President Barack Obama

Within the past  few days, two of the four most important economic advisors and policymakers within the Obama administration have resigned.. They are Peter R. Orszag, budget director at the U.S. Office of Management and Budget, otherwise known as OMB, and Christina Romer, who chairs the Council of Economic Advisers. Remaining on the economics team is Treasury Secretary Timothy Geithner and Larry Summers, Director of the White House National Economic Council. Supposedly, Romer and Orszag are leaving of their own accord, to pursue “other opportunities.” Some speculate that policy differences with Larry Summers and even President Barack Obama were a factor. My own sense is that the worsening economic crisis in the U.S. as well as the overall global economic crisis, and the increasing evidence that massive increases in public debt by Washington has not only failed to end the recession and restore robust economic growth; the risk of a sovereign debt crisis in the United States is now a reality.

The resignations of Romer and Orszag are the first ramifications of a failed economic policy. The more tangible result will be the upcoming midterm congressional elections in the U.S., which will almost certainly witness the Democrats losing control of the House of Representatives. From there, things will get worse, as America enters a double-dip recession, while Congress is mired in gridlock and imposes paralysis on the remaining two years of Obama’s presidential term.

As the economic clouds darken in America, it is likely that the resignations of Orszag and Romer are the crest of a wave.

“Commercial real estate is the next shoe to drop.”

James Helsel, Treasurer of the U.S. National Association of Realtors

 
Pennsylvania realtor and U.S. National Association of Realtors official James Helsel joined with other concerned parties in meeting with a congressional committee last week, conveying a collective message that was saturated with gloom and doom. A commercial real estate implosion has been predicted for months by many observers, including this writer. There is now mounting evidence that this sector of the economy is indeed in the grips of a severe contraction, with all indicators pointing to an accelerating price deflation spiral over a period that may extend to several years.

It has all happened before. In the early 1990s speculators drove the valuations on commercial space far beyond the bounds of prudence. When reality caught up, the worst crash in real estate prices ensued. It now seems increasingly clear that this early 90`s disaster is about to be eclipsed by the commercial real estate crash of the current Global Economic Crisis. In fact, commercial real estate prices have already fallen from their 2007 peak valuation by a greater figure than that which has crippled the U.S. residential housing market. As with the housing market, the commercial real estate contraction will adversely affect the balance sheets of the nation’s banks. However, the dynamics of that impact will be qualitatively different.

The subprime debacle in the housing market overwhelmingly impacted the largest U.S. banks and financial institutions. With commercial real estate, however, the pyramid becomes inverted. The bulk of the exposure to commercial real estate mortgages is held by financial institutions of small to medium size. Deutsche Bank real estate analyst Richard Parkus told the same congressional committee addressed by James Helsel that the four largest American banks have an average exposure of 2 percent to commercial real estate on their balance sheets. In contrast, the banking institutions that ranked between 30 to 100 in order of size had on average a 12 percent exposure to commercial real estate mortgages. What these figures suggest is that a massive collapse in the U.S. commercial real estate market will cripple a large number of regional and community banks, in comparison to a few “too large to fail“  institutions stricken by the subprime housing disaster.

Though publicly quiet on this gathering storm, behind the scenes the economic policymakers in the Obama administration are deeply worried by this growing danger of a wider banking crisis brought on by a massive collapse in commercial real estate. The Federal Reserve is also in a state of high anxiety, for the same reasons. By June of this year, there were already 5,315 commercial properties in default, a figure that is more than double the number of commercial real estate defaults in all of 2008.

Many loans initiated when the prices of commercial properties were at their peak will be coming due over the next 3 years, including $400 billion by the end of 2009, and nearly $2 trillion by 2012. With unemployment skyrocketing, real disposable income shrinking and nearly 7% of income now being saved by the chastened American consumer, it is a foregone conclusion that a greater proportion of these loans will become non-performing. In the current economic climate, there are simply no options available in terms of refinancing and securitization. As with housing, a glut of foreclosed commercial properties will further depress prices, creating a vicious concentric circle of financial doom.

Ultimately, the coming collapse in the U.S. commercial real estate market is not only inevitable; it is round two of the banking crisis. Having barely escaped alive from the consequences of the subprime housing collapse due to trillions of dollars in taxpayer aid and quantitative easing from the Federal Reserve, combined with Timothy Geithner’s stage-managed “Stress Test,“ it is difficult to see an escape route for the American banking sector once the ravages of the commercial real estate storm have hit with gale force. That must be what the Obama administration and the Fed are frantically consulting on behind the scenes, hoping against hope that they have a TARP 2 ready in time. In the final analysis, a very large number of small to medium sized banks in trouble can pose just as great a systemic risk to the global financial system as was the case with a small number of banking giants. What happens to the concept of “too big to fail“  in that scenario?

During the presidential campaign, candidate Barack Obama criticized GOP challenger Senator John McCain for claiming that the fundamentals of the American economy were sound. Now, however, economic advisors serving the Obama administration are saying that the U.S. economic fundamentals are in fact strong. Has President Obama changed his mind?

It appears that Wall Street has heard enough warnings about the state of the U.S. economy from President Barack Obama. They now want a more positive message coming from the Obama White House. Will a more hopeful President Obama turn around the American economy? It would appear that deeds would be far more important than words. The world still awaits an Obama economic plan to counter the effects of the Global Economic Crisis.

Prime Minister Gordon Brown of the UK was in Washington for an official visit with President Barack Obama, 44th President of the United States. Obama and Brown discussed the global financial and economic crisis, and how the two countries can work together to prevent a major economic depression.

President Obama has been working at a furious pace to craft coherent policy responses to the worsening economic crisis. His Secretary of the Treasury, Timothy Geithner, has been approved by the Senate and is now on the job. Obama’s $819 billion economic stimulus bill has been approved by the House of Representatives, albeit without a single Republican congressman voting for it, despite attempts by Barack Obama to win bipartisan support. In the meantime, the economic and unemployment data betray a fast deteriorating American and global economy.

Barack Obama has announced his intentions to formulate a plan that responds to both the economic crisis and the collapse of the U.S. banking sector. President Obama will have a difficult decision to make with respect to the banking crisis. Even with the $700 billion TARP program, the bank crisis in the U.S. is getting worse. It may eventually require trillions of dollars of taxpayer money to recapitalize the banks.

President Barack Obama is beginning his term in office with the worst financial and economic crisis since the Great Depression on his plate. President Obama has warned the American people that things will get worse before they improve. Obama has also warned that doing nothing will lead to an even larger disaster as the Global Economic Crisis cripples the U.S. and other major economies.

The incoming Obama administration will inherit many economic and financial disasters from the outgoing Bush administration, not the least the imploding automobile industry. The big three Detroit carmakers are all on the verge of bankruptcy. If GM, Ford and Chrysler are dissolved, millions of workers will lose their jobs. The numbers are high because many spin-off businesses depend on Detroit, including parts suppliers, advertising agencies, dealerships and service centers.

Barack Obama stated as a high priority while campaigning facilitating the retooling of Detroit to build a new generation of fuel-efficient cars, leading to the creation of many new jobs. It is clear that President Barack Obama, early in his administration, will need to focus on saving America’s auto industry. Speculation has centered on the creation of czar for the auto industry, and Obama may very well follow through on that possibility. Whatever is decided, Obama’s policies regarding America’s troubled auto industry will impact the health of the overall economy at a time of global economic crisis.