This started as a comment inWhere have all the flowers gone?, but veered off into a bit of macro-economics, so it seemed diary-worthy.
I continue to be stunned at how easy it is to learn the wrong lessons from history. One of those lessons appears to be the lesson that the US was brought out of the depression in the 1930s by WWII. This is ONLY true to the extent that weapons manufacture led to good paying manufacturing jobs here in the US (working in a weapons factory is how my grandfather managed to support his family).
However, giving all the credit to the war industry bypasses the primary impetuses for the recovery: the creation of a middle class through the policies of the New Deal; and fiscal policies that prevented bubble-style economic frenzies and crashes (formerly known as panics). Such panics were a regular element of the economy until the New Deal changed the rules, reducing the risks presented by market speculation.
Sadly, the clever folks elected since roughly 1980 have learned the incorrect “war is good for the economy” lesson (remember: it took most of the 1970s to climb out of the Vietnam debt hole), and unlearned the New Deal controls on speculation lesson. As a result, all of the growth that occurred since the policy reversals were implemented is in the process of unwinding.
Because of this wrong lesson, the “no taxes, no regulation” mantra’s success has essentially wiped out all segments of the economy.
The little bit of the economy that was propping everything else up, disguising the recession, was residential construction, which has now gone kerflooey. And, while the bobbleheads on TV try to claim we’ve hit bottom, don’t drink the Kool-aid. Look at all the other lies they’ve tried to sell us for the last decade and consider the following graph:
See what this chart means below the fold…
We are just about to hit the peak of subprime mortgage resets (paler green bars – the peak is in the next month or two – just in time for the spring market), THEN we get a reprieve in which the reset level drops to the same level as last summer (you know, when all this doo-doo started to hit the fan), from which we then slide into the Alt-A and Option ARM resets (orange and pale orange bars).
These Alt-A and Option ARM mortgages were packaged up and marketed as PRIME mortgages to bond funds and other supposedly “safe” “low-risk” investment options – the kinds of things our elderly parents’ IRAs and municipalities have invested in. (Think about that for a minute.)
Here’s the kicker: the majority of Alt-A and Option ARM loans are “stated income” loans, also known as “liar loans.”
These are loans made to people who said:
“Um, yup, I earn, $x.”
And the bank said,
“Ok, here’s a really big check.”
Unlike the subprimes, which are mostly non-investment loans to primary homeowners with less-than-stellar financial records, the Alt-A and Option ARM loans were largely taken out by investors – people who don’t live in the houses they bought. These folks have far less incentive to try to keep the house, and are thus far more likely to “walk away,” leaving the properties to foreclosure.
As the Fed in Boston describes in “Subprime Outcomes: Risky Mortgages, Homeownership
Experiences, and Foreclosures,” a primary predictor of homes going to foreclosure is a drop in price:
… homeowners who have suffered a 20 percent or greater fall in house prices are about fourteen times more likely to default on a mortgage compared to homeowners who have enjoyed a 20 percent increase.
Due to the massive number of defaults already, the inventory in the market is also massive. In the law of supply and demand, extra supply leads to decreasing prices. Oddly enough, that’s what’s happening – prices are dropping.
The sub-prime mess will get worse, but the Alt-A and Option ARM mess will make the current crisis look like the “good old days.” Housing inventory is likely to skyrocket in just over a year, further yanking down prices in a market that will not yet have recovered from the sub-prime tumble.
The catastrophic house price bubble was possible because (a) New Deal regulatory policies on banks were rolled back, and because (b) the Bush administration has intentionally allowed the bubble to build (even encouraged it) by keeping interest rates artificially low – it was the only way they could think of to hide (in the economic statistics, but not from the people who are losing ground) the economic devastation brought about by their absurd economic policies.
In the mean time, the amount of $$ held in cash by US banks has slipped again. We’re now looking at something well into the negative billions. This is after the fed has pumped over $40 billion into the banks via the “discount window” and the idiotic Bear Stearns deal.
What this means is that, when you go to the bank and take money out of your checking account, you’re taking it out of the bank’s own virtual credit card, because there’s no actual money there. They had to borrow it to give it to you, because they pumped all the actual money into loans that are defaulting.
The implications of this for the economy as a whole are dire. And the band-aids being proposed legislatively will do nothing in the face of the republican train-wreck economy.
Sometimes a bad idea just keeps coming back.