dog returns to its vomit, so a fool returns to his folly."
A reader who works in commercial real estate finance shared a warning,
informed by his own private industry perspective today. This was in response
to my post this morning on the Fed's policy error of indiscriminately
pumping money into an unreformed banking system, without adding safeguards
and provisions for its employment in productive investment rather than wealth
transfer control frauds.
It is almost tragically funny to see the economic principles learned from
the Great Depression applied so blindly and haphazardly as
advocated by some economists and policy makers.
It is hard to explain the realities of things to people who see the rough
world of the markets through the abstractions of their theory and models.
Yes, what my acquaintance Richard Fields calls the 'FDR
have favoured the stimulus of government work and
investment programs for a depression and liquidity trap, and a certain amount
of financial security to ease the pain.
But it would have never been so wilfully
complacent about the underlying fraud that caused it in the first
place. And austerity without reform is a form
of economic suicide. FDR came right at Wall Street and the Banks
with serious reform that saved capitalism from itself, and worked
for a generation to hold back its darker impulses. This is a
lesson that we have apparently forgotten.
If the Fed attempts their old fix once again, they may do what I thought was
almost inconceivable, and go a step beyond mere stagflation which is bad
enough, and cause an actual break in confidence, and the bond of their word,
the currency. The people of the world will not be fooled forever.
As Hyman Minsky once said, and the moderns seem to
have forgotten, "Anyone can create money; the problem is in getting it
accepted." He should have added, except by force.
Reform goes hand in hand with recovery.
Resurgence Could Meet Resistance From RE Investors
A recent bump in demand for collateralized debt obligations has some experts
predicting an onslaught of new deals in the coming months, but real estate
attorneys caution that even with a more conservative structure, CDOs could be
a hard sell with those still reeling from their role in the 2008 crash.
Also, Commercial Mortgage Alerts reflected commercial mortgage backed
securities issuance of $48 billion last year (2012) - up from about $33
billion (2011). Remember the Fed is buying up to $45 billion in mortgage
backed bonds per month!
"I believe the Fed has succeeded in incenting the banks to begin issuing
fraudulent paper again, the infamous CDO's. That's the only way the banks can
meet the demand for higher yielding paper given their reluctance to engage in
They know the game now, despite the real estate lawyers who are either wrong
or just propagandizing. Open-ended QE.
The banks will issue large amounts of the CMBS paper and CDO paper and
probably come up with other bond schemes and even LBO's that are fraudulent
and probably worthless.
They'll sell them to whomever, because if the fraud is ever revealed, it will
get charged to the Fed who will buy the paper from the investors or off the
banks' books for near 100 cents on the dollar.
The great fraud machine is stirring. The debt bubble is reflating.
There is no underlying strength in the economy, so the loans being
securitized will not be repaid in real terms and the banks and the investors
will ultimately offer them to the Fed, who will buy them at non-market
What's to stop this? There's nothing stopping it.
There is no threat of prosecution for fraud. There is no shame or sense of
There is only a ton of money to be earned by the banks/hedge funds/private
equity with no threat of punishment for engaging in massive fraud."