The American consumer capitulates

Back in August 2007 I wrote a diary entitled, Are Hard Times near? The Great Decline in interest rates is ending, that began:

The American consumer has had largely stagnant wages since 1974. While from 1980 through 2006, the median income of an American household has risen only from $39,700 to $48,200 in real terms, house prices for example have shot up form nearly $125,000 to $246,500. Consumers have responded generally by taking on more and more debt. Total household debt service has risen from 16% in 1980 to 19.4% in 2006.

The Bomb - McCain vs. Obama Plans on the Financial Implosion

madison implodeNews moves at lightening speed.    One minute the story is Lehman Brothers going bankrupt, the next is Barclays is now going to buy some of it, in the asset fire sale in the bankruptcy court.


AIG is like watching a building implode, in slow motion.   Bank of America is buying Merrill Lynch, yet no one is questioning any of this, including their purchase of another in trouble mortgage firm, CountryWide.  

So, what specifically do these Presidential candidates plan to do about all of this? Right now, we have more finger pointing of the two campaigns with little details on actual policy plans or positions.

Solving the Mortgage Crisis - Part I

I don't know about you all, but I was reading Ben Jones' Housing Bubble Blog 3 years ago when house prices were still climbing 20% a year and housing bulls were laughing at the bubbleheads. To them, the naysayers obviously missed the boat and were just sore losers who rented.

Way back in 2005 there were plenty of people (Federal reserve economists excepted of course) who saw the bubble and predicted that when the adjustable rate mortgage resets came due (beginning en masse in 2007) there was going to be one heckuva housing bust, and a cacophony of calls for a bailout of the greedy and the stupid.

Now that those predictions have come to pass, the question is, should we just let the mortgage/housing debacle play out, or are there ways to intervene that would be socially beneficial?

We ought to at least be able to narrow down the options, filtering out those that mainly bail out the greedy, or else entail too much cost or moral hazard. Of those options that remain, we ought to at least be able to narrow down areas of disagreement. Below are my suggestions.

Tuesday proving Larry Kudlow and other Ayn Rand droogies wrong

For anyone whose read my pieces in the past, knows that I hold a certain disdain towards former Reagan White House OMB Associate Director/conservative-libertarian Ayn Rand acolyte Larry Kudlow. It's nothing personal against the guy, it's his ideas and economic policy objectives that I find fault with. For the past couple of months, he's been going on about this is the "Goldilocks economy." Essentially, that we're worrying about nothing because one bad economic indicator is being offset by a good one (mind you, he's often just used productivity as that one). Well today, despite his claims that all is almost well, we got some news that just proves Larry Kudlow wrong!

Ok, I will give him some credit. He isn't a Pollyanna and he has come out and said this or that has been bad or needs to get better. Still, his overall anthem is that things are really great and that we (he's quoted Phil Graham) should stop "whining."

Inflation is still there and going higher.

Is the housing market bottoming?

I couldn't help but notice the screaming, above-the-fold headline this week in the SF Chronicle, Homes sales get lift, but lid still on prices. It sounded like nearly two years of a contracting real estate market was coming to an end.

The long slide in home sales may be nearing an end, but that doesn't mean prices are going to rise anytime soon.
...some people saw last month's unusually big surge as a sign the market may be bottoming out.

Any time the news media uses the term "some people" is a clue.
As it turns out, the article was not just misleading, it skirted the shaky edge of being an outright lie.

Worst Housing Slump since World War 2 CONFIRMED!

This morning's New Home sales, as reported by AP, make it official:

Sales of new homes plunged in March to the lowest level in 16 1/2 years as housing slumped further at the start of the spring sales season.

The median price of a new home in March compared to a year ago fell by the largest amount in nearly four decades.

The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.

The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

In a prior diary I asked if we were in The worst housing slump since the Great Depression? As of today, we have come close to our final answer.

New Durable Goods Orders Fall

New durable goods orders and new single-family home sales both fell sharply in February as recession worsens challenging the Presidential candidates


Two economic reports from the Census Bureau today reflect the deepening recession and an urgent need for the Presidential candidates to get serious about how they will address what could be a long and severe recession with lasting consequences.

Even with prices rising sharply, the nominal value of new orders for durable manufacturing goods fell another -1.7% in February after plunging by -4.7% in January. Nominal values of new durable orders is now down -8.6% since last July to the lowest levels since March 2007.

New Orders Durable Goods Feb. 08

Bernanke signs on to voluntary mortgage cramdowns

This will be a quick note. I will probably post more extensively tomorrow.
The Housing Crisis Fairy ain't coming. Ten years of housing were built in the 5 years of 2001-2005, and the only way the market will be restored to a reasonable equilibrium is by falling house prices. Those who bought houses in 2004-7 at very least are going to have to acknowledge that the value of their house is declining. I.e., there will be pain.
Fed Chairman Ben Bernanke has signed on to the idea of voluntary mortgage cramdowns, similar to those proposed by the Office of Thrift Supervision last week. Here's a quick summary, per CNN: