- Give me 5 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
- So, how do we explain these enormous increases in value?
After all, wasn't the housing boom just the natural outcome of "supply
- No it wasn't. That's an unfortunate myth that should
be interred with the withered remains of Milton "free-market"
- 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% to soften the blow from the stock
market meltdown. Rather than tighten interest rates and let the country
to 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.
- Remember, the 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 feeding-frenzy.
- Isn't that what happened?
- 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 7 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 their home?
- 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?
- Yes, because 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 which
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%) 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 video-game.
It's only a matter of time before the scattered, bleached bones of American
industry appear everywhere across the American heartland.
- 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 nothing?
- 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
- There'll be no soft landings. This is the Big One; Real
Estate Armageddon followed by a plague of locusts.
- 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%,
a plummeting housing market could pave the way for another (dare I say
it) Great Depression.
- $10 trillion!?! 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% to 20%. 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% to 30% of their 2005 value; diminishing
equity value by approximately 45% to 50% 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 house.
- 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
- 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
- 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 collapseand soon.
- 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%,
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 sure sign the writhing consumer-beast is in its
last throes. The end is near.
- Why should I care about Net Long-term Capital Inflows?
- 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 Treasurys; $9 billion in US securities and a paltry
$8 billion in Treasury bonds.
- What does it mean? It means that no is dim-witted 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."
- Foreign investments 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.
- Thanks, Greenspan.
- Some of you may have seen Alexander Cockburn's shocking
article "Lame Duck" last week 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 loan 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
- "Market 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 dumpster.
- 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
- 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 confetti?
- 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.