Hiding commercial real estate losses by laundering bad loans through the Federal Reserve. Trillions of dollars in bailouts were made while banks told the public all was well.
Part of the massive challenges facing our brittle financial system is the opaque and secretive nature of the Federal Reserve. It is difficult enough to confront a challenge with all information present but make it purposely convoluted and dark and we have a crisis of historical proportions. The recent market volatility is simply a dire reflection of a system unsure of what is going on. Markets despise distrust and that is what we are finding. A few years ago we were told that the banking system was fine yet we now have data showing over $1.2 trillion in emergency loans were made to countless too big to fail banks. In other words we were being lied to by both the Federal Reserve and the giant banks that largely created and spread this financial crisis like wildfire. As more information leaks out we are starting to get a grim picture of how the Federal Reserve assisted and is assisting banks not only to hide residential real estate loans but also toxic commercial real estate debt. Over $3 trillion in commercial real estate (CRE) values has evaporated since the crisis took hold yet banks continue to tell the public all is well while shifting these toxic bets onto the taxpayer balance sheet.
The collapse in CRE values
CRE values have already experienced a lost decade and are likely to remain depressed for years to come. Many of these properties were developed with lofty aspirations and with future growth in mind yet an economy that is contracting has little use for more commercial space. It is also the case that many of these CRE projects were designed for high flying easy money days. Take for example some of the condo mix projects in Las Vegas. Many now sit empty when they were once envisioned as selling for millions of dollars to high rolling aficionados. Those days simply did not materialize because austerity is taking hold across the world because the debt bubble has burst. The chart above is data collected monthly by MIT on CRE values. It is rather obvious that the trajectory of CRE values has imploded since the crisis hit. Yet somehow the Federal Reserve is openly shifting CRE debt onto its trillion dollar balance sheet even though it knows these are failed projects. Why? To aid and protect the banks it serves, not the nation’s economic wellbeing.
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