"Business Cycle" or "Gotterdammerung?"

"The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007.

Case-Shiller's index of 20 major metropolitan areas fell 18.5%, also a record.

"The broad downturn in the residential real estate market continues," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement. "There are very few, if any, pockets of turnaround that one can see in the data."

All 20 metro areas in the 20-city index recorded declines, with home prices falling more than 20% in eight of those cities. National home prices have dropped 26.7% since they peaked during the second quarter of 2006.

The decline does not seem to be slowing - just the opposite. The average home price dropped 2.52% between November and December in the 20 top metro areas. That was a larger increase than the 2.25% drop a month earlier."  CNN.com

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Ironically, the real estate market in Washington seems the least affected by all this.  We sit near the trough.

I wish to propose here an economic question for which I will, at least rhetorically, not admit of having an answer of my own.

Whether for crass political reasons or for genuine difference of opinion, the two American political parties are projecting diametrically opposed views of the nature of the present economic crisis and its probable outcome.

The Democrats state that the present depressed state of the economy is different both in quality and depth from any recession that we have seen since WW2.  They seem to believe that, if left to its fate, the economy of the United States and therefore probably of the world will spiral downward into a dark abyss from which it might well not climb for a long, long time.  In that pit would be; very high unemployment rates, deflation, low levels of investment, etc., We have not seen doctors and lawyers paid for their services with baskets of eggs and dead chickens for a long time, but that seems to be what the Democrats seem to think possible.

On the other hand the Republicans seem to think, or at least to say, that what is going on is really just the trough inherent in an exceptionally deep business cycle.  They seem to believe that if left alone the economy will "right" itself like a swamped boat, shrug off the water and rise to the surface.  Having that view, they say that all the money being appropriated and disbursed for "recovery" is just unnecessary and a surreptitious means to enactment of the Democrats' desired socialist re-structuring of the United States.  The belief in the "business cycle" theory of the crisis appears to be largely ideological, but subject to test by events, but the "socialist conspiracy" theory is, to some extent, supported by some of the items that the House Democrats chose to fund under the "stimulus" bill.  The Democrats would argue of course that all expenditures are stimulative.

I am curious to hear the arguments on both sides.  pl

PS  Watch your language.

 

Comments

[Cieran]

Curious:

Thanks for the info re: the Santelli hoax. And about this:

the former chief executive of HCA Inc. unveiled a $20 million campaign to pressure Democrats to enact health-care legislation based on free-market principles.

That's pretty funny -- the last thing that the plutocrats in the health care industry want is anything resembling "free-market principles".

Such principles would include economies of scale (rendered illegal in Bush's Medicare D plan), and the breakup of oligopolies such as, well, HCA!

[zanzibar]

JerseyJeffersonian

Disinformation and propaganda is how the plutocrats and their political acolytes in DC ensure that the working American transfer their hard earned money to the wealthy. If and when the people understand how they are being systematically looted we will have a lot of folks very upset.

Curious/Cieran

The Santelli rant seemed rather contrived considering that he was ranting about $250 million in mortgage support while no such rants for the trillions in support for investors in Fannie, Freddie, AIG and the Wall Street banks. Anti-trust enforcement or for that matter enforcement of the regulations that we have to ensure a fair and transparent "free market" was lost under the altar of patronage and the revolving door. The recent repeated taxpayer bailouts - each at worse terms for the taxpayer - of private investors and failed managements in AIG & Citi make a mockery of any notions of "free markets". This is the paradox of the Obama administration - their overt coddling of large financial interests at the expense of many generations of working Americans while they seem to want some reform of health care and energy. We'll have to wait and see what reforms are actually implemented.

Arun

Some of the CDO issues that I have seen also were predicated on increased home prices. Additionally, many of the even more leveraged structures like issues of CDO Squared and CDO Cubed had no chance to return principal to even the senior tranche holders since they were priced so aggressively. Meaning the assumed risk was so low. Wall Street snowed many institutional investors who did no due diligence of their own and bought into the greed of the herd. A consequence of the market downturn is a looming pension and retirement disaster. It is not much discussed in the corporate media. Take for example CalPERs - the California state retirement fund which is "officially" down by around 45%. And that does not include the current value of land that they purchased at the peak of the real estate bubble. Now here you have a state retirement fund that went against every known prudent investment precedent and engaged in pure land speculation in areas like Phoenix that were expected to mushroom forever. Similarly, our Federal government holds many large liabilities including social security and medicare off balance sheet. If the government financial statements were done on an accrual basis like any normal business annual deficits would already be north of $3-4 trillion.

I am not as sanguine with the massive projected near term growth in our national debt. Over the last 19 months our government has pledged over $11 trillion on behalf of taxpayers. To understand the scale of government debt growth required as they try and backstop investors in Wall Street banks, AIG and Fannie/Freddie, let alone stimulate the economy through employment support one has to come to terms with the stupendous growth of private sector debt over the past 15 years.

From 1995 to 2007, our GDP grew by 85% but credit growth was 170% to around $50 trillion. Financial sector borrowings grew 300% in the same period to around $17 trillion and provided the "liquidity" that made many Americans feel "wealthy" and consequently drove consumer spending to significant levels. To provide some context - in 1995 mortgage debt growth was $185 billion. In 2005 $1.4 trillion of new mortgage debt was added. The ABS market grew by $125 billion in 1995. In 2006 it grew by an eye-popping $800 billion. Every category of private sector debt grew at astonishing rates.

In the 8 years of George W. Bush - our national debt doubled to $10 trillion. Obama's recent budget projected a $1.7 trillion deficit and that has many assumptions for revenues that are rather optimistic.

I am afraid in our policymakers intent to try and bolster failed asset markets and investors in insolvent financial institutions they are risking the credit worthiness of our sovereign debt. If the Obama economic team and the Bernanke Fed continue on this trajectory I worry that not only will we have to contend with an economic downturn that was precipitated by the bursting of the credit bubble and that is now negatively impacting the financial sector balance sheet even further - that we will also be faced with a future funding crisis. This would further impoverish working Americans whose real wages have stagnated for years. Of course that does not mean we will not see periodic rallies in equity and debt markets.

[curious]

next budget is here.

http://www.newsday.com/business/ny-vpbud016053537mar01,0,6930525.story

President Barack Obama gambled big Thursday when he unveiled his first budget. He treated taxpayers like grown-ups. His extraordinary candor about what Washington spends, and what he thinks it will cost to get the economy out of the tank and on course for a sound future, is refreshing.

The figures are huge - $3.6 trillion to be spent in 2010, with almost $1.2 trillion of it to be borrowed. And the spending plan signals a sharp, maybe even historic, change of direction on taxes and the role of government. By baldly laying his cards on the table, Obama is betting that the public can handle the truth. It needs to.

The economy is in a tailspin. It contracted at a 6.2 percent pace in the last three months of 2008, the Commerce Department reported Friday - its worst performance in decades. The White House announced the same day that it will take a 36-percent stake in Citigroup. Those are ominous reminders that the nation has critical decisions to make in order to turn things around. Obama's truth in budgeting will help to make them informed ones.

[optimax]

I see Rush made a speech the news is talking about. I didn't pay attention to it but wonder if it's connected to this right-wing attack on Obama's stimulus. The timing makes it seem coordinated. I think the American people are feeling too much pain to fall for it. I hope so.

Now that housing prices are falling they can put them back into the CPI, reducing any future pay increases for American workers. That's how it works, at least since Reagan, isn't it?

[optimax]

Stephen Roach from Morgan Stanley certainly understood the weakness of our economy in an article he wrote in 2005. Explaining why the American consumer will suffer the most damage in a market correction: " Usually, it’s the least-experienced borrower or lender that suffers the greatest damage in a market correction. In my mind, that puts the income-short, saving-short, overly indebted, asset-dependent American consumer at the top of the watch list. As always, we won’t know where the rocks are until the tide goes out."

The rest of what he wrote is here. It's the first article:

http://www.morganstanley.com/views/gef/archive/2005/20050513-Fri.html

Hearing rumblings of getting rid of the income tax. What are these people thinking?

[Keith]

from a UVa study:

National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.

Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."

[Gary McGowan]

In the interest of watching my language, I shall let a calmer and firmly documented report speak for me:

What we are actually facing if the nation continues to follow the current trajectory:

America’s Fiscal Collapse
by Michel Chossudovsky
Global Research, March 2, 2009
http://www.globalresearch.ca/index.php?context=va&aid=12517