The Austrian Business Cycle Theory (ABCT) rests on the idea that the manipulation of interest rates disrupts the coordination between the intertemporal utilization of resources and intertemporal consumer demands. In other words, the divergence of the interest rate from the natural rate that would prevail in the absence of manipulation causes business to invest in resources differently than they otherwise would. This skewed investment creates a production structure for which there is insufficient support, demand, or both.
One of the questions raised by this theory is: what if the businesses were fully aware that interest rates were being manipulated? What if they knew exactly how and why this was happening? Would they still misallocate their investments?
As it happens, I find myself in exactly this position right now. I’ve followed the Austrian school economists through the tech and housing booms and, through this experience, have gained an appreciation of just how accurate they’ve been. I’ve been following the most recent operations of the Fed as they’ve pumped money into the system. I could tell you where the money has gone and why it’s gone there. Now, I’m faced with the prospect of making a significant business investment decision.
I’m a commercial real estate appraiser. For the past several years, I haven’t pursued bank lending work. Most banks require that appraisers be added to their approved appraiser list before they will use them. Getting on this list requires providing each bank with whatever documentation they request. Among the items that I’ve been asked to provide in the past are proof of errors and omissions insurance and various sample appraisal reports. Since professional appraisers are bound by confidentiality to their clients, the clients must either all agree to the release of the reports to the banks or the reports must be “sanitized,” so that neither the property nor the client can be identified. All of this requires a significant amount of time and expense. With the implementation of Dodd-Frank, I’m sure the requirements are now even more onerous. Since the banks have not been doing very much commercial lending, I decided not to pursue it.
Instead, I’ve kept myself busy with property tax appeals and corporate reorganization work. These types of work do not require the same regulatory compliance that the banks do. Furthermore, I have been assisting in the reallocation of resources so that they would be better coordinated with the structure of production.
Recently, however, bank lending has made a roaring comeback. On March 11, the Mortgage Bankers Association released the latest Commercial Real Estate/Multifamily Finance Mortgage Debt Outstanding report for the fourth quarter of 2012 [6]. It indicates that banks lent $17.1 billion more in the fourth quarter than in the third quarter. This is the largest increase in lending since the second quarter of 2008. Furthermore, in my personal discussions with bankers they have confirmed that they are expanding their lending.
All of this puts me in a rather awkward position. Assuming that the increased bank lending will continue for a while, there will be fewer opportunities for property tax appeals and reorganizations. Meanwhile, the opportunities for lending work will increase. I know that much of this increased lending will contribute to another bubble, but, in the mean time I have to make a living.
I’ve decided that I will pursue the lending work. I do this with full knowledge that, by doing so, I will be contributing to a bubble that will eventually collapse. My only adjustment to strategy that comes from my additional knowledge is that I will shift as many expenses as I can from the fixed category to the variable category.
I admit that my decision is this regard is just one anecdotal example. Nonetheless, I’m convinced that most businesspeople, facing a similar situation, would make similar decisions. Knowing that resources are being misallocated does not allow businesses to forego the profit opportunities that are created in the process. If they are to survive, they must operate in the system as it is, not as it should be.
