One of the hot topics in US monetary policy is whether Washington should follow a “super-loose” approach endorsed by Jay Powell or an “ultra-loose” approach demanded by President Trump.
Under the guise of Fed independence—an obvious fallacy—the two politicians have orchestrated a media charade that fits precisely between the boundaries of the Keynesian establishment’s Overton window.
On one hand, Jay Powell and the members of the Fed are advocating for a full percentage point decline in the Fed Funds Rate within the next 12 months. This will, of course, require the provision of more newly-printed money—also known as inflation—on the back of money supply growth at just under 4 percent over the last 12 months and an astounding annualized rate of 6.2 percent over the last 10 years.
On the other hand, Donald Trump wants precisely the same thing—monetary inflation leading to lower interest rates—but he wants it harder and faster.
Lurking in the background, licking their chops, are members of the rent-seeking class—those who can’t succeed in a free market and must therefore mooch and loot via proximity to taxpayer funds or the Fed’s money printer. These talentless parasites include stockjobbers, hedge funds running arbitrage scams funded by the taxpayer, CEOs of publicly-traded zombie companies, and—of course—members of the real estate investment community.
Extend, Pretend, and Beg for Bailouts in the Meantime
In 2023, the Real Estate Roundtable—a group of smarmy midwits-turned-lobbyists—sent a groveling letter to the various financial and monetary regulators pleading for a bailout to stop the modest decline in real estate valuations. This letter came shortly after commercial real estate—apartments in particular—experienced a ZIRP-fueled valuation boom unlike anything in history.
During the boom phase, members of the Real Estate Roundtable—through their various companies—speculated heavily in apartment construction and acquisition. Paying cap rates south of 3 percent in many cases while using high leverage, floating-rate bridge loans, these were textbook malinvestments driven by artificially-low interest rates.
Once the boom began to bust, these professional rent-seekers went hat-in-hand to their enablers at the regulating agencies—the Federal Reserve most prominently—asking for absolution from their speculative sins, but only at the expense of the taxpayer.
As it stands today, apartment metrics are showing major signs of strain.
Delinquency rates for non-agency apartment (“multifamily”) loans have reached their highest level since the crisis of 2008-09, though still well below delinquency rates in that period. One reason for this is that today’s lenders are far more hesitant about entering formal delinquency proceedings. This latter point is supported by the fact that the watchlist rate—the percentage of loans that are significantly distressed but not necessarily delinquent—is every bit as high as it was in the 2008-09 crisis.
What we have, then, is a large subset of apartment loans that are severely unhealthy but not entering formal delinquency. This occurs as a result of forbearance—the process whereby lenders avoid delinquency proceedings through the provision of loan modifications and other loan forgiveness.
For example, a loan that is unable to pay its debt service obligations in cash may be offered a modification that includes replacing some cash interest with PIK (payment in kind) interest. The borrower pays the lender a certain amount of interest in cash, with any interest remaining “paid in kind” by adding it to the outstanding principal balance. This type of modification has the effect of avoiding delinquency proceedings in the short term, while exacerbating the fundamental insolvency issues of the borrower and loan in the medium-to-long term.
A rational outside observer might ask why this should be the case. Shouldn’t lenders be concerned with the long-term viability of their distressed loans, in which case decreasing—not increasing—leverage would be called for?
At this point, an honest explanation must refer back to the wider monetary milieu. Real estate investors and lenders—as illustrated by the noxious letter from the Real Estate Roundtable—are conditioned to expect easy money from the monetary authorities when things get even mildly difficult. These easy money policies are not a one-time occurrence, but a continuation of the decades-long Fed Put, the now explicit policy of the authorities to support asset prices through easy money and lower interest rates. As the letter itself mentions, the real estate industry has been the recipient of bailout programs (branded by the regulatory authorities as guidance on “prudent loan workouts”) multiple times in just the last several years, including in 2009, 2010, 2020, and 2022. This set of factors encourages lenders and investors to hold on as long as possible until the authorities administer the coveted bailout.
If one examines this dynamic closely, the question of why a group of prominent real estate investors would need a political lobby in the first place is easily answered. Namely, their investment acumen is minimal, but their political acumen is honed. As inevitable, grievous mistakes made during the boom phase catch up with them during the bust phase, another boom phase is advocated as the solution.
Inflation without Pretense
Those familiar with Austrian Business Cycle Theory (ABCT) will not be surprised by the preceding. The dynamics of the commercial real estate investment market are only a specific instance of the broader theory’s undeniable observations.
It seems, however, that the threshold of pain for printing large amounts of money to juice the capital markets is getting lower and lower. Monetary and fiscal authorities—including Powell and Trump—no longer have any modesty about their desire for inflation, revving up the money printer at the slightest hint of a downturn in asset prices. We are moving quickly towards an era of aggressively inflationary policy without pretense.
This state of affairs is to the benefit of a few within the moocher-looter class, but most Americans will continue to suffer the consequences. Lacking real savings or a productive foundation, the American culture and economy will continue to backslide into cheap consumerism and high time preference—the opposite of civilization.
The solution? To the extent there is one, it comprises rejecting political messianism and thereby limiting the scope of government action and spending. In that instance, Americans will be required to work out their own salvation, but the same will apply to the Real Estate Roundtable and the rest of the looters.