Thursday, April 16, 2009

Bubble Collapse, Phase II

General Growth files for bankruptcy protection

General Growth is the second largest owner of malls in America. The Reuters article above calls this recent event "the biggest real estate failure in US history." The banking crisis is over? As I mentioned earlier, laughable. The banking crisis just entered phase two.

It turns out that we don't need a Starbucks every 500 feet, and that every last village in the country doesn't need a giant mall. Over-expansion in areas like these led to a bubble in commercial real estate that has begun to collapse.

The collapse of commercial real estate is expected to hurt midsized banks, which had largely escaped the housing bubble collapse. Fasten your seat belts, the depression that started in 2008 just took another bad turn.

It's doubtful that the vacuous "too big to fail" argument will be bought by anyone this time around, so there's a possibility of bank failures, which will strain the FDIC--and the FDIC is already nearing its breaking point. The good assets of failing banks will likely be bought up by larger banks (possibly with taxpayer guarantees). The danger here is the creation of an oligopoly of government-favored institutions in the financial sector, which would be a major step towards economic fascism.

Bankrupt banks should be allowed to go under, but the government shouldn't decide who gets what in the aftermath. This possibility is my biggest worry.

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