Thursday, July 8, 2010

I Disbelieve The Economy

Via John Cole comes this Henry Blodget piece on our old friend commercial Real Estate, and why the collapse isn't quite happening yet but may soon will.
Most experts agree that one reason Japan's economy has taken so long to recover from its bubble crash is that Japan's banks spent the first decade in denial.

Specifically, when loans went bad, the banks didn't write the loans off--they lent the bankrupt borrowers more money so the borrowers could keep paying interest on the original loan. Thus, the bank and the borrower could pretend that everything was hunky dory.

Except it wasn't. Because the borrowers were bankrupt. And, eventually, everyone figured that out. And, finally, more than a decade into the collapse, the banks began owning up to reality and writing off some of the bad loans.

This practice, "extend and pretend," isn't always a bad strategy. If the economy recovers strongly and quickly, sometimes banks can make more money (or at least lose less) by working with with troubled borrowers who will eventually make good on their debts.  This is what most of the ideas to "save the housing market" have been about--encouraging banks to restructure mortgages to keep borrowers in their homes.  And sometimes, it actually works.

But, usually it doesn't--especially when practiced on an industry-wide scale, and especially when borrowers aren't just temporarily strapped. When banks "extend and pretend" just to avoid write-offs and protect their capital, they're just delaying the inevitable.  And the financial health they're bragging about in the quarterly reports becomes bogus.

And that's what appears to be happening in the commercial real-estate market right now.
Applied denial as lending policy.  The banks, flush with taxpayer money, are playing Big Casino again with the CRE market to keep the band playing.  Once the music stops however, the explosion is going to pretty much cripple our economy.  Basically the banks are throwing money at commercial real estate hoping magically that the market will turn around and that everything will be fine.

The irony of course is that businesses are doing everything they can to screw over their employees in this economy, and that's cutting their own throats on demand.  People are cutting back.  Meanwhile, banks are making the same bet with construction companies, building more commercial properties in the hope that the market will come roaring back.

All of this is going to detonate in our faces spectacularly and soon.  The question is when and how ruthless it will be when it happens.  The answer of course is that we'll have no choice but to bail out the banks again to the tune of trillions...again...and that cost will get squeezed out of every American.

The next decade or so looks really, really bad.  Standing around trying to disbelieve it will not solve the problem.

7 comments:

  1. And you still don't have anything to add to the argument.

    Let me disabuse you of the notion you get to make the rules around here.


    Locking down your blog so that you can't have a dissenting opinion? Way to show the world your great passion of tried and true liberal values. Next you'll hold your breath until you turn blue unless I let you win the debate.

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  2. you are the most arrogant and obnoxious human being alive today. what debates have you won around here? you offer predictable libertarian responses to every single predictable liberal position. you are Z's mirror image. why on earth can't you understand that? what do you think you're doing here? you are nothing but a common crank infected with a nearly offensive belief in your own mental superiority. have you ever had a thought that couldn't be found somewhere on the cato or reason sites? ever? ever participate in the "gubmint am bad" circle-jerks that break out on any sites where libertarians congregate? good gosh, what a lunatic you must be to spend so much time bothering this one guy as if you're pursuing some holy crusade. get help, fast.

    ReplyDelete
  3. Says the guy who is so bent out of shape about one person coming from a different viewpoint that he changed his display name, and has long since dropping even pretending to have an argument and instead go the path of personal insults etc. You're a pathetic excuse for a hypocrite, all it took to get you to drop any semblance of ability was to...disagree with you

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  4. ps: If you can't take differing viewpoints maybe you should call up your ISP and have them turn off your internet, or stick to HuffPo

    ReplyDelete
  5. do you honestly think what you wrote constitutes a a valid response? you didn't address a single point i made. you are the mirror image of Z. if he's a liberal hack, you're a libertaian hack. he defends obama - you attack him for doing it. you honestly haven't got an original idea in your head and you act as though posting your dull libertarian claptrap on this blog is some great act of bravery that opens up the internet for free speech and the exchange of ideas. have you changed your mind about anything? has zandar? you are a pathetic deluded fool. zandar publishes a blog. nobody's forced to visit it. however, i believe that if you have the right to stalk Z (and you certainly do) i have the right to remind you over and over of what you could never in a million years see for yourself: that you're no better than he is and that what you're doing is utterly pointless. but unlike you, who wants to pretend that you've singled out zandar because he represents the height of liberal hypocrisy (the reality of why you're here is probably that this blog isn't visited by many people and you can troll here without getting piled on), i'm honest enough to admit to doing this because i simply dislike you. you're a smug, stupid asshole.

    PS: don't forget to post another borderline incoherent rant and proclaim yourself the winner.

    BTW: what's your blog address again? oh, i thought so.

    ReplyDelete
  6. Actually what I wrote fit perfectly, you come to a blog and post ranting comments attempting to personally insult me and chase me off without even appearing to have read the blog. At least you've stopped pretending to have a clue and now just spout off the same useless insults over and over. Hell you've changed your name in an attempt to insult me but yet act as if I haven't gotten to you at all.

    What a lunatic you must be to spend so much time bothering this one guy.

    BTW whats your blog address? Oh wait it's private now :-)

    Fail Harder

    p.s. Cry moar because I said you're fail

    Oh and before I forget

    Zandar because he represents the height of liberal hypocrisy

    Hilarious

    ReplyDelete