Friday, January 23, 2009

second stage of the real estate bust is about to hit US

Another Real Estate Crisis is About to Hit

The 1,120,000 lost US retail jobs in 2008 are a signal that the second stage of the real estate bust is about to hit the economy. This time it will be commercial real estate--shopping malls, strip malls, warehouses, and office buildings. As businesses close and rents decline, the ability to service the mortgages on the over-built commercial real estate disappears.

Posted by troy @ 10:06 AM (844 views)
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6 thoughts on “second stage of the real estate bust is about to hit US

  • Reforming the financial system is more important than the war against poverty and starvation, more important than the movement to protect the environment, the struggle against pollution, the peace movement, the fight against drugs and racism, and the battle for social justice and welfare.

    Financial reform is more important than all these other problems for the simple reason that the current financial system is responsible, both directly and indirectly for causing, or at least exacerbating them.

    As a result, however fast people try to tackle these various issues separately, the dominating economic background of an exploitative system of wage-dependency ensures that the situation deteriorates faster than the reforms can cope.
    The Grip of Death, pp. 324-325.

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  • 1. troy said…Reforming the financial system is more important than the war against poverty and starvation, more important than the movement to protect the environment, the struggle against pollution, the peace movement, the fight against drugs and racism, and the battle for social justice and welfare.

    crunchy- Reform? I don’t see it. It seems to me that everything is being done to prop up the status quo. More,more and more money, from the future now. Total destruction is the risk that they are prepared to take before any reform is even considered.

    Is that the idea I wonder? What form will reform come in, troy?

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  • “””
    A compassionate government would handle the crisis in this way

    The trillions of dollars in credit default swaps (CDS) should be declared null and void. These “swaps” are simply bets that financial instruments and companies will fail, and the bulk of the bets are made by people and institutions that do not hold the financial instruments or shares in the companies. The ideology that financial markets were self-regulating allowed illegal gambling free rein. There is no reason under the sun for taxpayers to bail out gamblers.
    “””
    Whilst I agree there is more to come, I don’t think the reporter has thought this through.
    All these bets have two sides – both could be speculative, both could be hedges or part hedges, or one party could be speculating whilst the other is hedging – both parties took a view. Furthermore a position could have been a hedge to another position which has since been closed. What happens if all these contracts suddenly become invalidated? Those who are receiving premium suddenly are not, and those who are paying for protection suddenly have none. Therefore the nullification would have to be managed such that ‘legitimate’ hedges were not affected, thus some contracts survive and some get nullified… however this leaves contracts with one party who is a hedger (or ‘legitimate’ part hedger), thus the aim must be to cross the remaining contracts such that as many speculators may be reduced. Unfortunately this knowledge means that the players, whether speculators or hedgers, cannot know what the final outcome will be.

    This would be an impossible task to perform without causing even more of a mess than there is currently and is no way to solve the problem at hand.

    Placing CDS via a clearing house for all future trades would help the market work smoothly, attempting to intervene in any prior market trades is never a good idea. (Even the SEC chairman has now admitted that they should never introduce another short selling ban, for example).

    ———————-

    “””
    The bailout money, instead of being given to favored financial institutions to finance their acquisition of other institutions, should be used to refinance the defaulting mortgages. This would slow, if not stop, the growing inventory of foreclosed properties that is driving down home prices.
    “””
    I think the idea here is to try to intervene in a controlled fashion. Any bailout is technically bad, since it favours certain economic agents. Providing more liquidity to the banks does not appear to have worked that well, however there has been nothing with which to compare – if it had not happened where would we be? Bailing out the defaulting home owner is actually indirectly giving to banks (after all they are the ones who own the loans) and is far less controllable than the base level implementations that have been, and will continue to be, the tools used by governments.

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  • 51CK thanks for your long and thoughtful post, only thing is I don’t agree.

    The CDS and other elaborate financial instruments were only a problem in that they disguised the gross debasement of capital that can never be paid back. They are no longer the problem and writing them off would have no effect, the problem is more old fashionednow there is going to be a tsunami of of bad debt at every level from individual to soveriegn and a realisation that the wealth we thought we were creating was an illusion. Buffett referred to such financial instruments of weapons of mass destruction because they allowed you to hide the truth for long enough to bankrupt yourself.

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  • @bellwether –
    I totally agree that derivatives may be used as tools of number manipulation
    AND that there will be ever more increasing defaults in the near term.
    However I do not agree that CDS are elaborate in any way – in fact they are very simple instruments.

    My point is more that intervening in markets is a much trickier game than this ex-Assistant Secretary of the Treasury seems to be suggesting.

    The people who have been in charge of the system in the past are not those we should listen to – especially those who played a part in deciding how markets should be made more free, like this guy – note he was in this position during Regan’s presidency, when many of the founding mistakes were made.

    Now I believe in free markets (liberalised markets) but I believe there is a need for the institution at the back to watch what is going on _very_ carefully indeed – that is:
    the one who is last in line in terms of protection;
    the one on which the derivative underlying all derivatives is grounded;
    the one on which the underlying which underlies the underlying of all derivatives is based;
    – the state. After all if they are the one in which the trust (the underlying…) is based and they are the last in the line of protection, then it comes down to them to maintain the level of trust and to make sure that the last resort never becomes necessary.

    They are now already in the position of being the only one left in line, so the only way forward is to refine the system for the future, not to try to meddle in it’s past.

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  • I agree with the comments re th eauthor’s remarks about CDS. I regret that someone with the apparent stature of an ex-Assistant Secretary of the Treasury should be making such ill informed remarks. Similarly, with respect o his comments on mark to market accounting; he seems to want to shoot the messenger – or perhaps a better analogy is that he wishes to cut out the messenger’s tongue before the message can be delivered.

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