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Global Crisis Threatens Another Economic Pillar: Is Commercial Real Estate The Next Asset Bubble To Burst?

March 29th, 2009 Comments off
While the Obama administration and the politically powerful oligarchs of finance focus on so-called public/private partnerships as a solution to the financial toxicity created by securitized subprime mortgages, another sizeable component of real estate securitization on bank balance sheets is on the verge of being the next domino to fall. While residential real estate’s impact on the global financial and economic crisis still retains the spotlight days before the G20 meeting in London, indications are growing that a global commercial real estate implosion is on the verge of becoming the next asset bubble to pop, with devastating consequences. Perhaps it is only because so many fires are already burning amid the rotting timbers of our flawed financial architecture that the impending disaster about to afflict commercial real estate has yet to compel urgent attention. Some, however, are astute enough to see the train wreck that is coming down the track at breakneck speed. Take, for example, billionaire financier and currency speculator George Soros.
Speaking at a conference held in Washington, Soros said, “Commercial real estate has not yet fallen in value. It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”
What are the transactions that George Soros is referring to? Some major commercial real estate markets are already pointing towards a catastrophic collapse. The brokerage firm C.B. Richard Ellis Inc. has issued a report on the prime Manhattan commercial real estate market that presents a truly apocalyptic image. The past year saw the value of Manhattan office building transactions decline by a staggering 69%. A high proportion of such sales were of a distressed character, the bulk involving buildings that had been owned and managed by Harry Macklowe. The real estate entrepreneur was forced to deleverage due to his inability to secure financing and meet loan obligations to his creditors, in particular Deutsche Bank. This process of forced deleveraging has had its inevitable impact on the Manhattan commercial property marketplace. Buildings that Macklowe purchased on credit for $1,100 a square foot are now obtaining as low as $778 a square foot, in the diminishing number of cases where buyers can actually be found who still have access to credit.
The contraction of the commercial real estate market in New York is only a harbinger of what is beginning to occur with increasing rapidity in large cities and medium sized towns, not only across the United States but also throughout the world. Two forces are at work in this disaster in the making; frozen credit flows and rising unemployment. Both forces feed on each other in a perpetual negative feedback loop. Restricted access to credit means property owners cannot meet their loan payments or refinance, forcing deleveraging, which in turn further distresses commercial property prices. The increasing levels of unemployment arising from the Global Economic Crisis has unleashed a wave of demand destruction, the likes of which have not been seen since the Great Depression of the 1930s. In major cities and shopping complexes across the globe, retail outlets are bereft of customers, in the process liquidating essential cash flow for these enterprises. This means even where credit might be available, such as through government funded injections of capital into the banking system, enterprises lack the capacity to service loans that otherwise might be accessible. The result is a self-perpetuating meltdown in which commercial real estate increasingly becomes vacant, with few potential buyers or tenants available, further distressing their economic value.
Just as with securitized subprime mortgages, many commercial banks, investment houses as well as the vast shadow banking system invested heavily in paper backed by commercial real estate. For those retaining hope that commercial property mortgages were consummated with more due diligence than was the case with residential borrowing, their optimism will soon be proven to have been unwarranted. Until about 2007, a commercial real estate boom existed in parallel with the residential housing bubble that was being fed in large part by the Federal Reserve and its low interest rate policy. Very often substantial properties were purchased, at the peak of the market, with 90% of the purchase price financed through credit. As these loans become increasingly non-performing, in synchronicity with the diminution in value of the collateral that backed up those loans, another transformation of bank balance sheets into toxic acid will be unleashed, with a vengeance.

How significant is the exposure to the coming implosion in the commercial real estate market? I have seen some estimates in the range of $7 trillion, however, the ultimate number may be significantly higher. Commercial properties encompass a vast array of buildings in developed and developing economies, from small, medium and large sized office buildings to shopping malls of all dimensions. Strip malls and mega-shopping complexes are losing tenants, with no one lining up to replace them as the Global Economic Crisis curtails demand by consumers. With fewer tenants and constricted income, property owners unable to service their outstanding loans are deleveraging, as mentioned above. Keep in mind that this is not just a New York City phenomenon; London and Budapest, Los Angeles and Berlin, Seattle and Tokyo are already seeing this torrent of economic destruction at work. As the implosion in commercial real estate accelerates, the already fragile global banking and credit system will be hammered again. In a worst case scenario, the blow about to be delivered by this next bursting asset bubble may prove to be mortal for the global economy.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

 

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George Soros: Global Financial System Has Disintegrated!

February 23rd, 2009 Comments off
At a recent private dinner held at Columbia University, two of the most high profile players on the global financial scene expressed opinions that are certain to arouse the most spine-tingling of chills. Currency speculator and billionaire investor George Soros said to his no doubt discomforted dinner colleagues that the world financial system has, in effect, “disintegrated.” He went on to relay his view that the resulting financial and economic turbulence was more severe than the levels experienced during the Great Depression.

“We witnessed the collapse of the financial system…it was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom,” stated Mr. Soros with emphasis. Not to be outdone, fellow participant at this nifty dinner pow-wow at Columbia University, former Fed Chairman and current senior advisor to President Barack Obama, the illustrious Paul Volcker, added the morose observation that, “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

When men as astute and intimately connected to global finance as Paul Volcker and George Soros are openly talking about the Global Economic Crisis as being “worse than the Great Depression” and having brought about the “disintegration” of the global financial architecture, it is clear that the most dire forecasts for the global economy can no longer be treated as uninformed hyperbole. The most knowledgeable and well-connected financiers on the planet are already preaching the gospel of economic and financial Armageddon.

Soros has also written in the Huffington Post a reflection based on simple math that outlines why the Global Economic Crisis, at least in the United States, will have an economically destructive impact that eclipses the Great Depression. He points out that at the time of the stock market crash on Wall Street in 1929, outstanding credit represented 160% of the U.S. GDP; this figure grew to 260% in 1932 as GDP contracted. Soros, however, writes that America “…entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt.”

How should we interpret the musings of Soros and Volcker? In my view, we ignore their informed observations at our peril. Their stated views are not uninformed speculation, but rather a reflection from those in the eye of the storm of this global economic tsunami. Furthermore, despite continued happy talk from the inept political actors across the globe, those who inhabit the rarefied world of high finance, observing the Global Economic Crisis unfold from the pinnacle of power, do not harbor in the least a hint of optimism-or illusion.

 

 

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Global Financial Meltdown:Perspective Of A Leading African Economist

January 6th, 2009 Comments off

Dr.Obadiah Mailafia is a distinguished African economist. Currently he is the Chairman of the Center for Policy and Economic Research (CEPER), in Abuja, Nigeria. Dr. Mailafia has had a distinguished career in government, academia and international development. He has been a university academic, international banker and a senior government official. He was until recently Deputy Governor of the Central Bank of Nigeria and a Senior Advisor to the President of Nigeria (with rank of Minister of State). He was also for several years an official of the African Development Bank Group. He is by training an economist and policy scientist, with research interests in monetary economics, international finance, and strategic management and development administration. On December 16th, 2008. Dr. Mailafia delivered a speech on the current Global Economic Crisis for the Kaduna Chamber of Commerce in Nigeria. Though his talk dealt in part with the impact of the global meltdown on the Nigerian economy, Dr. Mailafia’s presentation provides an exceptionally cogent and lucid analysis of the ongoing global financial and economic turmoil. Below is an excerpt from the speech on the Global Economic Crisis, which Dr. Mailafia graciously provided permission for WWW.Global EconomicCrisis.com to publish on our blog.

 

 

Presentation on the Global Economic Crisis by Dr.Obadiah Mailafia:

 

 

From first principles, we must not forget that financial booms and busts are not a new phenomenon. What is disquieting about the current meltdown is that it is in the nature of a seismic tremor of earth-shaking proportions.

Within a few moths, some of the biggest financial giants have gone belly-up, while several more are in serious trouble. How indeed are the mighty fallen! Bear Stearns, AIG, Fannie Mae and Freddie Mac, Lehman Brothers and Merill Lynch. The automobile giants are virtually on their deathbeds while a good number of industrials are surviving only by the skin of their teeth. A rather prosperous central European nation, Iceland, has virtually sued for bankruptcy, resorting to an IMF standby arrangement – the first since the British ‘humiliation’ of 1967.

The contagion has spread to Europe, Japan, Asia, Africa and Latin America. An estimated US$1.7 trillion in bailout funds has already been committed by OECD countries, but we are yet to see the end of the tunnel, not to talk of any light in it. According to a recent report, the world stands in need of a staggering US$4 trillion to fully resolve this crisis.

Any explanation of the current financial turbulence must begin with the housing bubble fuelled by low interest rates, increased global liquidity and predatory lending by the financial giants. According to some estimates, the annual issuance of US sub-prime mortgage backed securities increased from a mere $56 billion in 2000 to a massive $508 billion in 2005, comprising something of the order of 20 percent of total US mortgages. By 2006, the housing bubble was beginning to unravel, as higher interest rates and rising oil and food prices – and a generalized decline in consumer confidence – were starting to take their toll.

For Robert Reich, former Labor Secretary under President Clinton, greed has to be the main explanatory variable. For billionaire investor George Soros, on the other hand, the main villain is former Fed Chairman Alan Greenspan whose monetary policies allegedly encouraged speculative exuberance even as interest rates were at an all-time low and asset prices were spiraling out of control. Predictably, President-elect Barack Obama puts most of the blame on the misguided policies of the Bush administration, describing the situation as “the most serious financial crisis since the Great Depression”. To all intents and purposes, the big ratings agencies must also bear some of the blame for failing to be more rigorous in their risk assessments. There  Acare yet others who blame the situation on the repeal of the Glass-Steagall act 1933 which had made a clear demarcation between general commercial banking on the one hand, and investment banking activities, on the other. The absence of such a demarcation was underlined as one of the factors accounting for the speculative exuberance that led to the 1929 Wall Street crash.

Linked to this is the dwindling capacity of regulatory authorities. The reality is that the world of high finance has become so complex in our digital age, with capital travelling at the speed of light and several instruments engineered using the arcane language of quantum physics. The hedge funds, which control over a US$1 trillion in assets, are not subject to many of the traditional regulatory regimes. Inevitably, such power without responsibility is bound, sooner or later, to lead to anarchy or even worse.

Another factor that may not be so apparent is what I would term “the crisis of American hegemony”. It is an open secret that America is today the world’s number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was thrown out of the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in taxpayers’ money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.

A hypothesis made famous by the late Harvard economist Charles Kindleberger and others posits that a stable international monetary is possible only where there is a world power able and willing to bear the burdens of responsibility for the preservation of the prevailing system. Such a leader must also be prepared to act as a lender of last resort. Britain played this role in the nineteenth century. America was to play this role for much of the twentieth century. For such theorists, the decline of a ‘hegemon’ is often reflected in international financial disequilibrium, a situation which perhaps offers part of the explanation for the current difficulties.

For America, it will not be the end of the world, but it certainly signals the end of en era. In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that its wisest statesmen would never have dared to contemplate. In so doing, George W. Bush and his neoconservative brethren have exhausted the moral capital that the American Republic has accumulated for the better part of a century. More than at any time in her illustrious history, America stands isolated and bereft of moral authority…

I have to confess that I am not one of those who are easily taken in by the report attributed to Merrill Lynch, which declares our economy to be the safest in the world. As far as I know, our alleged safety derives from the paradox of marginality – to the simple fact that we are not deeply hooked into the global digital economy. It is foolhardy to behave like the proverbial ostrich when Rome is on fire and when the embers of financial contagion have been unleashed everywhere.

Madam President, talking about the much-vaunted Vision 2020, I am constrained to note that we are yet to see a clear economic strategy around which to anchor rational expectations and mobilize the vast resources and energies of our people. Our leaders have all but forgotten the onerous task of nation building. The simple truth is that we are not yet a nation and we are far from having that spiritual bond which the British political philosopher Sir Ernest Baker regarded as the most critical factor in the building of a united and prosperous democracy.

Clearly, we have enormous work to do and several steep mountains to climb. At the global level, we would need to work with others to hammer out a brave new world in which the demands of equity harmonize with the imperatives of international solidarity.

Distinguished Ladies and Gentlemen, for us in this benighted continent, the current upheaval provides an opportunity to re-launch the African Century and to consolidate the foundations of democracy that would enhance peaceful and just development for our long-suffering people. After a millennium of servitude, our continent may, at last, be coming to its own. No nation is better placed, in my view, than ours to champion this continental rejuvenation, whose foundations must be built on sound economic and public management. But I daresay that we will not rise to the occasion until we have transformed our national mindset, reformed the way we do business and changed the structure of our politics and the very spirit of our constitution, leadership and nationhood.

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