There is a reason I call economics the evil stepchild of Human Science: It’s evil.
Should investors take heart from the sale [Mori Trust bought half an office block next to Grand Central Terminal from real-estate investment trust SL Green], even though it is just a single Manhattan office block? Does it mean the disaster in office ownership is a bit less bad than thought?
The answers will reverberate well beyond the narrow group of buyers of high-end New York real estate. A crash in office values could start a doom loop with banks, with falling prices leading to less finance and thus lower prices. Gloomsters think that could spread across the multitrillion-dollar commercial real-estate sector, sucking money out of the economy as banks and institutional investors turn more cautious.[1]
The Federal Reserve’s high interest rates, ideologically meant to punish workers when corporate price-gouging and supply chain issues are more probable causes of inflation,[2] also make real estate loans more expensive, undermining a banking line of business[3] at the same time as those interest rates undermined the value of bonds in banking portfolios, leading to banking failures earlier this year.
The inescapable message is that even banks may be sacrificed on the all important neoliberal altar of subjugating workers. This policy is rooted in what can now only be described as intellectual fraud.[4]
[T]here could be a further financing blow from the troubles of the midsize lenders in the wake of the bank runs in the spring. Banks are less willing to lend, and because they make up about 40% of all commercial real-estate lending, other lenders are unlikely to be able to fill the gap. Less lending means higher rates, more distress and lower prices.
So far, we haven’t had any sort of doom loop. Prices are down thanks to higher interest rates—as is normal—combined with the twin problems of work from home hitting office demand and online shopping hitting retail. If recession leads to a big rise in layoffs, expect far worse as firms cut back on the cubicles the newly unemployed used to occupy.[5]
The “doom loop” here stems from a combination of lower property values and higher interest rates, leading to borrowers walking away from their mortgages, adding foreclosed properties to the market, driving values down further—rinse and repeat, as that leads even more borrowers make the same calculation as the earlier ones did.[6] As this happens, banks can be expected to be stuck with a lot of distressed property in their portfolios, adversely impacting their capital reserve ratios, leading to further pullbacks in lending, further depressing values,[7] as increasingly only those able to pay very large, albeit diminishing amounts of cash can purchase property—rinse and repeat, yet again.
In systems theory, we call these “rinse and repeat” iterations destabilizing feedback loops. What’s needed here—and which I do not see—is a stabilizing feedback. As desperate as the Federal Reserve is to do it, punishing workers simply doesn’t work here, as layoffs can only free up yet more office space—um yeah, do that rinse and repeat thing, yet again.
Economists generally won’t tell you any of this because they’re sticking with their intellectual fraud. That’s why they’re evil.
- [1]James Mackintosh, “How Scared Should You Be About Commercial Real Estate?” Wall Street Journal, June 30, 2023, https://www.wsj.com/articles/how-scared-should-you-be-about-commercial-real-estate-1ba0f913↩
- [2]Cory Doctorow, “Why the Fed wants to crush workers,” Medium, January 19, 2023, https://doctorow.medium.com/why-the-fed-wants-to-crush-workers-ff086f3b952a; Lora Kelley, “Why It Matters Who Caused Inflation,” Atlantic, June 16, 2023, https://www.theatlantic.com/newsletters/archive/2023/06/why-it-matters-who-caused-inflation/674448/; Stephanie Kelton, Deficit Myth (New York: Public Affairs, 2021); Justin Lahart, “Giving Labor Less of the American Pie,” Wall Street Journal, February 7, 2023, https://www.wsj.com/articles/giving-labor-less-of-the-american-pie-11675792087; Eric Levitz, “Larry Summers Was Wrong About Inflation,” New York, June 14, 2023, https://nymag.com/intelligencer/2023/06/larry-summers-was-wrong-about-inflation.html; Brian Merchant, “The real aim of big tech’s layoffs: bringing workers to heel,” Los Angeles Times, January 30, 2023, https://www.latimes.com/business/technology/story/2023-01-30/column-how-big-tech-is-using-mass-layoffs-to-bring-workers-to-heel; Jon Schwarz, “In Confidential Memo, Treasury Secretary Janet Yellen Celebrated Unemployment as a ‘Worker-Discipline Device,’” Intercept, January 24, 2023, https://theintercept.com/2023/01/24/unemployment-inflation-janet-yellen/↩
- [3]James Mackintosh, “How Scared Should You Be About Commercial Real Estate?” Wall Street Journal, June 30, 2023, https://www.wsj.com/articles/how-scared-should-you-be-about-commercial-real-estate-1ba0f913↩
- [4]Mark Blyth, Austerity: The History of a Dangerous Idea (Oxford, UK: Oxford University, 2013); David Fickling, “The Gig Economy Compromised Our Immune System,” Yahoo!, July 25, 2020, https://finance.yahoo.com/news/gig-economy-compromised-immune-system-000048670.html; Amir Fleischmann, “The Myth of the Fiscal Conservative,” Jacobin, March 5, 2017, https://jacobinmag.com/2017/03/fiscal-conservative-social-services-austerity-save-money; Jason Hickel, “Progress and its discontents,” New Internationalist, August 7, 2019, https://newint.org/features/2019/07/01/long-read-progress-and-its-discontents; Daniel Stedman Jones, Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics (Princeton, NJ: Princeton University, 2012); Stephanie Kelton, The Deficit Myth (New York: Public Affairs, 2021); Robert Kuttner, “Austerity never works: Deficit hawks are amoral — and wrong,” Salon, May 5, 2013, http://www.salon.com/2013/05/05/austerity_never_works_deficit_hawks_are_amoral_and_wrong/; Eric Levitz, “Neoliberalism Died of COVID. Long Live Neoliberalism!” Review of Shutdown, by Adam Tooze, New York, October 14, 2021, https://nymag.com/intelligencer/2021/10/neoliberalism-died-of-covid-long-live-neoliberalism.html; Dennis Loo, Globalization and the Demolition of Society (Glendale, CA: Larkmead, 2011); Thomas Piketty, Jeffrey Sachs, Heiner Flassbeck, Dani Rodrik and Simon Wren-Lewis, “Austerity Has Failed: An Open Letter From Thomas Piketty to Angela Merkel,” Nation, July 6, 2015, http://www.thenation.com/article/austerity-has-failed-an-open-letter-from-thomas-piketty-to-angela-merkel/; John Quiggin, “Austerity Has Been Tested, and It Failed,” Chronicle of Higher Education, May 20, 2013, http://chronicle.com/article/Austerity-Has-Been-Tested-and/139255/; David Stuckler and Sanjay Basu, “How Austerity Kills,” New York Times, May 12, 2013, http://www.nytimes.com/2013/05/13/opinion/how-austerity-kills.html; David Stuckler and Sanjay Basu, “Paul Krugman’s right: Austerity kills,” Salon, May 19, 2013, http://www.salon.com/2013/05/19/paul_krugmans_right_austerity_kills/↩
- [5]James Mackintosh, “How Scared Should You Be About Commercial Real Estate?” Wall Street Journal, June 30, 2023, https://www.wsj.com/articles/how-scared-should-you-be-about-commercial-real-estate-1ba0f913↩
- [6]Dror Poleg, “The Next Crisis Will Start With Empty Office Buildings,” Atlantic, June 7, 2023, https://www.theatlantic.com/ideas/archive/2023/06/commercial-real-estate-crisis-empty-offices/674310/; Carol Ryan, “Property Loans Are Starting to Crack,” Wall Street Journal, June 9, 2023, https://www.wsj.com/livecoverage/stock-market-today-dow-jones-06-09-2023/card/heard-on-the-street-property-loans-are-starting-to-crack-0tae3dxXRfn1hWR5jqar; Kevin Truong and Noah Baustin, “Westfield Gives Up Downtown San Francisco Mall,” San Francisco Standard, June 12, 2023, https://sfstandard.com/business/westfield-gives-up-downtown-san-francisco-mall/; Natalie Wong et al., “The World’s Empty Office Buildings Have Become a Debt Time Bomb,” Bloomberg, June 23, 2023, https://www.bloomberg.com/news/articles/2023-06-23/commercial-real-estate-reset-is-causing-distress-from-san-francisco-to-hong-kong↩
- [7]James Mackintosh, “How Scared Should You Be About Commercial Real Estate?” Wall Street Journal, June 30, 2023, https://www.wsj.com/articles/how-scared-should-you-be-about-commercial-real-estate-1ba0f913↩