A congressional panel led by Rep. Dennis Kucinich (D-Ohio), is currently investigating whether the IRS was right in granting New York City tax-exempt bonds to finance the new $950 million Yankee Stadium at cheaper borrowing rates, as well as whether the City overvalued the worth of the property in order to secure the large volume of bonds. Sorry sports fans, but this abuse of public funds by the Yankees and the IRS demonstrates the government’s ineptitude when it tries to dabble in economics. Randy Levine, Yankees President testified saying “Without the financing mechanism in place, a new Yankee Stadium would not have been built.” Well yes, Randy, that’s the whole point of borrowing rates. When a bank issues a loan at a certain rate of interest, that rate reflects the confidence that they money will be repaid and that the bank can make a profit from funding the project.
If a borrowing rate is high it means that funds are scarce, confidence of making a profit is low and it will be harder to gather investors for a project. Far from being a bad thing, however, when interest rates are determine by the free market, the quantity of investments reflects the quality of that investment. The interest rates largely determine the amount of credit available, but even at high rates, a project likely to be profitable should still be sufficiently funded. On the other hand, if a company has to use underhanded maneuvers, abetted by a government agency, in order to secure lower interest funding, it creates false confidence in that project. More money is likely to be invested, but that money is more likely to be wasted, especially if that investment wasn’t so smart after all – like if the Yankees don’t win the World Series soon.
Ironically, one of the reasons this case has attracted so much attention is due to national economy worries. A government panel is accusing the Yankees of wasting public money at a time of financial crises. However, the underlying reason why the new Yankee Stadium may be a bad investment is the same reason why we’re having economic worries in the first place and why government fixes aren’t going to help solve the problems.
For the last decade, it has been a Federal Reserve policy to hold interest rates artificially low. The point of doing this was supposedly to stimulate the economy by promoting investment. However, not all investments can be considered equal, as we are seeing with Yankee Stadium. The government panel doesn’t want to waste public funds on a poor investment, and neither would an investor of any project. However, keeping interest rates low gives investors a false confidence in the value of a project, whether its a sports stadium or Florida condominiums. This false confidence leads to the creation of economic bubbles, bubbles which burst because demand doesn’t meet the artificial supply. Only a return to market set interest rates will stop the boom-bust business cycle, because interest rates below or above real market value will cause over or underinvestment, respectively.
This also explains why the government can’t spend its way out of the long term economic crises. The Fed policy of continuing to keep interest rates low to insure the liquidity of credit will continue to cause malinvestment, meanwhile the government is actively purchasing, by printing dollars or selling debt, the product of this malinvestment. The economy simply cannot handle continued sustaining of this insolvent companies, while solvent companies are going bankrupted because cannot get the loans they need because the capital is being directed away from them and towards large investment banks.
The new Yankee Stadium, if it was meant to be built, should have borrowed money at market value interest rates just like any other project. The result of this type of government intervention is the investment of funds at unsustainable risk, with the illusion of low interest rate confidence.
