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Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

Using The ‘Rule Of 15’ To Identify Local Housing Bubbles

“All real estate is local.” A statement often repeated by those in the housing industry. Now, there might be a way to determine if housing bubbles are local too. CNBC contributor Carmen Wong Ulrich wrote on July 10:

Ever hear of the real estate Rule of 15? I mentioned it yesterday on a segment with Al Roker on the TODAY Show as we discussed a question tossing and turning through many American heads these days: “Should I buy or rent?”

Here’s how the rule goes: Let’s say you’re looking at a 2-bedroom house or apartment:

1) Find the going rent in the neighborhood or location you’re interested in—which you can track down through sites like Zillow.com and Trulia.com—and calculate how much you’d spend in rent a year. Say, $2,000 a month would mean an annual rent of $24,000.
2) Multiply that number—your annual rent—by 15. (in this case: $360,000)
3) Now look up and compare the going price of a comparable space in the same area, to buy.
4) If that number is much greater than your annual-rent-times-15, the location probably still has a way to go down in home value. The bubble here ain’t done burstin’ and you should rent for a while. The last thing you want to be is upside-down on a mortgage—owing more than your new home is worth.

Hmm. Time to whip out the old calculator and try the “Rule of 15” myself:

1) My girlfriend and I rent out a 2-bedroom, 2-bath apartment on the northwest side of Chicago. We pay $1,100 a month, or $550 each, which is more-or-less the going rate in the neighborhood. Therefore, annual rent is $13,200.
2) Multiplied by 15, this comes out to $198,000.
3) I took the average going price of comparable 2-bedroom, 2-bath condo units for sale in our neighborhood, and found that this number comes out to $223,444.
4) The difference between the numbers arrived at in step 3 versus 2 is $25,444. According to the “Rule of 15,” prices for comparable 2-bedroom, 2-bath units in the area are headed south. Judging by the number of “for sale” signs in front of some of these buildings (and in the neighborhood in general), there might be something to this Rule.

Just one thing I don’t understand though. Why the “15?” I’ve sent an e-mail to Ms. Wong Ulrich, hoping for an explanation…

Source:

“Buy or Rent? Learn the Rule of 15”
Carmen Wong Ulrich
CNBC, July 10, 2008

New Study: Housing Bust Causing Massive Losses In Household Wealth

Just wanted to share a press release with you from the think-tank of our old friend, Dean Baker:

Housing Market Meltdown Will Cause Massive Losses in Household Wealth

Plummeting house prices will leave millions of homeowners dependent almost exclusively on Social Security in their retirement

For Immediate Release: July 9, 2008
Contact: Alan Barber, (202) 293-5380 x 115

WASHINGTON, DC- As Senators McCain and Obama fine-tune their plans for Social Security in preparation for the 2008 presidential election, a new report from the Center for Economic and Policy Research (CEPR) shows that, due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth. This means that they will be almost completely reliant on Social Security and Medicare to support them in their retirement years.

The study, “The Impact of the Housing Crash on Family Wealth,” analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios- real house prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

“This extraordinary destruction of wealth will have tremendous implications for millions of families,” said report co-author Dean Baker. “Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce.”

The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004. These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median household in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent. If prices fall by 20 percent, the most pessimistic scenario, families in the 55-64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

This analysis should also prompt serious re-examination of policy proposals to cut Social Security and Medicare for near retirees. Baker commented, “policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear.”

In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board’s 2004 Survey of Consumer Finance. The authors also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.

###

The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR’s Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Source:

“Housing Market Meltdown Will Cause Massive Losses in Household Wealth”
Press Release
Center for Economic and Policy Research, July 9, 2008

Peter Schiff TV Appearances

Peter Schiff, author of the book Crash Proof: How to Profit from the Coming Economic Collapse, appeared on FOX News Saturday morning and CNBC Tuesday morning. Schiff told viewers of “Fox Bulls & Bears” that the downturn in the U.S. economy goes beyond a “slowdown.” He warned:

We’re already in a severe recession, and it’s going to get a lot worse.

Commenting on the poor performance of the U.S. stock market lately, the president of Connecticut-based Euro Pacific Capital said:

This is a bear market. We’ve been in a bear market since 2000. The market’s going a lot lower, not only in nominal terms, but in real terms.

Later on in the show, Schiff gave a timeframe for how long he thought the bear market would last. He told viewers:

We are in a secular bear market. It’s been going on for 8 years. It’s going to go on for another 5 to 10 years.

As to where investors may want to look at putting their money, the host of the weekly radio program “Wall Street Unspun” said:

It’s [oil] probably going up to $150…

And, you know, trying to catch a falling knife in the financials? They have a long way to go down. I wouldn’t touch them…

Look at gold. You want to see a good chart, look at commodities. Look at foreign currencies.

At the conclusion of the show, Schiff predicted:

Well, this week Bernanke said the economy was going to improve and inflation was going to moderate. He was wrong on both counts. The economy is going to get a lot worse. Inflation is going to get worse. And you’ve got to get out of the dollar. It’s going to fall at least another 10%.

FOX News Appearance
YouTube Video Link

On Tuesday morning, Peter Schiff appeared on CNBC’s “Squawk Box,” and responded when asked who was responsible for the financial mess the United States has found itself in by saying:

Well, first of all, it’s the government, and when I say the government, I also mean the Federal Reserve, that has artificially kept interest rates much too low in this country, and in so doing, they’ve encouraged a culture of consumption, of borrowing to buy things. In America, we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses, to take vacations. And what we’re seeing right now is the fact that we can’t pay any of this money back. And the lenders are cutting us off, and this whole bubble economy that we have is now deflating. But it never would have existed if we had honest money. If we were on a gold standard and we had higher interest rates, we would have been saving, we would have been producing, and we wouldn’t be in this mess.

Schiff shared his views about how to avoid a financial armageddon. He said:

We need to raise interest rates dramatically. What’s that going to do? It’s probably going to bankrupt most of the financials. It’s going to bankrupt a lot companies. We’re going to have to go through a big retrenchment because we basically spent ourselves into bankruptcy. But we can’t keep trying to reflate the bubble. That’s what the Fed is doing. That’s what the stimulus is trying to do. They’re trying to get us to spend more money. That’s the problem. We’ve spent too much. So, we’re going to have to live through a severe recession. If we keep fighting it, all we’re going to have is higher inflation, higher oil prices, higher commodity prices, and eventually, we’re going to get something far worse than just a severe recession. We could have hyperinflation and a complete destruction of our currency.

You can access the 7 minute 16 second CNBC segment here.

Sources:

“Fox Bulls & Bears”
FOXNews, June 28, 2008

“Squawk Box”
CNBC, July 1, 2008

Dow Headed Below 10,000?

Remember some of those “literary classics” from a few years ago that predicted new heights for the Dow Jones Industrial Average?:

• Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market, released November 14, 2000
• Dow 40,000: Strategies for Profiting From the Greatest Bull Market in History, released June 26, 1999
• Dow 100,000: Fact or Fiction, released September 30, 1999

Well, here’s a new forecast that points in the opposite direction. CNBC ran a piece today on how some analysts are saying that the Dow, which closed down 1.5% today to end at 11,215.5, is heading below 10,000. According to CNBC this morning:

Investors should ignore recent signs of strength and face up to the fact that we will face a prolonged bear market, John Carter, president of Trade The Markets, told CNBC Wednesday.

“Longer term we’re looking at a market that is a bear market,” Carter told “Squawk Box Europe.”

While we can expect a rally over the next three to five weeks, this is a downward spiral that is not going away any time soon, he said.

“A trend is a trend until it ends, and we’re actually looking for the Dow to take out 10,000 by the end of the year,” he added.

There are too few sectors holding the markets up, and too many dragging it down, to consider getting back into non-recession-proof sectors, according to Carter.

“A large percentage [of sectors], like financials, are getting hammered. A lot of the darlings of the past are going to get taken out back and get shot,” he said.

“I’m Your Man”

CNBC also spoke to Hugh Hendry, a partner at hedge fund Eclectica Asset Management, who added that technology stocks are also likely to be gunned down as the two were affected by bubble conditions. From the CNBC piece:

Hendry said the outlook is particularly bleak for financial and technology stocks — the two largest components of the S&P 500 — which he said have both seen a bubble.

“When a sector becomes infected by a bubble…what history reveals is it takes 25 years to regain the highs that we saw in real terms,” he said.

Source:

“Dow Will Sink Below 10,000: Strategist”
CNBC, July 2, 2008

Survey: 91 Percent Of Real Estate Appraisers Asked To Inflate Home Values

Here’s some disturbing information related to U.S. home prices that I came across this past Sunday. The Chicago Tribune’s Mary Umberger wrote:

When economic historians begin their postmortems on the housing bubble, they’ll zero in on nuggets such as:

A vast majority (91 percent) of real-estate appraisers say they’ve been asked to inflate the value of a home, according to ValuFinders Inc., a California firm that provides software for the housing industry.

The ValuFinders survey also reported that 81 percent of appraisers said they feared losing repeat business if they didn’t provide valuations in line with those from the requester.

Question is, how many appraisers actually followed through on these requests?

Source:

“Assessing the wages of a downturn”
Mary Umberger
Chicago Tribune, June 1, 2008

Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

Housing Pain To Continue?

Even though there’s more talk of a bottom in the U.S. housing market these days, I’m still not sold. I just haven’t seen any evidence out there which indicates a turnaround. However, I’m not the only one that sees further deterioration in the residential real estate market. Diana Olick, CNBC’s real estate reporter, made some good points yesterday regarding the continued weakness in homes sales. She wrote on her Realty Check blog:

The trouble is that there are a lot of factors working against sales right now — factors that are deteriorating, not improving. Number one is house prices. Sales may be bumping, but prices continue their slide down, and most of the “experts” I talk to think prices have a lot further to go, because foreclosures are mounting, as are inventories.

Then there’s the whole economy thing: We’ve said throughout this housing downturn that it’s unique because usually we see housing recessions in times of economic recession, and this housing downturn came before recession — and may have actually caused one.

Last year, we were still seeing job growth as housing faltered, but now we’ve seen 300,000 private-sector jobs lost in just the past four months. Add that to the credit crunch, and it doesn’t spell recovery for home sales…

In other words, I think we have a ways more to go.

Photo by Rene Asmussen, stock.xchng

On the topic of U.S. home prices, on Tuesday Yale University economist Robert Shiller said there’s a good chance prices will fall further than the 30% drop experienced during the Great Depression of the 1930s. During a speech at the New Haven Lawn Club yesterday, the founder of the Standard & Poor’s/Case-Shiller home-price index said, “I think there’s a good chance we’ll exceed that this time,” according to the Hartford Courant’s Eric Gershon. Home prices in the largest metropolitan areas across the nation have already dropped 15% since their peak in 2006. But, Shiller noted that real estate cycles typically take years to correct. Talk of the bursting of the housing bubble and subsequent turmoil it has produced led Shiller to warn:

This is the biggest financial crisis since the Great Depression.

Sources:

“Making Sense of Sales (Maybe)”
Diana Olick
CNBC, April 22, 2008

“Yale’s Shiller: U.S. Housing Slump May Exceed Great Depression”
Wall Street Journal (Developments Blog), April 22, 2008

“Home Prices Seen Falling Further”
Eric Gershon
Hartford Courant, April 23, 2008

Housing Porn

I’ve been meaning to write something for a while now on the television-based “housing porn” that blossomed during the U.S. housing boom earlier this decade. Unfortunately, James Poniewozik of Time beat me to the punch. I’m glad he did, because he nailed the phenomenon right on the head. Poniewozik wrote in “Pimp My Real Estate Market!” (April 21 issue) that:

Early this decade, TV both profited from and stoked the obsession with real estate. TLC’s Trading Spaces became a phenomenon. Real estate magnate and ‘80s relic Donald Trump reinvented himself as a prime-time star on The Apprentice. HGTV went from being an obscure channel to being one of the most popular destinations on the dial.

With the change in the psychology of home-owning– from the house as shelter to the house as investment, retirement vehicle and personal ATM– came a shift in home shows’ focus. Out of fashion went renovation programs like This Old House, about restoring details and loving a home for its character. In came playing the real estate market. Sell This House!, My House Is Worth What? and many more flattered the smug certainty of homeowners and speculators that their home equity would shoot endlessly up like shares of Google. HGTV, TLC and their ilk may not have created the real estate bubble, but they certainly supplied some of the hot air.

With the U.S.’s boomiest burgs going bust, these shows already seem as dated as wall-to-wall shag carpeting. Watching a rerun of House Hunters shot two years ago is like opening a time capsule. The sellers are swaggering; home prices are rising by the minute; the buyers are under pressure to decide!, decide!, decide! before another house flies off the market. Who are these confident sellers and brokers, you wonder, and what prosperous, optimistic nation do they live in?

You’d think that with the onset of the housing bust, Americans would finally understand that homes are places to live, not financial instruments, right? No way. Poniewozik wrote:

So many Americans still fixate on the dollar value of their homes– we’re literally too invested in them not to– and most of HGTV’s top-rated shows are still about buying and selling.

He concluded:

You’ll know that the bubble-besotted housing culture has really changed when the home channels stop focusing on houses as commodities to flip, invest in or date and start looking at them as places to live in.

Source:

“Pimp My Real Estate Market!”
James Poniewozik
Time, April 21, 2008

Quote For The Week

You’ll know that the bubble-besotted housing culture has really changed when the home channels stop focusing on houses as commodities to flip, invest in or date and start looking at them as places to live in.

At that point, it may finally be time to buy.

-James Poniewozik, who talked about the housing boom and home shows in “Pimp My Real Estate Market!” from the April 21 issue of Time.

The Failing Fed

Following through on a recommendation yesterday, I read the post “5 Reasons Why the Federal Reserve is a Failure!” from Bankaholic.com. It’s a great piece (especially the part about the Fed awarding gold stars to those deserving detentions), and I think you’ll enjoy reading it over the Easter weekend. Having obtained permission to re-post it, here is the article in its entirety:

No single quasi-private institution has as much influence on the worldwide economy as the Fed, and as a leader can head this institution for an indefinite term, no one man is as influential on the markets as the Fed Chair.

The Dollar has plummeted in the currency markets and shows few signs of recovery or even stabilization. The new style and policies that accompanied Bernanke into office have made the Forex markets more volatile than ever and even more difficult to predict. An examination of what has gone awry can help Forex traders understand this new era at the Fed.

1. The Fed ignored the signs
The Fed has stated that it will never act as a regulator in any financial market, but it has the duty to use its influence for reform when it sees signs of consumer exploitation. Since as early as 2001, at least two senior officials inside the Fed urged its board to call for tighter regulations in the housing markets, especially in abuses that were clearly evident in the handling subprime mortgages. At the time, the White House was singing the praises of America’s new society of ownership, so the Fed took this cue and did nothing.

These deceptive loans were making possible the dream of home ownership to millions of Americans, even to those who could not come close to affording it. Now these same Americans are living through a nightmare of foreclosure and debt, much in thanks to the Fed’s willingness to ignore long-term repercussions and revel in immediate accomplishments, no matter how hollow and transitory they might be.

2. The Fed did too little too late
Other than advocating for reform, the Fed should have fully committed to a strategy of lowering target interest rates. Instead, Bernanke procrastinated, and when he did finally announce a cut, it was insufficient and ineffectual, at best. On December 11th, the Fed dropped its benchmark rate by a quarter of a percent rather than the half of a percent that had been called for by analysts and investors. Wall Street promptly responded, as the Dow plummeted nearly 300 points in one day.

The Fed might argue that this cut was prudent and that a more drastic cut would have unnecessarily fueled a rise in inflation. However, many view the Fed’s temerity in this matter as merely an extension of its inertial proclivity towards inaction.

3. The Fed kept interest rates too low for too long
Though this may seem to contradict the statements above, one of the reasons that the Fed might have hesitated in cutting rates is that they were already too low to begin with. Greenspan’s long tenure at the Fed was defined by a tendency to aggressively cut interest rates, which he began to do frequently in 1987 after the drastic correction in the stock market.

This initial move helped stave off disaster, but the further rate cuts of the late 1990s eventually led to the dot-com bubble. Rates should have been raised again in the early 2000s; if this had been done, the US might have avoided the furious borrowing that has led to the current credit crunch.

4. The Fed’s view of inflation is flawed
The Fed seems rather befuddled by this important economic indicator. The soaring costs of food and energy are a phenomenon is the US and worldwide, but the Fed does not take these developments into account.

The Fed’s analysis focuses on “core inflation,” which excludes a number of indices that it views as transitory, including energy and food costs. “Headline inflation,” which does take these costs into account, is favored by European economists, who view high energy prices as a long-term trend. By choosing to disregard the rising costs of a barrel of crude oil and a bottle of olive oil, the Fed is ignoring reality.

5. The Fed gives gold stars to those deserving detentions
Fed policy following the recent economic slowdown has done nothing but reward those who helped caused it. The majority of financial stocks have suffered of late, and justifiably so. However, the Fed seems dedicated to bailing out even the worst of the perpetrators with the recent set of economic interventions that it has enacted.

While working to eliminate any downturn in the market might seem feasible for short-term success, it is a purely shortsighted endeavor that will hurt the economy in the long run. In order for a free market to truly exist, bear markets must coexist peacefully with bull markets. Unfortunately, the Fed has its bright orange vest on and is going bear hunting. This is a doomed outing, and one that is going to get us all hurt in the end.

Source:

“5 Reasons Why the Federal Reserve is a Failure!”
Bankaholic.com, March 15, 2008

The Great American Con

In the early days of Boom2Bust.com, the amount of material I encountered on a daily basis which was pertinent to the blog’s focus (educating/warning about a coming U.S. financial crash) was more than manageable. In fact, there were days when a lot of the material that came across my desk was way too Pollyannaish (being absurdly optimistic and good-hearted, believing in a good world where everything works out for the best all the time) instead of being realistic. My how things have changed. Now, I’m backlogged with bad news. And it seems that everywhere I look, Americans are changing their tune on the economy:

• Results from a USA Today/Gallup Poll of 1,025 American adults released today show 76% think we are in a recession.
• Results from a CNN/Opinion Research Corporation poll of 1,000 American adults released Monday show 74% believe the United States is now in a recession.
• A poll of 51 economists published last Thursday by the Wall Street Journal show 71% believe the economy is in recession.

Just this morning, U.S. Treasury Secretary Henry Paulson told NBC’s “Today Show” that:

We know we’re in a sharp downclimb and there’s no doubt that the American people know that the economy has turned down sharply. So to me, much less important is the label that’s placed on it today. Much more important is what we do about it.

It appears the three bears are getting the better of the “Goldilocks” economy. In fact, all this negativity reminds me of that movie “Kelly’s Heroes” and the exchange between the characters Oddball (Donald Sutherland) and Moriarty (Gavin MacLeod):

ODDBALL: Why don’t you knock it off with them negative waves? Why don’t you dig how beautiful it is out here? Why don’t you say something righteous and hopeful for a change?
MORIARTY: Crap!

While many would attribute the “negative waves” to a downturn in the business cycle, I read a brilliant piece this morning by Larry Elliott, economics editor for The Guardian (UK), which offered an alternative explanation for our economic woes. One, which Elliott argued, is rooted in the centuries-old conflict between the “haves” and “have-nots.” Yesterday he wrote:

But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital…

For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it’s payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

“See ya, wouldn’t want to be ya…”

Responding to those in the Pollyanna camp who still believe a recession can be averted, Elliott said:

The debate now is not about whether the US is in recession but how deep and long that recession will be. Super-bears have started to say that this is perhaps “The Big One”, by which they mean the onset of a new Great Depression. The need to rescue Bear Stearns has done little to still those voices.

As the economics team at HSBC recently pointed out, there has been a “catastrophic breakdown” of trust, and when that has happened in the past - the US in the 1930s, Japan in the 1990s - chucking extra money at the banks in the hope that they will start lending again proves ineffective.

Sources:

“Poll finds broad pessimism over economy”
JoAnne Allen
Reuters, March 18, 2008

“Three out of four say it’s a recession – survey”
David Goldman
CNN Money, March 17, 2008

“Paulson: We’re in A Sharp Economic Downturn”
Associated Press, March 18, 2008

“America was conned - who will pay?”
Larry Elliott
The Guardian (UK), March 17, 2008

Charting A U.S. Financial Crisis

I came across some excellent Wall Street Journal charts this morning which show how the present financial crisis in the United States came to be. Like that old saying goes, “A picture is worth a thousand words.”

Sources: WSJ Market Data Group, Federal Reserve, Dealogic, Equifax, Moody’s Economy.com, National Association of Realtors, St. Louis Federal Reserve, Dow Jones Indexes

Article Source:

“U.S. Mulls Next Steps in Crisis”
Bob Davis, Greg Ip, and Damian Paletta
Wall Street Journal, March 18, 2008

U.S. Housing Glut Gets Worse

As the air escapes from the U.S. housing bubble, it’s been hoped that after rising rapidly since 2005 the inventory of unsold homes in the United States would decline after leveling off in recent months. However, the Wall Street Journal reported this morning that the number of unsold properties for sale in major metropolitan areas grew modestly last month. James R. Hagerty, in a post for the Journal’s “Developments” Blog, wrote:

Total listings of homes in 29 metro areas at the end of last month were up 1.2% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif…

After rising rapidly since 2005, the inventory of unsold homes has leveled off at a high level in recent months. Economists and other market watchers say that is partly because some people who don’t have an urgent need to sell soon have pulled their homes off the market and are awaiting a recovery in the market. Ordinary homeowners must compete with builders seeking to unload inventory and lenders that have acquired homes through foreclosure.

Yet, even though properties are being yanked off the market, the inventory of unsold homes is still up 17% from February 2007 in 18 metro areas where ZipRealty is able to do a comparison. Hagerty noted that areas with the largest percentage increases in unsold inventory from January to February include Seattle (up 5.4%), San Francisco (up 4.8%), Minneapolis (up 4.4%), and Boston (up 3.7%).

To see the inventory of unsold homes in your area, check out the following interactive chart:

Interactive Chart
Source: ZipRealty

Source:

“Glut of Homes on the Market Grows, New Data Shows”
James R. Hagerty
Wall Street Journal “Developments” Blog, March 11, 2008