Disasters looming all around (Headlines from the Meltdown)
U.S. accountant-in-chief: ‘We’ve never seen the likes of what’s coming’ – Financial Times, Jan. 29
An influential US official on Tuesday hit out at his country’s “addiction to debt,” warning that the federal budget was on an “imprudent and unsustainable path” due to ballooning healthcare costs.
David Walker, US comptroller general, warned a Senate budget committee hearing that while recent falls in the budget deficit were encouraging, the long-term fiscal outlook was grim.
….”If there is one thing that could bankrupt America, it is runaway health costs. We must not allow this to happen. This is our addiction to debt.”
Mr Walker’s comments echo a warning he made last year, in which he urged the US to “learn from the fall of Rome” and deal quickly with a “burning platform” of unsustainable policies, including fiscal deficits.
….Mr Walker conceded that current deficit and debt levels were “not a major problem.” But he said the difference this time was that the US would be unable to grow its way out of a long-term fiscal crunch. “We’ve never seen anything like what we are headed into.”
* * * * *
U.S. in real economic trouble – Time, Jan. 24 (Feb. 4. print issue)
Say what you will about today’s global economy, it ain’t dull. In a cascade of worry on a single trading day, Jan. 21, Hong Kong’s Hang Seng index plunged 8.6%, Tokyo’s Nikkei 5.7% and Mumbai’s Sensex 12.9%. It was a worldwide mini-meltdown, and the Federal Reserve Board wasn’t about to let that go unanswered. Before the U.S. markets had even opened, Fed Chairman Ben Bernanke — not a man known for dramatic gestures — slashed a key interest rate three-quarters of a percentage point. The surprise move arrested the rout, and the markets have since rallied, but investors are left to absorb an unavoidable truth: the U.S., still the world’s biggest market for exports, appears to be in real economic trouble.
….And so whatever happens in the markets this year, you probably will not feel as house-proud as you did two years ago. Someone you know will be looking for a new job. And gas won’t be getting much cheaper. The Fed can’t magically make all that go away. Neither can Congress or the White House. The best they can do is keep it from getting any worse than it has to be.
* * * * *
Darker Days Ahead? Robert Reich warns a recession, or worse, may be coming – Newsweek, Jan. 23
Think the last few days have been bad forand the rest of the world’s markets? Hang on, things are probably going to get worse, says , President Clinton’s former secretary of Labor and author of the recent book Supercapitalism: The Transformation of Business, Democracy and Everyday Life. According to Reich, who currently teaches public policy at the University of California, Berkeley, the United States might even be headed toward a depression.
[Excerpts from Newsweek‘s interview with Reich:]
The Fed is clearly becoming aware of the serious potential of an economic meltdown. The size of the [recent interest-rate] cut is larger than anyone expected because the Fed usually moves in [increments of] .25 or .50 percentage points.
….[Bernanke’s decision to surprise the market] underscores the seriousness of the current economic problems
….The fact is that no one knows anything. Investors are flying blind. Even experienced Wall Street hands have no idea whether we’re near the bottom. We can expect even more violent swings in the stock market. The reason for all the uncertainty is that the big banks and lenders simply have no idea how many bad loans they’re holding. [During the housing bubble] credit markets evolved such complex ways of reselling and repackaging debt that even many top Wall Street professionals simply have no idea of the risks and costs they’re involved with.
….[S]everal managing directors on the Street, whose opinions I trust, have said to me that the chances for a depression are 20 percent. That matches my sense. In other words, it’s still low, but 20 percent is nonetheless far higher a probability than anyone should be comfortable with. Even absent a depression, it seems likely that the coming recession will be deeper than the last several.
Jim Rogers: This recession will be really, really bad – Fortune, Jan. 31
You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer . . . . But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.
“I’m extremely worried,” he says. “I have been for a while, but I just see things getting much worse this time around than I expected.” To Rogers, a longtime Fed critic, Bernanke’s decision to ride to the market’s rescue with a 75-basis-point cut in the Fed’s benchmark rate only a week before its scheduled meeting is the latest sign that the central bank isn’t willing to provide the fiscal discipline that he thinks the economy desperately needs.
“Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I’m afraid it’s going to be much worse,” he says. “Bernanke is printing huge amounts of money. He’s out of control and the Fed is out of control. We are probably going to have one of the worst recessions we’ve had since the Second World War. It’s not a good scene.”
* * * * *
Driving Towards Disaster – Newsweek, Jan. 28
If you want to see what hard times look like, come to Michigan. Last week’s manic markets fueled fears that America, or perhaps even the global economy, is tumbling into recession. But Michigan has been an economic wasteland for virtually the entire decade. Its fortunes riding shotgun with America’s ailing auto industry, Michigan has lost more than 400,000 manufacturing jobs since 1999. Its unemployment rate, 7.6 percent in December, has been at or near the highest in the nation since 2003. FOR SALE signs dot the landscape, even in the neighborhood of GM chairman Rick Wagoner. But there are few buyers: Foreclosures have quadrupled in the last two years, according to the Web site RealtyTrac.com. The Sunday Detroit Free Press recently printed a 121-page section listing thousands of homes facing foreclosure. And in the last year, 30,500 people have left Michigan, Census officials estimate.
“Michigan is the worst economy in the country, by far,” says economist Mark Zandi of Moody’s Economy.com. “But the financial pain Michigan is suffering now will become evident in many other parts of the country by this summer.”
Indeed, these days Michigan is looking more like the canary in the coalmine, than the isolated “one-state recession” native son Mitt Romney spoke of during his primary victory there . . . . [M]any of the factors that drove Detroit into the ditch — $100-a-barrel oil, the credit crisis, globalization — also are preying on the rest of the nation.
….”I worry about this every day,” says [financially distressed autoworker Sean] Gurskey, who has taken to plowing snow for extra money. “You wonder if you’ll have a job, if you can make your house payment. I don’t want to feel like I’ve failed my family.” It’s a feeling the rest of the country could become familiar with soon.
Barton Biggs has some offbeat advice for the rich [in his new book Wealth, War, and Wisdom]: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with “seed, fertilizer, canned food, wine, medicine, clothes, etc.”
…. Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners. He doesn’t lock and load until the last page of this smart look at how World War II warped share prices, gutted wealth and remains a warning to investors. His message: Listen to markets, learn from history and prepare for the worst.
….The “wisdom” in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.
….Mankind endures “an episode of great wealth destruction” at least once every century, Biggs reminds us. So the wealthy should prepare to ride out a disaster, be it a tsunami, a market meltdown or Islamic terrorists with a dirty bomb.
….”Events move much faster than anyone expects,” he says, “and the barbarians are on top of you before you can escape.”
* * * * *
New report: U.S. economy much weaker than expected – CNNMoney.com, Jan. 30
Economic growth nearly ground to a halt in the last three months of the year, according to a government report released Wednesday that showed the sharpest decline in growth since 2003.
The report raised fears of a recession and increased hopes that the Federal Reserve will make another significant interest rate cut.
Gross domestic product, the broadest measure of the nation’s economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter, according to the Commerce Department. That’s down from a final reading of 4.9% growth for the third quarter. Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.
The anemic growth in the fourth quarter matched the slowest expansion in the economy in the last five years. The report comes amid rising concerns that the U.S. economy is falling into a recession, with some economists arguing the downturn started in the final month of 2007.
* * * * *
Bubble-based U.S. economy is like a rampaging killer robot – Paul B. Farrell, MarketWatch, Jan. 28
What’s so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What’s really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.
Of course the Treasury and the Fed will never admit it, but they saw the housing bubble as a healthy economic necessity in their warped ideology! In their myopic minds, the housing bubble was the messiah “saving” America from a big, bad bear/recession.
Publicly they denied the bubble’s toxicity, dismissing it as “regional froth.” Privately, they conspired to create a massive new bubble driving America deep into debt.
This new ideology is extremely dangerous: It assumes the American economy can no longer be managed by politicians or Wall Street quants. The “new economy” has a life of its own, a “Terminator” from a dark future, an “I, Robot” from Asimov’s sci-fi world.
Yes, our economy has become a self-sustaining “bubble-blowing machine” inventing new bubbles at warp-speed even before the last is buried….
….There’s a higher truth: The best (not worst) strategy would be to let the “bubble-blowing machine” implode, live with the absence of a new bubble for a while, then quietly step back and reassess our unsustainable “growth-at-all-costs” economic policies that are secretly designed to benefit the self-interests of Wall Street’s insiders who profit by endlessly blowing bubble after bubble … after bubble … after ….
* * * * *
Housing Downturn Squeezing Schools – The Washington Post, Jan. 30
The rapid cooling of the Washington area’s real estate market has hit school systems with force, abruptly ending years of plenty and compelling superintendents to ask their teachers, bus drivers and custodians to do more with less.
….Because school systems rely mainly on state and county government funding, and those governments draw most of their revenue from property taxes, a regional 7.7 percent drop in home values during the third quarter of last year has stopped the rapid growth of education budgets. And as can be seen with jittery stock markets across the world, it is unclear whether the storm is over.
For school administrators, the economic instability could not have happened at a worse time. The federal No Child Left Behind law, with its mandate that all students show proficiency in reading and math by 2014, threatens schools that fail to comply with restructuring and state takeover.
* * * * *
U.S. homebuilders face growing bankruptcy threat – Financial Times, Jan. 29
The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.
Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments.
….”They are at the epicentre of what…is going to be a pretty bad recession,” Mr. [Byron] Douglass [an analyst at Credit Derivatives Research] said. “The first companies we are going to see defaults on are homebuilders.”
* * * * *
Foreclosures up 75% in 2007 – CNNMoney.com, Jan. 29
Total foreclosure filings soared 97% in December alone compared with December of 2006, according to RealtyTrac, an online seller of foreclosure properties. For the year, total filings — which include default notices, auction sale notices and bank repossessions — grew 75%.
….The rise nationally has confounded some community advocates. “Last December, we thought the national numbers were bad, and now they’re up almost 100 percent,” said John Taylor, CEO of the National Community Reinvestment Coalition.
* * * * *
Home ownership in record plunge – CNNMoney.com, January 29
The housing and mortgage meltdown caused the biggest one-year drop in the rate of homeownership on record, according to government figures released Tuesday.
….The report also also showed a record 2.18 million homes vacant and available for sale in the fourth quarter, up from the 2.07 million in the third quarter and the 2.1 million a year earlier.
….The glut of vacant homes is a sign the evaporation of demand for home sales, which has hammered housing values. It also signals bad news for homebuilders, who were stuck with a record inventory of 195,000 completed homes at the end of December. A separate Census Bureau report Monday showed the biggest drop in new home sales on record in 2007.
* * * * *
Recession puts Florida housing market in a death grip – The Dallas Morning News, Jan. 26
FORT MYERS, Fla. – Here, people don’t ask whether we are headed for a recession. They know a recession is here. For those who live here, the questions narrow down to two: How much worse will it get? How long will it last?
For some residents, everything hangs in the balance. And I mean everything.
A doctor friend once told me of an eerie feeling he got. Tending a dying patient, he’d look out the hospital room window for a moment. Outside, life went on without a pause. The automobile traffic never stopped; people were still in a hurry.
I feel the same way as I drive down U.S. 41, which connects Cape Coral, Fort Myers, Bonita Springs and Naples. The roads are still busy. The cars are still shiny. Massive new shopping centers greet the snowbirds, the early retirees setting up house and the usual vacationers escaping the cold of Minnesota, Michigan, Massachusetts and Maine.
But something is wrong in paradise.
….According to Fort Myers MLS Board figures, it would take 44.5 months – nearly four years – to work off the current inventory of homes for sale. That doesn’t count the discouraged sellers who have taken their houses off the market but still want to sell.
[Cardin comments: This column about the situation in Fort Myers, Florida gives a picture of what the current recession looks like in a relatively wealthy area of the U.S., one that was riding high on the bubble before it burst. For a sharply contrasting glimpse at what it looks like in a poorer area that got caught up in the bubble in its own way, read the next story below.]
* * * * *
U.S. mortgage crisis creates ghost town – Breitbart.com, Jan. 27
The streets are empty. Trash rustles down the road past rusted barbecues, abandoned furniture, sagging homes and gardens turned to weed. This is Shaker Heights, a suburb of Cleveland and a town ravaged by the subprime mortgage crisis roiling the United States.
Faded “for sale” signs sit in front of deserted houses. The residents are gone, either in search of new jobs after the factories shut down, or in shame after being evicted for missing their mortgage payments.
….Laura Johnston, 50, says that her street — about 10 minutes away by car — was alive two years ago. Today, half the houses are abandoned.
“Folks could not afford their payments. They were asked to pay loans which doubled. They could not afford it, some lost their job. Lenders were greedy. They threw them out of their homes,” she told AFP.….
For county treasurer Jim Rokakis, the greed of the banks is to blame for this man-made disaster. “All you needed was a pulse to buy a house. Some loans were written with no money down, no proof of buyer’s incomes. They did not even check what people were saying. Most of those folks were jobless,” he said in an interview. “Shaker Heights was the perfect storm: poor folks, unemployed and a desire to get a piece of the American Dream.”