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Steven Hansen
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Steven Hansen is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.
My company:
Econintersect LLC
My blog:
Global Economic Intersect
  • Commercial Real Estate and the Fed 3 comments
    Jul 10, 2009 1:20 AM

    In America, we have always thought that home ownership was a right.  Of course our legislative actions ended up creating a huge housing bubble - but the sentiment was understandable.

    The commercial real estate market has a bubble - too much capacity.  This is a much deadlier bubble than residential real estate as the value of each property is determined by a multiplier of revenue.

    No one needs to explain that there is a decline in the renters, which has pushed vacancies through the roof and decreased rents for the tenants who remain.  Values have fallen by more than half in places.

    Over $1.8 trillion dollars of real estate loans are on bank's books.  7% of these loans are in default today.

    Why did the Fed and banking regulators allow an accumulation of these amounts of loans in the banks??

    Here is the conclusion of the testimony on July 9, 2009 by Jon D. Greenlee, Associate Director, Division of Banking Supervision and Regulation Before the Joint Economic Committee, U.S. Congress, Washington, D.C.

    Financial markets in the United States continue to be somewhat fragile, with CRE markets particularly so. Banking institutions have been adversely impacted by recent problems in CRE markets. The Federal Reserve, working with the other banking agencies has acted--and will continue to act--to ensure that the banking system remains safe and sound and is able to meet the credit needs of our economy. We have aggressively pursued monetary policy actions and provided liquidity to help repair the financial system. The recent launch of the CMBS portion of the TALF is an effort to revitalize lending in broader CRE markets. In our supervisory efforts, we are mindful of the risk-management deficiencies at banking institutions revealed by the current crisis and are ensuring that institutions develop appropriate corrective actions. Within the Federal Reserve, we have been able to apply our interdisciplinary approach to addressing problems with CRE markets, relying on supervisors, economists, accountants, quantitative analysts, and other experts.

    It will take some time for the banking industry to work through this current set of challenges and for the financial markets to fully recover. In this environment, the economy will need a strong and stable financial system that can make credit available. We want banks to deploy capital and liquidity, but in a responsible way that avoids past mistakes and does not create new ones. The Federal Reserve is committed to working with other banking agencies and the Congress to promote the concurrent goals of fostering credit availability and a safe and sound banking system.

    Banks normally lead us out of recessions.  How is it possible this time?
     

     

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Comments (3)
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  • Steve, can you read through that goggly-gook and translate what the hell they are saying? How can they "prop up" the CRE situation? Businesses are going under, they don't need the space. Traveling back east I was shocked at the for lease signs, every other space, every other restaurant closed, etc. There is no market, people aren't buying and not eating out.
    So, who needs credit, that won't fix the business, only customers will.
    10 Jul 2009, 08:55 AM Reply Like
  • Author’s reply » what they are saying is that there is only so much they can do about commercial real estate loans. the default rate on these loans will continue to effect the banking system into the foreseeable future - and the effects will be large.
    10 Jul 2009, 10:19 PM Reply Like
  • Thanks, I hope that is correct. I'm one in the camp of getting government out of the picture, and let all aspects of the bubble deflate by way of natural market forces. I'd like to think our government is smart enough to enact policies to lessen the impact, "by the cancer, sell the car crash " if you will, but they aren't and they seem to always make things worse, not better.

     

    On Jul 10 10:19 PM Steven Hansen wrote:

     

    > what they are saying is that there is only so much they can do about
    > commercial real estate loans. the default rate on these loans will
    > continue to effect the banking system into the foreseeable future
    > - and the effects will be large.
    11 Jul 2009, 09:31 AM Reply Like
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