November 9, 2010
With credit tight and the economy flat, news that interest rates have sunk to the lowest level in decades is being greeted with a shrug in many quarters. Some say the Feds effort to stimulate the economy by making money less expensive isn’t working, because rates at today’s artificially low levels are proving to be a disincentive for the commercial bankers everyone is relying upon to fund economic growth and expansion, funding expert Jeffrey A. Davis observes.
The way this argument sets up, banks are able to make adequate returns by borrowing at near-zero rates and investing in government bonds and other relatively risk-free investments at rates between 3-4%. So there’s little incentive to invest in job-creating businesses or commercial mortgages that generate higher yields but require greater risks and effort, he noted.
Davis is Chairman of Chicago-based Cambridge Realty Capital Companies, a senior housing/healthcare lender. According to the company, the firm has closed more than 300 senior housing/healthcare transactions totaling more than $3 billion over the past 15 years and is active in acquisitions, joint ventures and sale/leaseback transactions through its Cambridge Investment and Finance Co. subsidiary.
Davis says critics of the Fed’s new quantitative easing policy, which involves the purchase of Treasury bonds and mortgage securities to help drive rates lower, claim the result hurts people like seniors and non-profits that depend on income from fixed-income investments. Artificially low rates are also said to help cause asset bubbles. They also encourage companies to sit on cash instead of investing and they penalize savers.
Fed Chairman Ben Bernanke counters these observations with the argument that rising rates would swiftly choke off the tepid economic recovery now underway. It is his contention that high interest rates and overly cautious fiscal policies greatly exacerbated the economic crisis of the 1930s.
“It’s a complex subject. From the perspective of senior housing/healthcare owners, low rates would be bigger news if capital was more readily available,” Davis said. “At this time, many conventional lenders have exited the senior housing/healthcare market and government agencies like HUD are dealing with a tsunami of orders. Deals are getting done, but these are challenging times and underwriting experience is more important than ever,” he added.
Cambridge is the creator of The Signature Experience, a four-step process designed to transform the traditional lender/borrower relationship and identify “ideal” capital solutions for worthy projects. The company has a national origination office in Los Angeles, and numerous correspondent and brokerage relationships nationwide.
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