In “As Vacant Office Space Grows, So Does Lenders’ Crisis,” the January 4th NYTimes reported:
“Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders. . . . With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. . . .
“Many building owners, struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year. However, the persistent chill in lending from banks to the credit markets will make that difficult —setting the stage for loan defaults. That prospect, in turn, bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.
“Commercial property owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due. But without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.
“Most commercial real estate loans . . . were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent . . . .
“Many of those buildings are basically underwater,” said Mr. Goade of CresaPartners. “The price they paid was too high to begin with. There’s no way anyone would lend that kind of money today.”
First, there will be insufficient “new financing” since the U.S. and global economies are cooling, banks aren’t lending, and borrowers aren’t borrowing. Without “new financing,” commercial properties will therefore 1) be lost to bankruptcy or abandonment; 2) suffer significant price declines; and 3) thereby contribute to further price deflation and a deepening U.S. economic depression.
Second, the strategy of buying commercial real estate and paying only the interest on the principal, then renegotiating the loan when it came due, is plenty smart during the “high times” when the economy seems strong, inflation seems certain, and the principal on existing loans is constantly being reduced by inflation. But if the economy shifts into deflation and the value of the dollar begins to grow then the value of the principal on outstanding loans will also begin to grow at the same time economic activity and income is falling. Result? Borrowers will be caught between the proverbial rock and hard place and driven into bankruptcy.
I’m reminded of an ancient observation on human nature: “You can’t ‘con’ an honest man.” In other words, if a man is content to live on that which he personally earns and isn’t greedy for unearned gain, you can’t trick him. Such men are both rare and extremely hard to deceive. Such men have an internal moral compass that prevents them from even wanting “something for nothing”.
However, such moral compass is seldom found among the bankers, financiers and speculators who seemed “plenty smart” when they invested in commercial real estate and paid only interest on the loans. After all, they “knew” that our inflation was “never-ending” and would constantly erode the value of the principal and (if they rolled the loan over enough times) they might ultimately get the building for almost nothing. (Pretty smart, huh?) However, without that moral compass to temper their ambitions, the “smartest guys in the room” are actually only the “greediest guys in the room.” Driven by greed, such men are the easiest to “con” and ultimately headed for a fall.
It’s the Enron story on a national basis. People wanted something (commercial real estate) for nothing. They wanted to make a fast, unearned dollar. But now, based on their greed, they’re going to lose their assets.
In the greater scheme of things, these losses may not be so bad. The commercial real estate buildings have been built. The physical assets are here and were ultimately “paid for” by the greediest Americans. Now, the greediest are going to be ruined, while the buildings remain. I’m not sure that’s such a bad thing.
The problem is that the vast majority of Americans are greedy. We have come to believe the fictional Wall Street broker’s declaration that “Greed is good”. Almost all of us are looking for an angle, a scheme, whereby we can get something for nothing. The same greed that motivated the “smartest guys in the room” to invest in commercial real estate also motivated Joe Sixpack to buy a house with a sub-prime mortgage—and motivated the banks to loan money to people they knew damn well would never repay the loan. Every one of these greedy con-artists was motivated by the sure and certain knowledge that inflation (a means by which borrowers can legally rob lenders) would never ever die.
But now, it appears that theft-by-inflation has been at least temporarily suspended and the “something-for-nothing” crowd is going to be hung by their own economic petards.
It would all be pretty funny—if theft-by-inflation weren’t so widespread. For decades, our entire economy has been based on the systematic robbery of creditors by means of inflation. In our “brave, new inflationary world,” we’ve become a nation of thieves, hustlers and con-artists—all looking to get something for nothing and sneering at the people who merely tried to live honestly within the means of their legitimate earnings. And in our greed, we’ve become the ideal marks for the con-artists in Washington D.C. and the central banks. If you can’t con an honest man, it’s no surprise that the American people are routinely “conned” by their leaders.
Virtually all of our immoral economic behavior can be traced to institutionalized theft-by-inflation. Our reliance on theft-by-inflation can be traced to our abandonment of constitutionally-mandated, gold and silver money and our consequent adoption the fiat currency of paper and digital Federal Reserve Notes. (Theft-by-inflation is virtually impossible with a gold or silver currency. Such theft can only be widely institutionalized by means of fiat currency.) The fiat currency seemed to provide a pretty cool economic ride while it lasted, but now—if we slide into deflation (the “dark side” of fiat currency) we will all be sentenced to 5 to 10 years in debtor’s prison (AKA an “economic depression”).
Don’t doubt for a minute that virtually all of our current (and coming) economic problems can be traced back to the use of fiat currency (paper and digital dollars). Don’t doubt for a minute, that our only way to mitigate the current crisis and prevent future crises will be the reintroduction of a gold- and/or silver-backed monetary system. And don’t doubt for one minute that at least part of your personal, economic salvation over the next few years will depend on having some of your own gold and silver coins.