It's the Housing Bubble, Not the ***** Credit Crunch!

[girl gone mad]

Dean Baker
The American Prospect

The news media almost completely missed the housing bubble. They relied almost entirely on sources who either had an interest in not calling or attention to an $8 trillion housing bubble or somehow were unable to see it. As a result they did not warn the public that their house prices were likely to plunge in future years.

Having dismally failed in their jobs to inform the public, reporters are still relying almost exclusively on sources that completely missed the housing bubble. As a result, they are still badly misinforming the public, first and foremost by attributing the economic downturn to a credit crunch.

This is truly incredible. Homeowners have lost more than $5 trillion in housing wealth. There is a very well established wealth effect whereby $1 of housing wealth is estimated as leading to 5 to 6 cents of annual consumption. This implies that the loss of wealth to date would cause consumption to fall by $250 billion to $300 billion annually (1.7 percent to 2.0 percent of GDP). If you add in the loss of around $6 trillion in stock wealth, with an estimated wealth effect of 3-4 cents on the dollar, then you get an additional decline of $180 billion to $240 billion in annual consumption (1.2 percent to 1.6 percent of GDP).

These are huge falls in consumption that would lead to a very serious recession, like the one we are seeing. This would be predicted even if all our banks were fully solvent and in top flight financial shape. Even the soundest bank does not make loans to borrowers who it does not think can pay the loans back (except during times of irrational exuberance).

Obviously the problems of the banking system make the situation worse, but the real cause of the downturn is the collapse of the housing bubble, and the reporters who talk about the economy should know this. (Of course, they should have seen the housing bubble too.)

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=11&year=2008&base_name=its_the_housing_bubble_not_the#110778

[Trajan]

1. Consumers cannot pay their mortgages ...

Consumers cannot pay their credit card debt ...

I am finding a pattern here: Consumers are unable to pay ...

Why are they unable to pay ? .... I would posit this:

> They do NOT make enough income ...

> Worker income has been stifled by conservative economic policies

> Workers have not shared in the profits they helped create

I believe that; IF workers had received decent wage increases, like they should have: They would be paying their debts ....

They have been strangled by conservative philosophy that denies workers a piece of the pie ....

The economy has reached the breaking point because of this ...

MY opinion ....

[Double T]

3. Many similarities to the 1920s which led to the crash and depression.

The bottom is no where in sight and the other shoe hasn't even dropped yet.

[Trajan]

4. I agree ....

The only real way out, in my view, is from the bottom up ...

The upper classes can horse trade all they want: UNTIL consumers have some folding money to spend, there will be no recovery ....

[Double T]

5. Absolutely correct. Wrestling 'growth' away from the criminals on wall street.............

isn't going to be easy; somebody with guts and big brass ones has to do it!

[Democrats_win]

2. Astonishing. For 4+ years, the foreclosure crisis has been going on.

In my view, it was the Federal government and the FED who missed it. They only cared when Wall Street was affected. Local newspapers were FULL of foreclosure notices for at least 4 years before the run-up to the "Lehman-Brothers-September 15th" crash. Also, the FED and the government knew that Wall Street might have a problem over a year ago. Now as we realize the economy is going to tank badly, the lead-bottoms of the FED and the bush administration won't make a move. Maybe if it involved terrorism they would get off their butts and do something.

The idea that consumer's can't pay was expressed by Obama's Nov. 4th speech in which he said something like: Wall Street can not get ahead while leaving main street behind.

[sendero]

9. Alan Greenspan...

... pumped money into the economy like a drunken sailor, fueling the housing bubble in a misguided and wrong-headed effort to prevent a recession, one which was sorely needed, from happening on Bush's watch.

This, coupled with the total lack of regulation of everything financial, put us here. Of course, there are huge systemic problems in our economy that are going to make the coming recession/depression a lot worse.

Libertarian ideal/ideas on the economy in action - a freaking disaster every time.

[OwnedByFerrets]

6. Funny. I knew it was gonna burst 4 yrs ago and was telling

everyone. But then again, I was also intelligent enough to know that Iraq was a huge fucking mistake.

[Marblehead]

7. you got that right!

many people here saw this coming years ago.

[girl gone mad]

8. Back in 2001..

there was a forum devoted to overpriced RE in California. None of us then thought it the bubble would last so long and spread so far. CA was just the staging ground.

[CoffeeCat]

10. I knew the bubble would burst three years ago...

...when we went looking for a house. The mortgage broker tried to steamroll us into an interest-only ARM, and she
wouldn't let up. Our realtor encouraged us to "Buy more house!" because the "today's financing allows you to
pay so little for so much!" These jackals came at us from all angles.

The signs on the lawns of the houses we would look at--were now signs of future doom, "Get in this house for only $800
a month!"

We knew plenty of others had been bamboozled into 'creative financing' and adjustable mortgages that would reset at
higher interest rates that would make payments nearly impossible. We saw it coming three years ago.

(We signed up for a fixed-rate, conventional mortgage--much to the chagrin of that mortgage broker.)

I'm concerned, because I see the credit-card bubble being the next explosive mess on the windshield of America.

I see the credit-card bubble as much worse than the housing bubble. Just like the housing situation--people
were preyed upon. The credit card companies gave a line of credit to people who weren't qualified--just
as those mortgage brokers gave loans to people who wouldn't be able to pay in the future. Credit cards
have become a way of life--for people making 300k and people barely getting by. So many people are in
up to their necks.

The problems is--people can't pay now--just like they couldn't afford those mortgages. The economy is
bad, and people are saving and paying off those cards. Furthermore, credit card companies are cutting off
lines of credit.

The crisis comes because our economy has been propped up on credit card spending for so long. Seventy
percent of the US economy is consumer spending. I would guess that at least 35 percent of that 70 percent
is credit card spending or some kind of financing. What happens when that dries up?

I fail to see how we avoid a major economic disaster. I fail to see how we avoid massive business failures
and unemployment at 20 percent. We've propped up so many businesses on credit card spending, and when
that goes, I say 10 percent of DOW and Nasdaq companies fail and are never seen again.

I just don't see how this is unavoidable.

[OwnedByFerrets]

11. You are right. Its the very next disaster, but I think it will be

mid 2009 before THIS shit hits the fan.

[CoffeeCat]

12. I'm glad to find someone else who feels the same way...

...because frankly, I'm scared. I'm not freaking out and paralyzed, but I am
preparing for very difficult times.

Like you, I don't think the credit-card bubble will burst until later in 2009.
Holiday spending will somewhat mask the problem.

I know so many people who "lived the lifestyle" for so long. They charged
everything, and had no problem accumulating 20k in credit-card debt. I live
in the suburbs, and these are mainly dual income earners who just thought everything
would keep rolling along as usual. You can tell that people are not spending like
that any more. I'm sure there are many people who use credit cards to get by--and
help pay for the high price of grocies and gas. Those cards are maxed out now, and
credit card companies are tightening credit, not expanding.

I think the credit-card bubble will be a disaster--because it will cause a contraction
in our total spending. There will be less demand for everything. However, the real
significance of the credit-card bubble is that it will intersect with the housing bubble
and rising unemployment and consumers spending less. It will be the big straw that
finally blows it all to hell.

If I can ask...are you nervous or concerned about what you see on the horizon? Are you
or your family doing anything to prepare?

[OwnedByFerrets]

13. Nervous AND concerned......

but not a whole hell of a lot we can do about it. Unfortunately, I got caught up in the credit card fiasco and have thousands of dollars of bills to pay. We put very little aside and what we have put into our retirement has been destroyed by the dow slide into the crevasse. It takes all we make each month just to pay the bills. When there is a financial emergency, like car troubles, it takes any small savings to pay for that. So, yes, we don't buy anything we don't HAVE to have. Wont be any christmas this year. Hope things are better for you.