FacebookTwitterGoogle+RedditEmail

The End of the Housing Bubble

by MIKE WHITNEY

 

I sold my home three weeks ago anticipating what I believe will be “Economic Armageddon” in the United States. It wasn’t an easy thing to do. My wife and I have lived in the same home for 25 years, raised both of our children there, and owned the property outright without any loans or mortgage. The house was paid for in “sweat-equity”, that is, by wielding a shovel day-in and day-out in my one-man landscape business. I don’t say that for sympathy, but to illustrate that we played by the rules, worked hard, paid our taxes, and took advantage of the American dream of home-ownership.

All that has changed.

I sold my home for one reason; George W. Bush. He and his protégé at the Federal Reserve have submerged the country into a morass of “unsustainable” debt, disrupted the nation’s economic equilibrium and thrust us towards fiscal disaster. They’ve also generated a humongous housing bubble through their irresponsible and self-serving manipulation of interest rates.

The facts are astonishing.

The current housing bubble “is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America’s stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.” (The Economist)

The banks have lowered the standards for home loans to such an extent that the traditional loan of 20% down and a fixed interest rate is virtually a thing of the past. Instead, those conservative practices have been replaced with “creative financing” schemes that put the entire housing market at risk.

Consider this: In 2004 “one-fourth of all home-buyers including 42% of first-time buyers”made no down payment”. (New York Times)

No down payment?

Sorry, but if a buyer can’t come up with at least $5 thousand dollars for a down payment, he shouldn’t qualify for a home loan.

Equally troubling is the fact that “nearly one third of all new mortgages this year call for interest-only payments (in California, its almost half)” (NY Times) This tells us that a large number of new buyers can barely make their payments, but are gambling that their property value will go up enough to justify their investment. This is “equity-roulette”; a shell-game that anticipates that salaries will go up while interest rates stay low.

Is that a reasonable judgment?

No, Greenspan has said that he will continue to ratchet up interest rates to head off inflation. This means that an economic slowdown is a near certainty. Remember, “class-warrior” Alan Greenspan lowered the prime rate to a ridiculously low 1% in 2002 to keep the economy humming-along while $300 billion was sluiced into Bush’s “preemptive” war in Iraq and while the tax cuts were siphoning the last borrowed farthing out of the public coffers. The Bush tax cuts transferred an average of $400 billion dollars per year into the pockets of America’s plutocrats. Now, the country is flat-broke and Greenspan will have to “incrementally” raise rates to stabilize the sagging dollar. This means a sluggish economy for most of us and doomsday for over-extended homeowners.

Greenspan assumed he could carry out his plan without too much unnecessary carnage. Unfortunately, gluttonous mortgage lenders have lowered long-term loans while the prime rate continues to go up. The banks, it seems, are addicted to the “cash cow” of shaky lending and are providing even riskier loans to new applicants. This has upset the Fed-master’s strategy for a “soft landing” and Greenspan has begun feverishly issuing warnings about an inevitable “adjustment” when the market bogs down. The bottom line is that the housing bubble is getting bigger by the day and increasing the potential for catastrophe.

The current problem is compounded by the dramatic surge of speculation in the housing market. As “The Economist” says, “A study by the National Association of Realtors (NAR) found that 23% of all American houses bought in 2004 were for investment, not owner-occupation. Another 13% were bought as second homes. Investors are prepared to buy houses they will rent out at a loss; just because they think prices will keep rising”the very definition of a financial bubble.”

What will happen to these “speculative” buyers when the market “flattens out” or the economy takes a sudden dip?

And, what will happen to the US economy when the jobs that depend on new home sales vanish overnight?

“Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.” (The Economist)

“Two out of every five” private sector jobs are now entirely dependent on an industry that is built on pure quicksand.

So, why would banks foolishly loan money to people who can’t even scrap together a few thousand dollars for a down payment or who can scarcely meet their “interest-only” obligations?

The reason is simple; because they are not the one’s taking the risk. Mortgage loans are acquired by investment banks and chopped up into various securities where they are sold in mutual funds, hedge funds and pension funds etc. To some extent, this takes the lenders off the hook, but it also means that the shock to the system will be much more widespread when the day of reckoning finally arrives. If we encounter a major glitch in the economy the shock-waves will be felt throughout the world. “Investors now hold $4.6 trillion in mortgage backed securities. That’s more than the outstanding value of the US Treasuries.” (NY Times) Think about it.

Shaky lending, interest-only loans, no down payments, a US government that is $8 trillion in debt due to Washington’s profligate spending, and a “ticking-time bomb” of adjustable-rate mortgages that will reset within three years; the table is set for a disaster of Biblical proportions. If we hit a bump in the economic road ahead (rising gas prices? recession?) the “Land of the free” will be knee-deep in bankruptcies and foreclosures. We’ll all be fighting for a soft-spot under the freeway on-ramp.

The fatuous Greenspan believes that all this can be avoided by regulating the money supply.

He’s dead wrong, and I bet my house on it.

Note: The current dilemma could have been avoided if Greenspan had incrementally raised rates as the bubble began to appear. Instead he lowered rates to facilitate Bush’s war in Iraq. It was purely a political decision that “postponed” the economic pain of the conflict and allowed the Bush administration to shift the cost of the war onto future generations.

Consider, also, how Greenspan paved the way for the budget-busting tax cuts (which he enthusiastically approved) and how they have increased America’s debt by $3 trillion. This is real money that American workers will eventually have to pay back in the form of taxes and a higher cost of living. This “class loyalty” is strikingly at odds with his philosophy as a young man when he said, “Deficit spending is simply a scheme for the confiscation of wealth.”

So it is; and the $3 trillion dollars that evaporated on Greenspan’s watch was in fact stolen from the American people while the Fed-chief concealed the crime behind the smokescreen of low-interest rates. In the final analysis, Greenspan will be seen as a greater traitor than Bush.

MIKE WHITNEY lives in Washington state. He can be reached at: fergiewhitney@msn.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

March 30, 2017
William R. Polk
What Must be Done in the Time of Trump
Howard Lisnoff
Enough of Russia! There’s an Epidemic of Despair in the US
Ralph Nader
Crash of Trumpcare Opens Door to Full Medicare for All
Carol Polsgrove
Gorsuch and the Power of the Executive: Behind the Congressional Stage, a Legal Drama Unfolds
Michael J. Sainato
Fox News Should Finally Dump Bill O’Reilly
Kenneth Surin
Former NC Governor Pat McCory’s Job Search Not Going Well
Binoy Kampmark
The Price of Liberation: Slaughtering Civilians in Mosul
Bruce Lesnick
Good Morning America!
William Binney and Ray McGovern
The Surveillance State Behind Russia-gate: Will Trump Take on the Spooks?
Jill Richardson
Gutting Climate Protections Won’t Bring Back Coal Jobs
Robert Pillsbury
Maybe It’s Time for Russia to Send Us a Wake-Up Call
Prudence Crowther
Swamp Rats Sue Trump
March 29, 2017
Jeffrey Sommers
Donald Trump and Steve Bannon: Real Threats More Serious Than Fake News Trafficked by Media
David Kowalski
Does Washington Want to Start a New War in the Balkans?
Patrick Cockburn
Bloodbath in West Mosul: Civilians Being Shot by Both ISIS and Iraqi Troops
Ron Forthofer
War and Propaganda
Matthew Stevenson
Letter From Phnom Penh
James Bovard
Peanuts Prove Congress is Incorrigible
Thomas Knapp
Presidential Golf Breaks: Good For America
Binoy Kampmark
Disaster as Joy: Cyclone Debbie Strikes
Peter Tatchell
Human Rights are Animal Rights!
George Wuerthner
Livestock Grazing vs. the Sage Grouse
Jesse Jackson
Trump Should Form a Bipartisan Coalition to Get Real Reforms
Thomas Mountain
Rwanda Indicts French Generals for 1994 Genocide
Clancy Sigal
President of Pain
Andrew Stewart
President Gina Raimondo?
Lawrence Wittner
Can Our Social Institutions Catch Up with Advances in Science and Technology?
March 28, 2017
Mike Whitney
Ending Syria’s Nightmare will Take Pressure From Below 
Mark Kernan
Memory Against Forgetting: the Resonance of Bloody Sunday
John McMurtry
Fake News: the Unravelling of US Empire From Within
Ron Jacobs
Mad Dog, Meet Eris, Queen of Strife
Michael J. Sainato
State Dept. Condemns Attacks on Russian Peaceful Protests, Ignores Those in America
Ted Rall
Five Things the Democrats Could Do to Save Their Party (But Probably Won’t)
Linn Washington Jr.
Judge Neil Gorsuch’s Hiring Practices: Privilege or Prejudice?
Philippe Marlière
Benoît Hamon, the Socialist Presidential Hopeful, is Good News for the French Left
Norman Pollack
Political Cannibalism: Eating America’s Vitals
Bruce Mastron
Obamacare? Trumpcare? Why Not Cubacare?
David Macaray
Hollywood Screen and TV Writers Call for Strike Vote
Christian Sorensen
We’ve Let Capitalism Kill the Planet
Rodolfo Acuna
What We Don’t Want to Know
Binoy Kampmark
The Futility of the Electronics Ban
Andrew Moss
Why ICE Raids Imperil Us All
March 27, 2017
Robert Hunziker
A Record-Setting Climate Going Bonkers
Frank Stricker
Why $15 an Hour Should be the Absolute Minimum Minimum Wage
Melvin Goodman
The Disappearance of Bipartisanship on the Intelligence Committees
FacebookTwitterGoogle+RedditEmail