On the net is a account of a US Treasury representive describing policy towards the decline in residential and commercial real estate in the United States.
Interesting reading "if" true, is what everybody expects and currently looks like is total engineering of a massive backstop of the economy by the Federal government.
Urban Land Fall Conference Nov 22 2009
A group of real estate and investment professionals were present at this meeting. Along with a US Treasury representive.
After the UST representive gave the presentation. Many professionals were adament in there disaproval and voiced their concern that such a interfence with market forces would lead to more dislocations in the market place.
Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.
Just NOT principal reduction. This is just like they are doing in housing.
Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on. When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks.
That is the choice.
What does this tell you?
A. The problem is going to take much longer to solve than it should,
B. The banks are still very weak, so lending will not return anytime soon,
C. A massive refi problem is getting deferred to 2013-2015.
D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.
I think I captured a lot of what was said in various panels and conversations. We have a long way to go and the government is making it harder to fix the problem."
Here's Paisgnome's take on this.
We have had the largest financial bubble ever created in real estate both residential and commercial in this country.
It popped!!!
Trying to reflate this bubble is pure lunacy. It will come down anyway and trying to artificially keep it up, will create more problems than anyone can imagine.
The banks and their shareholders will lose eventually and what we are risking is a Japanese style no or low growth period of atleast ten years or more.
When the next leg down comes and it will sooner than we all want, let's quit with the bailouts of the people that are responsible for this mess.
We need to have a orderly plan to relistically value all these toxic assets and get on with rebulding this financial system.
Because the system we now have in reality is not working for the benifit of the common man.
If the banks can't make it, close them. It's time for the government to create a system of regional redevolpment banks with clean balance sheets and the ability to meet the lending needs of people and business.
In the latest Federal Reserve reporting period the M1 Multipler stands below 1.00 at .842, that figure is indictive of a primitive banking system where people would rather transact in cash.
Ben Bernanke describes what I am talking about here:
(1) The "money multiplier," M1/BASE. In fractional-reserve banking systems,
the total money supply (including bank deposits) is larger than the monetary
base. As is familiar from textbook treatments, the so-called money
multiplier, M1/BASE, is a decreasing function of the currency-deposit ratio
chosen by the public and the reserve-deposit ratio chosen by commercial
banks. At the beginning of the 1930s, M1/BASE was relatively low (not much
above one) in countries in which banking was less developed, or in which
people retained a preference for currency in transactions. In contrast, in
the financially well-developed United States this ratio was close to four in
1929.
However, in 1931 and subsequently, the large declines in the money-gold
ratio that occurred around the world did not reflect anyone's consciously
chosen policy. The proximate causes of these declines were the waves of
banking panics and exchange-rate crises that followed the failure of the
Kreditanstalt, the largest bank in Austria, in May 1931. These developments
affected each of the components of the money-gold ratio: First, by leading
to rises in aggregate currency-deposit and bank reserve-deposit ratios,
banking panics typically led to sharp declines in the money multiplier,
M1/BASE (Friedman and Schwartz 1963; Bernanke and James 1991). Second,
exchange-rate crises and the associated fears of devaluation led central
banks to substitute gold for foreign exchange reserves; this flight from
foreign-exchange reserves reduced the ratio of total reserves to gold, RES/
GOLD. Finally, in the wake of these crises, central banks attempted to
increase gold reserves and coverage ratios as security against future
attacks on their currencies; in many countries, the resulting "scramble for
gold" induced continuing declines in the ratio BASE/RES.
!Ben Bernanke Great Depression
You will notice that the M1 Multiplier was at 4.00 in the Great Depression, why so high compared to the record low today.
My uneducated guess is that the system has not been allowed to clear itself like FDR did in 1932-33 period.
We cannot spend ourselves out of this problem. Japan tried and it has failed, for 19 years no less.
Stop the madness!