The Ugly Ain’t Over Yet, Not by a Longshot

Building on EMR’s previous post, I bring to the attention of Bacon’s Rebellion readers a Congressional Oversight Report, published February, “Commercial Real Estate Losses and the Risk to Financial Stability.” The executive summary states the problem so pithily that I quote from it directly:

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

That’s just commercial real estate. We haven’t even begun to talk about the coming wave of defaults in Alt-A or Option ARMs in the residential market that could be as disastrous as the collapse of the sub-prime market. It looks like we’re in for another round of deflation in real estate prices. Then, there’s the continuing de-leveraging of the American consumer generally.

Property tax revenues… down. Sales tax revenues… down. Municipal governments will be in a world of hurt for some time to come. My sympathy goes to anyone living in one of Virginia’s “fast-growth” counties because that’s where most of the damage will be located.

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37 responses to “The Ugly Ain’t Over Yet, Not by a Longshot”

  1. Larry G Avatar

    I don't disagree with any of this but do point out that none of this is Obama's fault and that all of us should want his policies to deal with this to be successful.

    My second point is a question and that is how will this meltdown most manifest itself at the local level and the answer is local revenues and what do most local revenues get spent on?


    we are going to have to rethink how we do education in my view.

    the bucks are not going to be there for business as usual.

  2. E M Risse Avatar
    E M Risse

    Jim Bacon:

    Love the graphic!


  3. Gooze Views Avatar
    Gooze Views

    I agree with Larry Gross on Obama. And while i have no doubt about what is in the eport, it is not really news.
    It is happening thorughout the subursb of the U.S. — Near Richmond, both Henrico and Chesterfield have budget crisis that Obama's stimulus did little to resolve. Henrico spent their's on minor bricks and mortar projects in schools and Chesterfield temporarily saved the jobs of nearly 300 teachers.l Then the state demanded their scond yeasr of money.
    Meanwhile, there are more and more commercial enterprises shuttered and restaurants closed. When I was stuck in Fredricksburg waiting for a late Amtrak, I had assumed I could drop into the station's kitschy restaurant for lunch. It had closed a few months before.
    So, this isn't reallynews. Also, there may be signs of recovery in residential. AM surporised the commercial firestorm hasn't been faster. Why is that?

    Peter Galuszkai,

  4. Larry G Avatar

    The Fredericksburg Region has a durable employment environment as it is essentially a bedroom community for the Federal Workforce.

    But economic damage is clear and widespread even in our area and that tells me that areas with a less percentage of govt jobs are even more damaged.

    I don't know why the business shoe takes longer to drop but apparently most economists think that is normal.

    Even though, I've see more mark-down counters in WalMart these days, I don't think a single one has gone under due to the economy while the continuing demise of mom&pops seems to have accelerated.

    Just FYI – the restaurant that Peter alluded to had developed a reputation of good but expensive food but small portions and crappy service.

    when the news of it's closing made the paper, several folks said good riddance…

    many other mom&pop downtown restaurants have also gone under as well as several chain restaurants in the suburbanized business districts outside of the burg.

    In the residential, besides the empty homes, we've seen add-ons to existing homes and even newly-parked (and occupied) trailers and RVs parked in non-subdivision, rural-home yards and driveways.

    grown kids are moving back with parents; even some parents are moving back with kids with add-on additions.

    The pressure is on Obama to "create jobs" with most everyone who is not-partisan understanding an acknowledging that it's a lose-lose proposition because the govt cannot create permanent jobs and even the jobs they do create – they get whacked for deficit-spending on high-dollar temporary jobs.

    This economic environment would have been interesting with a Republican President and Congress. It would have eaten a less younger person like John McCain alive in my view and probably in his case, it would have been 4-years of headlights in the deer's eyes…

    to bring this back around…

    the localities are in serious straights with the loss of their property tax base – and that's going to result in a wave of personnel cuts as they have no choice but to cut school positions – and that's going to throw more folks out of work – and more folks who will lose their health care insurance.

    The Ugly is not only not over by a longshot – more than likely we'll all be in a position to decide if we want to deny Obama a second term or switch to a Republican horse in midstream.

  5. Anonymous Avatar

    "—grown kids are moving back with parents; even some parents are moving back with kids with add-on additions."

    The housing policy expert from GMU was on tV this morning and this was one of the topics he discussed.

    He said doubling up was affecting the rental market as well.

    He expects the effects to last through 2012, but he notes that the improving economy will take some of the sting out, compared to the previus round.



  6. Larry G Avatar

    if the economy improves then it doesn't have anything to do with Obama's wantonly wasteful jobs stimulation policies.

    If the economy gets worse, it's because Obama did not do what was needed.

    The only good thing about this terribly devastating economy is that even the most partisan wing-nuts are forced to start admitting that this is not about Obama.

    I see virtually no Republicans saying what we should be doing instead – except continue the Bush tax cuts…

    If McCain and the Republicans were in charge, we'd be looking at another Great Depression, I'm convinced.

    cutting taxes does not help those without jobs and cutting taxes on the wealthy will not convince them to provide jobs to make widgets that there is no demand for – because people are broke.

    The Republicans got us into this mess with their idiotic tax cuts done at the same time they were paying for two wars and Medicare Part D and now we are told that they know what to do to fix this economy.

    In a pigs eye.

    If the American people vote these idiots back into a majority, we deserve what we get.

    If I have to listen to Eric Cantor open his trap one more time, I'm going to get the vapors.

    What a deuce that man is to be in the role he is in.

    this is apparently the best the Republicans can do to fill that role.

    woe is us.

  7. Anonymous Avatar

    I have heard it said (although it seems inflated to me) that 5000 people lose their homes every day, because of medical related bankruptcies. It may very well be that part of our housing crisis is really a health insurance crisis.

    In any case, even Republicans agree that doing nothing is going to cost more than the current plan. They just don't have a different or better one.

    The health insurance bill may cost us more than we are paying now, but at least we will get more insurance for what we pay.

    But the "no new taxes" advertisements have already started against the clean energy bill. In that case, the tax opponents have astronger argument because new taxes will get us higher energy costs, but they won't get us any more energy.

    Their timing for starting these ads is interesting. Either they figure health care is dead, or it doesn;t make any difference and they want to get a jump on killing the next bill while the Administration is still busy defending this one.



  8. Groveton Avatar

    "…none of this is Obama's fault…".

    Oh My!

    Those who really understand the history of the Great Depresion will know that Hoover started his administration by trying to fight the economic meltdown the same way that Bush ended his administration and Obama started his. After two years Hoover blinked and reversed course. Roosevelt was elected and he resumed Hoover's initial policies.

    It is VERY debatable as to whether Hoover first two years and Roosevelt's first two terms reduced the pain or extended it.

    Mr. Obama made his bet. He has bet that the early Hoover / Roosevelt policies will ease (rather than deepen) the pain. He may be right. He may be wrong. However, it is very dubious to say that "… none of this is Obama's fault…".

    Here is one manifestation of President Obama's bet:

    President Obama is taking the path blazed by Hoover (first two years) and Roosevelt. Vastly increased government spending, soaring deficits, higher taxes. He, like Presidents Hoover (first two years) and Roosevelt hope these actions will help the economy. Presidents Obama and Bush could have opted for a much more subdued response such as that used by President Grant and Hayes to counter the Long Depresion (

    For better or worse, President Obama is in this up to his eyeballs.

  9. Larry G Avatar

    comparing Obama to Hoover is an exceedingly novel idea especially given each of their basic ideas about the proper role of govt, eh?

    Do you REALLY think that 50 years from now will say something like "Obama, like his predecessor Hoover.. attempted to ….."

    I gotta hear someone else's take on this idea.

  10. Anonymous Avatar

    Larry, it is my recollection (more vague each year) that Hoover did spend quite a bit of federal funds trying to jump-start the economy and that FDR campaigned in 1932 against Hoover's deficit spending and expansion of government. Needless to say, the new president later changed his tune — for better or for worse, depending on one's point of view.


  11. Larry G Avatar

    I always thought the hit on Hoover was that he did not act and because of that things went to heck. no?

  12. Larry G Avatar

    well, let's cut to the chase. What is Obama not doing that he ought to be doing?

  13. Anonymous Avatar

    Perhaps not working to create functional human settlement patterns?


  14. James A. Bacon Avatar
    James A. Bacon

    Hoover was not a small-government conservative in the mold of Calvin Coolidge. Indeed, when Hoover served as Secretary of Commerce under him, Coolidge was not that fond of him, calling him "Wonder Boy." Hoover believed in a vigorous federal government. Two big things happened on his watch that turned the stock market crash of 1929 into the Great Depression of the 1930s. First, the Federal Reserve contracted the money supply. (Read your Milton Friedman.) Second, he signed the Smoot-Hawley tariff, which triggered a trade war with our European trading partners. According to Amity Shlaes' book, "The Forgotten Man," Hoover got the government engaged in a lot of other stuff, but, frankly, I forget the details, and I don't think they were terribly significant in affecting the economic outcome.

    FDR, of course, expanded the role of government enormously, charged the likes of Insull and Mellon with criminal indictments (both men were exonerated), cranked up the top income tax bracket to 87%, tilted the playing field in favor of labor, tried to pack the Supreme Court, and in general paralyzed the capitalist class, precipitating the 1937 recession within a depression. Only World War II got us out of the Depression. Shlaes argues that it wasn't the government spending that saved the country, but Roosevelt's backing off his class warfare: He needed the captains of industry to help him build the American war machine.

  15. Groveton Avatar


    Since an historical account of Coolidge, Hoover and FDR (compared to Obama) is off topic for this post and since we've been warned to stay on topic, I have posted an article on the matter on Groveton's Virginia…

    "Barack Hussein Hoover"

  16. Larry G Avatar

    so Hoover was an activist…interventionist.. more like a RINO R than a Reagan R?

    so he did act but wrongly or ineffectively?

    and that the thread between him and Obama?

    that they both are/were interventionist but inept?

    Here's another thing I find interesting.

    More than 60 years after Hoover's time there is not strong and unified agreement as to his role in the Great Depression but in less than a year, Obama's role is viewed with more certainty….

    Its was the Feds fault during Hoovers time and Obama's fault this time?

  17. Larry G Avatar

    re: " Coolidge was the proponent of small government who inspired Ronald Reagan"

    I love the way we all look back at history and remember what we like and forget what we don't.

    Mr. Reagan presided over one of the largest socialistic and expensive programs in the history of the US that is now at the heart of Obama's "intervention" on Health Care.

    To Wit:

    The Emergency Medical Treatment and Active Labor Act (EMTALA)

    for a man who is often quoted now days by small govt conservatives, as feeling that the govt is the problem.. he sure supported something that is the ultimate in nanny-state politics.

    No only does the govt MANDATE Free health care for everyone including illegals but it is the epitome of an unfunded mandate that now is at the root of our health care crisis.

    and yet.. not one of those who profess love of Mr. Reagan's policies has dared to suggest that the first step in rolling back the nanny state is the repeal of EMTALA.

    why do I mention this?

    well.. I used to be content when people advised that..over time.. history will (correctly) judge our Presidents.

    no more.

    it's become obvious whether it's Hoover or Reagan or Coolidge that each of us has our own rose-colored glasses when viewing past presidents.

    I still have a great deal of trouble with the concept that of all the prior Presidents, that Obama most resembles Hoover.. but I'm going to try to keep an open mind on this because there are other groups out there that say Obama most resembles Jimmy Carter.

    but I finish by asking again – those who feel that Obama is not doing what needs to be done (with respect to the economy) – what is he not doing what he should be doing?

    and no.. I'm not buying the tax-cut rat-trap.

  18. "what is he not doing what he should be doing?"

    The Administration's priorities are out-of-whack, IMO.

    Trying to reform health care in the economic environment we are in is one example.

    It's all about jobs, jobs, jobs. The amount of job growth we will need to get back to "normal" unemployment could take 5 or 6 years at this pace.

    My company ran an ad for a $12.00/hour office job earlier this month job and we got 200 resumes in three days……90% of the people were over-qualified……most were college graduates and some had a Masters Degree.

    I set in on the interviews and ALL of them had been out of work for a significant amount of time (6+ months) or they were underemployed….i.e., they were waiting tables or working part-time.

    I just don't see how these people are going to be convinced that four more years of this is going to make them any better…..that's not to say that the R's would have done any better or will do any better…..but for the sake of argument people need to start seeing the light at the end of the tunnel.

    Time is not on Obama's side.

  19. Larry G Avatar

    I don't really disagree. He had a pre-set agenda when he got elected and he did not count on having to deal with an economic meltdown.

    He's on a Jimmy Carter TRACK unless he and his advisors get their heads out of their butts.

    but remember how we got here and think about who you think would make some headway on the jobs thing.

    I heard today that several projects in our area are dead in the water – there is no financing available –

    and there's a tidal wave of folks considering walking away from their seriously underwater loans and that's going to take down more financial businesses …

    localities that are funded from property taxes are in serious trouble.. forced to lay off teachers and other employees that will add to the already terrible unemployment.

    So, Obama comes across as clueless about priorities and he could have staunched the bloodletting with a perfectly acceptable reason for all but the most partisan base folks.

    However, I seriously do not believe this President or a Republican Model – even Romney would have a whole lot more juice on the jobs issue.

    and if Republicans think the govt should not be involved in this – I'd just point out what RBV (and others) say – and that is they EXPECT Obama to do SOMETHING about jobs.. and that's why they want him to be a one-termer.

    so one more at you –

    If not Obama – who?

  20. Anonymous Avatar

    Trying to reform health care in the economic environment we are in is one example.


    I don't think so. The first thing you lose when you lose your job is health coverage.

    For many, whose jobs are not coming back no matter what the administraion (of either color0 does, health care is a major economic issue.

    for the rest of us 25% of the economy is still a big issue.


  21. Anonymous Avatar

    "The amount of job growth we will need to get back to "normal" unemployment could take 5 or 6 years at this pace."


    Why not ask for the impossible? We have never, ever, seenthe kind of jobs growth that would get us out of this in a year.

    Not unless, maybe, you count the biggest government spending plan ever: WWII, and I don't think even that would fill the bill today.


  22. Larry G Avatar

    I think the Republicans own this problem also and I've yet to see anything from them on this except their continuing bogus ideas that tax cuts create jobs.

    I've never seen a definitive study that shows that for each penny of tax cut – that x number of jobs are created.

    It's Ronald Reagan hocus pocus

    you'd have to believe that if the wealthy got tax cuts that they'd go out and open up a new weed eater factory with that money.

    or one presumes that there is existing tremendous unmet demand for more weed eaters but no one has the money to build more until the govt gives them tax breaks.

    I like the Obama approach. You get the money only when you prove you actually hire someone…

    Now … I would like to know if you still get the money if you hire a Chinese worker in China…with the tax break.. ha ha ha.

  23. "Trying to reform health care in the economic environment we are in is one example."

    I am not saying our health care system is perfect…it's not.

    But, it's neither the cause of or solution to many of the problems we have now.

    Re: WW II;

    We have been spending money on "wars" for almost ten years and have little to show for it.

    Have we won yet?

    Define victory, please?

    There's no doubt people are getting rich and making a living off of the current situation….it just ain't me or anyone I know.

  24. Anonymous Avatar

    "We have been spending money on "wars" for almost ten years and have little to show for it. "

    I do not know for a fact that this is true, but I doubt we are spending anywhere near as much on our current "wars" as we spent on WWII, relatively speaking. WWII mobilized almost everyone in the US that was capable. However, our hardware is much more expensive today, so I do not know what our real relative spending is, it just seems as if it must be less – we don't have ration cards yet.

    Whether or not we have any business conducting our current wars, they have kept a large contingent of people out of the employment search. The wars are a drain on our resources, but what would the unemployment lines look like if you added all or most of the people who are supporting Iraq, Afghanistan, and the other 100 or so countries where we have troops stationed?

    Not to mention the war on terror by the TSA, otherwise known as Thousands Standing Around. (Not to be too hard on those guys, I always make a point of thanking the security guards for a tough and boring job.)

    Suppose we actually took all those people and put them to productive work. What could they possibly make that we need? Talk about massive over consumption!

    In this economy, though, overconsumption seems to be the least of anyone's worries.


  25. Larry G Avatar

    remember… wars are an investment in our future..right?

    it's sorta like a national equivalent of "protection" money, eh?

  26. Larry G Avatar

    in terms of "stimulus" and tax cuts…

    what's the difference between those things and taking money from each of us to build Humvees and Submarines instead of letting us spend it on big screen TV's and game boys?

    what if instead of Humvees, Submarines, big screen TVs and game boys – we spent it on Health care?

  27. Anonymous Avatar

    "you'd have to believe that if the wealthy got tax cuts that they'd go out and open up a new weed eater factory with that money."

    The money is going to go someplace. If they just stick it in a savings account, the bank has to find a use for it, several times over.

    It is going to wind up invested in something, but that something might be in Korea or China.

    At least with government spending instead of a tax cut, the government can direct the first round where it wnats the money to go. Suppose they invest in a road resurfacing project. That money goes to an American corporation, first. But it is probably owned by a Republican, he either stashes the money in the bank, where it gets invested in Korea or Brazil, or homes we don;t need yet.

    But maybe he invests in his own American Corporation, so he goes out and buys a new asphalt roller, built by John Deere.

    In India.


  28. Anonymous Avatar

    I think the idea is to reduce spending on health care, not increase it.


  29. Larry G Avatar

    tax cuts to spur investment to China or tax these same guys instea to provide health care jobs here…

    is that like saying we can invest in China or we can invest in the US?

  30. Anonymous Avatar

    All I'm saying is that with a tax cut, you have no control over waht happens to the money "saved". Republicans would have you beleive it is allinvested to make jobs, but that may not be true.

    The government would have you believe that moneyinveeted in infrastructure stays here, but htat may not be entirely true either.

    If we pay our doctors more, under some better incentive plan, we may get more health care per buck. but the doctors willstill have more money, and they may invvest the excess in China.

    Bottom line, government does not control what happens to money, except on the margin.


  31. Larry G Avatar

    " If we pay our doctors more, under some better incentive plan, we may get more health care per buck. but the doctors willstill have more money, and they may invvest the excess in China."

    how about all the nurses and technologists and manufacturers of scalpels and cat scan machines, etc, etc?

    humvees, healthcare or Chinese TVs?

    what should we invest our money in?

    should we buy a tractor for our farm or a Humvee to show those terrorists who is boss?

    if someone invests their money overseas, why should we not tax it at 20 or 50% to keep our share of it?

    you can invest 100% of it in America or you can invest 50% of it overseas and 50% in America – your choice.

  32. Anonymous Avatar

    if someone invests their money overseas, why should we not tax it at 20 or 50% to keep our share of it?

    you can invest 100% of it in America or you can invest 50% of it overseas and 50% in America – your choice.

    First of all, you can't tax the capital, only the return on it, otherwise you arecutting off you nose to spite your face.

    Suppose I invest $100 in the Columbian Stockmarket in 2000. It has gone up 800% since then. The US stockmarket is just about dead even since 2000.

    If I invest in the U.S. 20% tsx on my capital gains is zero.

    If I invest in Columbia 20% of my capital gains is $140.

    If I invest half in Columbia and half in the US my capital gains is

    Under your plan, the government takes $50 dollars up front and then $50 gets invested in Columbia. @0% tax on the capital gain is $70 for a total of $120.

    I'd rather some capitalist speculator pay the IRS $140 for me instead of zero, or even $120.

    Why would you ever NOT want your citizens to make as much as they can, wherever or however they make it? You ALWAYS lose money on protectionism.

    Loudoun and Fauquier were once equal in family income, now Fauquier is #62 and Loudoun is number one. Fauquier took your advice, and limited what its citizens could do. Now a lot of them work or own businesses in Loudoun or PW.

    Fauquier and Loudoun both have budget problems this year, like many other places, but Loudoun has a lot more to work with.

    Whether it is county or country, the principle is the same.

  33. Larry G Avatar

    " Why would you ever NOT want your citizens to make as much as they can, wherever or however they make it? You ALWAYS lose money on protectionism."

    why would you want someone who benefits from living in America to invest in foreign jobs when we're using taxes to pay unemployment benefits to our own citizens?

    When an American invests in an overseas plant that makes the same items made in America and Americans lose their jobs – who benefits?

    What will American workers do – to make a living ?

    Is the job of American govt to let Americans invest money wherever they want even if it weakens and undermines this country so that individual can increase their wealth then move their money overseas to a swiss bank?

    tell me again why that's a good thing for the USA.

  34. Anonymous Avatar

    why would you want someone who benefits from living in America to invest in foreign jobs when we're using taxes to pay unemployment benefits to our own citizens?


    Because when they get those unemployment benefits they will be able to buy more stuff to meet their needs than otherwise.

    They may very wll be better off getting unemployment and buying foreign goods than if they had a job and had to buy only higher priced American goods.

    for example:


    Congressman Mike Michaud urges Treasury Secretary Tim Geithner and Commerce Secretary Gary Locke "to immediately address the growing problems associated with China’s continued currency manipulation."

    Don Boudreaux responds:

    "After you’ve succeeded in denying Americans access to the lower prices and larger quantities of goods made possible by Beijing’s current monetary policy, will you and your colleagues take similar action against Silicon Valley?

    After all, firms there famously engage in technology manipulation, which – by improving the productivity of nearly every industry in the economy – essentially (as you would say) subsidizes production of countless industries and imposes tariffs on the outputs of workers who compete with these advanced techniques. Such advanced techniques present an insurmountable barrier to the ability of many such workers to continue in their old jobs."

    So, we should eliminate the technology and subsidize people in their old jobs?

    Remember that today is the anniversery of the Luddite rebellion in which hand loom workers rebelled against automated looms, smashing the looms and killing the owners.

    Basically, China has a technology (economy) that allows them to support more people doing more work at a lower price.

    We either compete, or we don't. Protectionism does not change that.


  35. Larry G Avatar


    WHERE do you think the money to pay unemployment comes from if not from the guy getting tax cuts who then sends that money overseas?

    who generates the taxes to pay unemployment benefits?

  36. Anonymous Avatar

    The question was " when we're using taxes to pay unemployment benefits to our own citizens?"

    Which I answered.

    Protectionism always harms thos it supposedly benefits.

    Now you are asking a different question.

    This is a favorite Lrry tactic: change the subject while pretending not to have lost the last round.

    The answer is the same: wether you are getting unemplyment benfits or not, you are still better off buying equivalent (or sometimes better) goods from overseas at a lower price, than you are paying a higher price for the same goods locally.

    The problem is that you have to make a living somehow. If your customers are unemployed,because their jobs went overseas, they are less likely to be able to buy from you.

    At the same time, to the extent that they are able to save money by buying overseas goods, the more money they will have to spend with you.

    Presumably, there is some overseas company providing the same stuff you do.

    In a global economy, both you and your customes will have to compete with overseas suppliers. In a global economy, you have much more opportunity to sell, and much more of a requirement to compete.

    The only thing protectionism protects yu from, is th global economy and global opportunities.

    Protectionism removes the global part from global economy and allows youto be the big fish in a smaller pond.

    You can then delude yourself that there isn't a bigger,faster smarter fish someplace else.''


  37. Anonymous Avatar

    The ugly ain't over yet.

    Visited my Alexandria neighborhood today and there are a dozen new and extravagant homes there, all priced around a million dolllars.

    This, in a neighborhood that was formerly very modest homes.

    Curiously, several of these homes were built in what I would have thought was flood plain.


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