No, I’m not referring to capital wasted at the margin, like buying a bigger TV than you need, or that ninja sword that sits by your bed (just in case the zombie apocalypse is tomorrow). That’s (maybe) a poor investment. I’m talking about wasted capital. I’m talking about paying someone to dig a ditch and then paying someone else to fill it in. The bigger waste isn’t the money paid to the ditch digger and ditch filler (though paying for nothing is wasteful), it is their labor. Paying them not to dig and fill the ditch would have arguably been more productive. They could have built tree houses for their kids, or read some books. They have done something with their combined time and effort. Instead of creating something useful, they created nothing.

This is why I’m opposed to plans to tear down excess housing inventory. Typically, a house has some value, even if it has less value than hoped. The house itself is a form of wealth. Paying to tear down excess housing inventory only is productive if the houses are worth less than nothing.

Of course, houses can be worth less than nothing. For example, there were some homes in Florida that were foreclosed upon. They sat vacant and unattended long enough to develop mold problems. They represent a hazard; they cannot be safely inhabited. Nobody wants to buy the homes because the demolition costs are actually greater than the value of the property. There are other ways that a home can have negative value. If abandoned homes lead to increased crime, then time and money must be spent on policing the area.

So, when I read the post at Calculated Risk titled One-Third of REOs Seriously Damaged, I knew I was going to be depressed. Criminals destroying property turn a problem of poorly invested capital (yeah, we built too many houses) into a problem of wasted capital.