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Generational Dynamics Web Log for 1-Mar-2010
1-Mar-10 News - Real estate and Greek crises

Web Log - March, 2010

1-Mar-10 News - Real estate and Greek crises

Harvard professor Niall Ferguson and 'America, the fragile empire'

Mish Shedlock analyzes the commercial real estate crisis

Michael "Mish" Shedlock has pulled together several stories on the worsening crisis in commercial real estate in his blog.

Here are some of the facts pulled together by Shedlock:

The same story is playing out in shopping malls across the country: Stores and entire shopping centers are foreclosed and put on the auction block, and no one is bidding on them.

Elizabeth Warren, chairman of the Congressional Oversight Panel, is quoted as saying: "There's been an enormous bubble in commercial real estate, and it has to come down. There will be significant bankruptcies among developers and significant failures among community banks."

Nearly 3,000 community banks -- 40% of the banking system -- have a high investment in commercial real estate loans.

The Washington Post points out that in Washington, the number of troubled properties has multiplied at a phenomenal rate, with the value growing from only $13 million in 2007 to $40 billion now.

Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.

Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date.

If you do the math on this, according to Shedlock, then expect to see a thousand commercial bank failures in the next couple of years.

The commercial real estate crisis is coming later than the residential real estate crisis. There's a huge, growing "'Shadow inventory' of unsold homes" in the US, ready to trigger a housing panic, and a commercial real estate panic is now a parallel possibility.

Greece and the euro face another tough week

In the face of large public sector union strikes, opposing the austerity measures that Greece is facing, Prime Minister George Papandreou has been using very strong language. He's quoted by the Greek newspaper Kathimerini as telling Parliament that additional "harsh" measures are required:

"Unfortunately, history has confirmed our worst fears. Our duty today is to forget about political cost and think only about the survival of the country. Past policies make it necessary to proceed with harsh changes.

The dilemma we face is: Are we going to let this country go bankrupt or are we going to react?

We became the weak victim, the guinea pig. We stood unprotected before the markets’ wild appetite.

We must do whatever we can now to address the immediate dangers. Tomorrow, it will be too late and the consequences will be much more dire."

There have been conflicting reports and speculation over whether the EU will find a way to bail Greece out. France's AFP quotes German Chancellor Angela Merkel as saying on Sunday that there would be no bailout.

Merkel denied that any such plan was in the works, saying "there is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty."

On the other hand, an EU audit of Greece's finances begins on Monday, and there is speculation that the audit will lead to some kind of bailout.

Papandreou is planning to visit Merkel in Berlin on March 5, and Barack Obama in Washington on March 9, according to Kathimerini. Presumably the purpose of the trips is to beg for mercy.

As in the areas of US residential and commercial real estate, the Greek situation in particular, and the European situation in general, is also ripe for a panic.

Harvard professor Niall Ferguson: 'America, the fragile empire'

Harvard professor Niall Ferguson's latest book is "The Ascent of Money: A Financial History of the World," and he narrated a PBS documentary by the same name.

In his article, "America, the fragile empire," in the Los Angeles Times, he describes how history is filled with "fat tail" events that occur suddenly, and cause the collapse of a society or nation almost overnight.

He describes nations and empires as "complex systems" where a small event can produce huge, often unanticipated changes. This, of course, is the process described by Chaos Theory that I've described many times.

Here's an example:

"The most recent and familiar example of precipitous decline is the collapse of the Soviet Union. With the benefit of hindsight, historians have traced all kinds of rot within the Soviet system back to the Brezhnev era and beyond. Perhaps, as the historian and political scientist Stephen Kotkin has argued, it was only the high oil prices of the 1970s that "averted Armageddon." But this did not seem to be the case at the time. The Soviet nuclear arsenal was larger than the U.S. stockpile. And governments in what was then called the Third World, from Vietnam to Nicaragua, had been tilting in the Soviets' favor for most of the previous 20 years.

Yet, less than five years after Mikhail Gorbachev took power, the Soviet imperium in central and Eastern Europe had fallen apart, followed by the Soviet Union itself in 1991. If ever an empire fell off a cliff, rather than gently declining, it was the one founded by Lenin."

The very rapid collapse of the Soviet empire is a recent example that shows what can happen to America:

"One day, a seemingly random piece of bad news -- perhaps a negative report by a rating agency -- will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but the public at large, not to mention investors abroad. It is this shift that is crucial: A complex adaptive system is in big trouble when its component parts lose faith in its viability."

This is EXACTLY the kind of thing that I've been talking about for years.

I hope that one day Niall Ferguson has a chance to familiarize himself with Generational Dynamics, because it provides a theoretical underpinnings for his warnings.

For example, those commentators who talk about "fat tails" or "black swan events" seem to imply that they could happen at any time. Generational theory tells us that's not true. The kind of panic and collapse the Ferguson describes could not happen during a generational Recovery Era, or Awakening era, or Unraveling era. For example, a 1929-style stock market panic could not have happened in 20 years earlier in 1909, or 20 years later in 1949. It happened at the right point in the generational cycle. Such a panicked collapse can only happen in a generational crisis era, such as we're in now. In fact, using specialized terminology, it's such an event transforms a "pre-regeneracy" crisis era into a full-fledged crisis.

The issues described earlier -- commercial and residential real estate, the Greek financial crisis -- are examples of areas where a small event might trigger a panic.

Additional links

Peace talks between Pakistan and India have moved disappointingly slowly, because they have conflicting agendas. India is laser-focused on terrorism, while Pakistan wants to discuss the broader issue of the future of Kashmir. Asian Times.

Whether the Persian Gulf should be called the Arabian Gulf is one of the many issues separating Persian Muslims from Arab Muslims. The disagreement even caused the scrapping of the Islamic Solidarity Games, the Olympics of the Muslim world. NY Times. This is just one more manifestation of the growing Sunni-Shia divide.

(Comments: For reader comments, questions and discussion, see the 1-Mar-10 News - Real estate and Greek crises thread of the Generational Dynamics forum. Comments may be posted anonymously.) (1-Mar-2010) Permanent Link
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