7/25/10: Entrepreneurs in the New Economy – Getting Paid to Solve Problems
Do you remember the old “new” economy? That was the one where technology companies could go public without profit. In some cases, they didn’t even need revenue. Ahhhh, those were the days.
The new “new” economy (the Great Recession one) hasn’t been nearly as fun – unless you’re an old school entrepreneur. That’s the kind who looks at problems as opportunities. Guys (and gals) like that are having a lot of fun right now because there are opportunities galore coming out of the Great Recession.
The Real Estate Guys™ headed off to Freedom Fest in Las Vegas a few weeks back. We heard that money manager / economist / author / Senate candidate Peter Schiff would be there (among many other people with very strong opinions about the U.S. economy) and we wanted to do some interviews. We’re happy to report we got lots of great stuff, including Mr. Schiff and the CEO of Forbes Magazine, Steve Forbes. Watch for those interviews in future broadcasts.
So we fly into Las Vegas in our private jet (the one operated by Southwest Airlines), and get to the convention venue and start setting up our booth. Before the event had even started, a man stops by and sees our banner for Belize (we were promoting our upcoming field trip to Belize) and asks a few questions. The short of it is that we find out he’s working on a very exciting project in the Caribbean – one that solves a problem we’ve been trying to figure out too. Russ gets so excited that he hugs the guy. Very weird.
After the appropriate apologies and some follow up male bonding, our new friend agrees to do a radio interview. And that’s what this broadcast is all about.
Manning the microphones for this edition of The Real Estate Guys™ Radio Show:
- Your host, the Larry King of real estate radio, Robert Helms
- Co-host, our “I love you, man” booth babe, Russell Gray
- Special Guest, Investment Banker, Entrepreneur and assault victim, Jeff Villwock
Any time we get around smart people, we jump on the opportunity to talk with them. In this case, Russ literally jumped on Jeff. When Jeff recovered, we got him on the mic, so you can listen to what he’s doing, where he’s doing it and why. There’s lots of lessons to be gleaned!
Freedom Fest is an event that attracts people with strong political opinions. In many of the interviews we did there, those opinions come out. Great! We think the world works better when people respectfully debate important issues. Sharing ideas is among the most sacred of our freedoms, especially if you’re radio guys.
We also realize that the U.S. (the bulk of our audience) is pretty polarized right now. Now, we love our entire audience and our show isn’t political. However, policies affect economics and economics affects real estate. There shouldn’t be a serious student of real estate who can look at the last several years and deny that. So politics are going to get into the discourse from time to time, which is a very good thing.
We think these Freedom Fest interviews are great. If you disagree with the political views of our guests, don’t let that get in the way of hearing what’s being said. Here’s why: a big part of real estate investing is understanding demographics and human nature. How people think and believe affects where they (and their money) will be moving. Even if you disagree with them, if they believe it, it will affect their actions. So YOU need to understand them (even if you disagree) if you want to anticipate their behavior.
Did we mention that Jeff’s project is in St. Kitts? It just so happens that St. Kitts is one of the stops on our upcoming 9th Annual Summit at Sea! So we ask Jeff if we can visit his project as part of our already planned real estate shore excursion in St. Kitts. Not only does Jeff agree to allow us to visit, he says he’ll meet us there and show us around. Awesome!
Once again, we’re reminded of the importance of getting out of our cubicles and into the world where real people are. No doubt that virtual networking is powerful, but just as phones did not replace face to face meetings, neither will social media replace conventions as a great place to make important connections. This is one of the reasons we attend trade shows and promote our field trips and the Summit at Sea™. It’s a great way to get to know great people in the real world. We hope to see YOU at one very soon!
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The Mortgage Meltdown and Healthcare
What do these two topics have to do with each other? Well, certainly after the mortgage meltdown the US economy is in need of health care. Not reform. Just getting healthy! But that’s not the topic of this post. Instead the question is: What lessons from the mortgage meltdown can be applied to the health care debate? And, as a real estate investor, why should you care?
Without going into an extensive history lesson, here’s a quick recap of the mortgage meltdown:
- Government decides to “help” the free market for mortgages by establishing Fannie and Freddie to buy mortgages in the secondary market.
- Assured of a buyer for their mortgages, mortgage originators aggressively market them. They sell it silly. People buy houses. Values go up and more people buy. Equity happens and life is good.
- Private industry sees opportunity and wants to play, but find themselves competing against the “Government Sponsored Enterprises” (GSE’s) Fannie and Freddie. Mortgage rates are dictated by risk and the implied government guarantee of Fannie and Freddie means mortgages that “conform) (i.e., conforming loans) are cheaper than private industry. Of course, the consumer will buy the cheaper loan.
- Private industry expands into “non-conforming” (i.e. Jumbo, sub-prime, etc) in order to be in the mortgage business without having to compete directly with the GSE’s. They make money.
- In 1999, the Clinton Administration says, “Fannie and Freddie, you need to make it even easier for people to get home loans”, which is code for “lower your standards”. Fannie and Freddie comply.
- Home ownership surges under George W. Bush. He’s an economic genius. Home values soar. Private industry says, “I want some more!” and recruits foreign investors to plow money into “super safe” mortgage backed securities. The money is directed at sub-prime, alt-a, investors, jumbo, etc. Now equity is REALLY happening!
- Reality sets in. People who shouldn’t have gotten loans do what people who shouldn’t have gotten loans do: they default. The sub-prime crisis sets off a chain reaction of well chronicled events that set off The Great Recession. As a result, the private mortgage business is almost wiped out. Fannie and Freddie survive on the backs of the taxpayers (the working private sector).
Obviously, there’s a lot more to the story, but what are the lessons? Here are two of the most important ones:
1. In a capitalistic society, the objective of enterprise is to make a profit. It’s what motivates the brightest people to work hard and sacrifice to create solutions to society’s problems – solutions that can be sold for a profit. Profits are what allow people to pay taxes, give to charity, invest in product development and new enterprises that create jobs and enrich society. Profits are not evil, they are essential.
2. When the government, though well intentioned (giving it the benefit of the doubt) enters into competition with private industry, with the goal of making a product or service “more affordable” (code for reducing or eliminating those evil profits), the result is a) private industry is crushed, taking its jobs with it; or b) private industry is forced to compromise sound business practice in order to survive (like loaning money to people who can’t afford to pay it back) and eventually those unsound business practices result in failure – and the loss of jobs.
And the correlation to healthcare?
The President of the United States has gone on record as stating that one of the “benefits” of a public option is to create a health care insurance program “without a profit motive” to compete with private industry. When you follow that thought track to its logical conclusion, does anyone see a train wreck?
When you think about how big the health care industry is, you can imagine how many private sector jobs would be lost if it were to melt down too. And since the private sector economy is the one that pays 100% of the taxes, the smaller it gets, the larger the tax burden will be on those who remain.
Loss of private sector jobs and higher taxes have a DIRECT impact on your real estate investments. When more private sector capital is sucked into government, there is less of it available for private purposes. And what is available becomes more expensive (higher interest rates).
So even though “homes and healthcare for all” are noble and compassionate causes that everyone can support, the methodology of undermining the private sector to accomplish them is counterproductive in the long term IF one is operating in a CAPITALISTIC society.
There is no debate about whether we all want people to have homes, healthcare and abundance. We all want that. The debate is whether or not we are committed to capitalism. If we are (and you should be as a real estate investor), then the solution will be found in the private sector as entrepreneurs work every day in their “enlightened self-interest” to invent, build and sell homes, health insurance, health services and whatever other products or services enhance the human experience.
Diesel engines run great on diesel fuel. Regular gas engines run great on regular gas. But when you put diesel fuel in a regular gas engine or vice versa, it might run for a little while, but it won’t run well. Eventually, it will break down and not work at all.
Until someone re-writes the Constitution of the United States, the US is a capitalistic society. Let’s be careful about injecting incompatible “fuel” no matter how noble the motive.
