14 ms·

I came here to read the inevitable second-order effects discussion, that is to say, if cities enact things like vacancy rate they will cause extra unforeseen pr

by xrd 5y ago

I came here to read the inevitable second-order effects discussion, that is to say, if cities enact things like vacancy rate they will cause extra unforeseen problems. But, I've never seen anyone discuss second order effects from hedge funds, or rich developers. Can someone explain why second order effects are only relevant and as powerful when it is a government entity. Hedge funds and large corporations often seem like they have more power and often much more agility than governments. And, they have impacts far greater as well at times. Is this a relevant question? What am I missing?

User23 5y ago
> Hedge funds and large corporations often seem like they have more power and often much more agility than governments. They don’t. Hedge funds and corporations don’t have powers like eminent domain and men with guns authorized to use violence to enforce them. The vacancy rates actually are a second order effect of the banking industry. You’d think landlords would reduce rents because some income is better than none. However commercial property is valued as a function of the rent, so reducing rents 20% could reduce the value of the property 20% too, potentially leaving the commercial mortgage underwater. But leaving it empty with a rent the market can’t bear keeps that from happening. Therefore the correct solution is changing banking regulations to eliminate that perverse incentive, not to try an ad hoc fix at the city level which probably won’t work as intended.
- sokoloff 5y ago
  That provision is because commercial property is often valued by reference to a cap rate (essentially a net-operating-income multiplier to get to the property value). This is not a property of the banking system but of the market for commercial property. The banking angle is to ensure that loans on property aren't durably underwater, such that the bank has a high likelihood of ending up owning underwater property. (The bank is in the money business; anytime they get into the real estate business with a REO, someone screwed up.) Preventing banks from doing this is likely to lead to a lot more bank-owned properties (REOs), which is generally a bad sign for a real estate market.
  - krisoft 5y ago
    You seems to be understanding this better than I do. I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduction in the valuation of the property. What I don't understand, shouldn't not-renting it out cause an even bigger dip? An 80% reduced property brings in 20% less income to the owner, but if the property is empty that means the owner has to pay for maintenance out of their pocket. (maintaining the roof, keeping the squatters away etc. However cheap these expenses are, it is clearly not zero dollar.) The property becomes from an asset to a liability. (in the colloquial sense at least, as you can hear I'm not well versed in economics.) How does that not decimate the valuation like crazy?
    - sokoloff 5y ago
      Commercial property as a category has some characteristic vacancy rate. (For office and retail, this can be around 10% under typical market conditions. It's not at all weird for "good" property to sit vacant for 18 months at a stretch.) The valuation is based* on looking forward multiple decades. If you think COVID (or recession or other short-term event) is a blip in the future prospects, you aren't overly concerned if a property sits vacant for a year or two, when you're looking at the overall income over the next 30 years. On the other hand, if you drop the rents 20% because you're feeling an urgent need to fill the property now, your fixed costs don't change (property tax may eventually go down slightly), you have 20% less income to cover them and leave a profit, and your next 10 years' of rental income outlook is now nerfed by about 20% (and profit by perhaps 30% or more). It's the reason that rent rebates are a thing. You don't drop the monthly rental rate; you instead credit free months of rent over the initial period of the lease, give larger allowances for landlord-paid improvements, or other "one time" credits. * - every market participant does something slightly different, of course, but they're all more or less looking over a multi-decade period to judge what the property is worth now.
  - User23 5y ago
    As you say, it means the bank’s underwriting process failed. It makes more sense to me that they eat the loss caused by their error and auction off the property at a price the rental market will bear. Papering over bad underwriting with dishonest valuations doesn’t strike me as worth sacrificing cities’ commercial vibrancy for.
itronitron 5y ago
I expect that companies create larger second order effects than governments. However governments last longer than private companies so they are a more reliable target for criticism. When a company messes up it can morph it's constituent parts into something else.
qwertycrackers 5y ago
It's definitely a matter of what the commenters view as "right". Obviously everything affects everything else, to infinite degrees. But assuming an American perspective, hedge funds and developers are both dealing in their own private assets, that being their reserves of capital and valuable labor. So whatever they do with those things is... primarily their business. Of course most reasonable people accept some small intrusions to this situation, but the overall perspective remains the same. Whereas land use regulations and the like are a public commons, and everyone is entitled to a say and should have their needs meet. So all the ramifications of any public policy like this are of great significance and the affected feel they have a right to be heard. Private actors with very strong claims on things like their labor and capital can just do what they will, and the second order effects aren't discussed because they are not relevant to the stakeholders. Everyone is a stakeholder of public policies like this.
Ericson2314 5y ago
To start, the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources and incur fewer environmental externalities, and are more productive. If our only hope is continued "suburbanization with li-ion characteristics", as so many people seem to believe, we're fucked as a country. So this preposterous fact those that all manner of incentives have gone wrong. For example, we now know rent control isn't bad, just like minimium wage: https://jwmason.org/slackwire/considerations-on-rent-control/ https://jwmason.org/slackwire/considerations-on-rent-control.... To flip this around, that these neoclassical-economics-defying conclusions are true means the housing market and labor market are terrible markets. We do need to abolish bad zoning and things, but we also need more public housing. The simple fact is we need to build enough dense housing to "devalue" the existing events in terms of their rent revenue, and the private sector will be loath to do that. Another thing is public transportation. Public transit is extremely valuable, but the private sector is unable to provide because a) it's a natural monopoly we can't trust the private sector with (except for Japan, where a bunch of things relating to land use are really different). It works best when cars are beaten back (investments in one hampers the utility of the other), see https://pedestrianobservations.com/2019/09/18/cars-and-trains-urbanism/ https://pedestrianobservations.com/2019/09/18/cars-and-train.... The private sector is too impatient without the prospect of terrible rent seeking to wait out a transition from cars, and is also powerless to eradicate lanes and do other things that might driving rightfully harder (https://www.youtube.com/watch?v=ORzNZUeUHAM https://www.youtube.com/watch?v=ORzNZUeUHAM). So people saying every government intervention has unwanted side effects are just shills for the continued retrenchment for the state. The fact is the market cannot coordinate on a scale needed to "turn the ship". At the same time, the emaciation of the administrative state decades across across the US means we have a weak and incompetent pubic sector that's currently incapable of administrating the necessarily infrastructure we need. Hard problems all around, but the former is a hard fact, while the latter is fixable.
- tonyedgecombe 5y ago
  >the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources 50% of the world lives in cities yet they consume 70% of the worlds energy.
krisoft 5y ago
> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers. I think we do. We discuss startup culture, unicorns, huge companies with no revenue, the effects of quarterly reporting on long term thinking and many similar topics. These are all in my opinion second order effects of how business is financed nowadays. If you can think of other second order effects which are not widely discussed please do write about it. They are usually all super interesting and more insightful analysis is always welcome. > Can someone explain why second order effects are only relevant and as powerful when it is a government entity I don't think that they are only relevant when it is about government. See my previous point, but it is easier to talk about governments in this sense. Our governments in the "free and democratic" world are very transparent. We have freedom of information laws, the laws and policies of our countries are published, and politicians leak info like a sieve. Of course there are secrets, and backroom deals, and honest to goodness conspiracies too. But when you compare how transparent our governments are to how transparent hedge funds are it is day and night. It is much easier to talk about what you can observe, therefore there is more discourse around the second-order effects of transparent government action than the intentionally more opaque hedge funds. Likewise people discuss more what they can influence. At least in theory we all can influence our governments. I'm not voting on hedge fund managers. They don't really care what I think. They care enough to not anger so many people that they grab pitchforks, but the opaqueness and lack of information helps them there. Curiously the easiest way the average Joe and Jill can affect a hedge fund is by convincing the government to enact and enforce some law. This is another reason why people might be talking about the second-order effects of government action more.
jl2718 5y ago
There is only one thing that distinguishes the difference between government and all other social entities: A monopoly on the use of force.
- deleted 5y ago
  [deleted]
- aqme28 5y ago
  A government is also accountable to the citizens while a private company is only accountable to its shareholders. That's a pretty big difference.
  - AtlasBarfed 5y ago
    Companies are dominated by the major shareholders, basically the rich. Guess what the us government is dominated by?
  - jl2718 5y ago
    Private companies and governments can both exist without accountability.
    - sudosysgen 5y ago
      There is literally no government in the world that isn't somewhat accountable to citizens. Meanwhile, there are many multinationals that are not accountable at all to the citizens of countries they operate in.
      - csomar 5y ago
        > There is literally no government in the world that isn't somewhat accountable to citizens. Actually, there might only be a few government that are accountable to citizens. Maybe most governments care for their citizens, but accountable? I don't think so.
        5y ago
bregma 5y ago
Regulatory capture is like boiling a frog. Hedge funds and developers make us warm wet and happy until it's too late.
HWR_14 5y ago
> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers. There is a huge body of research on it. When private entities do it the term used is an "externality".

by xrd 5y ago

User23 5y ago

> Hedge funds and large corporations often seem like they have more power and often much more agility than governments. They don’t. Hedge funds and corporations don’t have powers like eminent domain and men with guns authorized to use violence to enforce them. The vacancy rates actually are a second order effect of the banking industry. You’d think landlords would reduce rents because some income is better than none. However commercial property is valued as a function of the rent, so reducing rents 20% could reduce the value of the property 20% too, potentially leaving the commercial mortgage underwater. But leaving it empty with a rent the market can’t bear keeps that from happening. Therefore the correct solution is changing banking regulations to eliminate that perverse incentive, not to try an ad hoc fix at the city level which probably won’t work as intended.

sokoloff 5y ago
That provision is because commercial property is often valued by reference to a cap rate (essentially a net-operating-income multiplier to get to the property value). This is not a property of the banking system but of the market for commercial property. The banking angle is to ensure that loans on property aren't durably underwater, such that the bank has a high likelihood of ending up owning underwater property. (The bank is in the money business; anytime they get into the real estate business with a REO, someone screwed up.) Preventing banks from doing this is likely to lead to a lot more bank-owned properties (REOs), which is generally a bad sign for a real estate market.
- krisoft 5y ago
  You seems to be understanding this better than I do. I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduction in the valuation of the property. What I don't understand, shouldn't not-renting it out cause an even bigger dip? An 80% reduced property brings in 20% less income to the owner, but if the property is empty that means the owner has to pay for maintenance out of their pocket. (maintaining the roof, keeping the squatters away etc. However cheap these expenses are, it is clearly not zero dollar.) The property becomes from an asset to a liability. (in the colloquial sense at least, as you can hear I'm not well versed in economics.) How does that not decimate the valuation like crazy?
  - sokoloff 5y ago
    Commercial property as a category has some characteristic vacancy rate. (For office and retail, this can be around 10% under typical market conditions. It's not at all weird for "good" property to sit vacant for 18 months at a stretch.) The valuation is based* on looking forward multiple decades. If you think COVID (or recession or other short-term event) is a blip in the future prospects, you aren't overly concerned if a property sits vacant for a year or two, when you're looking at the overall income over the next 30 years. On the other hand, if you drop the rents 20% because you're feeling an urgent need to fill the property now, your fixed costs don't change (property tax may eventually go down slightly), you have 20% less income to cover them and leave a profit, and your next 10 years' of rental income outlook is now nerfed by about 20% (and profit by perhaps 30% or more). It's the reason that rent rebates are a thing. You don't drop the monthly rental rate; you instead credit free months of rent over the initial period of the lease, give larger allowances for landlord-paid improvements, or other "one time" credits. * - every market participant does something slightly different, of course, but they're all more or less looking over a multi-decade period to judge what the property is worth now.
- User23 5y ago
  As you say, it means the bank’s underwriting process failed. It makes more sense to me that they eat the loss caused by their error and auction off the property at a price the rental market will bear. Papering over bad underwriting with dishonest valuations doesn’t strike me as worth sacrificing cities’ commercial vibrancy for.

itronitron 5y ago

I expect that companies create larger second order effects than governments. However governments last longer than private companies so they are a more reliable target for criticism. When a company messes up it can morph it's constituent parts into something else.

qwertycrackers 5y ago

It's definitely a matter of what the commenters view as "right". Obviously everything affects everything else, to infinite degrees. But assuming an American perspective, hedge funds and developers are both dealing in their own private assets, that being their reserves of capital and valuable labor. So whatever they do with those things is... primarily their business. Of course most reasonable people accept some small intrusions to this situation, but the overall perspective remains the same. Whereas land use regulations and the like are a public commons, and everyone is entitled to a say and should have their needs meet. So all the ramifications of any public policy like this are of great significance and the affected feel they have a right to be heard. Private actors with very strong claims on things like their labor and capital can just do what they will, and the second order effects aren't discussed because they are not relevant to the stakeholders. Everyone is a stakeholder of public policies like this.

Ericson2314 5y ago

To start, the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources and incur fewer environmental externalities, and are more productive. If our only hope is continued "suburbanization with li-ion characteristics", as so many people seem to believe, we're fucked as a country. So this preposterous fact those that all manner of incentives have gone wrong. For example, we now know rent control isn't bad, just like minimium wage: https://jwmason.org/slackwire/considerations-on-rent-control/ https://jwmason.org/slackwire/considerations-on-rent-control.... To flip this around, that these neoclassical-economics-defying conclusions are true means the housing market and labor market are terrible markets. We do need to abolish bad zoning and things, but we also need more public housing. The simple fact is we need to build enough dense housing to "devalue" the existing events in terms of their rent revenue, and the private sector will be loath to do that. Another thing is public transportation. Public transit is extremely valuable, but the private sector is unable to provide because a) it's a natural monopoly we can't trust the private sector with (except for Japan, where a bunch of things relating to land use are really different). It works best when cars are beaten back (investments in one hampers the utility of the other), see https://pedestrianobservations.com/2019/09/18/cars-and-trains-urbanism/ https://pedestrianobservations.com/2019/09/18/cars-and-train.... The private sector is too impatient without the prospect of terrible rent seeking to wait out a transition from cars, and is also powerless to eradicate lanes and do other things that might driving rightfully harder (https://www.youtube.com/watch?v=ORzNZUeUHAM https://www.youtube.com/watch?v=ORzNZUeUHAM). So people saying every government intervention has unwanted side effects are just shills for the continued retrenchment for the state. The fact is the market cannot coordinate on a scale needed to "turn the ship". At the same time, the emaciation of the administrative state decades across across the US means we have a weak and incompetent pubic sector that's currently incapable of administrating the necessarily infrastructure we need. Hard problems all around, but the former is a hard fact, while the latter is fixable.

tonyedgecombe 5y ago
>the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources 50% of the world lives in cities yet they consume 70% of the worlds energy.

krisoft 5y ago

> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers. I think we do. We discuss startup culture, unicorns, huge companies with no revenue, the effects of quarterly reporting on long term thinking and many similar topics. These are all in my opinion second order effects of how business is financed nowadays. If you can think of other second order effects which are not widely discussed please do write about it. They are usually all super interesting and more insightful analysis is always welcome. > Can someone explain why second order effects are only relevant and as powerful when it is a government entity I don't think that they are only relevant when it is about government. See my previous point, but it is easier to talk about governments in this sense. Our governments in the "free and democratic" world are very transparent. We have freedom of information laws, the laws and policies of our countries are published, and politicians leak info like a sieve. Of course there are secrets, and backroom deals, and honest to goodness conspiracies too. But when you compare how transparent our governments are to how transparent hedge funds are it is day and night. It is much easier to talk about what you can observe, therefore there is more discourse around the second-order effects of transparent government action than the intentionally more opaque hedge funds. Likewise people discuss more what they can influence. At least in theory we all can influence our governments. I'm not voting on hedge fund managers. They don't really care what I think. They care enough to not anger so many people that they grab pitchforks, but the opaqueness and lack of information helps them there. Curiously the easiest way the average Joe and Jill can affect a hedge fund is by convincing the government to enact and enforce some law. This is another reason why people might be talking about the second-order effects of government action more.

jl2718 5y ago

There is only one thing that distinguishes the difference between government and all other social entities: A monopoly on the use of force.

deleted 5y ago
[deleted]
aqme28 5y ago
A government is also accountable to the citizens while a private company is only accountable to its shareholders. That's a pretty big difference.
- AtlasBarfed 5y ago
  Companies are dominated by the major shareholders, basically the rich. Guess what the us government is dominated by?
- jl2718 5y ago
  Private companies and governments can both exist without accountability.
  - sudosysgen 5y ago
    There is literally no government in the world that isn't somewhat accountable to citizens. Meanwhile, there are many multinationals that are not accountable at all to the citizens of countries they operate in.
    - csomar 5y ago
      > There is literally no government in the world that isn't somewhat accountable to citizens. Actually, there might only be a few government that are accountable to citizens. Maybe most governments care for their citizens, but accountable? I don't think so.
      - 5y ago

bregma 5y ago

Regulatory capture is like boiling a frog. Hedge funds and developers make us warm wet and happy until it's too late.

HWR_14 5y ago

> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers. There is a huge body of research on it. When private entities do it the term used is an "externality".