As the housing bubble bursts, being the Fed means never having to say you're sorry.

[marmar]

from TPMCafe:


Being the Fed Means Never Having To Say You’re Sorry
By Dean Baker | bio


Everyone knows who the Federal Reserve Board is. They are the folks who told us that there was no housing bubble. Then they told us that there might be some problems with housing, but it would be restricted to the subprime market, and was no big deal. Last weekend at their annual meeting of central bankers in Jackson Hole, Wyoming, they seemed to agree that the housing market is somewhat of a problem. However, just like President Bush in Iraq, they were nonetheless confident that everything is under control.

Excuse me if I don’t share their confidence. The country is now seeing the beginnings of an unprecedented drop in housing prices. House prices in many formerly hot markets, like Las Vegas, San Diego, and Miami, are now falling at double-digit annual rates. Prices are also falling in many other cities, although at a somewhat less rapid pace. For the first time since the depression the country will be seeing nominal declines in house prices nationwide.

And of course this is just the tip of the iceberg. With record supplies of unsold and vacant homes, and demand suddenly curtailed by a sharp cutback in credit, there is no way that house prices will stop falling anytime soon. Trillions of dollars of housing equity will vanish in the next few years as the bubble deflates and house prices return to trend levels.

The fallout from this drop in housing prices will go well beyond the subprime meltdown. The housing sector is still almost 5 percent of the economy. It has already contracted by close to 20 percent and will likely contract by another 20 percent or more. The loss of trillions of dollars of equity in housing will almost certainly lead to a sharp reduction in consumption through the wealth effect. The basic story is that homeowners can no longer use their homes as ATMs when there is no equity against which to borrow.

And of course as more people end up with negative equity, the greater is the likelihood that they will default on their mortgages. This could ramp up the losses by another magnitude for those suckers holding mortgage backed securities and their various derivatives. .....(more)

The complete piece is at: http://www.tpmcafe.com/blog/coffeehouse/2007/sep/03/being_the_fed_means_never_having_to_say_you_re_sorry_0

[zbdent]

1. Aren't they also the guys who decided to pump dozens of billions of dollars

into the pockets of stockholders in a couple of days ... despite the fact that that Bush said that this country couldn't afford to spend $5 billion A YEAR to make sure that America's children get minimal preventative health care?