Another bubble that’s starting to leak. From Wolf Richter at wolfstreet.com:
The Fed caused it, but it won’t do much to contain it.
Last year, Boston Fed President Eric Rosengren — considered a “dove” on the Fed’s policy-setting committee — started warning about the commercial real-estate bubble in the US and what its demise could do to banks. But in his speech on Financial Stability on March 22 in Indonesia, he added what I’ve come to call “Housing Bubble 2” to his ever more emphatic concerns.
Like all central bankers, he can’t warn publicly about an approaching problem because it could trigger the very problem he’d be warning about. In this manner, no one at the Fed saw the last bust coming. So Rosengren started out his presentation, “Financial Stability: The Role of Real Estate Values” – by clarifying this: “First, I am not here today to predict problems, but rather to suggest we continue working to head them off.
The phrase, “continue working to head them off,” is ironic because he also pointed out what has caused these problems: “very low interest rates” that were “wholly necessary” and that he “strongly supported.”
But the risks are massive.
Rosengren finds that “the root cause of the financial crisis was a significant decline in collateral values of residential and commercial real estate” and “exposures across the banking system that are correlated and sizeable.”
Real estate becomes a trigger for a financial crisis because of its high leverage. For banks, these properties are collateral. When property values tank, the collateral is impaired. Defaults rise. Then broader problems spread into the economy. Property owners experience a reduction in income. Homeowners see their paper wealth evaporate and financial stress rises. At some point, banks begin to fail.
To continue reading: Commercial and Residential Real-Estate Bubble once again a Risk to “Financial Stability
