It's not just Donald Trump. Big real estate developers all around the country are welching on loans. Properties are going into default. Banks -- not to speak of savings and loan associations -- are taking billions of dollars of writeoffs on loans for office buildings, shopping centers, hotels and condominiums. This is the greatest collapse of the commercial real estate market since World War II.

The full consequences, though still hazy, are potentially scary. Poor real estate loans could sink some big commercial banks and exhaust the $11.4 billion reserves of the Federal Deposit Insurance Corp., which insures deposits up to $100,000. In that case, a costly taxpayer bailout of the FDIC (similar to the rescue of the thrift industry's insurance fund) would become necessary. And the soundness of some insurance companies and pension funds could be jeopardized.

The overbuilding that occurred in the 1980s was huge. In the 50 largest metropolitan areas, office space more than doubled to 2.5 billion square feet, reports the real estate firm of Coldwell Banker. The number of shopping centers rose 57 percent (to 34,683), and their retail floor space increased 42 percent (to 4.2 billion square feet). Hotel rooms jumped 43 percent to 2.9 million. Meanwhile, population expanded 8.5 percent, employment 18 percent and the gross national product 29 percent.

What happened is that too much money was invested in commercial construction, says real estate expert Anthony Downs of the Brookings Institution. It came from savings associations, banks, foreign investors, pension funds, insurance companies and speculators. By contrast, there was no general overbuilding of single-family homes, and their prices -- with some exceptions -- have not collapsed. (Average home prices are actually up about one to 3 percent in the past year, though there have been declines in about a quarter of 98 major metropolitan areas.)

A decade ago, the typical commercial project -- say an office building -- was financed in a relatively prudent way. The developer put up between 10 and 25 percent of the project's cost. A bank made a construction loan to cover the rest of the building cost. But the bank usually wouldn't make the loan unless the developer met two conditions: first, got a commitment for a long-term mortgage from, say, an insurance company to repay the bank loan once construction was completed; and second, provided a personal guarantee for the bank loan.

This arrangement automatically created safeguards. The bank had a cushion (the developer's investment) against a default. To minimize its loss, the bank could also seize the developer's home and personal wealth (that's what the guarantee meant). The risks made developers cautious. Likewise, the permanent mortgage lender typically wouldn't give a commitment unless persuaded that the project was viable. To do that, the developer usually had to line up a few big tenants in advance. Unfortunately, this system broke down in the 1980s.

The first break resulted from the 1981 tax law, which liberalized depreciation deductions for real estate. Office buildings, hotels and shopping centers instantly became huge tax shelters. Developers could raise their part of a project's costs by selling ownership shares to outside investors. "They {investors} were looking at the tax advantages, not the economics {of the building}," says Saul Leonard of Laventhol & Horwath, an accounting firm. Construction boomed. So many new office buildings went up between 1980 and 1984 that the nationwide office vacancy rate jumped from 4 to 15 percent.

The wonder is that the building boom continued even after the Tax Reform Act of 1986 curbed real estate tax shelters. Savings associations, often with close ties to developers, provided gobs of money, as did commercial banks. Between 1984 and 1989, bank real estate loans increased $366 billion, rising from 25 to 37 percent of all bank lending. Worse, lending standards were relaxed. Construction loans often covered 100 percent of a project's costs. Personal guarantees were weakened or waived, as was the requirement for a permanent mortgage commitment.

In part, the banks' enthusiastic lending reflected desperation. Many of their traditional corporate clients had deserted them and were borrowing directly from the securities markets. The banks needed to fill the void. Mostly, though, lax lending was fed by speculative buying of commercial properties. Pension funds, foreign investors and others purchased buildings at increasingly unrealistic prices. Developers could repay their bank loans by selling finished buildings to outside investors.

It was crazy. "Rents were falling, while values {building prices} were rising," says economist Raymond Torto of Coldwell Banker. Despite double-digit office vacancy rates, banks lent on inflated values. This aggravated the overbuilding and made the ultimate market collapse worse. All developers didn't overbuild, but all have been affected by it. Many projects now can't meet their loan payments from rental income and can't be sold for what they cost to build. By June, banks had $28 billion in bad real estate loans. The total is headed up. Just recently, Chase Manhattan increased its reserves for bad loans by $650 million.

The goods news is that the colossally wasteful overbuilding of the 1980s is now ending. The investment funds that went into real estate can be more productively used elsewhere. Half-empty office buildings can gradually fill up. Hotels will have fewer unused rooms. Shopping centers will be busier. With time, all this will improve the economy's efficiency and raise living standards. The bad news is that someone has to pay for the real estate debacle. The initial losers are developers, investors and the bank shareholders. But if the costs rise too high, taxpayers may have to pick up some of the bill.

All speculative bubbles look insane with hindsight. This one looks especially foolish, because high vacancy rates should have deterred banks and investors. There were too many office buildings, hotels, malls and casinos. By temperament, developers are optimistic. Bankers should be skeptical. They weren't. Says a federal regulator: "The developers ate the bankers' lunch."