The Next Big Economic Earthquake

While some Americans are beginning to believe they are recovering from the twin disasters of the mortgage crisis and the Wall Street freeze, there is a new problem just beyond the horizon...a potential crash in commercial Real Estate. The extent of the concern was expressed quite well in a recent interview on Fox Business between anchor Alexis Glick and FDIC Chairwoman Sheila Bair.

Concerning the commercial and residential Real Estate situation: “Commercial real estate is ticking up more. I think later in the year into next year, the commercial real estate losses are going to be a much bigger factor. We’ve known it’s been coming for some time—there’s not a whole heck of a lot we can do about it.”

“The more traditional commercial real estate loans are showing some distress and that is derivative of the economic situation, so we will have some time working through that and I think it will be a big driver for bank failures in the next year."



On the rules that the FDIC put out yesterday: “They are good rules. I think there are some issues about timing because a s you know the industry is still under some distress…I think the issue is more of timing as opposed to whether the rules are the right thing to do. If we’d had them a few years ago, there would have been more capital in the system, so it would have been nice to have it back then and we’re doing the right thing now although the timing is troublesome.”

On economic recovery: “As the economy improves it will take a bit longer for the banks to fully recover, but we have some challenges ahead. They’re manageable and we’ll work through them.”

Can the FDIC cover the cost of bank failures? “We have a lot of cash—we have $22 billion cash on hand to cover the cost of failures.”

On the common ground between herself and other regulators: “We all agree that we need to end ‘too big to fail’ and we need a resolution mechanism that will allow these even very large institutions to be closed down and for shareholders to take losses as part of that process.”

Funny how the hero of 2008 was "too big to fail" is now the demon of 2009. I think the "average joe" could have forewarned the geniuses of Wall Street and DC that government wasn't the solution to our economic crisis.

View Glick's interview here.




Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Suze Orman Could Use a Lesson in Economics

Suze Orman, middle America's favorite financial Advisor, has become the poster child of the Federal Deposit Insurance Corporation. She was on the Today Show on NBC singing the organization's praises and assuring Americans that the government is coming to the rescue in light of the current financial crisis on Wall Street. And it appears she is on the agency's payroll, since she dominates its' MyFDICInsurance.gov home page.

In light of the chaotic frenzy both Wall Street and Main Street are in, it would be nice to have a calming voice. That is exactly the role she tried to play, although I will say she looked extremely stressed out while trying to make her case.

My biggest concern came when the interviewer asked about the economic impact of people having their accounts insured. Orman pointed out that if you have $100,000 in a FDIC insured account, that money is safe. That statement is largely true. But the interviewer than asked "what if this leads to thousands of people needing to cash in on the insurance?" Orman's answer was something to effect that "Americans have nothing to be concerned about, the US Government has a check book and will pay for every account that is covered by the agency. Taxpayers will never have to pick up the bill." That was quite a mouthful.

First of all, that agency (like all government agencies) exists due to taxpayer funding. All taxpayers have already paid into it.

Secondly, and more importantly, is the high costs behind the "checkbook" she spoke so warmly about it. If the costs of accounts going bad exceeds the amount of money in the agency's budget (a very real possibility in light of our current crisis), the government will likely fund (at least) some of it through the simple printing of money. Essentially printing counterfeit dollars to pay for the program. As government prints new money, without an increase in productivity, the value of all money goes down. This is the definition of inflation, which is the worse tax program of all.

I have actually been a fan of Suze Orman and still believe she has advice that is helpful to many Americans. However, this interview on Today makes me question either the extent of her honesty (because of how outrageous her statements are) or the extent of her knowledge (because she should know better). At the very least it would make sense for her to get a basic refresher course in economics.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

Is Buffett Bearish on Banks?

It appears that Warren Buffett and his Berkshire Hathaway, Inc. have become more than a little concerned about the health of banks. Reuters reported this morning that his insurance firm has "told one of its units to stop insuring bank deposits above the amount guaranteed by the U.S. federal government, the Wall Street Journal reported. The subsidiary, Kansas Bankers Surety Co, is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds."

This is a fairly far reaching move. After all, companies offer insurance products as a means of making profit. Furthermore, firms such as Hathaway are in the risk management and assessment business. This sends the message that this insurance company believes that the risks are greater than the profit potential, when it comes to this form of policy.

Typically before ending a product, insurance companies usually raise rates first. There is no word if Hathaway pursued such first. Also, there is no word yet if this is going to be an industry trend, since there is a small group of other companies who offer similar policies and no announcement from them on future plans or recent increases.

This policy was very important to banks that pursued wealthy customers who found insurance from the federal government of up to $100,000 in deposits inadequate. Much of the concern stems from the fact that the US has seen eleven banks fail in 2008 alone, the most since 2002 which some attributed to larger national financial problems following September 11th. More banks seem poised for failure, which only adds fuel to concerns.

This will force some of those wealthy depositors to do more research on where they bank, strengthen the positioning of smaller community banks (which tend to keep a closer eye on banking activities), and require customers to continue to pursue alternatives to banks for larger deposits (which often bring higher risks, costs, or both).

This policy change follows the federal government's bolstering of mortgage lenders Freddie Mac and Fannie Mae. This move by the government led to a huge rally on Wall Street, but appears to have done little for Buffett in placating his concerns.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Get his commentaries in your email box by contacting Info@HoustonBusinessShow.com.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.