The commercial real estate market, The Wall Street Journal informs us Monday morning, is feeling rather poorly. Stop me if the following scenario seems strangely familiar:
...[There has been] a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.
Deliquency rates are up, property owners are finding themselves unable to refinance existing loans as they come due, and malls and office buildings are festooned with vacancy signs.
The total size of commercial real estate mortgage-backed security market adds up to only about ten percent of the residential MBS market, but when dealing with a fragile economy, any new illness can be life-threatening. Banks are looking at another huge hit, with little sign of relief coming.
Of course, this isn't exactly news. At reliable economy-watching outposts like Calculated Risk and the Big Picture, the proprietors have been warning of a commercial real-estate (CRE) meltdown for years. Typically, troubles in the CRE market come towards the latter stages of a recession -- after people have been laid off and stop spending money, they stop going to the mall, business activity slows, and hotels suddenly become ghost towns.
But not everyone saw this coming. Take for example, the New York Times' reliably arch-conservative Economix columnist, University of Chicago economist Casey Mulligan. In February, he went out on a limb and told us that "I do not expect to see a nationwide surplus of commercial real estate and therefore do not expect to see commercial real estate suffer the kind of crisis that followed from the housing surplus."
The professor appears to be wrong. It wouldn't be the first time. Last December Mulligan also famously opined in the Times that "the recent decrease in employment may be due less to employers' unwillingness to hire more workers and more to workers' unwillingness to work."
Yes, you heard that right. The U.S. economy is approaching ten percent employment because workers would rather take their unemployment benefits and sit on the couch. That Mulligan outburst earned him a scathing attack in the Economist:
His role [at the Times] has been to play the satirist, writing absurd commentaries in order to demonstrate the silliness of the claims of crisis sceptics...
I can only hope that his victims understand the satire. So able is its execution that the intended targets may take his work as actual agreement with their views.
But for the true acme of Mulligan brilliance-in-economic forecasting, one must go all the way back to September 2008, when the economist started up his own blog, "Supply and Demand (in that order,)" with the declaration that "Wall Street will drown alone."
The gist of the post is that we did not need to bail out Wall Street because the demolition of the financial sector would have little effect on the real economy.
Quite simply, history has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa...
The weak correlation between asset prices and non-financial sector performance and the strong profitability of today's non-financial capital are two good reasons to scoff at the idea that the non-financial sector will collapse because of the recent events on Wall Street...
The drastic decline -- dare we say "collapse?" -- in nearly every single "non-financial" economic indicator in October 2008, directly following the decision not to bail out Lehman Brothers and the consequent global credit crunch offers as much empirical evidence of the umbilical cord connecting the financial economy to the "real" economy as one could ask for. Casey Mulligan's first blog post was about as wrong as it is possible to be for a tenured professor of economics. Just something to think about as his analysis of current economic affairs continues to pop up, week after week, in the New York Times.
UPDATE: David Warsh writes to remind that the attack on Mulligan referenced above as having appeared in the Economist actually appeared in the Economist's blog, FreeExchange.