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How I used to ‘deceive’ Commercial Lenders! Let’s Review!

September 1, 2014

The Keynesian economic model is based on many deceptions of logic and reality. The one deception which I used continually (1971 – 2000) when arranging commercial loans for my developer friends was the deception called: The Present Worth of Future Benefits (also called the Discounted Cash Flow Model). This deception is still used today as developers arrange for their huge financing packages with today’s bankers/lenders. Let’s explore this financial deception of the Keynesian economic model to gain understanding? Why did this deception work in the past and why will it NOT work in the present (going forward). Let’s review and think about the logic and reality of this Keynesian deception (which started back in the 70’s).

Mythical ‘Values’ are created via discounting imaginary future cash flows! This Keynesian model started back in the early 1970’s (after the closing of the gold window)! It’s a model which assumes that which which is ‘impossible’ in realtime! Who can actually know the FUTURE?

The ‘Present Worth of Future Benefits’ is a concept of Keynesian logic which assumes that I can discount future cash flows (say 10 years into the future) into a PRESENT ‘value’ via the logic of math and numbers. This deception is based on the idea that my ‘present’ perceptions of bottom line cash flows (along with future projections of inflation and cash flow growth) can be ‘discounted’ into a ‘present value’ with formulae of compound interest (over periods of time). This logic creates a mythical ‘value’ for a real estate project (or any series of cash flows over various time periods). This logic can then be manipulated to create practically any ‘present value’ which I desire (within reason)…and can sell to gullible banker/lenders who buy into this mythical Keynesian concept. Let’s think further about this concept of logic and imagination!

Reality is always a NOW experience, yet Keynesians like to create models of imagination which work only while inflation and Central Planning continue. Keynesians generally assume that historical business cycles can be eliminated by their Central Planning Models and their realtime manipulations/policies!

If I prepare a Discounted Cash Flow report for a banker/lender on a 300 unit apartment project (for example), I can create a mythical present ‘value’ which lenders might ‘bite’ on and then finance with their bank funds. I was quite good at this logic back in the 70’s and 80’s (when I was active in the real estate markets). This same logic is used today by brokers, investors, speculators, appraisers, and lenders to finance practically any asset which has the logic of continual cash flows over time. So what is the problem with this logic of Keynesianism? Why does it not work today and why was it mostly mythetical…since its inception back in the early 70’s? Most commercial real estate loans are based on this futuristic concept of imagination/myth.

Futuristic cash flows via a professional looking report makes reality ‘appear’ logical (even though the futuristic projections are proven wrong shortly after the loan is funded)!

First of all, this model of deriving a ‘Present Value’ generally assumes that cash flows will increase over time via inflation and growth. Without the reality of Keynesian inflation, however,  this model would never have been developed. Inflation and continuing inflation creates this illusion that cash flows continually increase over futuristic time periods. And increasing cash flows (and inflation) mean that I can project (assume) a higher ‘Present Value’ for an asset than is generally justified based upon present moment reality (the now reality). I can create imaginary ‘values’ for my banker/lender friends so they can tell their Loan Committee that their proposed loan is Sound and Logical. All this logic, however, is mostly a huge MYTH! Why? Let’s explore further!

The reason this logic is a myth is because no one can actually determine future cash flows with any degree of accuracy. The entire concept of a ‘future’ which supposedly can be discerned precisely is a huge myth and is logically…unsound. We all live in the present moment continually. In reality, there is NO future which we can discern precisely and there is NO past which we can recall precisely. In reality, I/you live our lives (bodily/mentally) in the NOW MOMENT (always). The ‘now moment’ is reality and ONLY the ‘now moment’ is available for discerning realtime reality. Future cash flows are a huge imaginary projection of logic with no foundation within realtime reality. And these futuristic projections are nearly 100% wrong within a few months (sometimes days) after the bankers loan is funded. Within a year they are pure MYTH and totally worthless! Who can predict the future in our dynamic world of change? Answer: No One!

Personally, I can’t think of ONE valuation report which I prepared for my banker/lenders (based on the Discounted Cash Flow Model) which turned out valid or correct (and I did hundreds)…and most were wildly wrong within a years time. Yet the Keynesian logic allows for these futuristic projections (of cash flows) into a mythical future and allows lenders to ‘assume’ that these projections are based on sound realities and sound assumptions. Any projection of ‘inflation’ going forward, however, is a pure imaginary projection. Any projection of solid and growing cash flows into the future are also pure imaginary projections. And to make a proposed loan viable, appraisers were instructed to use these mythical projections for their reports (and lenders would buy into this logic)!

Most real estate developers assume that their projects will follow a cash flow path as above (increasing over futuristic time periods). This logic deceives most lenders into funding a loan which probably should not have been funded!

In reality, however, we all live in the present moment as we live our lives (what I call successive moments of now) and none of us can discern ‘tomorrow’ and/or the meaning of ‘yesterday’. So why do Keynesians desire to perpetuate this myth called the Present Worth of Future Benefits? My sense is that Keynesians (being Central Planners) assume that they can force the Free Market to perform precisely as they plan and determine (via their econometric formulae and models). They also assume ‘inflation’ (to some degree) forever! Those who buy into this Keynesian non-sense think that their logic is sound and that whatever projections (into the future) which they make are reasonable/sound and will likely develop (even though these projections are usually proven wrong within months or less)!

Keynesians (bankers/lenders/investors/ etc.) also assume (generally) a continuing inflation over time and this projected inflation (they assume) should ‘bail-out’ any false financial assumptions devised by this Discounted Cash Flow Model. Today, lenders continue this non-sense of projecting increasing cash flows over time and increasing or stable inflation over time (assuming that they can eliminate realtime market cycles). This is being done for all the new real estate development here in the Tucson/Phoenix area…resulting in substantial construction but with huge vacancies and unsold properties within each development. What non-sense…yet this allows developers to obtain large loans for their proposed development under the assumption that the FUTURE will be different (better) than realtime (now) reality!

Many housing developments in the Tucson/Phoenix areas are completed but not fully rented and/or sold. Lenders fund these projects via the Present Worth of Future Benefits model! This model does not work during a time of general Deflation!

As I drive into many new real estate developments in the Tucson/Phoenix area I have noticed that all developments have mostly spec homes/apartments which are now for-sale or for-rent. Many of these developments have from 70-85% vacant rental units and/or unsold homes. Lenders have obviously funded all these developments under the assumptions of this Keynesian model of: The Present Worth of Future Benefits (also called The Discounted Cash Flow Model). Now that DEFLATION is emerging in the Tucson/Phoenix markets and many other real estate markets, this mythical model developed by Keynesians (back in the 70’s) will fail miserably going forward. First time renters/buyers are not available in sufficient quantity to absorb all these apartments/houses at current prices.

I witness many huge real estate developments (fully funded by lenders) yet demand (at current prices) is not present. The DCF model is part of the problem (especially if Deflation is now emerging nationally and inter-nationally)! Lenders could be in serious trouble within the next 12 months (or less)!

Deflation is an ‘assumption’ which Keynesians do not accept as a reality! Deflation creates a situation where futuristic projections are mostly meaningless as ‘values’ are destroyed and all the mythical financial projections are so uncertain that lenders dare not accept this concept called: The Present Worth of Future Benefits. As ‘values’ get destroyed lenders become aware that all their past financial reports are worthless and meaningless. Liquidations create a new reality which Keynesians can not accept. Their Model is not built for Deflation and all Keynesians understand this reality. Let’s watch the markets for the coming Deflationary cycle which has now started locally, nationally, and inter-nationally (to variant degrees). Watch! I am:

2 Comments leave one →
  1. October 13, 2014 8:33 am

    In 1999 I bought some cheap land at a busy intersection and it took me 10 years to rezone the property from residential to commercial against a crony filled city counsel. After getting $2 M to build we operated for 4 years and to succeed I convinced the bank to lend another M to revamp and open another wash. When a competitor opened and introduced themselves telling me that they would close down 5 competitors with mortgages I had to take notice. The bottom line was the time line took too long, regulations end up killing a business even before they have started, with 30 trees and 17o bushes, to name one. The banks force Libor rated interest rates on you ( which are a lie) and they can’t wait for you to fail so they can foreclose and resell. In our case our bank went into receivership. We were the last loan left in a group of loans still functioning. When I asked them for consideration in restructuring the loan they said unless we missed a payment they could not help us. When we did miss they foreclosed immediately. Bankers are the scum of the earth. The future is unknown but we both can expect that THIS CURRENT fiasco is going to end extremely bad for the serfs of this country and the world. If they could kill of off half of $3M in the U.S. their biggest bill of S.S. would most likely save them. If 1 person infects 48 people, 48 would infect 2310 and 2310 would infect 5.3 M! It could go that fast!
    We are a nation of Christians who appear hated by our governance!


    • October 13, 2014 5:30 pm

      Thanks for your response and description of your experience with banks. Yes, the banks play on customers and often create legal issues which only favor the bank. D


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