Another Real Estate Crisis Is About To Hit
For a picture of the US real
estate crisis, imagine New Orleans wrecked by
Hurricane Katrina, and
before the waters even begin to recede, a second
1,120,000 lost US retail jobs in 2008 are a
signal that the second stage of the real estate bust
is about to hit the economy. This time it will be
commercial real estate—shopping malls, strip malls,
warehouses, and office buildings. As businesses
close and rents decline, the ability to service the
mortgages on the over-built commercial real estate
The over-building was helped
along by the irresponsibly low interest rates, but
the main impetus came from the slide of the US
saving rate to zero and the rise in household
indebtedness. The shrinkage of savings and the
increase in debt raised consumer spending to 72% of
GDP. The proliferation of malls and the warehouses
that service them reflect the rise in consumer
spending as a share of GDP.
Like the federal government,
consumers spent more than they earned and borrowed
to cover the difference. Obviously, this could not
go on forever, and consumer debt has reached its
Shopping malls are losing
anchor stores, and large chains are closing stores
and even going out of business altogether.
Developers who borrowed to finance commercial
ventures are in trouble as are the holders of the
mortgages, derivatives and other financial junk
associated with the loans.
The main source of the economic
crisis is the infantile belief of US policymakers
that an economy could be based on debt expansion. As
offshoring moved jobs, incomes, and GDP out of
the country, debt expanded to take the place of the
missing income. When the offshored goods and
services were brought back to be sold to Americans,
trade deficit rose, adding another level of
financing for an economy that consumes more than it
The growth of debt has outpaced
the growth of real output. Yet, the solution offered
by Obama`s economic team is to expand debt further.
This is not surprising as Obama`s economic team
consists of the very people who brought on the debt
crisis. Now they are going to make it worse.
The unexamined question is: Who
is going to finance the next wave of debt?
The US budget deficit for
fiscal year 2009 already appears to be on a path to
$2 trillion, and that is before Obama`s stimulus
program. What we are looking at is a $3 trillion
budget deficit if Obama`s program is enacted in time
to impact the economy this year.
Foreign countries can finance a
$500 billion US budget deficit out of their trade
surpluses with the US. But foreigners do not have
the funds to finance a US budget deficit in the
trillions of dollars, and they would not finance
such a deficit even if they had the funds.
Foreigners are over-weighted in dollar holdings and
prefer to lighten their holding than to add to them.
America`s economic prospects are dim as are the
dollar`s prospects as reserve currency. An annual
budget deficit in the trillions of dollars makes the
dollar`s prospects appear even dimmer.
The federal government`s likely
solution to the debt problem will be to monetize the
debt, that is, the government will finance its
deficit by printing money. Debt will be inflated
away. But for those Americans without jobs or whose
incomes do not rise with inflation, life will be
Life is already cruel for
Americans living on retirement savings. Not only has
the stock market bust reduced their wealth by half,
but also their remaining assets are producing no
income. Interest rates are so low that debt
instruments produce no income, and there are scant
capital gains in the stock market. Retirees are
living by consuming their capital.
America`s economic policy of
low interest rates and debt expansion bodes ill for
everyone living off their savings. Their future
prospects are even worse as high inflation will
destroy the value of their savings, especially if
held in cash or debt instruments, including
There are more intelligent ways
to try to escape from the current crisis. However,
the financial gangsters and their shills that Obama
has put in charge of economic policy are thinking
only of their own interest. What happens to the
American people is not a concern.
A compassionate government
would handle the crisis in this way:
The trillions of dollars in
credit default swaps (CDS) should be declared
null and void. These
are simply bets that financial instruments and
companies will fail, and the bulk of the bets are
made by people and institutions that do not hold the
financial instruments or shares in the companies.
The ideology that financial markets were
self-regulating allowed illegal gambling free rein.
There is no reason under the sun for taxpayers to
bail out gamblers.
The bailout money, instead of
being given to favored financial institutions to
finance their acquisition of other institutions,
should be used to refinance the defaulting
mortgages. This would slow, if not stop, the growing
inventory of foreclosed properties that is driving
down home prices.
The mark-to-market rule should
be suspended until the real values of the troubled
properties and instruments can be determined.
Suspension of the rule would prevent the failure of
sound institutions and lessen the need for a
Interest rates have to be
raised in order to encourage saving and to provide
incomes to retirees.
To preserve the dollar`s status
as reserve currency, a credible policy of reducing
both budget and trade deficits must be announced. In
the near term the budget deficit can be reduced by
$500 billion by withdrawing from Iraq and
Afghanistan and by cutting a bloated defense budget
that represents the now unattainable goal of US
The trade deficit can be
significantly reduced by bringing offshored jobs
back to America. One way to do this is to tax
corporations according to the value added to their
output that occurs in the US. Corporations that
produce their products for US markets abroad would
have high tax rates; those that produce domestically
would have low tax rates.
This approach to the economic
crisis stands in marked contrast with the approach
of the gangsters running US economic policy. The
gangsters are using the crisis as an opportunity to
steal from taxpayers and to finance their misdeeds
and exorbitant salaries with Federal Reserve loans.
Their shills among economists and the financial
press tell the people that the solution is to fatten
up the banks with funds so they will resume lending
to an over-indebted public that will then return to
the shopping malls.
This unrealistic approach to a
serious crisis indicates a leadership crisis on top
of an economic crisis.
Paul Craig Roberts [email
him] was Assistant
Secretary of the Treasury during President Reagan`s
first term. He was Associate Editor of the Wall
Street Journal. He has held numerous academic
appointments, including the William E. Simon Chair,
Center for Strategic and International Studies,
Georgetown University, and Senior Research Fellow,
Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois
Mitterrand. He is the author of
Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington;
and the Soviet Economy and
Meltdown: Inside the Soviet Economy,
and is the co-author
with Lawrence M. Stratton of
The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice. Click
here for Peter
Brimelow`s Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.