1929 ALL OVER AGAIN?

1 02 2008

a plethora of stories on the economic train wreck:

from Counterpunch:

America’s Teetering Banking System
By MIKE WHITNEY

“When US homeowners default on their mortgages en-mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth,” says economist Henry Liu.

The debt-securitization process is in a state of collapse. The market for structured investments — MBSs, CDOs, and Commercial Paper — has evaporated, leaving the banks with astronomical losses. They are incapable of rolling over their short-term debt or finding new revenue streams to buoy them through the hard times ahead. As the foreclosure-avalanche intensifies; bank collateral continues to be down-graded which is likely to trigger bank failures.

Henry Liu sums it up like this: “Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.” (“The Road to Hyperinflation”, Henry Liu, Asia Times) It’s a vicious cycle. The Fed is caught between the dual millstones of hyperinflation and mass defaults.

Forbes reports that there’s a real possibility that cities will not be able to finance their activities with bonds:


The bond insurers are against the ropes. MBIA lost $2.3 billion in the fourth quarter because of more than $3 billion in derivative write-downs. Large exposures as insurers of troubled derivatives to their capital bases have raised questions about the bond insurers’ ability to continue writing new business.

***

“If you throw municipal bonds into disorder, you’re going to have a real world-class problem,” Ross was quoted as saying at a luncheon in New York.

The most likely scenario is what regulators call “runoff,” where the bond insurer doesn’t write new business and simply operates on the premiums earned from its existing book of business.

MSNBC reports on the difficulties involved in the snowballing foreclosure landslide:

The systemic implications already are being felt. Uncertainty about the extent of future losses has hammered the stock market and tightened credit for businesses as the economy shows signs of slowing. In many areas foreclosures are adding inventory to an already-glutted housing market. As consumers watch home prices slump and their equity melt away, some economists fear the housing recession could spill over to the broader economy.

well, maybe the economists haven’t noticed it “spilling over,” but a lot of the rest of us have!

(And, while you’re at MSNBC, check out Keith Olberman…man, somebody should force Bush and Cheney to listen to this guy…. )

Robert Reich knows that “consumers are at the end of their rope”:

This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich — which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.

And the Guardian reports on the next big fiasco:  credit cards….

Claire McCaskill, a newly elected Democratic senator from Missouri … says her own mother has struggled to cope with rocketing credit card debt.

Alternet reports that some people are just abandoning their overpriced, unsellable McMansions:

“We just estimated a trashout yesterday where we’re going to have to drain the pool,” one Fontana, CA resident posted on AgentsOnline.Net, a resource and idea site for realtors, “and the stench from it when you enter the backyard is overwhelming. Then, of course there are mosquitoes all over the top and it’s been sitting so long without chemicals that it’s green on top and murky black on the bottom. We’ve already had to refuse one pool because of its really creepy condition and I’m not so sure about this one either. [I] just hope we don’t find the previous homeowner at the bottom when we drain it.”

If they think it’s bad now, wait ’till the water supply runs out….we’ll see abandoned subdivisions, suburbs, and, ultimately, cities….

And CNN reports that the number of long-term unemployed people is on the rise…sorry, no flashy quote from this story….

“I think most Americans don’t understand that they are in a hole in terms of minimum payments, and I think, frankly, we are not preparing for what could be the next sub-prime disaster,” she says. “I believe the next sub-prime disaster is the debt that is out there within the credit card obligations in America.”

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