Are Democrats afraid of playing hardball? The economy is tanking. Don't worry about Wall Street. They've got Father Fed to write them a check if things get tight. But on Main Street, things are grim.
Housing is hitting two ways.
- The value of homes is dropping. The Congressional Joint Economic Committee estimates hundreds of billions in lost property values, not only from foreclosures, but from houses close to foreclosed property.
- Residential construction has dried up. That means the main strength of the labor market over the past five years is gone, and along with it demand from those workers.
The banking crisis is hitting three ways:
- Money scared out of so-called alternative investments is bidding up commodity prices, including oil, gas, grain, metals, etc., which is going to end up as inflation.
- Inflation is also coming down from the Fed, which is dumping liquidity, i.e., easy money all over the place.
- Credit is drying up because of dysfunction in the current wad of mortgage-backed securities
This means, yes, inflation and recession together. Not supposed to happen. Never mind it's been happening since the 1970s.
A couple of charts that made the rounds last week.
This shows the subprime adjustable rate mortgage problem is not over for a long time. Then we begin the other sorts of adjustable rate mortgages. This will be a big bunch of problem for the homeowners over many years.
But this is what the banking/finance sector is trying to swallow right now. Inability to price the securities which swallowed this debt is a bone in the throat of credit markets. The great Treasury-sponsored Super Conduit, or whatever it is now known as, is turning out to be a solution that makes the problem worse.
November is the end of many of the big houses accounting years. Their year end statements will be audited. There is about $900 billion in problematic paper in the US, and another $300-$400 in Europe and maybe $100 billion in Asia.
Then we see that there is big trouble. These delinquencies are coming in even before the much anticipated downturn in prices, and it is very likely that many folks have been keeping up by tapping the equity in their homes. Not going to happen. House prices are correcting downward.
Kevin has put up a Price Correcting Calculator for the top 54 metropolitan areas.
But the point is not that this is going to be bad. The point is there is not enough being said about it. This is a political fiasco. Greenspan, a Libertarian at the Fed started the whole business with rates that were too low too long. Non-regulation of the financial markets created hot money for mortgage peddlers to rope in the unsuspecting. And the whole business is the inmates running the asylum, a White House theme.
Middle America is worried. It is time the candidates got in front of the parade.