Despite all of the promising talk about transforming commercial buildings into residential ones (a win-win), this sector is likely to crash (a win-lose) some time next year. If you pay attention to the way things are heading politically, you'll see the writing is already on the wall.

Bloomberg reports that "private equity firms want to take advantage of deep American discounts after office values fell by almost a quarter last year...." These capital vultures are looking at about $1 trillion worth of distressed commercial real estate debt. Ten percent of the CRE assets in Seattle are in this exposed position. Upon insolvency, they will be forced to transfer their properties to private equity firms at bargain-basement prices. 

Bloomberg:

John Brady, global head of real estate at Oaktree Capital Management, wrote in a recent note that investors could be on the precipice 'of one of the most significant real estate distressed investment cycles of the last 40 years.'

From this point, we can look back and see that what happened to Washington Mutual in 2008 was by no means exceptional. It's going on all of the time. It's happening right now. Instability rather than stability is the order of the day.

Can there be capitalism without crashes? The answer to this question is a wee bit tricky. Capitalism is, of course, defined by the constant accumulation of value, which is social rather than material. Any policy or political practice that restricts or decreases this process is by definition socialist. If recycling presents an obstacle to capital accumulation, it can correctly be described as socialist. The same goes for democracy or civil rights—and, of course, for economic stability.

Though the 20th century American economist Hyman Minsky came up with the concept that “stability is destabilizing,” he failed to provide an adequate explanation for this law, which the real world confirms again and again. Why is such the case? Why do paper markets move in this manner: "1) hedge finance, 2) speculative finance, 3) Ponzi finance"? Also, this movement (stability/instability/crash) is not singular; it's system-wide. All sectors (commercial, manufacturing, real estate) operate like the Minsky's Financial Instability Hypothesis. The idea that capitalists do everything in their power to prevent crashes is a fiction. They encourage them. They fight politicians who attempt to weaken their force. For those at the top, a crash is the hyperdrive of capital accumulation.

This fact is hard to appreciate if economics is not seen in the context of politics. Markets can be stabilized; crashes are not a given. Indeed, the period between the global implementation of the Brenton Wood's program (1947) and its demise in 1971 (the Nixon Shock), experienced only minor disruptions in all sectors. The return of instability had the collapse of the Bank of the Commonwealth as its starting pistol. This happened in 1972. Deregulation in the 1980s only increased the frequency and severity of these episodes.

If we turn to a future that's not far from now, we can see why the top capitalists of society are aggressively pushing for Donald Trump's return to the White House. He is likely to do little or nothing about the growing crisis in the CRE market. Government intervention could, of course, stabilize the sector at a cost that's far lower than that which follows a crash. Jobs could be saved, savings protected, and so forth. But this would get in the way of what matters most to those with the most social power: excessive and accelerated capital concentration. 

This brings me to an idea that was on my mind as I walked around South Lake Union yesterday afternoon. It occurred to me that economics, in its mainstream form, will provide little in the way of insights about the developments described in this post because of its reliance on mathematics and its rejection of historical thinking. Economics is still directed by Walrasian equilibrium, but the only mathematics that's of any value to the study of wealth and its modes of distribution is that which concerns the second law of thermodynamics.

This law has its origin in a theorem first presented in 1824 by a French physicist, Sadi Carnot, who wanted to improve the efficiency (more work, less heat waste) of steam-driven machines. It's called Carnot's theorem, and it's not hard to understand. Learn this equation, and you are pretty much good to go as an economist. Why? Because the physics of heat, which has the second law of thermodynamics as its crowning achievement, places not only energy at the center of economics but also asymmetrical time, time that moves in one direction, from the past, to the present, and into the future.

Economics almost completely ignores energy, as the Australian neo-physiocrat Steven Keen points out in his pressing post "Putting Energy Back into Economics." The field is not only "energy blind" but also, as a consequence of equilibrium thinking, it is time blind, in the sense that time in its key equations is not historical but symmetrical or static. One of the founders of post-Keynesianism, Joan Robinson, described this as "logical time" in her 1980 essay "Time in Economic Theory." Because energy and time (the arrow of time) are formalized by the second law of thermodynamics, it (and only it) provides a link between physics and economics. Private equity firms move and make all of their money in time, my brother, in time.