Give me five
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.
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
percent to soften the blow from the stock market meltdown. Rather than tighten
interest rates and let the country 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.
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
Isn�t that what
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 seven years?
Did they know what
they were doing?
Did they know that
printing more money creates inflationary pressures and reduces the value of
money already in circulation?
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
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?
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 that 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
percent). 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 videogame. It�s only a matter of time before
the scattered, bleached bones of American industry appear everywhere across the
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
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
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 percent, a plummeting housing market could pave the way for another
(dare I say it?) Great Depression.
dollars! 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 percent to 20
percent. 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 percent to
30 percent of their 2005 value; diminishing equity value by approximately 45
percent to 50 percent 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 houses.
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 percent.)
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 collapse . . . and
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 percent, 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 a sure sign
the writhing consumer-beast is in its last throes. The end is near.
Why Should I
Care About Net Long-term
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 Treasuries; $9 billion in US securities and
a paltry $8 billion in Treasury bonds.
What does it mean?
It means that no one is dimwitted 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.�
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.
Some of you may
have seen Alexander Cockburn�s shocking article, �Lame Duck,� 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 lend
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.�
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
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
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.
Mike Whitney lives in Washington state. He can be reached at: email@example.com.