The Commercial Real Estate Bailout

I can see the case for extending Fed loans to hedge funds, when those hedge funds invest in consumer loans. The credit-card business has been built on securitization, and now that market has dried up, there's a serious risk that the US consumer will simply run out of liquidity.

But bailing out owners of commercial property? That seems to me to be a step too far. If the US consumer isn't able to keep on spending, the consequences for the US economy would be devastating. If a bunch of big landlords see some properties revert to bank ownership, on the other hand, the systemic consequences seem to me to be much smaller.

When the government implements any kind of plan which involves spending hundreds of billions of dollars in a short amount of time on an ad hoc basis, you can be sure that just about every interest group will line up for a piece of the pie. So if I were Barack Obama, I'd be pushing my economic team right now to come up with some clearly-defined principles for bailout funds: what they're for, how they should be used, where they should be spent, where they should not be spent.

If nothing else, such a set of principles would make it much easier to persuade Congress not to put up too much of a fight when the Treasury secretary asks for the second $350 billion of TARP funds. But more importantly, they would impart some much-needed predictability and stability to the policymaking process. And they might help to minimize the number of desperate trial balloons floated on the front page of the Wall Street Journal.