Grandparent and Grandchild Bubbles

A 30 Year Overview of Commercial Real Estate

Did you know that bubbles can have progeny?

That's John Carney's take, in his treatise-length (but extremely worthwhile) post, "How A Government Bailout Created Today's Commercial Real Estate Catastrophe" (Clusterstock; 11/16/2009).

According to Carney, today's commercial real estate bubble is actually a "grandchild" bubble; the "grandparent" was the bubble that resulted from letting commercial banks branch out into commercial real estate loans in the early '80's.

Carney does a remarkable job of presenting three decades of government policy toward banks -- and tracing the consequences of same.

One of his (not so surprising) insights is the extent to which commercial real estate the last three decades has been driven by financing (or the lack thereof) -- vs., say, fundamentals like supply and demand.

One other nugget: the securitization phenomemon that ended up wreaking so much havoc with residential real estate the last few years dates back to government clean-up efforts following the S&L bust in the early '90's.

In essence, securitization acted like a giant sponge, allowing the Resolution Trust Corporation -- the government entity charged with overseeing the S&L cleanup -- to expeditiously sell off thousands of mortgages at a time, in literally millions of tiny slices.

Sound familiar?