Meet the new financial boss, same as the old financial boss – Commercial real estate bailout implicates Federal Reserve as Fed balance sheet balloons to $2.7 trillion. CRE values down $3 trillion from their 2008 peak.
Commercial real estate (CRE) is still benefitting from a large shadow bailout by the Federal Reserve. This isn’t some secretive move since the Fed actually publishes data on this and is available to anyone in the public with a desire to shuffle through the mounds of information. There has been virtually no media coverage on the CRE industry even though CRE values have lost close to $3 trillion from their peak. You would think a $3 trillion loss would garner some attention but the media would rather focus on squabbles over a few billion dollars. Residential real estate is very tangible and most can understand what a bailout in housing means; at least in theory they grasp it since the bailouts really at their core were about saving big banks and making sure they were not penalized by their past transgressions. The irony of CRE problems is also the interesting support Donald Trump is getting even though CRE and residential real estate speculation are at the core of the financial mess. We can argue about taxes and public policies but the real money and the grease that ground the system to a halt was banking and their speculation on the real estate markets. This is why the CRE coverage has been completely missing from the morning shows. Let us look at this closer once again.
Banks gone wild – The temporarily embarrassed millionaire syndrome. Bailout recipient JP Morgan Chase pays CEO what amounts to 843 times the median US household income.
It is a fascinating case study in human psychology that one of the top contenders for President is Donald Trump, a man who makes a living at least on his show by firing people. You would think that many Americans would want someone that hires people given our current economic predicament. Put aside the antics and showmanship, many Americans (the average per capita income being $25,000) somehow admire a person who grew up with a silver spoon and has made his public persona revolve around firing people and speculating in real estate (a sector that has led us into this mess because of speculation). Usually when I get asked why we have very few protests against the trillions of dollars handed out to the banking and investment class, I usually point to this mentality. Many feel that they are only one step away from being the next Trump. This perception might explain the growth in massive banks and why it is even allowed. Having giant banks is not a normal part of our economy. In fact, I went ahead and gathered banking data going back to 1934 showing that the growth of too big to fail really started in the 1980s.
The housing gamble: What if home prices remained stagnant until 2020? 6 charts laying out the argument for stagnant or declining home prices for another 10 years. Peak in dual income households, home prices still inflated relative to incomes, Federal Reserve unable to hold mortgage rates low forever.
What would happen if home prices remain stagnant for another decade? It is hard to imagine that the cornerstone of the American dream would somehow become a bad investment for the next decade. For decades every generation was conditioned into believing that housing was the best investment a family could make. For many it provided a stable home for retirement once the mortgage was paid off. One third of all homes in the United States that are owner occupied have no mortgage. Yet this mindset of buying and paying off a mortgage has largely been lost. No mortgage burning parties in the digital age. It may be making a comeback not because people want this but because there is no other financial choice. Given the current domestic and global trends, it is likely that housing will be suffering another troubled decade from 2011 to 2020 just like it experienced from 2001 to 2010. I want to lay out six charts as to why I believe housing will have difficulty moving up in price in the next ten years.
The new Gilded Age – The psychology behind the aspirational rich in America and how people allow banks to swindle their financial security away.
A couple of weeks ago a survey of the ultra-rich by Fidelity Investments showed that most of these millionaires did not feel rich unless they had $7.5 million. Keep in mind that one out of three Americans do not have one penny to their name, not even stashed in the beat up mattress. It is also the case that the average per capita income in the United States is $25,000 so it must be odd to hear millionaires saying that they don’t feel wealthy until they reach the $7.5 million mark. The top 1 percent already have over 40 percent of all financial wealth in this country but apparently this is not enough. What the survey found implicitly is the wealthy want even more from an already shrinking pie and they are more than willing to sacrifice the American middle class to achieve their benchmark of wealth. Why aren’t people on streets revolting against inequality that resembles that of the Great Depression? We didn’t have a Gilded Age because the working class enjoyed this period. So why the continued silence on behalf of the public? Part of the reason stems from many in America believing that someday they will wake up and have $7.5 million in the bank and they want to make sure the government doesn’t touch any of their hard earned money. Once again, one out of three don’t even have a dollar to their name and the average per capita income is $25,000. Many have bought into the aspirational propaganda and in fact are protecting the same Wall Street investment banks that have robbed their homes, crushed American jobs, and are stripping away the rights that working and middle class Americans have fought for over the last century. Apparently some are not aware that we are living in a new Gilded Age. Instead of railroad tycoons we now have the master’s of the universe on Wall Street.
No quantitative easing for oil – The Federal Reserve can digitally print money into existence but this does not create more oil. Federal Reserve has a comic book section?
The Federal Reserve continues to support a flawed banking system that has ignored the urgent calls for reform in spite of the greatest financial collapse since the Great Depression. Bankers and fellow politicians understand that each day that passes without serious reform allows one more day for the painful memories of 2007, 2008 and 2009 to be slowly erased like castles in the sand. It was rather clear who led us into this mess in 2007 and most would agree it was the financial sector and their ill advised reward systems. It was greed run amok yet today you have some politicians trying to argue in favor of the banks that fault is really too hard to ascertain or place on only one group therefore no real changes can take place. At the very least hands off the compensation packages of the top 1 percent in the financial sector that have pilfered the wealth of the nation is their core argument. The Federal Reserve is not a government institution and contrary to public perceptions is mainly designed to protect the banking interests, not the interest of the people. Searching for more data I stumbled on comic books put out by the Fed.
The financial elixir that is falling home prices – Lower home prices good for the economy – Median U.S. home price down to $157,000 taking up 3 times the annual household income instead of the bubble peak of 5. Adding jobs while home prices move lower? Banks big winners when home prices remain inflated.
It is interesting that in the short-term horizon of our economy falling home prices are occurring while jobs are being added. The banking sector during the early days of the crisis made it abundantly clear that falling home prices would lead to economic collapse. Yet the opposite is occurring. Why? First, inflated home prices eat up a deeper portion of a household’s income. With a large portion of our economy dependent on consumption this funnels consumption into a largely unproductive sector of our nation. The banking sector is largely linked to the real estate industry so it benefits their bottom line for home prices to simply go up even if household incomes have gone negative for over a decade. So it should come as no surprise that as home prices continue to move even lower that somehow jobs are being added. Middle class Americans will be better off with a boring housing market with 30 year fixed mortgages and a sizable down payment requirement of at least 10 percent so resources can be focused on more job supporting growth that also allows us to export abroad (there is zero exports with housing).
Federal Reserve punishes savers by subsidizing big banking bailouts – Two largest U.S. banks offer a paltry 0.05 annual percentage rate while increasing service fee charges and upping loan interest rates. S&P 500 not cheap.
The challenge most Americans are facing is first, trying to save money. If that hurdle is accomplished the next tougher question becomes where the money should be placed. The Federal Reserve by default with a negative interest rate policy has punished savers at the expense of massive debtors. The Fed for many decades since the 1960s had held the Fed funds rate over 5 percent. What this also meant was that Americans if they decided to step aside from the risky stock market would at least yield a decent return in U.S. Treasuries. Those days seem to be long gone with the funds rate near zero. Banks are using their easy access to the Fed to borrow cheap and to lend at much higher rates. They are also borrowing cheap and investing in global stock markets. The two biggest banks in the U.S. give depositors merely a place in the bank’s digital vault and pay almost no interest.