Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee last week: “Recession is possible. Our estimates are that we are slightly growing at the moment, but we think that there's a chance that for the first half, as a whole, there might be a slight contraction." And the second half? After much verbal dodging , Bernanke said that the only antidote to the economy’s woes is getting housing prices back up. As though addressing the unfrocked Wizard of Oz, a fuming Senator Ted Kennedy asked: “You mean to tell us you don’t have answers?” “No, sir,” said Bernanke. “It’s up to the Congress to decide.”
The recession is tied to the housing crisis and the credit crunch. The housing boom, in which house prices doubled and tripled in many regions in a few years peaked in 2006 and went into reverse in 2007. The price decline accelerated as the subprime mortgage sector imploded.
The excesses of that sector soon spilled into every other credit sector until even those with excellent credit could not borrow – the definition of a credit crunch. The credit machinery driving the U.S. economy has seized-up for lack of confidence that creditors will be repaid in full.
Consumer spending (and borrowing) accounts for 70 percent of the U.S. economy’s Gross Domestic Product (GDP). Manufacturing has shrunk to about 10 percent, compared with roughly half of GDP as recently as 1980. Since the Reagan years, we have “out-sourced” everything that China could make cheaper, which is just about everything. The many “Little Chinas” of prosperous Asia subcontract various production tasks, all focused on exporting to the U.S. – the global “importer of last resort.”
Now the Bush administration plans to “expand a government program that helps struggling borrowers keep their homes to respond to the housing crisis…. [It] is designed to help about 100,000 homeowners, including many who owe more than their houses are worth, reduce their monthly payments…. The expansion involves encouraging lenders to write down the value of the loans…. In return, the risk of default would be shifted to the government,” reports the Wall Street Journal. The expansion is intended to bring the total number of borrowers under a program called FHASecure to about 500,000 by the end of the year but the effort is expected to face opposition from Democratic lawmakers.
Bernanke is correct to lay the blame for the mortgage mess and the credit crunch at the doorstep of the Congress, which in the name of “fairness” greatly liberalized lending laws and practices over the past 15 years.
This means bankers who obeyed the law and made mortgage loans that should never have been made must now obey new laws and policies and assume financial responsibility for those bad loans on their banks’ balance sheets. It isn’t fair and the powerful bankers’ lobby is on the warpath on Capitol Hill.
By year end, the all-important deflating housing sector will have fallen 20 percent from the 2006 peak, representing the destruction of some $4 trillion in real estate wealth and more than one-fourth of all U.S. household assets. “… A 10 percent drop in house prices would make a discernible dent in consumption growth….consumer spending would slow by almost two percentage points, reports The Economist. The Economists’ studies, however, suggest that effect will be gradual; falling house prices will be an ongoing drag on consumer spending rather than a sudden brake.”
Ian Shepherdson, chief domestic economist for High Frequency Economics, gets paid for describing the economic situation as he sees it. He declares: “We are in for a much longer recession than Wall Street thinks. This particular downturn is driven by a rare contraction in consumer spending, and that is starting to hurt a broader range of people than those hurt by the mortgage crisis.”
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Comments
Simply not true John.
From:
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."
Posted by: Greg | April 10, 2008 6:06 PM
The most critical point has rightly pointed out- America outsources everything. There is no income in the economy from core activities. Banking and Finance are a pack of cards. They can fall anytime, precisely like they are falling now. This recession will be much more severe than America has ever seen. America did not just just transfer manufacturing and service to India and China, it transferred real wealth. It is impossible to believe how the regulators couldn't see it coming. The marketing party is over!
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Posted by: RefinancingTips | May 2, 2008 5:37 AM
I watched the latest debate between Barack Obama and John McCain. Although the “town-hall”-style TV debate attracted more than 60 million viewers, the majority were not satisfied with countless indirect answers to many of the questions that were asked that night. Instead of providing firm resolution for the well-being of all Americans, they hope to bring on a larger number of citizens to take sides by means of personal criticism. McCain continued to proclaim his “stay the course” stance on Iraq and his oil drilling policies. On the other hand, Obama carried on criticizing Republican policies that he claimed have led to America’s current recession. This unremitting action of theirs only leaves us wondering exactly how either of them would work to prevent further economic catastrophes. America needs a logical economic proposal. Obama encourages the scheme to wipe out the payday loan industry, which is not a logical solution to the real economic problems we face. This is only to add more flavors for the banking and credit union appetizer.
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Posted by: Payday Loan Advocate | October 13, 2008 5:41 AM
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