The present administration will be remembered for many things. I'll leave it to others to retrospect the sum of the last eight years. But what would be the single biggest legacy of this period?
More than the erosion of Civil Liberties, Consumer protection, or the twisting of our Judiciary into a Banana-Republic Taliban, is the economic Crack Cocaine epidemic of the last four years: irresponsible & virtually unregulated Mortgage lending.
You hear a lot about the "Credit Bubble". What does it really mean? How do you get your head around the scale of the problem? Let me attempt to explain -
In an unusually prescient article, the Economist in 2005 stated that
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.
So basically we're looking at a bubble larger than the Stock Market bubbles of late 1920's and 1990's.
The situation is so extreme, and so convoluted, the banking sector is unable to even estimate their potential losses. Which is another way of saying that Trust is about to collapse in the Market.
But wait! The National Banks of the G7 are pouring easy money into the Market to soften the blow. Prices will flatten, but after a 1-2 year hangover the Market will have adjusted and normalcy will return to the Housing sector. Right?
Continuing with the same article:
Another worrying lesson from abroad for America is that even a mere levelling-off of house prices can trigger a sharp slowdown in consumer spending. Take the Netherlands. In the late 1990s, the booming Dutch economy was heralded as a model of success. At the time, both house prices and household credit were rising at double-digit rates. The rate of Dutch house-price inflation then slowed from 20% in 2000 to nearly zero by 2003. This appeared to be the perfect soft landing: prices did not drop. Yet consumer spending declined in 2003, pushing the economy into recession, from which it has still not recovered. When house prices had been rising, borrowing against capital gains on homes to finance other spending had surged. Although house prices did not fall, this housing-equity withdrawal plunged after 2001, removing a powerful stimulus to spending.
But the wake-up call is this:
But even if prices in America do dip, insist the optimists, they will quickly resume their rising trend, because real house prices always rise strongly in the long term. Robert Shiller, a Yale economist, who has just updated his book "Irrational Exuberance" (first published on the eve of the stockmarket collapse in 2000), disagrees. He estimates that house prices in America rose by an annual average of only 0.4% in real terms between 1890 and 2004. And if the current boom is stripped out of the figures, along with the period after the second world war when the government offered subsidies for returning soldiers, artificially inflating prices, real house prices have been flat or falling most of the time.
So if I divide 80% by 0.4%, that means it will take 200 years to achieve price equilibrium after this boom. Of course, this assumes a 0% inflation rate. We could let home prices fall 50% or so, but that puts many Mortgage holders under water, creating massive loan defaults, (etc.).
So, care to guess what the next Fed policy will be? Inflation! That's right. What better way to write down this bubble?
Watching the Housing bubble burst in the US is an queasy thing to watch for Homeowners. The coming Democratic (hopefully) administration will have its work cut out for them trying to un-fuck this mess. And the Politicos and Business interests who created this monster will do their best to blame it the incoming Democratic administration. (Remember the flak Jimmy Carter took after Ford/Nixon?)