Economist: FDIC gearing up for bank closures

The Federal Deposit Insurance Corp. is gearing up to handle a large number of bank failures expected as a result of bad mortgages, both in residential and commercial real estate, an economist says. "They know they're going to take down a large number of banks and they can't do it until they're staffed up," said Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University, at a real estate conference in Tampa, Fla., Tuesday. Dotzour expects federal regulators to establish an agency, similar to the Resolution Trust Corp. that disposed of assets belonging to insolvent S&Ls in the late 1980s and early 1990s. "Once they start to sell [foreclosed real estate], we'll find out what the market really is," Dotzour said. Dotzour blamed federal intervention for the lack of commercial real estate investment activity in recent months, as well as the failure of businesses to make major decisions. "Nobody knows what to do so they're doing nothing," Dotzour said. Government, in its quest to help the economy, is causing harm by propping up failing companies and regularly changing rules, he said. "People are frozen. It's not that they don't want to invest in the future, the rules are unclear," he said. He jokingly called the Federal Reserve "inksters" for routinely printing money to bail out big business, including banks that are still not making many loans. The government's role in a capitalistic society, he said, "is to make the rules and get off the dance floor." Businesses and individuals that can't pay their bills should resolve their problems in bankruptcy court, not with money from the government, he said. It's a process that has worked for decades, for generations. "Everyone has a lesson to learn here, including you and me," he said. "We have to live within our means." Dotzour expects foreclosure rates to continue to climb, real estate prices to fall more and cap rates to rise to at least 9 percent before leveling off. In 2010 and 2011, interest rates will begin to rise, as will inflation. Once investors realize the market is at bottom, deals will begin to flow again, he said. In the meantime, he compared the bad loans that remain on banks' books to a smelly cat litter box and said the feds keep throwing more litter on top to mask the smell. But they'll eventually have to remove the organic material to fix the problem.