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.

snip//


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.

[Warpy]

1. The only thing keeping the consumer economy going

was the ability of underpaid workers to leverage low priced debt.

Those days are over, at least for things like cruises, big screen TV sets, trophy kitchens, and other accoutrements of the good life.

[EVDebs]

2. Housing takes big chunk of budgets

"Housing costs are taking ever larger bites from the budgets of Sonoma County homeowners. More than half spend greater than a third of their income on mortgages, according to a Census Bureau study released today that found a similar trend across much of the nation."

Housing takes big chunk of budgets
Census reveals squeeze on county homeowners

By MICHAEL COIT
THE PRESS DEMOCRAT (Santa Rosa, CA)
Wednesday, Sept. 12, 2007

http://www1.pressdemocrat.com/article/20070912/NEWS/709120362/1033/NEWS01

Here in CA with Prop 13, real estate taxes begin at 1.25% of sales price and can increase from that amount 2% annually. This is unsustainable with $500,000 median home prices. Do the arithmetic and see that you will end up mortgaging your grandchildren if this keeps up; besides, how can someone just starting out even contemplate a life knowing that such a huge financial burden is staring them in the face ?

[Double T]

3. The job numbers provided are NOT even the actual job losses,..........

just wait for the 'adjustment'. The American consumer is on life support and his/her 'economic health care' has run out! How many of 'US' are about to be dumped on the sidewalk?

[babylonsister]

4. My b-i-l got his walking papers about a month ago after

24 years of faithful service, not one sick day taken, and 5 months before his 60th birthday. Yes, he's pretty much out of options. And no pension, but a measly severance pkg. That hurts.

[Double T]

7. DAMN, I am so sorry his former employer has no consciene........

and thanked him for his loyal, dedicated work by slamming the door in his face; corporate ANTI-america is a disgrace. Things will workout; we're ALL going to be forced to change our lifestyles and in that, I believe there is a silver lining. Retirement will become a thing of the past; working and still having a place to go and a purpose isn't all bad. We are being lied to by our government about the tremendous number of job losses that have occurred over the last 6 1/2 years and it has come to the point where bushco can't hide THAT lie anymore. I wish only the BEST for your b-i-l!!

[babylonsister]

8. Thank, Double T. Yes, I think more people are going to be shocked soon,

and not in a good way.

[whistle]

6. Last month 90,000 construction and production jobs plus 30,000 service

...jobs were lost and that did not include the 10,000 job cut-back announced by CountryWide Mortgages as of September 1st

[whistle]

5. What is congress prepared to do to save homeowners from being evicted and banks from

...shutting down? The $215 billion dumped into the banking system along with the reduction of interbnaking disount rates by the Federal reserve and authorized by Ben Bernanke since the last week of August, has ALL gone to bail out hedge funds and feed the speculators on Wall Street.

We need to have Congress take the kind of action Franklin Roosevelt's Administration took in the worsening banking collapse in 1933, that is to take actions for protecting the economy, homeowners, and chartered banks themselves with a "firewall," from the the storm of collapsing mortgage securities, and issuing Federal credit to generate real new economic activity and public works—not to attempt to bail out the mortgage bubble.

That would be the "Homeowners And Bank Protection Act of 2007" similar to what FDR proposed back in April 1933, and which is circulating around the halls and offices of Congress right at this moment.

<snip>
The President's Message to Congress on Small Home Mortgage Foreclosures, April 13, 1933:

To the Congress:

As a further and urgently necessary step in the program to promote economic recovery, I ask the Congress for legislation to protect small home owners from foreclosure and to relieve them of a portion of the burden of excessive interest and principal payments incurred during the period of higher values and higher earning power.

Implicit in the legislation which I am suggesting to you is a declaration of national policy. This policy is that the broad interests of the Nation require that special safeguards should be thrown around home ownership as a guarantee of social and economic stability, and that to protect home owners from inequitable enforced liquidation in a time of general distress is a proper concern of the Government.

The legislation I propose follows the general lines of the farm mortgage refinancing bill. The terms are such as to impose the least possible charge upon the National Treasury consistent with the objects sought. It provides machinery through which existing mortgage debts on small homes may be adjusted to a sound basis of values without injustice to investors, at substantially lower interest rates and with provision for postponing both interest and principal payments in cases of extreme need. The resources to be made available through a bond issue to be guaranteed as to interest only by the Treasury, will, it is thought, be sufficient to meet the needs of those to whom other methods of financing are not available. At the same time the plan of settlement will provide a standard which should put an end to present uncertain and chaotic conditions that create fear and despair among both home owners and investors.

Legislation of this character is a subject that demands our most earnest, thoughtful and prompt consideration.

-- Franklin D. Roosevelt