The Congressional Oversight Panel headed by Harvard Law professor Elizabeth Warren today released a report that states what everyone should know, but which most of our elite journalists and politicians are studiously ignoring: the looming Commercial Real Estate catastrophe that threatens any economic recovery and continues to place our financial system at risk of collapse:
The Congressional Oversight Panel’s February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability,” expresses concern that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks. Commercial real estate loans made over the last decade – including retail properties, office space, industrial facilities, hotels and apartments – totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present “underwater,” meaning the borrower owes more on the loan than the underlying property is worth. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble. From the summary page at the COP website:
The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.
From the Conclusion of the COP report:
Even though commercial real estate was not mentioned in the press release announcing this new program, Treasury has noted that the problems of commercial real estate and the restricted flow of credit to small business are related.471 When the inability of small businesses to borrow causes them to close their doors, vacancy rates increase, which then drag down commercial real estate values.472 In a recent speech, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, expanded on this theme. He spoke about the potential of a self reinforcing negative feedback loop‖ involving bank lending, small business employment, and commercial real estate values.473Lockhart noted that small businesses tend to rely heavily on smaller financial banks as a source of credit. He further noted that smaller financial institutions tend to have a larger-than-average concentration in commercial real estate lending.474 Lastly, he noted that banks with the highest levels of exposure to commercial real estate loans account for almost 40 percent of all small business loans.475 What this means is that a small bank that does not make many loans – perhaps because it is hoarding capital to offset future losses in the value of its commercial real estate portfolio – can feed a vicious cycle that does additional damage to the bank itself. The lack of lending may mean that small businesses that rely on the bank as a source of credit will be forced to shut their doors. This drives up vacancy rates on commercial real estate in the local region, which puts more downward pressure on real estate prices. And those falling prices can lead to additional write-downs in the bank‘s commercial real estate portfolio. […]
This report has outlined the risks posed by the current and projected condition of commercial real estate. A second wave of real-estate driven bank difficulties, even if not as large as the first, can have an outsize effect on a banking sector weakened by both the current crisis and by the economy remaining in a severe recession. In the same way, even if smaller absolute numbers are involved, a second wave of bank losses and defaults can have a serious effect on public access to banking facilities in smaller communities, lending to small business, and more
importantly, on confidence in the financial system. The system, as noted above, cannot, and should not, keep every bank afloat. But neither should it turn a blind eye to the impact of unnecessary bank consolidation. And the failure of mid-size and small banks because of commercial real estate might even require a significant recapitalization of the FDIC with
taxpayer funds.
I think that’s a fairly important crisis situation that our politicians and journalists should be educating the the public about so we can have a reasoned debate on how to forestall the worst case scenario should the edifice of massive commercial real estate loan losses occur. Sadly, the Big Media mouthpieces have chosen to focus their attention elsewhere.
Thus, David Broder writes about the awesomeness of Sarah Palin, and David Ignatius tells us a Tea Party Movement is just what Europe needs since it has been so beneficial to the political debate in America. Meanwhile the Wall Street Journal wants NY Attorney General Andrew Cuomo to lay off harassing the “Too Big to Fail” Bank of America.
They should all be speaking to Elisabeth Warren, but another economic story about the dangers the (this time commercial) real estate market bubble and the way in which it was financed pose to our nation and the world would probably be considered too wonky for these high flying insiders. In short, our “liberal” media elites are not only ignorant and clueless, they are also essentially shills for Banksters, conservative blowhards and the revival of the Know Nothing Party.
But hey, I’m just stating the obvious …
