19 October, 2008 - A Lesson to be Learned

With all of the stress and hand-wringing over Wall Street and the global economy over the past month, it is difficult to find something positive to talk about, but let me try.

This week I turn to a long-time friend, whose judgement I truly respect, Porter Martin, President of Martin, Goodrich & Waddell in Northern Illinois, a firm that deals in farm management and farm real estate. Four times a year, Porter puts his thoughts in writing in the company newsletter entitled Seasons. His most recent effort was headlined “Why Farmland is Your Safest Harbor in the Current Financial Storm”. In addition to talking about that though, he offers some history on how we get into the problems we do when government regulates every detail of private enterprise and tries to solve every economic problem with credit expansion, subsidies and restrictions.

Quoting Porter, “ Mercantilism birthed and built the two mortgage giants which became the rotten foundation of U.S. mortgage debt, Fannie Mae and Freddie Mac, created by a Congress eager to expand home ownership for lower income people. Fannie and Freddie underwrote half of the twelve-trillion dollars in U.S. home mortgages in America, many of them by buying bundles of mortgage-backed securities. When home prices fell, mortgage defaults rose and those securities crashed, throwing the entire banking system into chaos.”

Fast forward to the latter part of Porter’s column; he said “I hope administrators of any future Wall Street ‘rescue’ will look back to the farmland price crash of 1981 to 1986, and apply its useful lessons on the need to find real values in the market place, so real recovery can flow again. Lenders struggled through the 1981-86 farm defaults on their own. The Farm Credit System consolidated. Contract sellers took back farms. Banks resold foreclosed farms. Land values in many regions settled and stabilized at new lows, often 60% down from the 1981 peak, and new buyers got a toe-hold in land. And one of the most enduring legacies of that land bust; farmland borrowers and lenders have remembered ever since that leverage cuts more deeply in a price down-trend than it enhances returns in an up-trend. As a result, we do not see over-leveraged farmland deals today. Many sales are all cash, no financing.”

It’s too bad we quickly forget that history can be a harsh teacher and we pay dearly for not paying attention. Let’s hope this year’s economic lessons will not be quickly forgotten. Thank you, Porter Martin, for your common-sense thoughts.

I’m pleased to share them on Samuelson Sez.