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Onward,
Alexander, Jeffrey, Becky and Deva
November
20, 2006
Alan Greenspan, Homewrecker
Housing
Bubble Smack-Down
By MIKE WHITNEY
Give me 5 minutes and I'll convince
you that you should sell your house immediately and invest your
life-savings in gold or a Swiss bank-account.
Okay?
For some time now we've been
hearing about the so-called housing bubble and what effect it
could have on your net worth and future. Well, the numbers are
finally in and you can decide for yourself whether its time to
sell now or try to ride out the storm.
In 2000 the total value of
homes in the US was $11.4 trillion. Today that number has shot
up to $20.3 trillion; nearly double.
At the same time, mortgage-debt
in 2000 was a trifling $4.8 trillion (about half) while in 2006
it skyrocketed to a whopping $9.3 trillion.
So, how do we explain these
enormous increases in value? After all, wasn't the housing boom
just the natural outcome of "supply and demand"?
No it wasn't. That's an unfortunate
myth that should be interred with the withered remains of Milton
"free-market" Friedman.
If we really want to know what's
going on, we need to look back at the machinations at the Federal
Reserve in 2001, that's when Greenspan lowered interest rates
to 1.5% to soften the blow from the stock market meltdown. Rather
than tighten interest rates and let the country to go through
a period of recession, Greenspan lowered rates and ramped up
the printing presses to "full-throttle".
Voila; the housing bubble!
Or what the conservative "Economist" magazine calls
"the largest equity bubble" in history.
The housing bubble has nothing
to do with supply and demand or with the fictional increase in
workers salaries. (which have actually gone down since Bush took
office) Rather, it is the predictable result of dramatically
increasing the money supply while expanding personal debt via
home-mortgages.
Remember, the central banks
are not in the mortgage business; they are in the "money-pedaling"
business. And the way you sell more money is by making it as
cheap as possible. The Fed intentionally inflated the bubble
with cheap money so they could keep the printing presses whirring-along.
They worked in concert with the banks to lower the requirements
for mortgages so they could attract an endless swarm of "unqualified"
customers who wanted to join the feeding-frenzy.
Isn't that what happened?
And, didn't that make it possible
for every Tom, Dick and Harry to borrow hundreds of thousands
of dollars on "no-down payment", "interest only",
ARMs or other equally risky mortgage-packages?
Of course it did.
There are some who will argue
that the Federal Reserve just made an honest mistake and were
merely trying to steer the country away from impending recession.
That may be true, but let's
consider the facts before we draw any hasty conclusions.
Did the Federal Reserve double
the money supply in the last 7 years?
Yes.
Did they know what they were
doing?
Yes.
Did they know that printing
more money creates inflationary pressures and reduces the value
of money already in circulation?
Yes.
Did they realize that the money
was going directly into the real estate market where it was creating
an "unsustainable" equity bubble that would eventually
crash and destroy the lives' of hundreds of thousands of Americans
whose greatest asset is their home?
Of course, because it's the
Federal Reserve which produces all the relevant facts and figures,
charts and graphs, about increases (and trends) in the housing
market. How could they NOT know?!?
In other words, they doubled
the money supply and then sat back and watched while $4.5 trillion
went directly into the real estate market via mortgage loans
to people who were "under-qualified".(knowing that
these same people would eventually fail to meet their payments
and adversely effect the entire market)
The Federal Reserve knew all
of this. In fact, they knew where every dime was going, but decided
to persist in their swindle to the bitter end.
Have the real effects of this
monster-bubble been softened by the huge trade deficit?
Yes, because America currently
borrows $800 billion a year from China, Japan etc. which keeps
the economy sputtering along while our manufacturing sector continues
to be ransacked.
The $800 billion account deficit
is like a sedative which lulls us to sleep while the country
is looted right in front of our eyes. For example, in the last
12 years, foreign ownership of US assets has soared from $3 trillion
to over $12 trillion.(400%) At the same time, over 13,000 major
US companies have been sold to foreign corporations since 1980.
Nevertheless, Americans are only-too-happy to ignore these unpleasant
facts as long as they can totter off to Wal-Mart to buy little
Johnny his new video-game. It's only a matter of time before
the scattered, bleached bones of American industry appear everywhere
across the American heartland.
And, does the Fed realize that
Americans borrowed another $825 billion from their home equity
in the last 12 months (to spend on house repairs, shopping, boats
etc) and that without that consumer spending the nation's growth
rate (GDP) will shrivel to nothing?
Yes, because they provide all
that data, too.
So, what does this mean for
the homeowner whose future depends on the steady increase in
his home equity? What can he expect?
Well, first of all, you can
ignore all the gibberish you hear on the business channel about
"soft landings" and a "temporary downturn".
There'll be no soft landings.
This is the Big One; Real Estate Armageddon followed by a plague
of locusts.
JUST LOOK AT THE NUMBERS! There's
a $10 trillion difference between the aggregate in 2000 and 2006!
$4.5 trillion of that is new mortgage-debt! That's more than
a little "froth" as Greenspan likes to say. In an economy
that's currently growing at a feeble 1.6%, a plummeting housing
market could pave the way for another (dare I say it) Great Depression.
$10 trillion!?! Some things
are worth repeating.
First of all, (if we compare
our situation to what happened in Japan during the 1990s) we
can expect that prices will continue to fall for years to come,
perhaps, a decade or more. Many of the slower markets are already
showing a decline of 10% to 20%. This is a trend that is likely
to speed up dramatically in 2007 when $1 trillion in ARMs reset.
That's when we'll begin to see a truly new phenomenon in the
US, that is, people who've always been solid members of the middle
class sliding downwards into the ranks of the working poor.
By 2008, if the present trend-lines
persist, housing prices will probably drop to 25% to 30% of their
2005 value; diminishing equity value by approximately 45% to
50% for most homeowners.
If you own your home outright;
you can sweat it out, but if you got into the market late; you're
toast. You'll be joining the throng of mortgage-slaves who are
shackled to loans that are significantly higher than the current
value of their house.
Imagine paying off a loan for
$400,000 when your house has been reassessed at $250,000 or $300,000;
that'll be the reality for an estimated 30 million Americans.
Meanwhile, inventory will continue to grow (already at an 8 month
backlog) the economy will continue to contract, and the dollar
will continue to weaken. (Many of the major home builders; Centex,
Beazer and Toll Bros, are reporting that profits are down by
nearly 65%.)
At the same time the Fed just
issued another $10 billion in Treasury Bonds last week raising
the national debt to a mind-boggling $8.6 trillion. This loosey-goosey
approach to printing fiat money and creating debt explains the
recent surge in the markets. As "The Daily Reckoning's"
Richard Daughty says, the "bull market is manufactured from
rampant government deficit-spending and financed by the Federal
Reserve creating the money."
Amen. Its all fluff and there's
nothing to it. It's just loose money finding a temporary perch
before the approaching squall. Don't trust the smoke and mirrors.
Behind the merriment and gusto, Wall Street analysts are expecting
a collapseand soon.
How soon, you ask?
Well, Daughty also notes that
"revolving credit like credit card loans grew by $2.85 billion,
or at an annual rate of 4.00%, to $857 billion."
So, credit card debt is going
up, which is an indication that the people who were siphoning
money from their home equity have switched over to plastic. That's
sure sign the writhing consumer-beast is in its last throes.
The end is near.
Why should I care about Net
Long-term Capital Inflows?
In another bit of disheartening
news the net long-term capital inflows fell short of what the
US needs to cover the current account deficit. The inflows were
only $65 billion when we need $70 billion to make ends meet.
This is another way of saying that foreigners are no longer mopping
up our red ink. Interestingly, foreign central banks are buying
considerably fewer Treasurys; $9 billion in US securities and
a paltry $8 billion in Treasury bonds.
What does it mean? It means
that no is dim-witted enough to buy our debt anymore because
we're no longer a good risk.
That's a very bad sign. Under
different stewardship the "full faith and credit" of
the US Treasury meant something. That's no longer true.
Also, according to Marketwatch,
"US residents purchased a net $22.9 billion in foreign securities,
up from $2.7 billion in August. Foreign holdings of dollar-denominated
short-term securities, including Treasury bills, fell by $10.8
billion."
Foreign investments are up
$20 billion in one month?!? Are you kidding me?
So, the smart money is getting
out of Dodge pronto; leaving the rest of us behind in a leaky
canoe.
Thanks, Greenspan.
Some of you may have seen Alexander
Cockburn's shocking article "Lame Duck" last week on
Counterpunch. Cockburn refers to a report published by the Financial
Services Authority (FSA) "a body set up under the purview
of the British Treasury to monitor financial markets and protect
the public interest by raising the alarm about shady practices
and any dangerous slides towards instability."
The report "Private Equity:
A Discussion of Risk and Regulatory Engagement" states clearly:
"Excessive leverage: The
amount of credit that lenders are willing to extend on private
equity transactions has risen substantially. This lending may
not, in some circumstances, be entirely prudent. Given current
levels and recent developments in the economic/credit cycle,
the default of a large private equity backed company or a cluster
of smaller private equity backed companies seems inevitable.
This has negative implications for lenders, purchasers of the
debt, orderly markets and conceivably, in extreme circumstances,
financial stability and elements of the UK economy."
The problem is even greater
in the US where unregulated fractional lending has allowed banks
to loan unlimited amounts of money on measly reserves. Hence,
"the default of a large private equity company is inevitable".
The whole deregulated banking scam has turned the system into
a Vegas-style "crap shoot" with no guarantees that
you'll ever see your money again. The same is true with the new-fangled
investment "instruments" like hedge funds which contain
few tangible assets and more and more "collateralized debt".
That means that they depend heavily on the "worker bees"
at the bottom of the economic Totem Pole, who are expected to
continue making their payments even while the economy begins
to swoon.
The present system is fraught
with peril and likely to come crashing down in a heap. As Cockburn
sagely notes, "The world's credit system is a vast recycling
bin of untraceable transactions of wildly inflated value."
"Market transparency"
has gone the way of the Dodo. The new "deregulated"
markets are intentionally opaque so the medicine men and hucksters
who designed them could fleece the public from the comfort of
their Wall Street enclaves. No one should be too surprised that
the whole rickety contraption is tilting towards the dumpster.
Happy Days
in the Weimar Republic
So, what was the "Grand
Plan" the Fed had in mind when they decided to anesthetize
the American public with low interest rates and flood the planet
with worthless green scrip?
Did they think that Bush would
corner the oil market and, thus, force the rest of the world
to take our anemic greenbacks? Or were they just planning to
steal every last farthing from the American people before they
loaded the boats and fled to more promising markets in Asia?
Or perhaps they were delusional
enough to believe that really wonderful things would happen if
they just kept tossing banknotes into the Jet-stream like New
Year's confetti?
Whatever the madcap rationale
might have been, the country is now facing an agonizing wake-up
call as the full-effects of Greenspan's tenure materialize and
the stronghold of global consumerism deteriorates into Weimar
USA.
In the long run, Greenspan's
treachery will loom larger then that of his "would-be"
understudy, Bin Laden. He put the country on the fast-track to
disaster.
Just watch as the "For
Sale" signs go up on lawns across America in Dear Alan's
honor.
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