The “extend-and-pretend” strategy, employed by banks in leaguewith government agencies, in the U.S. as well as Europe, continuesto benefit many cash-strapped borrowers and bank shareholders fornow. Financial institutions aren’t forced to recognize losses ontheir books and borrowers can hold onto their properties at leastfor a while longer. Government regulators conveniently look theother way so banks aren’t forced to write down portfolios byrecognizing defaults and engaging in foreclosures. At all costseveryone collectively wants to avoid setting off a panic over thefragility of the global financial system. So we hear the pr spinabout how the banks are strong again—just they aren’t lendingmuch—all the while the FDIC quietly takes over more financialinstitutions—saddled with bad residential, land, construction loans—on a weekly basis.

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At the same time, the Federal Reserve keeps interest ratesartificially low to prop up the banks further--they basically takefree money from the fed and lend what they can at higher interestrates, which helps them shore up depleted reserves and keep theirbusinesses going.

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Investment bankers, meanwhile, gnash their teeth over pendingregulatory reform and tax changes that “will make business moreexpensive.” The pr spin is they won’t be able to take as manyreasonable risks to finance enterprises to encourageentrepreneurial growth and advance the economy. But their realconcern is over how transaction activity may be constrained—eatinginto promotes and transaction fees, especially for high riskactivities where personally they’ve had little downside with thepotential for big upside.

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Individual bankers viscerally resist the swing to greaterprudence—many have continued to collect fat bonuses on varioustrading strategies using government funds despite the wretchedcondition of underlying financial balance sheets. And now realestate opportunity funds and private equity managers fret overlosing committed capital before investment terms expire—since theycan’t find good deals in the market.

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But they can’t have it all ways. The government tactics, whichprop up the capital markets, delay property markets from clearingin a wave of opportune distress for investors with cash.

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It’s a schizophrenic environment—investment advisors and bankersdrowning with their legacy funds in the tank are frustrated overthe lack of anticipated home-run (promote rich) deals for new fundsat market bottom. Many decry the heavy hand of governmentwhich takes away carried interest tax breaks, and convenientlyignore where they’d be without the bailouts.

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And the Obama Administration and regulators tiptoe around what’sreally happening too— hoping that the economy turns around fastenough to help cushion the necessary massive de-leveraging thatstill must occur. They know if markets get unsettled about the realdimension of the problems, all bets are off on sustainedrecovery—witness recent angst over Greece—and all bets are offabout reelection in 2012.

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That gets us back to our last blog about anemic fundamentals.The economy isn’t getting back in gear fast enough to helpextend-and- pretend bear much fruit. Property cash flows aren’tincreasing as more borrower reserves run dry, although someborrowers with more stabilized properties will scrape through andbe able to refinance.

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Ultimately, inflation may be the only way out of this ratherlarge mess.

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Jonathan D. Miller

A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.