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Thanks Steve, this has gone to Catallaxy to be refereed by the resident economists.


It seems he's crossing his macroeconomic and microeconomic wires here, isn't he?

Keynesians - to my knowledge - have never denied microeconomic readjustment (have they? news to me). The concern is that a financial crisis (microeconomic by nature - it perks up in some market or another) increases demand for money and liquidity preference, raising interest rates above a marginal efficiency of capital consistent with full employment. We know special circumstances like the zero lower bound can aggravate swift recovery from these dynamics. But that's all a MACROeconomic phenomenon, set in motion by changes in the demand for money. What the emailer is describing is a microeconomic adjustment, and I have no doubt we could readjust from that if we didn't implement some of the policies that we did. The question is - would that readjustment have come at greater macroeconomic distortion, and would we have considered it equitable.

But to treat a market-level intervention like the bailouts or a housing program as a "Keynesian intervention" like the emailer does seems to fundamentally misunderstand (1.) what a Keynesian intervention is, and (2.) what the disagreement is over. The disagreement is not over the efficiency of the price mechanism - it's over the stability of the macroeconomy.

Steve - as Rafe indicated this has been linked at Catallaxy and one of the more trollish residents has linked to a graph that disputes the claim that commercial markets are almost back to pre-great recession levels.(Mind you that graph is six months old). Can your friend clarify exactly what he means? If correct, it makes a wonderful natural experiement.

Thank you, Daniel, for exposing the utter confusion of Keynesianism. Macroeconomics is Ptolmaic and utterly ridiculous if this is the response to a completely valid, sensible counter to the Keynesian nonsense. This recession would be over if Keynesianism had gone the way of Marx -- an equally utterly ridiculous economic pseudoscience. There is no "macroeconomy" any more than there is "macroevolution" the creationists love to argue against.

The issue devolves around the question that DK is begging. Again.

There is no separate "macro" adjusment process apart from the totality of micro adjustment processes. If policy interferes with the adjustment in an important sector like residential housing, that policy will impede recovery.

Until home prices bottom out, there can be no reovery in homebuilding. That is a big industry to be iddling. It is one of the contributers to our jobless recovery. Bad micro policies have "macro" consequences.

For whatever reason, people who subscribe to Keynesian macroeconomics are also prone to want to tinker at the micro level. So it is reasonable for someone, especialy a noneconomist, to term the interventionist policies of the Obama administration "Keynesian."

Roy Harrod, Keynes' biographer, talked of "the presuppositions of Harvey Road." One such was that "the government of Britain would and should continue to be in the hands of an intellectual aristocracy using the method of persuasion." That was a Keynesian (of Keynes) idea. Today we call it the rule by experts.

Such experts believe that problems have solutions and they, the experts, are annointed to solve these problems. So they are operationally tinkerers -- interventionists.

DK: the email correspondent is not an economist and he was using Keynesian in the way a non-professional would. That said, Jerry's response is right on.

Sinclair: I can't repost the specific graph as it's proprietary, but I think I can quote this: "The Green Street Advisors Commercial Property Price Index increased by 3% in May. Property values have recovered three-fourths of the ground lost during the '07-'09 downturn and are now only 10% below their all-time highs."

Troy - I would love to respond to you but I'm not sure what in there I can respond to. Care to be more specific?

Steve - That's fair enough, but I still think it's right to point out that the idea "we can't adjust without a bailout" is very distinct from "we will have macroeconomic repercussions without a bailout".

Jerry - re: "Bad micro policies have "macro" consequences." I couldn't agree with you more. The macroeconomy is nothing but the totality of micro adjustments, but we need to be careful not to commit a fallacy of composition when we think about that totality. That's the sort of thing that got people thinking that "private vices" couldn't possibly lead to "public virtues" in Smith's day. As for what is "reasonable" - I'm not saying it was "unreasonable" for a non-economist to say that. I'm just saying it's important to be clear about what the disagreement is over.

re: "Such experts believe that problems have solutions and they, the experts, are annointed to solve these problems." - well that's a little elitist for my tastes and for the tastes of most Keynesians I know.

So if we're thinking about the adjustments of debt markets in a depression - and the distinction between the microeconomic and macroeconomic adjustments involved, Bernanke's JMCB article "The Macroeconomics of the Great Depression: A Comparative Approach" seems relevant. He makes the point there that while both parties benefit from the renegotiation of a wage contract during a depression, this is not true of debt contracts.

That would suggest that the commercial real estate market (at least as this emailer describes it) is the odd case, and the residential market is what we would expect.

This report from the Congressional Oversight Panel also looks like it merits a careful read. Whereas the residential market has already largely exploded, this report suggests that one of the reasons why the commercial market may be so stable is that a lot of the bodies are still buried: http://cybercemetery.unt.edu/archive/cop/20110401232630/http://cop.senate.gov/reports/library/report-021110-cop.cfm">http://cop.senate.gov/reports/library/report-021110-cop.cfm">http://cybercemetery.unt.edu/archive/cop/20110401232630/http://cop.senate.gov/reports/library/report-021110-cop.cfm

I'd be curious what people thought of that analysis - I don't know much about that market personally.

Well, nobody's lying, but rather using different indices.

According to the wall street journal:

The Green Street CPPI, which tracks properties owned by 47 real-estate investment trusts with roughly $400 billion in assets, tilts toward sales of high-end and trophy buildings. It reflects the valuations assigned to the REIT portfolios formed by input from brokers, economists and company executives and uses metrics that include the price of property deals currently being negotiated, under contract or recently closed.

The Moody's index tracks all property sales of $2.5 million or more, but only deals that have closed and that are repeat sales. Thus, it measures more distressed and smaller properties than does the Green Street index.



Given this information, I think Moodys is probably the more relevant to our interests. The CRE recovery would seem to be a non event.

Calculated risk compares the history of Moody's CRE index and the Case/Shiller index as of May 24th 2011. Hard to make a case from this for a CRE rebound, and also hard to claim it's out-recovering housing.

On one hand, I think it would be significant if there really was such a vast disparity in the performance of the two markets (while i recognize they are different markets) but there doesn't seem to be evidence for that.


On an unrelated note, I'd like to think this was a substantive contribution to the discussion, and note that Argosy is not my real name. Pseudonymous people can make a genuine contribution to a conversation despite the tendency to incivility and shenanigans. Thanks.

Thanks for that information argosy. That's extremely helpful.

I'm starting to scratch my head over what the emailer was refering to. And if the COP report I shared is to be believed, there's still more to come in CRE.

And again - we can't confuse micro and macro. Macroeconomic processes can be set off by microeconomic disturbances that subsequently readjust themselves.

re: "On an unrelated note, I'd like to think this was a substantive contribution to the discussion, and note that Argosy is not my real name. Pseudonymous people can make a genuine contribution to a conversation despite the tendency to incivility and shenanigans. Thanks."

I can think of people who use their names that produce considerably less substance and citation than you do.

I never understood how someone can divorce macroeconomics from microeconomics. Macroeconomic policies have consequences in microeconomics and viceversa. Thinking of them as two totally separated domains is schizophrenic at best.

Also the fact that a market recovered is not equivalent with having the bubble prices again, but it means that most of the previously idle resources are employed again. So if in terms of prices we could have depression numbers, there could be quite a lot of productive activity. Of course modern economists hate this, but then again economy is not their strong suit.

This is a really informative point.

Argosy Jones has an important point. Everybody should look at the link he provides before getting too excited about this. Indeed, the broader Moody's index has commercial real estate down as of the end of March from its peak in Oct. 2007 by 45%, about the same as the decline in housing. Googling found mixed stories for April, with a possible flattening in May, with some markets up. But then, some markets are up for housing as well, such as Washington.

The bottom line is that there appears not to be much substantial difference between the markets, certainly not as much as Steve's friend seems to think there is. Both have been affected by a macro intervention, very loose monetary policy and low interest rates.

What may be a more important difference between the two markets is that those dealing with commercial real estate are more hard-nosed and calculating of basic economics, whereas it is well known that there is much more emotionalism in the housing market, particularly on the side of sellers who are slow to lower prices on their homes. Even with those differences, at least some data suggests that the two markets have behaved quite similarly, although it appears that the commercial real estate market peaked later than the housing one (mid-2006 to fall 2007), with this consistent with this story about the different conduct of the agents involved.

Sorry, Steve, not much of a story here.


macro and micro aren't divorced. This is just a trial separation to see how things feel after a cooling off period.

but seriously you have a good point about price recovery vs. idle resources... however, it doesn't seem to be the case that such a recovery has taken place -based on anything I've seen.

Niko -
It's a relief nobody here seems to be guilty of that at this point.



1) CMBS AAs are down 10-15 points over the past 10 days (on European bank selling).

2) Commercial versus residential mtg markets are completely different and cannot be compared apples to apples. Just think of the differences in revenue streams between a household and a fully leased office building. Other than being financial insturments collateralized by property - commercail and resi mtgs are pretty different (from their terms to how they're originated to syndication).

Let's go back to Steve's original post. It was about repricing and recovery, not whether prices for commercial real estate had fallen at some point. "Repricing" implies prices had fallen. Recovery is about transactions and economic activity.

If you follow commercial real estate, you know there are lots of transactions. Hedge funds are snapping up properties in various categories (e.g., hotel chains coming out of bankruptcy). Prices in some catgories are rising. So at least some of the markets have bottomed.

In residential real estate,prices are still falling in almost all markets (18 out of the 20 in the Case-Shiller Index). DC is a special case reflecting the growth of the federal government at the expense of the rest of the country. Residential real estate has not bottomed.

Where I live, developers have written land values down to zero. And they still can't build to compete with foreclosure sales. That implies home prices must fall further. Such markets have not proeprly repriced and have not found an equilibrium. Emotion has nothing to do with this.

The failure of residential real estate to reprice reflects the unintended (but predictable) consequences of interventionist policies. In the big pircture, Steve's post is on the mark.

Jerry -
re: "The failure of residential real estate to reprice reflects the unintended (but predictable) consequences of interventionist policies."

[Try to take this non-personally, because (like all my comments here) I genuinely don't intend it to be, but you always seem to take it that way.]

I would wonder, though, whether this is really even an unintended consequence of the intervention. Wasn't the whole idea of the intervention that repricing wouldn't take place, or at least that it would take place at a more measured pace and with what was perceived to be a more egalitarian distribution of the pain of repricing?

You may think that has macroeconomic merit or you may not. You may think it has ethical or humanitarian merit or you may not. But I think from the perspective of the intervention this isn't necessarily an unintended consequence.

This is why my point above about being clear about what the (Keynesian) policy goal is and competing concerns about micro adjustment and macro stability is so important. You haven't really demonstrated a problem with the intervention if it achieves its goals.

My assumption would have been that repricing certainly would have occurred without intervention. I don't see any good reason to question that point. I'd simply wonder about the negative implications of that repricing.

My correspondent (who wishes to remain anonymous for professional reasons) has looked at the comments and adds this about the question of his index vs. Moody's:

"The index I look to is the Greenstreet Advisors Commercial Property Index. It is the very best CRE index out there. Greenstreet Advisors (GSA) is the axe in buyside research (unbiased) for REITs. All the major institutional investors follow it. Their index tracks the performance of all the commercial real estate portfolios owned and managed by the 80 or so REITs they cover. They track sales, leasing, occupancy, cap rates and capital markets transactions by property type (shopping centers vs office vs industrial vs hotels, etc) in each of the portfolios of these companies. It’s the best cross section of institutional real estate properties possible. Their data is updated every two weeks. Moody’s on the other hand, produces a much less current index which has tended to lag Greenstreet’s by about 6 months. For example, Greenstreet’s index turned up (Nov, 2009) well before Moody’s did.

The Greenstreet index shows the aggregate of all property types they cover to be within 10% of the 2007 peak. Note also the near full recovery in REIT stock prices which is probably the best data point since it is a distillation of how investors now value the sector every day. So, I stand by my assertion that CRE prices are well back to where they were pre-crash. Try to buy an apartment building in DC, or an office building in NY, or a super-regional mall anywhere for a cap rate better than what you would have been offered in 2007. You can’t.

Here’s a link to their website (the index is at lower right). www.greenstreetadvisors.com "


Thanks for this additional information. So, after looking at the link your correspondent provided, where indeed it has CRE turning up in Nov. 2009 and now at 90% of the previous peak, I then googled "Moody's commercial real estate vs Greenstreetadvisors real estate." The first hit was a site whose url was too long to get right, but it was a post on World Property Channel from over six months ago, 10/27/10, by Alex Finkelstein, examining the dispute over which index does best.

Before getting into that, let me point out that your correspondent's remark about Moody's laggin Greenstreet is indeed correct, as indeed Moody's still has CRE declining, while GS had it turn around over a year and a half ago. As of over six months ago, Moody's had CRE down 33% and now has it down at 47%. This is a huge difference of opinion.

So, I shall provide two quotes from the article. One is from Greenstreet's Mike Kirby about their method: "Yes, it's subjective, but like Keynes said we would rather be roughly right than precisely wrong."

From Michael Gerdes of Moody's is the following: "We are trying to capture the entire market, not just a subset of institutional quality assets."

So, and this is consistent with the correspondent's remark, GS follows properties that are in the portfolios of the REITs that they follow, which are almost certainly "quality assets" (and while some REITs are doing well, others are falling hard right now, so watch out for using their performance as a bottom line on the overall CRE market). Also, apparently Moody's uses actual closing prices, whereas GS uses some sort of proposed prices, including for deals that do not go through, and Moody's claims to cover the broader market.

I have no independent way of determining which is better, but if the Moody's claim of using actual closing prices on a broader set of assets is correct, they may have an edge. Certainly REITs are highly selective in what they put their money into, so what the very wide current divergence between these two services may suggest, now greater than at the time of this World Property Channel report, is that there is a serious divergence within the market between properties and areas that are doing well and those that are not.

In any case, I do not think that GS provides credible evidence that there has been a recovery in general in CRE due to recalculation.

So, sorry, Steve, while your case now has somewhat more support, it remains very far from proven or established.

(Oh, and I find it ironic that it is the guy people on this site are using who is quoting Keynes.)


Insofar as there was anything approaching a "theory" behind the various housing support prorgams, it was that markets were prone to undershooting. It was to that argument I responded at the time. I do not recall hearing points like you are now raising.

I think we have had an interesting sidebar on the pitfalls of indices and what they measure. There is a similar debate over indices for home prices.

Case/Shiller covers the main urban markets puts more wight on "hot" housing markets. So it tends to be more volatile than a broader index. Truth is, much of the country never saw that much of housing boom.

And the same issues carry over to be price indices measuring the cost of living.

Jerry -
Well here's one example of what I'm talking about: http://krugman.blogs.nytimes.com/2007/08/06/foreclosures-a-call-to-action/

Foreclosure intervention to prevent a bigger financial crisis (rather than foreclosure intervention because of concerns about the ability of markets to adjust). Krugman says pretty clearly up front that there's no doubt the market is going to adjust. It's the concomitant financial crisis that he's worried about - precisely what I mentioned.

I recall hearing this concern from all sorts of people.

This and humanitarian concerns (ie - foreclosures hurt poor people) are just about all I remember hearing!!!!

The main rival for housing prices to Case-Shiller is an index maintained by the much-reviled-here Fannie Mae, which like Moody's for CRE is a much broader index than its rival, but Case-Shiller is the one that gets reported on far more. Fannie had the housing bubble peaking a full half year later than Case-Shiller at the beginning of 2007 (sound familiar?). It also had it rising somewhat less than C-S. I have not seen the Fannie Mae index for awhile, so do not know what its current line is about the residential market, although I do not think the two of them are nearly as far apart as are the Moody's and Greenstreet indices for CRE are.

BTW, for those who want to make too much of the peculiar supports we have for the housing market here in the US, such as allowing the deduction on taxes for mortgage interest (something only the US has) as well as the existence of Fannie Mae and Freddie Mac, I note that there have been a number of other countries where the housing bubble was substantially more dramatic going up than in the US and also continue to have failed to hit a solid bottom. I have not seen data on how the CRE markets have behaved in those countries, however.

Actually, I think it is Freddie Mac rather than Fannie Mae that has the residential market index that competes with Case and Shiller.

To follow up on Barkley's point, too much has been made about the mortgage-interest deduction. It's been there a long time. And it doesn't exist in countries that also had housing booms.

If you want to explain a change, it must be in terms of a change in some other relevant causal agentt. Fed policy is then certainly a candidate for explaining a housing boom.

Fan & Fred have also been around a long time, but their underwriting standards did change. So, too, did other housing policies. These were demand-stimulating changes.

Land-use restricions also enter into the story. These are local, however. In markets with tight land-use restrictions, increased demand tends to raise home prices more than in locations with loose restrictions. In the latter, higher demand elicits more supply. For the former, think coastal California. For the latter, think Dallas and Houston.

Well, following Keynesian policies has most certainly spread the suffering out and around, now hasn't it? Bottom line: we could have been out of this by now if nobody had been listening to people like Krugman or any of the proponents of bailouts, QE 97, etc. I'm really not sure what it takes to prove to otherwise smart and sensible people that Keynes was a economic Ptolmist. All he did was reintroduce the economic equivalent of epicycles, and people bought it! Ridiculous! We try various Keynesian, pseudo-Keynesian, neo-Keynesian, paleo-Keynesian, etc. policies, and get the Great Depression, 1970's stagflation, and now the Great Recession going on and on and on. And yet, people still defend this nonsense! SUrely I'm not the only one at this level of frustration over having to deal with this Ptolmaic economics, am I? It seems so obvious to me that it's wrong and why it's wrong.

I cannot resist calling attention to an editorial in tomorrow's Wall Street Journal. Quoting Richard Fisher, president of the Dallas Fed, the editorial points out that Texas has created 37% of the new jobs in the US since the recovery began in June 2009. (By an alternative measure, Texas created 45% of new jobs in the recovery.)

What has Texas done right and other states, like California, done so wrong? Texas has no state income tax; a light regulatory environment; and good fiscal policy. As Fisher notes, monetary policy is the same for the entire country.

Good policies in other areas can spark job growth, while QE has done little or nothing. Happily, Chairman Bernanke has now fallen into line behind Fisher and said that monetary policy has done all it can do.

As I just noted, Texas also has affordable housing thanks to liberal land-use policies. (Houston literally has no zoning.) Dallas and Houston always do well on affordable housing measures.

Interestingly, Texas also does not have a "single action" rule when a homeowner defaults. In many states, including California, a lender has only a single sourse of action against a defaulting homeowner: either take the house or sue for the unpaid balances. In Texas, the lender gets the house and can secure a deficiency judgment against the borrower.

Thanks for the update Steve,

Although I agree that gov't intervention has delayed the bottoming and hence recovery of the resi property market, I don't think a direct comparison to the commercial market is definitive. There are too many fundamental differences between the resi and commercial property markets that makes recovery in commercial a lot easier. More specifically looking at the financing between housing and industrial/apartment/office there are a lot more sophisticated liquid financing options on a loan by loan basis. For resi mtgs to be liquid you essentially have to securitize them, it's the only way to get the scale to have capital flow freely. With commercial you can either take on structural or financial leverage in the loans. Mtgs can be split into tranches at origination, post origination and the syndication market never shut down. This greater flexibility in financing allows the market to recover more quickly.

It is also false that there was no gov't intervention in the commercial market. CMBS was included under TALF beginning in summer 2009.


We should be careful about treating historical data as a controlled experiment. Commercial real estate has had the advantage of being conducted with mostly variable rate loans, which makes adjustment in the market easier.

On the other hand, adjustable rate mortgages in residential housing were used mostly by house flippers.

Somewhat related, the BIS has a paper trashing the savings glut theory of the housing boom (Greenspan, Bernanke, Summers et al) and promoting an Austrian-like elasticity of money theory: Global imbalances and the financial crisis (Claudio Borio and Piti Disyatat) at http://www.economist.com/blogs/freeexchange/2011/06/economics.

Has the BIS become a bastion of Austrian econ?


This fellow, William White, appears to be positively influenced by Austrian econ. I remember reading this paper: http://www.bis.org/publ/work250.htm and being favorably impressed.

Wasn't it actually those residential loans which were adjustable that were the problem? You may be able to afford your house payment when the interest rate is 3%, but not when it is 5%. It was my understanding that a lot of the defaults happened when the interest rates went up, and the payments thus increased. I locked my interest rate in, and my payments have remained the same (it's been my wages which have varied!).

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