United States Heading towards a Depression?

I hope the FED has some idea what its trying to do. In my opinion trying to bailout the housing bubble is going to cause some serious economic pain. The FED pumped 60 Billion into the economy in January and has been steadily lowering the FED rate.

The economy is going pretty good right now and the housing bubble is reaching "depression levels" What is going to happen if we go into recession and the unemployment rate tops 8%

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater.

Each foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent

http://www.nytimes.com/2008/02/22/business/22homes.html?_r=1&ref=todayspaper&oref=slogin

I din't think the article is taking into consideration that the US is running a 750 billion trade deficit and the US is exporting dollars for goods and services.

Somehow the FED has to absord those dollars or the dollar will collapse.

The part about the "Prices are too high and Congress and this administration is spending too much money weakening the dollar." is the two underlying causes of the subprime mess.

 

And as a result, foreign real estate investments into the USA is higher than ever before. There is no bailout of the "housing bubble." It was caused years ago when the rate was lowered to a ridiculous level and housing prices jumped sky high. It had to burst. I can imagine that rental property management will be a good business to go into to deal with the fact that the government doesn't seem to be concerned with the above mentioned issue either. I have no idea what the Fed think they are doing except there is some interests in the industry who have a connection and are being protected, perhaps to dump their investments before the mess pops with a big bang...

 

The "housing bubble" is more involved than interest rates. The subprime part of it is filled for fraud. Stated income loans aka 'liar loans' were made to individuals without sufficient income to pay the loan. Appraisers valued the homes for more than they were worth. Borrowers took out loans in excess of the sale price. The list goes on ...

In addition to the subprime borrowers, there was a gold rush mentality. House flippers purchased homes and sold them quickly for $50,000 or $100,000 profit.

In addition to this, mortgage brokers loaned out money at teaser rates with no regard to the lenders ability to repay the loan. The loans were repackaged by Wall Street into securities and sold to banks, pension funds etc

 

That's interesting.

But if the fed let things run their course, there would be no need for the fed.
It would become obsolete.

If we don't do something about our problems, the problems win.

 

They shouldn't aggravate the situation, but neither should they just leave it alone.

They should always be seeking solutions.

 

Which of course begs the question - what is the Fed supposed to do? I think they have no choice but to keep interest rates low and supply the banks with low cost loans and other forms of cash infusion, but this will force the dollar to keep falling as supply out-paces demand. As long as the government runs debts and the people consume more imports than we send out, there is nothing the fed can do to increase the demand for dollars.

Of course, they could raise interest rates and cut the supply of cash again, but that's just going to lock up the finance sector and cause business after business to fail due to a lack of investment capital.

I think in many ways, the fed has brought this along by delaying several smaller recessions. Instead of letting things "sort themselves out" they offered quick-fixes that could not be used as a permanent solution. They used all the ammo on minor events, and now that there's a big problem they're out of options.

 

The power of the FED is the power to manipulate liquidity.

Of course, playing with liquidity can affect change in things like employment levels, pricing, investment and so forth, but those are not straight line relationships.

It's problem, reaction, solution thinking. The FED messes up the credit markets and bloats the money supply, which leads to mal-investment. PROBLEM.

The markets react to all of the bad and fraudulent credit, which panics homeowners, investors, homebuilders etc. This is a REACTION.

Now everyone is turning to the government for stimulus, or the FED for some magic bullet. A SOLUTION.

Problem, reaction, solution is how the government grows.

The irony is, many of the problems, are cause by government solutions.

 

This is not a good sign for the economy. My guess is that the decline in home prices have dried up home equity lines of credit and consumers are unwilling to stop living above their incomes.

Consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.

http://www.cnn.com/2008/LIVING/pers.../index.html?section=cnn_topstories&eref=yahoo

 

Interesting point Bogart. Poor spending habits are hard to break. Especially when you have an entitlement mentality.

 

What do you guys want to bet that 80% of that spending is consumption, not investment?

I live a pretty simple life (by choice, not circumstance). Seeing how other people obsess over commercial goods, it's like watching pigs at a trough, eating and excreting, without lifting their heads up for air.

It's totally disgusting.

 

My understanding is that 73% of the US economy is based on consumption.

Consumption for its own sake seems pretty hollow to me but if someone wants to do that I can't really judge them for it. People should be free to do that if they want to and it doesn't harm anyone else.

The concept of a consumer economy is an interesting one when you consider the dictionary meaning of 'consume':

v.tr.

1. To take in as food; eat or drink up. See synonyms at eat.
2.
1. To expend; use up: engines that consume less fuel; a project that consumed most of my time and energy.
2. To purchase (goods or services) for direct use or ownership.
3. To waste; squander. See synonyms at waste.
4. To destroy totally; ravage: flames that consumed the house; a body consumed by cancer.
5. To absorb; engross: consumed with jealousy. See synonyms at monopolize.

v.intr.

1. To be destroyed, expended, or wasted.
2. To purchase economic goods and services: a society that consumes as fast as it produces.

 

The Feds current policies of lower interest rates to support dual housing and stock bubbles is leading to run away inflation.

The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.

The January inflation surge left wholesale prices rising by 7.4 percent over the past 12 months, the fastest pace in more than 26 years.

Another report Tuesday showed that home prices, measured by the S&P/Case-Shiller Index, dropped by 8.9 percent in the fourth quarter of last year, the steepest drop in the 20-year history of the index.

http://news.yahoo.com/s/ap/20080226/ap_on_bi_ge/economy;_ylt=AnWMiz4nVZKWqo384mxQpy6yBhIF

The US is at risk of either a dollar collapse or stagflation. You can't dig yourself out of a hole. I thought Bernanke new better. Home prices are decreasing because there is a negative rate of return in buying a home.

 

The first time today the fed got on TV and the market went up. That threw off my day

 

Yeah the market likes to be irrational, partly went up because of IBM, and then some guy on CNBC decides for the second time to release some news on monoline bailouts at the end of the day, how convenient.

The dollar is sucking wind on fed rate cut forecasts. I do the un-American thing and short the limping bastard.

 

The economic factors to keep am eye on are inflation, the dollar, unemployment and home prices. The Fed is on a mission to support the housing bubble and it will come to the day that it's either a dollar collapse or the housing bubble. It's already starting to feed on itself. The number of homes facing foreclosure climbed 57 percent in January from the previous year. A wave of adjustable rate mortgage resets expected in May and June threatens to push many other homeowners into default.

At some point the subprime is going to kick the market in the butt.

 

Ron Paul vs. Bernanke coming up, Weds/Thurs!

Bernanke vs. the economy
http://money.cnn.com/2008/02/25/news/economy/fed_bernanke_hearing/index.htm

Excerpt

This Diane Swonk is foolish. The only way the FED can bring stability is to inflate, and create the possibility of future instability.

The natural and moral solution is to ride out the storm to market balance.

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Traitor Greenspan Urges Gulf States To Abandon Dollar
http://www.infowars.com/?p=464

Excerpt