Whip Comes Down: Hotel defaults, foreclosures rise in California

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"When the whip comes down"- The Rolling Stones.

The real estate California earthquake has begun. The shake, rattle and roll of this news could be the first tremor of the oft-predicted commercial real estate crash. The crash would be the third bubble to burst from our "irrationally exuberant" economy of the late '90s, which so far has included two stock market crashes and a home real estate crash as well.

All of this could have been, if not prevented, reduced in severity, with tighter money policies and with higher credit standards. We had such standards until Fannie Mae and Freddie Mac changed their lending standards in an attempt to "greenline", as it was called, loans to areas where poorer minorities lived. 

The creation of what came to be called "sub-prime" loans was not the only element responsible for the crash, but it contributed. The Wall Street firms actually did most of the heavy lifting by piggy-backing the mortgages as bonds to be sold to investors overseas who were taken in by Moody's AAA rating of the bonds.

The bonds were essentially of what is called "junk bond" quality. That is, the bonds represented risks so high that the interest on them should have been around 25% to cover the losses in that area, and Moody's should have refused to rate them, having no value outside of being high risk, which would have let possible investors know that the bonds were "junk bonds". 

The whole thing spurred a rise in real estate prices as more and more buyers got in on the bottom driving it all upward, even at the top. But, as one of the several experts said in his interview in CNBC's House of Cards, the best reporting I have seen on this, there was no real increase in income to spur these sales.

The expert warned Bear Stearns and bet against the market making himself hundreds of millions of dollars, while Bear Sterns, and Lehman Bros. went down, with others surviving due to privileged positions with Bush's Secretary of Treasury Paulson, ex-director of Goldman Sachs.

Now, comes the commercial real estate crisis. Same protagonists. Same mentality.

With the same wads of cash pumped into the economy by the Fed and then leveraged, multiplied, by the banks and financial institutions, commercial real estate boomed, with hotels and offices building thrown up by operators who had the intention of making their money in the financing of construction, sales, of the commercial real estate and then getting out, leaving a lot of "bagholders" in their wake.

The very boom that fed all this contributed to what was called "affluenza" in Southern Californian, as people fed themselves economic goodies from the proceeds of this speculation and boom based on no real value.

Now the piper wants his due, and, with an economy falling farther and faster into an abyss and no respite in sight, the credit that fed business travel and personal travel has dried up.

So, now, the commercial real estate dominoes have begun to fall.

The banks who supported this are next. The jobs are lost in the hotel and resort industry. Tax revenues fall, and whole thing becomes the Creature from the Black Lagoon pulling the economy down.