Recession Time! The Housing Bubble Bursts the Economy

[babylonsister]

http://www.commondreams.org/archive/2007/09/12/3795/

Recession Time! The Housing Bubble Bursts the Economy
by Dean Baker


The downturn in jobs reported last month by the Labor Department provided evidence of an economic downturn that even the economy’s greatest cheerleaders could not ignore. Healthy economies do not shed jobs.

During the core periods of the upturns in the eighties and nineties, there were three months in which the economy lost jobs. In two of these, the loss was attributable to major strikes. (The jobs of striking workers are not counted in the survey.) That leaves a grand total of one month in more than twelve years of recovery in which the economy lost jobs. In other words, the August job loss leaves the economic optimists somewhat less credible than the deniers of global warming.

The backdrop for the August job loss is the collapse of the subprime mortgage market. Millions of low- and moderate-income homeowners are now looking at the resetting of interest rates on adjustable rate mortgages to levels that they cannot afford. While the Fed chairman and other leading economists assured the public that the problems would be restricted to the subprime segment of the housing market, this assertion was always ridiculous on its face.

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In addition, declining construction-related fees and property tax revenue will constrict state and local budgets. This will lead to pressure for tax increases, just as the economy is going into a downturn, and to cutbacks in government spending and employment. This will further reinforce the downward spiral.

The growth of the housing bubble made this sort of collapse inevitable, just as the crash of the stock bubble was inevitable. The only question was when the bubble would finally burst and the exact form that the collapse would take.

It was incredibly negligent for the Federal Reserve Board and the Bush administration to allow the housing bubble to grow unchecked, and especially to allow the sort of mass fraud perpetrated against moderate-income homebuyers in the subprime market. At this point, there is probably no way to avoid a recession. If those making economic policy show no better judgment going forward than they have in the recent past, it is likely to be a long and painful recession.