Check out the latest from my friend Brandon Saylor ………

Lessons Learned From Iceland

Officially, the Great Recession started in December 2007. There is a lot of blame to go around for the causes that precipitated the Greatest Recession. Some of the responsibility goes to the politicians. Politicians and the banks sought deregulation of the banking and investment banking industries. In 1999, the Glass-Steagall Act was repealed with bankers and politicians believing that they were too smart to outwit another depression. They got their wish after deregulation and absolutely neglected the lessons from the Great Depression.

Maybe it was the toxic paradigm that home prices would never go down and persist upward eternally. Easy credit caused increased speculation and people began buying several houses or houses they could not afford. Mortgage companies had relaxed lending standards and were therefore unconcerned with the credit worthiness of the buyers because most sold their mortgages in the secondary market.

Maybe it was the rating companies Moody’s, Standard and Poor’s and Fitch. Their job was to properly rate securities relative to risk. They stamped the highest and most secure AAA rating on toxic mortgage backed securities assets on which mortgage insurance had been purchased from AAA rated Insurance Companies.

It is clear multiple culprits were responsible. By the fall of 2008 it became evident there were formidable troubles as housing prices continued to fall and more and more people who now owed more against their homes than those homes were worth.  Defaults and foreclosures were rising well beyond what the models had predicted, and it was way beyond the worst case scenario. This economic freefall sent shockwaves across the globe. No country was immune to the destruction.  Banks started to have severe capital and liquidity problems as home prices fell and their mortgage backed securities dramatically sank in value. The banks were in jeopardy of running out of money.

Countries across the globe took different measures to address the credit crunch. Most resorted to bail outs and to this day many countries are still dealing with the repercussions. Between TARP (Troubled Asset Relief Program), bank bailouts, auto bailouts and 3 stimulus packages the total price tag for the United States reached $1.4 trillion (that we know about). Much of this money will never be recouped. Not to mention the $1.4 trillion investment yielded an agonizingly sluggish recovery with unemployment still years later of 14.9% (U6), trillions of dollars in debt, a credit rating downgrade of US Treasury Debt (first time in history) and a projected GDP for 2012 of an anemic 2%.

What should the United States government have done differently? We were told the bailouts were the only option to prevent a worldwide 1929 style depression. Iceland took a different approach. Just like the United States in the early to mid 2000s, Iceland benefited from nearly a decade of robust economic growth. The country’s three largest banks Glitnir, Kaupthing and Landsbanki went broke within weeks of each other after the collapse of Lehman Brothers and Bear Stearns.

What set the Icelandic government apart from most governments in the world is they declared that the government would only rescue domestic bank account holders. They were not going to save the banks or any other industry. The free market would correct itself. And, instead of attempting to prop up its currency, Iceland let the value of the Krona devalue. It also enforced capital controls to thwart money from leaving the country.

Make no mistake this was an audacious effort for the Icelandic government. Iceland still took a beating. From the peak in the third quarter of 2007 to the low in the second quarter of 2010, the economy contracted by 14.3%. The decrease in the value of the Krona slingshoted inflation up to 19%. Slicing real wages through inflation meant that unemployment rate climaxed at 7.6% in 2010 lower than any of the peripheral European countries, and even the United States. The collapse of the banks demolished domestic stock markets. On August 17 2007 the stock market peaked at 8,238. By March 13 2009 just over 18 months later it grasped a low of 379.93 a plunge of more than 95%. Prime Minister Geir Haarde asked for God’s support. Protesters packed the streets in retribution for not bailing out the banks. Years later Geir Haarde is currently facing charges and may possibly be jailed if found guilty of “gross negligence in failing to prepare for the impending disaster.” He is rejecting the allegations. His fate will be determined later this year.

This economic freefall sounds excruciating and I am sure if you ask any local residents they would agree. But once Iceland hit bottom the markets began to change and rather quickly. GDP expand on average rate of 6.9% since the second quarter of 2010. Three years later, the unemployment rate has fallen considerably. Tourism has improved by leaps and bounds. The government lucratively raised money from investors in the summer of 2011 for the first time since the disaster.

Arguably just as important, the result of not bailing out the banks has destined the debt to GDP levels peaked at a high but acceptable level of 100% of GDP, and are projected to recede. By contrast, the United States and many other European counties are facing higher than 100% GDP ratios because of the colossal money spent on bailouts.  The Greek bailout deal is hoping to achieve a debt to GDP ratio of 120% by 2020 and that’s the best case scenario. Right now the debt/GDP ratio of Greece is 166%.

The lessons learned from Iceland are incredibly powerful and simple. In the heat of the moment I believe decision makers want to believe that fiscal measures will cure the problem because there is nothing else they can do. The consequences of such actions are evident. Bailouts do not work. They only prolong the original problems and never solve the core issue. Iceland’s economic course was risky, yet I am sure in hindsight they were glad to let the banks fail. In future economic downturns governments should focus on saving depositors only not other bank creditors, insurance companies and whole industries. Iceland’s experience suggests that devaluation and capital controls may be the least painful solution to an economic contraction. Compare Iceland’s troubles to what happened to other countries and you will realize that things could have been much worse for Iceland particularly given the absolute scale of its banking bubble. Iceland represents a tiny fraction of the size and impact of the American Economy and the US Dollar in the world’s reserve currency. But there are some parallels that are worth noting when the intellectual arguments of bail outs and the moral hazard associated with government sponsored bailouts are considered.

Have a great weekend!

Brandon Saylor
-Associate

Check out Robert Bach’s latest post on city rankings.  Where does your city rank….chances are…you can find it here…..cheers….rob

http://myemail.constantcontact.com/Ranking-Cities.html?soid=1102184413218&aid=h4SPz0bJUfE.

Below is a post from Bob Bach……I hope you enjoy…..rob

Manufacturers Rally

Analysts shuddered two months ago when the monthly Business Outlook Survey from the Philadelphia Federal Reserve plummeted unexpectedly, signaling a worrisome slowdown for manufacturers in the region. Although it covers only a corner of the U.S. – eastern Pennsylvania, southern New Jersey and Delaware – the survey provides an early clue to the more widely followed manufacturing index from the Institute for Supply Management. The dismal August reading from the Philly Fed raised fears that the economy was sliding into recession.

But the manufacturing sector is expanding again according to the October survey, released yesterday. The survey asks manufacturers a list of questions with three possible answers – increase, decrease and no change – and calculates a diffusion index for each question, which is the difference between the percentage of respondents citing an increase and those citing a decrease. The index rose from minus 17.5 in September to 8.7 in October, the largest one-month gain since the early 1980s. The index measuring activity levels expected in six months increased to its highest reading since April before the economy began to slow. The survey doesn’t point to robust growth ahead, but it is consistent with Grubb & Ellis research showing sustained demand for industrial space over the past two quarters and this quarter as well. Together with other recent indicators such as retail sales and weekly jobless claims, the Philly Fed survey suggests that the economy is fighting off a near-term recession.

Have a great weekend.

Best regards,
Bob

Robert Bach
SVP, Chief Economist
Grubb & Ellis
312.698.6754

If you are watching the news, you are aware that the “year in review” news segment is almost in rerun mode.  Well, I thought I would show you a few videos from the blog-o-sphere of what the prognosticators are saying about the near future.  And….of course commercial real estate news. One thing is for sure….if there was a time to buy….it is in the very very near future. Will you find a cave or figure out how to take advantage of the commercial real estate bust?

Video’s from prognosticators (credible and not-so-credible):

Ron Paul on the Economic Collapse!

Peter Schiff on Impending Economic Collapse

Economic Collapse of 2009 – Greater than Great Depression of 1929

Baby Boomers Will Drive Real Estate Growth : Smarter Finances …
- The size of the group gives it vast influence over American politics, popular cultural, and of course, real estate. To evaluate the influence of the baby boomers on the future of real estate, the National Association of Realtors (NAR) …

Your 2009 Real Estate Outlook
- The residential real estate business started slowing in 2006, and then really fell out of bed in 2007. But commercial real estate continued chugging along for a while. That’s all changing — and 2009 will likely be even worse for landlords and investors in warehouse, office, … It will make it so you can invest in rental property, or strip malls, or an office building and generate attractive returns again, without relying on pie-in-the-sky projections about future growth. …

The Coming Commercial Real Estate Implosion | The BizJournal at …
- Anyone concerned about the short term future of commercial real estate would do well to read the full report, but I’ll go ahead a spoil the punchline:. In short, tougher times appear to lie ahead. Worsening macroeconomic conditions …

Real Estate Investmenting …
- It is not a secret that today real estate is in a rather bad shape. One of the main reasons behind this is the problem of foreclosure. Let’s remind that.

Will 2009 be “it” — the year when things finally start turning …
- Investors are going to focus once again on the wounded real estate market. And millions of homeowners and commercial property owners are going to ask that all-important question: Will 2009 be “it” — the year when things finally start turning around? … It will make it so you can invest in rental property, or strip malls, or an office building and generate attractive returns again, without relying on pie-in-the-sky projections about future growth. …

Buchanan Street’s Brunswick Looks Back at ’08, Eyes Future
- Brunswick: It’s not particularly troubling, as I believe those monies can be better utilized within our economy than within the commercial real estate sector. The distress in commercial real estate is not currently …

Until next time…..rob

There is snow on the ground….but only enough to make one crave for more.

Anyway…I read a really cool article about a real estate agent named Ben Edelstein who took a lot of time off (over seven years) to sail around the world. Ben took his earnings from real estate and lived his dream. You can read the article by clicking HERE.

Ben’s dream got me thinking.  Not so much about “living the dream” but more about life after living the dream.  Per the article, Ben is now looking for a job.  Kind of a bummer..huh?  What if he would have taken the time to build a passive income base?  He still might be sailing?

As for commercial real estate news….it is all bad….no…I am not joking.  But understand….bad news is good news for those who are looking for opportunites.  Like I have said before…you are going to see a lot of opportunities….the question is…will you be able to act on them?

Anyway….More Commercial Real Estate news and videos from the blog-O-sphere:

What’s Going on in the Commercial Real Estate Market Today

Commercial Real Estate: The Next Domino to Drop? – There is another connection that jobs play in the real estate market, and that is in commercial real estate. Commercial real estate refers to the portfolios of office building, apartments, retail stores and lots held by developers and …

The Encyclopedia of Poker: Commercial Real Estate Financing for … – Fortunately for investors seeking commercial real estate financing, the commercial sector is not directly affected by these developments. Although riskier ventures will still be more difficult to finance with credit, …

Real Estate Blog – Ring the Bell for Salvation Army – These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these …

Donald Trump faces tower of troubles – Crain’s New York Business – Mr. Trump insists that this string of events isn’t a replay of his travails in the early 1990s, when the collapse of the real estate market nearly drove him into bankruptcy. He has learned his lessons, he says, and is much more …

The Progressive Mind-II: The Coming Commercial Real Estate Crash … – This site contains a number of links to articles, publications and editorials expressing progressive and humanistic viewpoints.

“The Next Tsunami to Hit will be the Commercial Real Estate Market … – The Wall Street Journal wrote about the looming commercial real estate crisis in November, leading off with the quote “The next tsunami to hit will be the commercial real estate market”. Bloomberg and others have covered it. …

Until next time…….rob