While the basic cure comes from one of our own
Mainstream voices offer solutions as the economy worsens
We update the receding economy’s 2008 indicators and pass on some basic corrections.
by Jeffery J. Smith, August 2008Home prices in 20 major US cities -- all areas tracked by Case-Shiller -- have fallen a record 15.8% in the past year; the government’s measurement is about a quarter the CS percentage.
Yet the pace of the monthly decline has slowed for three months in a row, having peaked at 2.6% in February. Still, prices in the so-called bubble regions continued to plunge at a rapid pace in May. Prices thus are at the same levels as they were in the summer of 2004; four years of appreciation have been wiped out. From their peak two years ago, prices are down 18.4%. Home prices surged in 2003 through 2006, climbing by a cumulative 52%.
While prices must return to affordability, those who bought assuming prices would climb forever are hurting. Since the mortgage crisis began last summer, over one million owners have already lost their homes due to foreclosures. Another one million are 90 days past due on their mortgages (foreclosure notices usually go out after 90 days) and two million more are 30 days past due.
A small Florida-based bank, First Priority, became the eighth US bank to fail this year. Its failure will cost the federal taxpayers an estimated $72 million. The biggest bank failure this year is IndyMac, seized on July 11, the third-largest bank insolvency in US history.
Credit unions -- among the most conservatively run financial institutions in the US – show that no financial sector is immune from the mortgage meltdown. Five of the nation's largest credit unions are reporting losses on mortgage-related securities, large enough to wipe out the net worth of each of them. Financial-services firms have already taken write-downs of more than $300 billion (some say $500 billion). So far this year, nine regular (smaller) credit unions have failed. Seven failed in 2007. The last time a corporate (bigger) credit union failed was in 1995. (WSJ, August 11)
To keep bigger banks, brokers, and speculators afloat, the Fed bestows them with billions, which inflates the money supply. An official inflation gauge tied to consumer spending rose 0.8% in June, the biggest increase since a 1% rise in February 1981. The personal consumption expenditures price index rose 4.1% on a year-over-year basis in June -- highest since a matching 4.1% in May 1991 and up from 3.5% in May.
The cost of living rises many times faster than one’s income from making a living, despite workers doing their jobs more efficiently. Productivity grew at an annual rate of 2.2% during the April-to-June quarter, down from a 2.6% growth rate logged in Q1. Unit “labor costs” -- wages -- slipped to a 1.3% pace in the second quarter, from a 2.5% growth rate in the first quarter. Economists have quit claiming that rising productivity raises wages.
The economy has gotten so bad, the rich are investing more conservatively, spending less on luxury goods, and are being more thrifty with their platinum credit cards. Many are asking their personal shoppers and private-jet travel providers to seek the best deals rather than over-the-top extravagances. When the wealthy get stingy, it trickles down to the rest of us. The 10% of households with the highest incomes account for nearly a quarter of all spending. For an ordinary salesman selling an extraordinary product like yachts, he’s now making far fewer sales and needs some other source of income.
What went wrong, fundamentally? Central bank forecasts this year have consistently been off, underestimating how fast inflation would rise or how quickly economic growth would slow. Their models are “never confronted with data from the real world,” said one G7 central banker. “This is not science.” When a trigger point is reached, say if oil prices moved past a particular level, the model fails to predict a step change in output growth. The models that central banks use “operate like a Maginot line. They have been constructed in the past as part of the war against inflation. The central banks are prepared to fight the last war.” (Reuters, Aug 8)
Investor Jim Rogers, who slammed the Fed for pouring liquidity in the system while accepting mortgage-backed securities as guarantees, said Federal Reserve Chairman Ben Bernanke should resign and the Fed should be abolished. Then "we don't have anybody printing money, we don't have inflation in the land, we don't have a collapsing US dollar," which would speed up the recovery of the US economy. Rogers had his own show on CNBC which he called “The Geonomics Report”. (CNBC, Mar 12)
Fred Harrison, author of Boom Bust, explains how the repeatedly blamed subprime debacle is a sympton not a cause of the disease called "the property cycle". The solution can be found in Fred's book and in a 2-part documentary on http://www.youtube.com/watch?v=_C-Nd_MStxU&feature=, related by a property owner who now regrets he didn't listen to Dr. Harrison.
Jeffery J. Smith runs the Forum on Geonomics.
A July update on the housing led business cycle
The business press points to unstable underpinnings
Economic indicators hit lower lows
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