Fed extends a helping hand to Hilton Hotels and takes over malls across the country – The Federal Reserve clandestine bailout of the $3 trillion commercial real estate industry. South Florida apartment building prices down 52 percent from peak.
If you think residential real estate is having problems, you should shift your gaze to the mammoth issues confronting commercial real estate. Little is mentioned about commercial real estate (CRE) in the mainstream media yet this is a $3 trillion market (or twice the annual GDP of Texas). Much of the problems in CRE are profound and pose systemic risks to the banking sector. While the current attention is on fraudulent paperwork on residential housing, the biggest and most hushed bailout of commercial real estate is occurring. The Fed directly buying up questionable mortgages from banks is an indirect form of bailing out CRE. Yet in some instances, the Fed has gone ahead and directly taken on the role as owner for places such as a mall in Oklahoma. While U.S. residential property prices have fallen approximately 30 percent CRE has fallen by 42 percent.
The debt end game – Top 10 percent of families own an average of $700,000 in stocks while the next 15 percent own an average of $53,000. The other 75 percent are insignificant players by Wall Street standards.
The government recently announced on a slow Friday a $1.29 trillion budget deficit as if it were no big deal for the completed fiscal year. In fact, this was spun as grand news since the previous budget deficit topped $1.4 trillion. We are now reaching a nationwide tipping point of debt. The U.S. Treasury and Federal Reserve are gearing up for another round of quantitative easing that will surely depress the U.S. dollar further. Does anyone outside of the enclosed circle of the Wall Street crowd actually have any faith in the Fed? This is the same organization that dropped rates to historical lows and fanned the blistering red flames of the housing bubble. And keep in mind that the first round of quantitative easing of buying up mortgage backed securities (MBS) did very little for the working and middle class. What is going on is a giant busload transfer of wealth and this should be the headline story everyday on the news until the financial crisis is resolved.
The hidden gigantic risk of derivatives – Top 77 U.S. banks have their hand in $225 trillion in derivatives. The top 5 banks hold $7.8 trillion of all banking assets growing their asset base by $1.7 trillion from 2007.
The concentration of banking risk in the United States is immense. The Federal Reserve and U.S. Treasury like to convey a pretense that we have a very diverse banking system with over 7,800 banking institutions. In the mind of most of the public, this seems like a very diverse industry. Imagine having 7,800 different kinds of hamburger businesses. One failure would not systematically breakdown the system. If Burger King went away our economy would still survive. Yet in the U.S. five banks hold $7.8 trillion of all banking assets. Total banking assets amount to $13 trillion so these five banks manage every 6 dollars out of 10 in our banking system. Even more amazing, 77 banks have their hands in $225 trillion in derivatives. That is correct, $225 trillion or 16 times the total amount of annual GDP for the United States.
Will the U.S. face a generation of underperforming housing values? It happened from 1915 to 1945 and the current trend is not looking favorable. Current U.S. housing values over priced by 30 percent.
It is hard to imagine a time in U.S. history when housing was actually perceived as cheap for an entire generation. Yet this is the exact experience that occurred from 1915 to 1945. Home values were cheap in relative inflation adjusted terms. Even after 1945, homes were still affordable and this is where the seeds of viewing housing as a great investment took hold. But housing was a good investment for all the reasons it is not today. Housing was a store of value, not an ATM machine for funding your next boat. Yet the current credit bubble bursting is exposing the underlying problems with using a home as the primary function of wealth in this country. A home doesn’t offer anything more than shelter and certainly doesn’t create new and innovative employment sectors. Yet for an entire decade housing was seen as the elixir to solve every problem in our economy. Today, nationwide housing values are inflated by approximately 30 percent even after the current correction. This is hard to believe for many but all we need to do is look at data from 1968 and adjust it for inflation.