A Terrible Foreboding RENSE.COM

[Sophia]

5

http://www.rense.com/general51/fore.htm


Rense.com

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A Terrible Foreboding
By Carl F. Worden
wolfeyes@hisurfer.net
4-17-4

Ladies & gentlemen...

Most of you familiar with my writings know that I am a financial consultant involved in just about every aspect of economic and financial proceedings, and I must tell you I have a terrible feeling of foreboding regarding the future of American prosperity. The threat is imminent, and much closer than most Americans can possibly foresee.

br>My associates from every corner of America have consistently confided to me that the primary driving force in the American economy right now is people refinancing their homes at low interest rates, and wit


h
rawing the equity to make purchases like cars and applia
nces, and to pay off credit card debt.

Those of you old enough, and those of you who are younger, but cognizant of the historical events leading up to the crash of 1929, will recall that people were buying stock on credit credit that became immediately due and payable when those stocks lost their value. Thousands of people lost their homes put up as collateral in the ensuing catastrophe, and wound up living in cars and on the streets and in soup lines.

That is exactly what is going on right now. Further, there are sharp increases in home purchases in various areas of the United States, driven not by people buying homes to live in, but to purchase a home on pure speculation that they will reap a huge profit by re-selling the h
ome a month or two later often to another speculator. Economically, it is a disaster waiting to happen, and these home speculators are playing a reverse game of musical chairs in which you do not
want
to
have a se
at (read overpriced home) when the music stops a
s in when the buying frenzy suddenly ends and prices drop. All it will take is a Federal Reserve announcement of an interest rate increase, and I see that coming very soon.

Couple this trend with the fact fuel prices are soaring, making the price of everything from groceries to basic household goods, jump substantially due to transportation costs.

This trend cannot go on without harsh economic consequences, including double-digit, runaway inflation -- and the inevitable rise in interest rates. If interest rates jump just one or two percent, the entire basis for our existing economy through refinancing of homes will come to a screeching halt. If the Federal Reserve refuses to raise interest rates, inflation will explode unchecked.
It,s a no-win situation, no matter how you look at it.

What,s going on right now isn,t very different from the events leading up to the crash of 1929. People were betting on
the come
line t
hat stock values
would keep on rising forever, just like peop
le of today are betting their home,s equity will keep rising forever, but this cannot continue without a drastic correction that can be brought about by any number of unforeseen events. It,s like a house of cards in a high wind, and you never know when the breeze will bring the whole delicate structure to ruin.

I do not understand why the Bush Administration is not trying to do something about these exploding fuel costs. $2.00 + per gallon for diesel?? Diesel is just about the most cheaply produced fuel, yet its cost at the pump is equal to or higher than regular grade gasoline here in Oregon! Clearly, the oil companies are profiteering and cooperating in illegal acts of trust with one another, yet the Bush Administration is taking
no hard federal action to even investigate, let alone bring prosecutions that send a strong message. I don,t get it, and I don,t understand why there has been no massive me
dia or publi
c outcry fo
r action.

Fore
closures and bankruptcies all acro
ss America are already spiking, despite government assurances that we,re all enjoying a growing economy and a promising job market. Those government assurances are all a big, fat lie! The unemployment figures are completely unreliable, since those dropping off the unemployment compensation rolls are no longer counted, even if they remain unemployed after their benefits run out. It,s all a big, fat lie, and I have a terrible sense of foreboding of what is to come, because this economy is not built with underpinnings that can withstand even the slightest breeze.

Carl F. Worden



Comment
From Don Stacey
4-17-4

As you read Mr. Worden's message, think about:

1. Americans in aggregate are spending
120% of their income!

2. We are more in debt than at any time in history and borrowing more at a furious rate!

3. The savings rate i
n America is alm
ost nil.


4. The Federal Reserve is pr
inting huge amounts of new dollars, creating them from th
in air. The new dollars contribute to rising inflation.

How will we handle bad times? I am afraid not well at all.

 

[Xuxa the White]

5

Most of we sheeple are cutting our wooly throats by overspending. I do my damned best to save, rather than spend foolishly. We are nothing more than slaves to the Stalinazicommfascist in power! America has had a counterfeit money system since 1933 when Juu, FDR took away; our gold and rights at gunpoint! :angry: :angry:

 

[Sophia]

5

Since 1913 when the Federal Reserve was established.

FIAT MONEY, better for Monoploy or Charades than commerce.

 

[Sophia]

5

http://www.lewrockwell.com/orig3/blumen4.html



All Real Estate, All the Time
by Robert Blumen


It has been widely reported that housing has been holding up the economy during the recent period of weakness,

and that were it not for the consumer's ability to keep spending by extracting equity from their home, the recession would have been much worse.

However, few commentators realize that these reports are evidence that the US economy is undergoing a secular shift.

The emerging reality, slowly being recognized by economists, is becoming known as the Housing Economy.

Thi
term recognizes the emergence of residential real estate as the driver of economic activity.

Some experts believe that the current changes will be comparable in their scope to the major shifts of t


he
ast two decades, such as the change from the Old Economy (
based on manufacturing) to the Service Economy (based on the import of consumer goods), that took place in the 80;
or the transition from the Service Economy to the New Economy (based on computers and the Internet) that took place in the 90s.

The changing composition of the labor force illustrates the transition that is taking place.
The Wall Street Journal and other papers have recently reported that many unemployed professionals from fields such as information technology,

management, and finance, are now leaving their old line of work to become real estate agents as they realize that their old job has moved offshore or is not coming back.

Eventually, most of the US labor force will be employed in one of a few typ
es of work:
real estate developer, building contractor, appraisers, real estate broker, and real estate agent.
Their work will consist of the construction, financing (and re-financing),
purc
hase
, and sale
of residential real estate.

Day traders who now trade NA
SDAQ issues may be able to day trade residential real estate if sufficiently liquid markets and continuous price quotes are available.

Housing will be more than the driver of the Housing Economy: it will be the only form of economic activity.

Other types of production, now seen to be unnecessary, will be converted or diverted to residential real estate, as the New York Times has reported in a recent story:

Gregory J. Nickels, the mayor of Seattle, is battling the Port of Seattle and the longshoreman's union
to close one of the city's three port terminals in a few years, saying it makes more sense to use the spectacular mountain-framed waterfront property for

condominiums than cargo ships go
ing back to Asia without full loads. He argues that even the $700 million of recent renovations on the port will not increase cargo traffic.

"The land values are suc
h that w
hen the
port is only creat
ing 13 jobs per acre, there may be a better way to create jobs," Mr. Nickels said
.

The conversion of factories, transportation networks, and other capital goods, to residential real estate will yield significant economic benefits.

A Seattle real estate developer contacted by this publication explained the thinking behind this, "We used to need shipping terminals because we used to have to produce goods to trade with foreigners to get things from them in return. But production is a lot of work, and you have to save and invest.

Now how much fun is that? Why not just build houses and condos?"

One challenge that has been issued by critics is the likelihood of an excessive accumulation of debt. Only hard-core skeptics question that home owners can perpet
ually refinance and extract home equity from their rising home prices. However, a growing chorus of doubters has raised the issue that increasing debt levels will limit th
e long-term
growth of t
he economy.

Past ge
nerations of home owners looked forward to the final payment of their mortgage debt prior to their
exit from the work force. Of concern are the following trends: in recent years, home equity as a percentage of home values has sunk to an all-time low, in spite of the aging population of baby boomers nearing retirement, several consecutive years of strongly rising home prices, and a period of record-low interest rates.

The total amount of mortgage debt outstanding, now around six to seven trillion dollars, is at an all-time high. Critics are increasingly alarmed that the fraction of income devoted to mortgage payments is also at historically high levels, and has been growing.

While some have argued that the fraction of income spent on mortgages must remain under 100%, not all
economists agree. A mainstream economist asked to comment on the issue, defended the Housing Economy.

"Using the most modern econometric techniques
, we can projec
t where the mor
tgage payments of all home owner r
eaches 100% of national wage income. Basically what we do is draw a graph of the percentage over t
ime, lay a ruler over it, and draw a straight line. The point where the line crosses 100% is our forecast," he stated.

Some have charged that this type of forecasting is devoid of any economic reasoning, and even that it violates common sense. How, for example, could mortgage payments reach or exceed 100% of income?

The mainstream economist responded to these charges. "Home owners can simply extract equity from their home by refinancing and use the cash they take out to pay the difference between their income and their mortgage." Home owners extracted $491 billion of equity from their homes last year according to the Wall Street Journal. "Home owners
are already using home equity from refinancing to meet ongoing monthly expenses," he continued, "It is a small step forward to start usin
g these funds for t
he mortgage itself.
"

He continued, "Those wo
rry-mongers who are always complaining about debt are laboring under the quaint notion that debt is supposed to be repaid. The purpo
se of going into debt is so that you can acquire more debt in the future. Governments have known this for a long time, but in a democracy, why shouldn't ordinary people be able to take advantage of this as well?"

Fed Chairman Alan Greenspan, one of the leading thinkers in this new paradigm, has generally endorsed these changes, as the Wall Street Journal reported:

WASHINGTON ' Federal Reserve Chairman Alan Greenspan said Monday the finances of U.S. households are in "good shape" despite a steep rise in household debt and national bankruptcy rates over the last few years, suggesting that consumer spending isn't likely to
fizzle out.

In a speech, Greenspan said that although nonbusiness bankruptcy filings have risen steadily over the last few years
, they don't reflec
t the true state of hou
sehold finances. Household debt, he said, has clim
bed in tandem with rising homeownership rates and rising home prices, allowing most households to carry the debt without stress.

"Overall,
the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflect factors that do not suggest increasing household financial stress," Greenspan told the Credit Union National Association in prepared remarks.

If the use of debt to fund current consumption is to be sustainable, continually rising housing prices are required so that a plentiful supply of home equity to be cashed out is always available.

This might sound like a perpetual motion machine to old-school economists, who have argued that wealth creation required savi
ngs and investment. But thanks to recent developments in economic thinking, the use of permanently rising asset prices as a
means of wealth creation no
w has a sound basis in econ
omic theory.

Fed Chairman Alan Greenspan was one o
f the first to see how rising home values could be a source of economic growth:

As an economic consultant in the 1960s, Alan Greenspan had a novel ins
ight about buying and selling homes. He noticed that when a house changed hands, the mortgage the buyer took out almost always was bigger than the one the seller was retiring.

Mr. Greenspan went on to conclude that this borrowing played an unexpectedly large role in consumer markets, by generating extra spending power backed by the value of homes. At the time, it was an arcane thesis that few other economists accepted or even understood.

["â┚¬Ã…¡ÃƒÆ’”�šÃ”š¦]

Mr. Greenspan's analytic interest in housing dates to his days as a consultant at Townsend-Greenspan & Co. He noticed that total mortgage debt was incre
asing each year by more than could be explained by mortgages taken out on newly built homes, after he subtracted
scheduled repayment of existin
g loans. The difference, he con
cluded, had to be mortgage borrowing secured by the equity in exis
ting homes ' borrowing that consumers used for other purposes, from buying cars to investing in stocks.

Mr. Greenspan called this the "monetizatio
n," "liquefication" or "extraction" of home equity. He believed it could explain a lot of things ' stock prices, home prices and consumer spending ' better than other economic models did. "Capital gains from home sales are a potent force in consumer markets, far greater than ... stock-market gains," he told the National Association for Business Economics in Philadelphia in 1977.

["â┚¬Ã…¡ÃƒÆ’”�šÃ”š¦]

"In the old days, housing wealth was relatively illiquid and the only way to realize it was to sell and move to smaller house," said Fed researcher Andreas Lehnert at a recent
academic conference in Washington. "Now you can borrow against housing wealth." He calls th
is increased role of the home as a
source of cash the "ATM effect
."

In a groundbreaking 1996 article, the concept of using ris
ing prices to create wealth was extended from rising home prices to rising asset prices in general. Economist Dr. Kurt RichebÃԚ ÃƒÆ’”�šÃ”š¤cher summarizes this article:

For the first time ever in the history of e
conomic thinking, economists ' that is, American economists ' are claiming that growing asset prices represent fully valid wealth creation. In 1996, an article in Foreign Policy entitled Securities: The New Wealth Machine effectively explained that the financial markets have become the most powerful generator of wealth.

Verbatim: "Historically, manufacturing, exporting, and direct investment produced prosperity through income creation. Wealth was created when a portion of income was diverted from consumption into investment in buildings, machinery and
technological change. Societies accumulated wealth slowly over generations. Now, many socie
ties, and indeed the entire world, hav
e learned how to create wealth directly
. The new approach requires that a state find ways to increase the market value
of its stock of productive assets. Several countries have successfully directed their economic policies toward that goal, achieving and sustaining faster growth rates than were once thought
possible..."

The Housing Economy brings concept of extracting wealth rising asset prices full circle: rising housing prices will drive not only the entire economy, but also ensure the further increase in housing prices. The Wall Street Journal noted that the net worth of households recently "surpassed the peak of $43.58 trillion reached in the first quarter of 2000," due to "a rebound in the stock market as well as the rapid appreciation in home values in the past few years."

Proponents of the Housing Economy have argued that it will
be more resistant to business cycles. One case in point is that it will be imm
une to offshore movement of jobs to India
or China. Real estate agents must be local
in order to be familiar with the neighborhood conditions.

However, some social
justice activists have raised concerns about what will happen to those individuals who fall through the cracks ' those unable to get a mortgage or to find work as real estate agents or brokers.1

One comm
unity-based development activist recently spoke out: "We are in danger of an unequal society, one of real-estate haves and real estate have-nots." Indeed, this would mirror the experience of Japan's bubble economy, in which modest homes fetched millions of dollars. Only those who already owned a home had the means to purchase real estate. Those who had not purchased before the bubble were left behind.

To avoid the specter of housing inequality, the Housing Economy will require additional social safety net programs to ensure that everyone
can obtain a mortgage of any size, no matter what their credit-worth
iness. Recent financial innovations such as z
ero-percent (no down payment) mortgages2, inte
rest-only mortgages3, negative amortization4, and mortgages written for greater than 100% of t
he value of the home5 will provide a basis for these new programs.

Here the Housing Economy may borrow from recent financial innovations in auto financing. Car owners who are "upside down," that is, ow
e more on their car than it is worth, can roll the old debt into a loan on a new car. The new loan is often for more than the value of the new car.

The housing GSE Fannie Mae will continue to provide an important service to home buyers by purchasing mortgages that are issued to finance homes, securitizing them, and selling them to the Chinese and Japanese Central Banks.

Fannie Mae CEO Franklin Raines has emphasized the important role of the GSEs in ensuring continually rising home prices. In a speech to the SIA, Raines calculat
ed the supply of credit that would be available for mortg
ages. Raines then made an independent calculation
for the demand for mortgage loans, based on the e
ntirely reasonable assumption of continued home price appreciation.

According to Raines, credit
demand would have exceeded credit supply by a significant margin. This would undoubtedly lead to a complete shutdown of the housing market, as home prices remained stuck at high levels that buyers could not affor
d. Fortunately, Fannie Mae was able to step in and provide the additional credit that was needed to make up the difference between supply and demand.

It was thought by older economists that supply and demand could not be permanently out of balance because the movement of prices would occur until supply and demand were matched. In this mode of thinking, supply, demand and price were seen as interdependent phenomena. Indeed, without Fannie Mae, the price system would have been required to bear the full burden of bringing supply and deman
d into balance. This would have meant either
higher interest rates, lower home prices, or some com
bination of the two.

One home owner, who has re
tired from their line of work and now lives entirely off their home equity, summarized the impact of the Housi
ng Economy on his own life: "Is this a great country, or what?"

Notes

Some people will always find something to complain about.
I'm not making this up.
Or this.
Or this, either.
Or this.

March 8, 2004

Robert Blumen (send him mail) is an independent software consultant based in San Francisco, where he rents an apartment.

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Perhaps they want housing for all those immigrants they plan to keep
bringing in here ?? h34r: