see it. With a flick of the pen, our government can radically change the legal landscape in which our businesses operate. It can incent or disincent behavior. It can make us do things, sensible or not, that we wouldn’t do except for the government’s “helping hand.” Would you be shocked to be reminded that even well-intended government intervention can go wrong?
What all this means is that we should be very careful when we ask government to fix a problem. I understand the reflexive predilection to ask for goodies, particularly when everyone around us is asking for goodies. The urge to hold out the begging bowl can be irresistible whilst a mirage of unalloyed good outcomes dances in our heads. Moreover, we’ve now normalized the ask. Everyone is doing it. No shame! The cacophony of begging is deafening and surely not unseemly in today’s political circus. Why not ask?
Yet, before we ask our government to solve a problem, we should think about the possibility that either, or both, the immediate or remote intended and unintended consequences of governmental action might well turn out to be not so good. The offered help might not work. The offered help might ultimately be radically different than the ask or contain a fatal flaw. The offered help might be so encrusted with compliance obligations as to make the thing unworkable. Small, well intended initiatives can grow like topsy. Once launched, governmental initiatives are rarely unlaunched and rarely even rethought. Unintended consequences abound. Also, governmental intervention in markets almost always leads to more, not less, intrusiveness down the road. We should be mindful that the camel moves in only one direction…forward.
It has always been this way, and it always will wherever the government is powerful. Some folk thought an income tax would be swell a hundred years ago as it would make tariffs unnecessary. How’d that work out? How about the geniuses in Beijing who thought that the path to prosperity was a one child policy? Remember when many financial participants lobbied hard for reduced underwriting discipline in the early 00s in the service of ensuring that the American Dream was broadly available to the folks? Worked fine until the GFC showed us all that it was a really bad idea. Mr. Hoover and austerity in 1932? Popular among many powerful denizens of the street. A really bad idea.
There are “bargains” currently on offer. Let’s get behind the sovereign wealth fund that can dispense all sorts of goodies. Imagine what such a huge investor would become, an enormous cookie jar for all of us that sheds capital left and right, like a drunken sailor (or a Covid patient). But, hang on a moment. Might that type of concentration of power distort pricing, distort markets, distort capital allocation and suppress competition? Might its investment behavior not be driven by economics, by profit and loss and by risk assessment, but by the current public policy nostrums of the administration? Is it absolutely certain that it would be an unalloyed good? Camel’s nose, baby.
How about the notion that private equity should begin to hoover up all those 401K dollars and we should smooth the path for access to Mom and Pop’s nest egg? There’s trillions there and some (many) in private equity (including the non-bank lending sector) would be delighted to get access to these funds. Not so fast (as Coach Corso would always say). If we encourage the aggressive investments of the folks in what are complex and illiquid investments, what could possibly go wrong? Well, first the trial lawyers would have a field day, but more consequentially is the question of what our government might do, under this administration (or the next). If the folks’ delusionally euphoric expectations are thwarted, would you be shocked to think that the government might (undoubtedly) act aggressively to protect these small investors? It might be perfectly fine to allow large institutions to play in a field with wide guardrails, but now? What can be sold? How can be it sold? What disclosures would be required to sell it? Ever since Dodd-Frank, there’s been a notion floating around that the SEC should investigate the possibility of extending public disclosures into the private marketplace. Maybe someone ought to stand behind all those forward-looking statements. Criminal liability for bad behavior, anyone? Hmm. Wouldn’t that be a delight? Before we ask for a broader remit, we might at least think a moment about an activist government looking to protect the folk might do.
The government is now thinking about spinning off Fannie and Freddie. Each successive administration has passed this poison chalice to the next aware of the complexity and indeterminacy resulting from the return of Twins to private hands. Politically, asymmetrical risk and reward. Getting it right might not even be noticed by the folks; getting it wrong might lose you an election. As we sit here right now, we don’t know what a re-launched GSE (or two) would look like nor what they would actually do once let back into the wild. Maybe it’s good, maybe it creates enterprises with a strong profit motive which will operate in a way that doesn’t distort capital markets pricing as has been happening for the past umpteen years, but do we know where that’s going? What about life with the government as a major shareholder (particularly in a more progressive leaning administration)? What would that entail? Might disruption of our multifamily business model follow? We might well regret putting our shoulder to this wheel.
Inviting the government into our business life, to play an outsized role, to be a white knight, to fix something, to make something better is a fraught decision. Someone might have said, (albeit it might only have been me) that when the canary makes love to the hippopotamus, no matter what happens, it’s probably not going to end well for the canary.
What’s to worry about? Distortion of markets, distortion of pricing and misallocation of capital to start with. How about the dependencies created by businesses which are tied to the mutable whims of a political actor? Government policy can change every two years (or actually more often). I wonder how all those enterprises which poured millions or billions into a business plan tied to windmills and climate change feel right now. We should think about that as we tie more of our business life to the antics of a government that is convinced of its capacity to do good.
I get the attractiveness. In the Big (and possibly soon-to-be-lamented) Beautiful Bill, the real, real estate business got lots of goodies (most of those goodies provided only derivative benefits to the finance marketplace). They got 100% bonus depreciation. They got preservation of the 1031 trade. They got expended interest deductibility. They got better and more attractive opportunity zones. They got the 199A passthrough and more. If the dirt guys got all the goodies, why not us in finance?
But please be thoughtful that every time we deepen the pathway of engagement between our business and our government, we make it easier for the government to intrude. As we intertwine our business with our government in a more fundamental way, the government will find it easier and easier to make the case that it ought to act, as it happily and proudly embraces the notion that it doth bestride the world like a mighty Colossus. The risk of such ambition ending in tears is great.
Let me also make clear I’m not talking playing defense here. That’s a different calculus. We need to be excellent counter punchers when confronted with bad ideas, bad initiatives or deep misunderstanding of our business. As our gloriously elected representatives and their legions of apparatchiki beaver away, they will do things which are damaging or dangerous to the health of our commercial finance marketplace and our commitments to efficient markets and liquidity. We need to resist. We need to educate as surely sometimes, like the proverbial bull in the China shop, they don’t even know they could be breaking the crockery. In some material respect, playing defense is essentially asking the government to honor the Hippocratic Oath: Do no harm. What I urge, however, is caution when we ask the occupants of the heights to affirmatively fix something for us, simply not do harm. We should be cautious about asking them to step in and use its vast power to fix a problem or make something easier. I know it’s hard standing still while watching everyone’s snout is in the trough and I’m surely not suggesting we do that. There are some asks worth the risk, but we must pick our fights with great care. Our government is not a reliable counterparty. A deal is not a deal. The political class has a complexity of incentives, goals and constituencies well beyond and sometimes in conflict with the interests of our market. To assume they have our backs (even when they might say so) is a bad idea.
Be careful out there; it’s a remarkably dangerous world.
[1] As I have begun several recent missives, I reiterate that I’m speaking not in any sense ex officio for any organization with the bad judgment to have me as a member, but in my own capacity and expressing my own lonely views on this topic.
