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Another great article by Mike Whitney - Soup Kitchen U.S.A.
The days of the dollar as the world’s “reserve currency” may be drawing to a close. In August, foreign central banks and governments dumped a whopping 3.8% of their holdings of US debt. Rising unemployment and the ongoing housing slump have triggered fears of a recession sending wary foreign investors running for the exits. China, Japan and Taiwan have been leading the sell off which has caused the steepest decline since 1992.
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Bernanke is expected to drop the Fed funds rate on September 18. The move will provide more “easy credit-crack” for the addicts on Wall Street but it could also trigger a run on the dollar. That’s what keeps the Fed-chief up at night.
The Bush Team was warned repeatedly---by the BIS, the World Bank, the IMF and the European Central Bank ECB---that their policies were “unsustainable” and would end in an economic meltdown. But they brushed aside the warnings with the same casual indifference as they did the critics of the war in Iraq.
Why would they care if the country suffered? Their friends would still get their massive, unfunded tax cuts. Their private armies and “no bid” contractors would still get their payola. The Democrats would still cave in on the enormous “off budget” war spending. And, they’d still be able to print as much counterfeit money as they chose until every last copper-farthing was drained from the public till.
.
.
Consider this: US GDP is 70% consumer spending. That means that wages have to increase beyond the rate of inflation OR THE ECONOMY CAN’T GROW. It’s just that simple. So how is it that 50% of the American people still believe Bush’s supply side baloney that cutting taxes for the uber-rich strengthens the economy? How does that increase wages or build a healthy middle class. If we want a strong economy wages have to keep pace with productivity so that workers can buy the goods they produce.
.
.
The devastation in real estate is almost too vast to comprehend. The mortgage bubble is roughly $5.5 trillion, and yet, prices have just begun to fall. It’s a long way to the bottom and there’s bound to be plenty of bloodshed ahead. Two million homeowners will lose their homes. 151 mortgage lenders have already gone belly up. Many of the hedge funds—which are loaded with billions of dollars in “mortgage-backed” securities are struggling to stay alive. Perhaps the most shocking projection was made by Yale University Professor, Robert Schiller, who believes that home prices could decline as much as 50% in some of the “hotter markets”. (Schiller’s book “Irrational Exuberance” predicted the dot.com bust before it took place) The effects on the US economy would be considerable. If other factors come into play---like a stock market crash and a subsequent period of deflation---we could see housing prices descend 90% as they did between 1928 and 1933.
It’s possible.
Typically, housing bubbles deflate very slowly, over a period of 5 to 10 years. Not this time. Credit problems in the broader market are speeding up the pace of the decline. The subprime sarcoma has spread to all loan categories and filtered into the banking system. This is forcing the banks to hoard reserves to cover their potential losses (from CDOs and mortgage-backed bonds “gone bad”). Now, even credit worthy applicants are being turned away on new mortgages. At the same time, “nearly half of borrowers with adjustable rate mortgages were not able to refinance their loans. That’s a major concern for policymakers as an estimated 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year.” (Associated Press)
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SOUP KITCHEN USA
Roubini is right. The Fed doesn’t have the tools to fix this problem. It needs to be addressed on the policy level. The “structured finance” model has proved to be an abysmal failure. It has created an unstable and opaque market full of bizarre-named debt-instruments---CDOs, CDSs, CLOs, MBSs, etc—which collapse under stress. Congress needs to step up and force regulators to ban these poisonous bonds and swaps and restore the market’s credibility.
We also need to address the expanding wealth gap which is the result of 20 years of wage stagnation. Personal savings can only grow if wages keep pace with productivity; otherwise workers will try to meet their needs by increasing their debt-load. That’s why we’re in the fix we are now. Working families are having a harder time making ends meet. It’s only natural they would try “speculating” in the real estate market to get ahead. After all, everyone wants a piece of the “American dream”. Unfortunately, many homeowners stand to lose more now than when the dot.com bubble burst. The downturn in housing is certain to wipe out trillions in market value.
There are no quick-fixes or “silver bullets” as Bush likes to say. These issues will require a fundamental change in our political consciousness. Nobody’s going to fix this for us. It’ll take organization, energy and an unwillingness to accept failure.
It’ll take years to dig our way out of this mess. In the meantime, we need to close-ranks and prepare ourselves for tougher times ahead. The dollar will weaken, housing prices will fall, and economic conditions will continue to deteriorate. We can either organize--and meet the challenges we face head-on--or form a line and wait for the soup kitchens to open.
.
.
Bernanke is expected to drop the Fed funds rate on September 18. The move will provide more “easy credit-crack” for the addicts on Wall Street but it could also trigger a run on the dollar. That’s what keeps the Fed-chief up at night.
The Bush Team was warned repeatedly---by the BIS, the World Bank, the IMF and the European Central Bank ECB---that their policies were “unsustainable” and would end in an economic meltdown. But they brushed aside the warnings with the same casual indifference as they did the critics of the war in Iraq.
Why would they care if the country suffered? Their friends would still get their massive, unfunded tax cuts. Their private armies and “no bid” contractors would still get their payola. The Democrats would still cave in on the enormous “off budget” war spending. And, they’d still be able to print as much counterfeit money as they chose until every last copper-farthing was drained from the public till.
.
.
Consider this: US GDP is 70% consumer spending. That means that wages have to increase beyond the rate of inflation OR THE ECONOMY CAN’T GROW. It’s just that simple. So how is it that 50% of the American people still believe Bush’s supply side baloney that cutting taxes for the uber-rich strengthens the economy? How does that increase wages or build a healthy middle class. If we want a strong economy wages have to keep pace with productivity so that workers can buy the goods they produce.
.
.
The devastation in real estate is almost too vast to comprehend. The mortgage bubble is roughly $5.5 trillion, and yet, prices have just begun to fall. It’s a long way to the bottom and there’s bound to be plenty of bloodshed ahead. Two million homeowners will lose their homes. 151 mortgage lenders have already gone belly up. Many of the hedge funds—which are loaded with billions of dollars in “mortgage-backed” securities are struggling to stay alive. Perhaps the most shocking projection was made by Yale University Professor, Robert Schiller, who believes that home prices could decline as much as 50% in some of the “hotter markets”. (Schiller’s book “Irrational Exuberance” predicted the dot.com bust before it took place) The effects on the US economy would be considerable. If other factors come into play---like a stock market crash and a subsequent period of deflation---we could see housing prices descend 90% as they did between 1928 and 1933.
It’s possible.
Typically, housing bubbles deflate very slowly, over a period of 5 to 10 years. Not this time. Credit problems in the broader market are speeding up the pace of the decline. The subprime sarcoma has spread to all loan categories and filtered into the banking system. This is forcing the banks to hoard reserves to cover their potential losses (from CDOs and mortgage-backed bonds “gone bad”). Now, even credit worthy applicants are being turned away on new mortgages. At the same time, “nearly half of borrowers with adjustable rate mortgages were not able to refinance their loans. That’s a major concern for policymakers as an estimated 2.5 million mortgages given to borrowers with weak credit will reset at higher rates by the end of next year.” (Associated Press)
.
.
SOUP KITCHEN USA
Roubini is right. The Fed doesn’t have the tools to fix this problem. It needs to be addressed on the policy level. The “structured finance” model has proved to be an abysmal failure. It has created an unstable and opaque market full of bizarre-named debt-instruments---CDOs, CDSs, CLOs, MBSs, etc—which collapse under stress. Congress needs to step up and force regulators to ban these poisonous bonds and swaps and restore the market’s credibility.
We also need to address the expanding wealth gap which is the result of 20 years of wage stagnation. Personal savings can only grow if wages keep pace with productivity; otherwise workers will try to meet their needs by increasing their debt-load. That’s why we’re in the fix we are now. Working families are having a harder time making ends meet. It’s only natural they would try “speculating” in the real estate market to get ahead. After all, everyone wants a piece of the “American dream”. Unfortunately, many homeowners stand to lose more now than when the dot.com bubble burst. The downturn in housing is certain to wipe out trillions in market value.
There are no quick-fixes or “silver bullets” as Bush likes to say. These issues will require a fundamental change in our political consciousness. Nobody’s going to fix this for us. It’ll take organization, energy and an unwillingness to accept failure.
It’ll take years to dig our way out of this mess. In the meantime, we need to close-ranks and prepare ourselves for tougher times ahead. The dollar will weaken, housing prices will fall, and economic conditions will continue to deteriorate. We can either organize--and meet the challenges we face head-on--or form a line and wait for the soup kitchens to open.
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