Should The Fed Stop The Dominoes From Falling?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency. Retail commercial real estate is over-built and over-leveraged. If it is allowed to burn off as Nature intended, we can finally move forward.

Last week I suggested that Retail-CRE (Commercial Real Estate) would be The First Domino to Fall in the domestic U.S. economy. The reason is simple supply and demand: for a variety of structural reasons, there is an enormous oversupply of retail commercial space and an ever-declining demand for bricks-n-mortar commercial space.

I laid all this out in a three-part series last week:

Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail (January 22, 2014)
The First Domino to Fall: Retail-CRE (Commercial Real Estate) (January 21, 2014)

After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects (January 20, 2014)

I've prepared a graphic depiction of dominoes falling that depicts the causal chain:

1. Standard-Issue Financial Pundits (SIFP) underestimate the CRE implosion, just as they underestimated the domino-like consequence of subprime residential mortgages blowing up in 2007-2008.

2. Few grasp how over-leveraged CRE is, so the "surprise" will be considerable, i.e. the shock-and-awe of malls being recognized as near-worthless will be outsized.

3. Occupancy and lease rates plummet in retail, resorts and office space.

4. These dynamics (fewer leases and lower lease rates) push leveraged owners of CRE into bankrupty.

(Recall that rolling over existing mortgages doesn't increase dwindling cash flow.)
5. The Fed may want to add $1 trillion in impaired commercial real estate mortgages to its bloated $4 trillion balance sheet, but the bond market may question yet another open-ended bailout of the Fed's cronies, i.e. the banks who foolishly lent monumental sums against marginal commercial properties.

6. The lenders foolish enough to leverage loans against phantom collateral fail as $1+ trillion in CRE loans default.

7. The "recovery" in the U.S. economy is revealed as just another fiction sold as fact by the Fed, the political Status Quo, the organs of Federal propaganda, etc. 

(The Recent "New High" in Stocks Is as Bogus as the Unemployment Rate January 25, 2014)

Here's the key issue at stake: propping up failed private enterprises with Fed or Federal money throws up roadblocks to the real growth of our economy. Rather than bail out more banks and save over-valued, over-leveraged mall owners from the consequences of the economy changing, we should be casting off what's been holding the economy back--phantom assets, debt that should be written off and failed financial sectors bailed out with taxpayer funds and Fed trickery.

The question shouldn't be could the Fed bail out the imploding retail-commercial real estate (CRE) sector? but should the Fed bail out the imploding retail-CRE sector?

We may as well ask if the Fed should have bailed out the buggy whip industry in 1914. The retail-CRE sector is imploding for a very good reason: speculators built way too much space with way too much credit and leverage supplied by banks emboldened by the notion that the Fed will never let crony-capitalists suffer the consequences of their insanely risky bets.

On top of that cheap-credited-fueled over-building, Web shopping and the systemic decline in household income for the bottom 90% (please look at the income charts in The First Domino to Fall) have undercut the need for ever-more commercial real estate space.

In any economy with the slightest bit of free enterprise still left breathing, the retail CRE sector would be allowed to go bankrupt and all those exposed to the risks (mall owners, banks with CRE loans, etc.) would absorb the losses. Anything less than the creative destruction of a failed sector that time has passed by will impede the economy in terribly negative ways.

Yes, the Fed can print up another $1 trillion and buy every CRE loan that's worth $1 for $1 million and bury the defaulted loan away from public view. But should it be allowed to do so? Should the Fed's role of savior of every crony-capitalist in America who loses a leveraged bet go unchallenged?

Should the Fed end up owning every dead mall in America so the owners and lenders can be cashed out at a fat profit? Janet Yellen, the Nation's New Chief Slumlord (January 9, 2014)

Should the Fed be allowed free rein to bail out its owners (private banks) and crony capitalists with limitless newly created money? Is that what the U.S. is all about now, bailing out failed speculative bets by crony capitalists and banks? Most commentators believe the Fed has a totally free hand to create as much money as it wants whenever it wants and to use those funds to bail out banks and speculators by buying their defaulted mortgages and hiding them away in the Fed balance sheet.

But I believe the political resistance to this neofeudal arrangement is rising, and the Fed's ability to bail out crony capitalists and banks is not as infinite as its supporters believe. The bond market might start pricing in negative consequences to the Fed floating yet another $1+ trillion bailout of super-wealthy cronies.

Maybe the public will finally tire of yet more bailouts of the super-wealthy and their failed sectors and failed bets. Maybe the Nation's New Chief Slumlord, Janet Yellen, will hesitate to pursue Ben Bernanke's policy of bailing out every failed crony capitalist regardless of the costs to the nation's economy and the injustice of backstopping foolish risks made for private gain.

"It can't happen here" includes the Fed. The average SIFP (Standard-Issue Financial Pundit) believes the Fed is politically unconstrained as a matter of unquestioned fact, on the order of a belief in a Cargo Cultish quasi-religion such as Keynesian "stimulus." (Wow, Paul Krugman can really dance the humba-humba and wave a dead chicken!)

Just as it turns out "it can happen here" (runaway central state suppression, spying, etc.), the Fed can encounter political limits on its Grand Plan of bailing out every crony capitalist in America.

Maybe we should let the retail CRE sector go the way of the buggy whip manufacturers instead of bailing out every super-wealthy crony involved in the orgy of over-building and over-leverage. The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency. One of the biggest pile of dead wood in the U.S. is retail-CRE. If it is allowed to burn off as Nature intended, we can finally start moving forward.

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unrulian's picture

Gravity is a Bitch-ez

MisterMousePotato's picture

The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency.

Remember the movie, Being There, with Peter Sellers?

ATM's picture

Our forest is now growing not from solid ground but from a rotten platform of dead trees that are not allowed to decompose.

The rot is being forestalled but it cannot be put off indefinitely. At some point the entire structiure will simply collapse and everything will come down together, good trees, dead trees, diseased trees..... all of it. 

Emergency Ward's picture

  • ALLENBY -- It's happening to everyone, I'm afraid. The way things are going they'll probably legislate the Medical Profession, as we know it, right out of existence.
  •  CHANCE -- Yes. Right out of existence.
Theosebes Goodfellow's picture

This was, and will continue to be, all about bailing out the TBTF banks. Everyone else can consume feces and expire. And this action will continue until the banks' protector, the Fed, collapses because the exchange rate of their "promissory notes", i.e. dollars, devalues to zero.

Things die. Big things die slower, but die just the same. Sometimes it is hard to tell when something really, really big has died. It takes quite a while to be able to declare it dead, as portions of it have been moribund for a long time and whilst presumed alive were actually deceased. The Fed is really, really big. Is the Fed cooked? It's hard to tell. I can though tell you with a fair amount of certainty, it's toast.

Headbanger's picture

No.  The TBTF banks know they can't be bailed out again so they're covering their assets big time here.

It's the Federal Government that's in deep shit now cause the big banks are not playing the QE game any longer to bail out the US Treasury

So expect the US Government to default on s few things soon and tax rates to soar across the board!


SDShack's picture

The TBTF banks WILL be bailed out because they are all run by sociopaths just like the Fed. Just look at the never ending bailouts in the EU. Sociopaths only do what they have always done to get where they are at. They never change. In fact, when confronted with the failure of their own plan, they double down or go all in on the same disasterous plan, even if it eventually means their own destruction. It is the frog and scorpion analogy. It's how sociopaths think. The Federal Govt, and the Federal Reserve and the TBTF banks are all one and the same. They all exist together only for each other, not for anyone else. It's what sociopaths do. This entire world cluster fuck is going to continue forever, until it doesn't. Bailouts will continue, debt will skyrocket, and taxes and wealth distribution from the massess to the elites will accelerate. It will break eventually, by something no one sees coming. Plan accordingly.

vmromk's picture

You are asking the CRIMINALS at the Federal Reserve to do the right thing ?

zorba THE GREEK's picture

Looks like PPT has their hands full with the S&P today and here comes gold back after being

monkey-hammered all morning. The real question is can the Fed bail out every bubble they

have created since 2007. That would take multiples of their present balance sheet. 

Yes " Gravity IS a bitch "

Woodhippie's picture

Gravity.  Not just a good idea, it's the LAW.

Offthebeach's picture

PPT= Plunger Provider Team. This shit is going to be shoved down the peoples throats no matter what.

It's for the children ( if any non Section 8ers could afford any. )


OpenThePodBayDoorHAL's picture

"Multiples of their current balance sheet" Mm-hmm, that is EXACTLY what they have in mind. One of the Regional Fed governors told Kyle Bass that "he saw no problem with the Fed going to $6 or $9 trillion if required"

thunderchief's picture

I believe the fed will stick to its taper policy, as the priority is saving the dollar, pushing treasury purchases to the private sector, and lots of smoke and mirrors in emerging markets to distract from their horrible failures.

2014 will be about saving the dollar and shoving bonds down the private sectors throats, IRA and 401k's included.

RebelDevil's picture

If that is true, then 2014= 2008 = 2000.

rubiconsolutions's picture

"Gravity is a Bitch-ez"

Like the guy that falls from the top of a skyscraper and when he gets to the 3rd floor thinks to himself, "so far, so good". It's not the fall that gets you, it's the sudden stop.

Bearwagon's picture

I dare you, I double-dare you, damned assholes!

SheepDog-One's picture

The Fed can't stop the dominoes from falling, they can only make them appear to fall slower.

Son of Captain Nemo's picture

Boy frame that one, along with a DoJ that no longer will prosecute criminals that ply their trade by buying there way into D.C.

q99x2's picture

The FED should get on that spaceship to Mars because the entire world is about to come and haul their asses to jail.

Cursive's picture

Better question:  (Other than buying time), can they?

fijisailor's picture

The FED only stops large dominoes from falling.  There are millions of little ones falling every day.  A better analogy would be a suspension bridge.  If you cut all the support cables can the roadway be self supporting?

denverdolomte's picture

Can Obama handle foreign policy?

Did Bernanke save Main Street?

Are paper notes backed by anything than the green stains in Yellen's undies?

Has the government / centeral planner done anything beneficial for America?


I could go on but seem to continually get the same answer again and again. 

SheepDog-One's picture

I laughed out loud yesterday on one of the Sunday 'inside the beltway' talking head shows when I heard some fiancial bankster pundit say they have it all under control because everyone trusts 'the full faith and credit of the US. govt'....holy shit if that's all they've got, promies that I'll work hearder and pay back their wild cash infusion sprees, then they have no idea how fucked they really are!

denverdolomte's picture

Are you serious? Thats hilarious, was it a comedy schtick or some banker really believing himself? 


Hahha, yeah I don't even give a shit anymore, these idiots are so fucked and have no idea just how bad they fucked up it's become hilarious. 


I have a great 4G setup so I am not worried. (Guns, Gold, Greens, & Goods) 

Woodhippie's picture

"4g" setup.  Love that.  If you don't mind I think I will borrow that one.

Dr. Engali's picture

Should we allow the fed to continue? NO! NO! NO!...Hell NO!.....Will we? YES!

NoDebt's picture

"Yes, the Fed can print up another $1 trillion and buy every CRE loan that's worth $1 for $1 million and bury the defaulted loan away from public view. But should it be allowed to do so? Should the Fed's role of savior of every crony-capitalist in America who loses a leveraged bet go unchallenged?"

And who, exactly, is going to challenge it?  Name the party with a vested interest in doing so and enough pull to significantly affect Fed (or really, any government) policies in any way.

First person who says "the American people" gets a 2x4 to the back of the head.

NihilistZero's picture

Hit the nail on the head!  This slow motion trainwreck will playout over the next few decades.  The "profit" from each "bubble" allows the banking sector to cover the losses of the previous.  If you don't participate in the bubble in some way you don't profit, which in fact eans you lose because you've got inflation coming up your rear end.  Who would haev thought going broke defending a shitty little country in South East Asia (or better known as bailing out the MIC) 50 years ago would still haunt us today...

Anyway, time the bubbles, don't fight the FED and do your best everybody.  I doubt we're going Mad Max it's just a slow drag along the bottom until soething truly revolutionary in the bio-engineering or energy sectors come along

yogibear's picture

"The FED only stops large dominoes from falling."

More reason for the big players to be irresponsible. The top managers can suck all the funds out and get bailed out. Rinse and repeat.

BadDog's picture

As General Jack Ripper said, the only course of action is total commitment. 

LawsofPhysics's picture

PLease, don't overthink this folks. The "dominoes will fall" when TPTB want the domines to fall.  The question is, what assets of real value will you and your tribe have when they do?

hedge accordingly.

NihilistZero's picture

TPTB determine much of what has "real value" if holding gold privately is declared illegal it could make it harder to barter for necessities.  Real Estate is only as valuable as the institutions and/or weapons that protect it.  Even the ost ardent doomsday prepper must admit he does not know what will happen...

ejmoosa's picture

But we already know the Recovery is bogus....

LawsofPhysics's picture

I was going to say, I think his dominoes are out of order.

trebled99's picture

Let the bodies hit the floor let the bodies hit the floor!

NoWayJose's picture

The Fed is not just bailing out the big banks, it is encouraging them to over build and over leverage.  The reason there is a problem in commercial real estate is that we bailed out the over-leverated banks and them gave them more ammo to leverage even more.  Commerical real estate cannot recover because we never cleared out the dead wood from 2008/2009 - meaning the big banks that should have failed, and the housing market that should have deflated to be in line with incomes.  This didn't happen, so the customers who might otherwise shop at commercial real estate stores cannot afford to do so; small businesses that might open in strip malls do not have enough customers to stay open or make it affordable to open a new business; and office space in commercial real estate is not needed because there is no need for managers or supervisors or service businesses that would other wise need or want such space.  The only commercial real estate that still seems to be doing well is -- BANKS!

i_call_you_my_base's picture

Agree with you. What's ironic is that by juicing the RE market they destroyed brick and morter margins, and with the alternative and low-overhead of online purchasing, it amounts to a death knell. Unintended consequences and all of that.

madcows's picture

Won't be allowed to happen.  B/c all the banks would be bankrupt, and there would be a bank run.  There are already withdrawl limits going on in other countries.  we're next.

medium giraffe's picture

The only real influence the Fed has is dictating the rate at which the USD becomes less valuable than dogshit.



cowdiddly's picture

Well the "All Knowing Omnipotent" Fed is in control of the printer. And with recent advances in 3D printing, in the not to distant future, they can just print up more cronys or more debt slaves as the economic system demands.

buttmint's picture

...the article pretty much echoes what James Kunstler has been chronicling since the 1990s: all of suburbia is the greatest (mis) allocation of wealth and assets in mankind's short history.

Ya gotta love Kunstler's flamboyance and humour. His rants. "The Geography of No-Where" will brings tears of joys and sadness to your countenance.

Jason T's picture

The forest (the economy) can only remain vibrant and healthy if the dead wood is burned off in bankruptcy and insolvency. Retail commercial real estate is over-built and over-leveraged. If it is allowed to burn off as Nature intended, we can finally move forward.


Tis why the bible says "rejoice in your sufferings."  To bring about a greater good.

Pumpkin's picture

Where the hell is the Fed domino in that picture?

waterhorse's picture

The Creature from Jekyll Island hides under all those dominoes.  That's why you didn't see it in the illustration.

Hayabusa's picture

Look, the system runs on complaint tax slaves to finance the federal gubmint and their precious special interest pet projects, war mongering, etc.  We are nothing more than "energy producers" for the matrix... they may pretend to care about us, but in reality they only care about the tax revenue each of us generates for their corrupt system to use as THEY please.  We are just tools out here to them, no more, no less.

undercover brother's picture

It is idiotic to even think for one second that any "crony", especially those who provide the massive political contributions, will be allowed to go bankrupt.  TPTB will come up with some lame reason, like nation security, and bail them all out again. sure, the people will bitch and moan, but are powerless and can do nothing.  This is what america has become. get used to it.  you're either in with the politicians or you're no one.