The commercial real estate industry would like a bailout – see my preview/links to testimony before the JEC today. This is not a surprise – even some of the most libertarian people I meet think the government should help them personally when times are bad. Is there a case treating commercial real estate as special?
The sector is definitely taking a beating, but who is not? This lobby’s most sophisticated advocates are arguing that various Fed facilities can be extended to support commercial real estate financing, i.e., so there is no cost to the government’s budget or your future taxes.
This is illusory.
We cannot have the Fed indefinitely take over the provision of credit to most of the economy. Asset prices need to fall and, if necessary, debts have to be restructured. This is easier, generally, for commercial real estate developers and operators than it is for residential mortgages.
The global crisis is surely not finished, but we are out of the panic phase. There is little compelling reason to provide “emergency” financial support to anyone at this point.
The price of retail space is falling because consumers are spending less and retailers are contracting or going out of business. This is painful and will turn around only when consumers figure out the new (higher) level of savings they want. We are already cushioning this blow with a big increase in public spending and a difficult future for public debt issues.
Going further for commercial real estate specifically is not appealing. If we do it for them, why not for everyone?
Of course, if commercial real estate worsens considerably, we will see further damage among banks. But didn’t the government stress tests assure us that the banks have enough capital to handle even worst case scenarios?
By Simon Johnson
The Baseline Scenario 
“We cannot have the Fed indefinitely take over the provision of credit to most of the economy.”
Hasn’t that already happened?
Yes, Simon, why not for everyone? Too many politicians have already taken a lot of public money for themselves, relatives, lobbies, related interests, constituencies. Everyday you can read new stories of how politicians are doing it and planning to continue doing it.
Your analysis assumes that there are many bad guys in big banks and other big private companies. From your research on development you should know better: the bad guys are the ones that can tax and/or sell protection.
“The global crisis is surely not finished, but we are out of the panic phase. There is little compelling reason to provide ’emergency’ financial support to anyone at this point.”
There was never a “compelling reason to provide ’emergency’ financial support to anyone” even when we were in the panic phase, there were simply political reasons to do that and they were “compelling” only because they were a workproduct that had been purchased before the fact from politicians with “For Sale” signs on their backs.
I mean, really, “not appealing”? You must have learned to employ this kind of understatement in visits to a Wall Street law firm. When thousands now mill about unemployed casualties of these same manipulators, wouldn’t the more decisive “immoral” be prefered?
Re remark from Lavrenti Beria
Simon’s use of “not appealing” may not be the result of spending too much time amongst Wall Street law firms but rather an attempt to make a point with some irony that is fitting in an amoral world.
Now that’s downright generous. I know, he’s made you a loan of some kind, eh? :-)
> When thousands now mill about unemployed casualties of these same manipulators, wouldn’t the more decisive “immoral” be prefered?
I’m with Lavrenti Beria that immoral or amoral should be used for this pondscum.
PS – BTW is this you http://bit.ly/3aFX4I ;)
I fear the taxpayer may be on the hook for much of the CRE losses if, as it appears, they are on loans from FDIC-insured banks, since the FDIC is already treading water.
If policy makers could accept that “asset prices need to fall” the entire bailout could have been avoided. It was precisely the ingrained need to see charts up and to the right that caused the massive investment of taxpayer dollars and hot air that pumped up the market.
Indeed, the distinction between CRE and residential turns out to be quite limited in the sense that residential ALSO needs to fall, and fall much more, to the point where a median salary can service the payments on a median house with enough cushion to provide for life’s vagaries (divorce, illness, job loss, etc).
According to reports in the online version of the Wall Street Journal, one of the largest real-estate investment trusts in the US is seeking to raise $1 billion to invest in commercial properties.
http://bit.ly/fdag8
It appears that there may be enough private investment available again so that government can stand clear on this new whine.
Presently the government gravy train is the only game in town. If you are not currently on the train, have no tickets for the train and don’t have any way to get tickets then consider yourself a fool and realize you are being taken to the cleaners. It may be time to forgo that college education for a political education. Stop saving for college and start saving for that trip Washington DC to visit you representatives and (more important) all those lobbyists-probably the sector of the economy with the highest growth rate!
“The global crisis is surely not finished, but we are out of the panic phase.”
We are out of “A” panic phase, not “THE” panic phase. Recall that there was a smaller panic phase in March 2008 when Bear was collapsing. There may be more coming.
That’s me. Just don’t believe the scurrilous lies that the swine Khruschev and Malinkov disseminated in 1953 about my spying for the English. More important, don’t ever believe their fairy tales about my trial and execution. I mean you don’t see anyone parading around the internet with the nome de plume, Gregori Malenkov, these days do you?
If residential homebuilders didn’t get a bailout, why would commercial real estate companies get one? Probably because their debt is on the big banks’ balance sheet. The administration will not let any of the stress-tested banks fail so to the extent any CRE loans would threaten one of those “chosen few”, they will get a bailout…and it’ll most likely be via some kind of back-door arrangement a la AIG.
Before history started, there was the Fed and 1000 banks. In the land of the east, there was the People’s Bank of China. Fast forward 40 years. There is the Fed, and all teh Fed’s subsidiaries like Citi Bank, Bank of America. And there is the People’s Bank of China, in a much smaller capacity, and 1000s of other banks. Fast forward another 40 years, what would the world be like?
“even some of the most libertarian people I meet think the government should help them personally when times are bad.” Odd how it is with the Ayn Rand crowd.
Prof. Simon, This is unrelated to this particular post and I apologize for that, but, I have always wondered what you thought of the Taibi article?
Simon, the key statement in your article is:
“Of course, if commercial real estate worsens considerably, we will see further damage among banks.”
And, that is the real issue. Residential foreclosures continue (and will, with unemployment on the rise), and commercial is now increasingly moving toward more and deeper failures (and will continue with retail sales falling, and businesses cutting back more and more).
The upshot is that these issues (together with state bond defaults, and other credit failings, both individual and corporate) cannot help but cause even greater stress on questionable bank “legacy” assets. The real question is: do we continue to prop up banks, or, if not, will a more specialized form of stimulus be necessary just to keep the credit markets from collapsing completely?
Back in March, I predicted that by August or September, things would once again become much more desparate (like late last year and early this year. I hope I’m wrong, but I see only withered brown shoots, and little good economic news (IS THERE ANY AT ALL?).
What is going on with commercial real estate seems as though it may be the tip of the next huge economic iceberg. Say it ain’t so.
Back in Nov I wrote on Forbes.com that it was Lehman’s commercial real estate book that caused the Fed etc. to back away from a bailout. “We pick up these assets,” I envisioned Paulson thinking, ‘and the next thing we know, Donald Trump’ll come begging.” Well, here it is.
Somehow, I imagine the developers and other RE investment companies will be allowed to twist in the wind but the banks will be magically insulated from detrimental balance sheet impacts.
There is no motivation to save the private companies (unless one of them can show they employ 300k people) but the banks will be covered at all costs.
After taking in and digesting Simon’s content, I fear that the USA economy in particular will over a long period of time beget crises, financial and economic, that are driven by the very “connectedness” of all economic actors participating in the economy; and to the vested interests we should not rely upon for the solutions. A thousand and one cuts will bring the giant to his knees.
People continue to argue that me must bailout industries in order to prevent the economy from going deeper into recession; that is illogical, asset prices need to fall, commercial real estate is no exception. Seriously, all of our money is being used to prop up these edifices of the past, not investing in our future, where is creative destuction when you need it. I dont want to know how much better off we would have been if we had taken the bail out money and simply invested it in education, grants for small businesses and graduating students(they cant find work), reforming healthcare and extending unemployment benefits? This extends beyond wall street or main street, this is about one generation bankrupting another, those in power are sucking the life of the young to prop themselves up. Im tired of watching a generation who had every advantage, and who failed despite it rob its children to pay for its own incompetence.