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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 16, 2009 at 11:20 AM

The debt chickens come home to roost at the mall

Top of the News: The chapter 11 bankruptcy filing of General Growth Properties, the nation’s second-largest mall owner, shows why there will be no easy exit from the recession. Like many companies that were expected to show “growth” to Wall Street over the past 25 years, General Growth did this heavily through debt-funded expansion. Now comes the piper: with $27 billion in debt, the company was caught defenseless in the credit freeze and the worst consumer pullback in decades. The result: one of the largest real estate failures in American history.

The company’s malls will stay open, including Westlake Center in downtown Seattle, Alderwood mall in Lynnwood, Bellis Fair in Bellingham, NorthTown Mall and two other shopping centers in Spokane, and malls in Aberdeen and Kelso. Shareholders, who should have been paying more attention, will be wiped out. The conventional wisdom holds that the company will emerge largely intact — perhaps selling off some properties — with no malls closing. We’ll see. There will be no easy return to a consumer culture that was also based on historic debt levels. Average Americans will take time to pay down those credit cards — debt again — and rebuild what savings they can. And the rising gasoline prices that are in our future make continued suburban sprawl and the ever expanding mall industry less tenable. As importantly, the trauma of this financial wave of the Great Disruption may change psychology.

Now we can plainly see these strategies of high leverage were unsustainable. There was a reason that executives tempered by the Great Depression avoided big debt loads. Yet the smartest people in the best business schools spent the past two decades preaching, the paraphrase Gordon Gekko, that debt is good. It can be useful. But not taken to the extremes seen across the American economy, and not when a future of discontinuity arrives. More debt reckoning will follow.

The Back Story: Meanwhile, the federal government must run up debt to fight the downturn — and we hope there will be enough demand for Treasuries. An interesting stat: Net foreign purchases of long-term U.S. securities were $20.8 billion in February — compared with $56 billion in November. China’s net holdings of U.S. assets declined by $14 billion.

Today’s Econ Haiku:

JP Morgan Chase

Has the scratch to repay TARP

Give us back WaMu

Comments | More in Consumer spending, Real estate, Retail

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