The Fed never met a bubble it wasn’t keen to reflate. The latest wrinkle is that it is trying to learn from its old behavior, although most of us would disapprove of the lessons it has drawn.
One of the cognitive biases in the readings of past crises is to attribute failure to official intervention, that is, the authorities either did not do enough, or they did the wrong thing. The result is a belief that correct action, if such a program had been divined, could have made the Great Depression a mild phenomenon, or tamed Japan’s post bubble malaise quickly.
The better question to ask is “How far can we go in short term intervention to alleviate pain and disruption without making things worse in the long run?” Admitting some dislocation is inevitable when you are in this big a mess is somehow verboten. And the “we can’t have too much visible distress” (tent cities are OK, it seems) plays right into the hands of the banksters, since “visible distress” seems to be measured more in asset values than human consequences.
For instance, in an oft-cited 2002 speech on deflation, Ben Bernanke cited a litany of things a central bank could do to create inflation. Nary a though was given to the possibility that if action as radical as he suggested was required, it could be a symptom that monetary policy had become ineffectual and doing more would yield little in the way of results. Or it might indicate that other problems were neutering monetary action, and addressing those issues would be more productive.
But no, the Bernanke default position on Japan was that its central bankers didn’t try hard enough. The Japanese, by contrast, believe their single biggest error was taking forever to take on and clean up the politically connected banking sector. Sound familiar?
So the latest of the “when in doubt, do more” syndrome is that the Fed is trying to get in front of an imminent commercial real estate bust by letting banks use the TALF for commercial real estate loans, thereby keeping credit cheap. The reason? That market is ready to go into free fall. Leon Black of Apollo Management, predicts a commercial real estate “back hole” that could deliver as much as $2 trillion in losses. to banks.
Ouch.
Ben, no matter how cheap the funding, is, if rent rolls collapse, commercial real estate prices and with it, commercial real estate debt values, will fall. Cash flow is king.
From Bloomberg:
The Federal Reserve is close to offering investors five-year loans to buy commercial mortgage- backed securities, granting an industry request, a person familiar with the matter said.The decision on extending the term of such loans under the Fed’s Term Asset-Backed Securities Loan Facility isn’t final yet, said the person, who spoke on condition of anonymity. The Wall Street Journal reported the state of the decision earlier today. In December, the Fed lengthened the term of TALF loans to three years from one year.
Fed officials had been considering a compromise of charging higher fees after three years. That would be aimed at giving a greater incentive for investors to borrow from the Fed and helping restart markets for commercial mortgage-backed securities, while protecting the Fed’s flexibility to raise interest rates in the broader economy once consumer demand recovers.
“It continues to illustrate that it’s just a patchwork quilt of trying to shore up whichever asset du jour happens to be in trouble,” said Julian Mann, a manager of asset-backed bonds at First Pacific Advisors LLC in Los Angeles. In addition, “the taxpayer is encumbered for another few years,” Mann said.
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Wow! What logic can possibly justify this sort of action? The collateral underlying these loans is starting to decline in value and the probability of default is increasing, so the value of the loans themselves is going to decline, and we can’t let that happen because…what?
I think this exposes the central bank’s “reasoning” better than anything it’s done so far because it’s a preemptive action designed to keep prices up. In the case of residential mortgage-backed securities, at least they waited long enough to step in that they could make the (albeit almost certainly spurious) argument that they were irrationally undervalued. But here they’re not even making that pretense. This can only be read as an attempt to keep asset prices artificially high.