To begin with, in this Business Week article from January 8, further tales of woe and loss are expected in the US housing market through 2008.
In case you were still harboring a tiny bit of optimism about the U.S. housing sector, just take a look at a couple of headlines from Jan. 8. KB Home (KBH) President and Chief Executive Officer Jeffrey Mezger said in a conference call with investors that he sees "no sign" that the sinking housing market is stabilizing in 2008, after announcing a staggering $9.99 loss per share in the last quarter of 2007.
On the same day, shares of Countrywide Financial (CFC) plunged as the mortgage lending giant denied rumors it is facing bankruptcy.
Oh boo hoo. Cry me a river that you're facing the loss of profits while thousands of people are losing their homes due to your predatory lending practices. Only mobsters can make unsecured loans to people who really can't afford it because most people value their kneecaps above any amount of money. It's unlikely, however, that Countrywide could successfully follow this same strategy since it's illegal and would require hiring a lot of thugs (who aren't as easy to find these days as you might think.
Just a few days later, The Washington Post told us "Fears about Economy Increase".
New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.
I think I touched on that already in this post. To recap, it's not some kind of simultaneous effect caused by rate adjustments on credit cards; what we've actually seen happening is that as home equity lines of credit run out or people default on them, they tend to do so on credit cards and car payments as well, indicating that way too many people were living off credit financed by their houses. Very, very poor choices. For more on how this is impacting auto loans, read this WSJ article (via Balloon Juice).
Harold Myerson over at WaPo tells us that this is not a recession that can be solved with the normally prescribed remedies.
[T]he coming recession will not be normal, and our economy is not fundamentally sound. This time around, the nation will have to craft new versions of some of the reforms that Franklin Roosevelt created to steer the nation out of the Great Depression -- not because anything like a major depression looms but because we face an economy that's been warped by two developments we've not seen since FDR's time.
The first of these is the stagnation of ordinary Americans' incomes, a phenomenon that began back in the 1970s and that American families have offset by having both spouses work and by drawing on the rising value of their homes. With housing values toppling, no more spouses to send into the workplace, and prices of gas, college and health care continuing to rise, consumers are played out. December was the cruelest month that American retailers have seen in many years, and, as Michael Barbaro and Louis Uchitelle reported in Monday's New York Times, delinquency rates on credit cards, auto loans and mortgages have all been rising steeply for the past year.
What's alarming is that this slump in purchasing power doesn't appear to be merely cyclical. Wages have been flat-lining for a long time now, the housing bubble isn't going to be reinflated anytime soon, and the upward pressure on oil prices is only going to mount. As in Roosevelt's time, we need a policy that boosts incomes and finds new solutions for our energy needs.
Too true, too true. The question is how we do this. Other than mandate that we pay all workers more (quite a bit more, actually), we can only lower the fixed costs people have to pay, such as the aforementioned health care and energy. Wow, would you look at that? Progressive reforms would alleviate a recession! Isn't that amazing? I mean, who would ever guess progressive reforms could do that (just like they alleviated the Great Depression)?
Myerson goes on:
The second way in which the current downturn echoes the Depression is the role played by our deregulated financial sector. Now, as then, the financial foundations of our leading banks and other lending institutions have turned out to be made of mush. Now, as then, this news has come as an appalling surprise not just to consumers but to many of the banks themselves. Now, as then, the banks created such complex and deliberately opaque financial vehicles -- all devised to make them a buck every time they swapped some paper -- that they long ago lost track of the paper's true value.
Oh my goodness, would you look at that? Another problem progressive reforms would solve! Guess what it is Republicans swear they won't do to their constituents: they won't regulate businesses. And don't Libertarians say that government should leave the markets completely alone? Well guess what happens when you do that: you get circumstances like these where bad lending causes a nation-wide recession (and perhaps global, which I'll get to later). Why exactly do Republicans have the reputation for being smart on economics when their policies lead (inevitably and inexorably) to this?
Right now though, Dems aren't doing much more than blowing the same hot air the Republicans are, what with all this talk of tax rebates (which I will rail against mightily, also later).
As Myerson mentioned, wages have been flat for something like twenty years or more, but we've been hearing about relatively low unemployment from the Bush administration for a couple of years now (something like 4.7 percent). According to this WaPo article (and as I've mentioned in some much older posts) hidden by this number is the fact that there are more long-term unemployed and educated people are returning to jobs that don't pay anywhere near what they used to make.
The growth in long-term unemployment has occurred even as displaced workers have taken bigger pay cuts to reenter the job market. A 2004 study found that workers who lost a job in 2001 to 2003 took an average pay cut of 17 percent in their new jobs, more than double the average cut of those displaced in the late 1990s.
"When people are losing good jobs these days, they have a very hard time getting back to the type of job they had before," said Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group that presses for more generous unemployment benefits.
While strong corporate profits, low inflation and record manufacturing output characterized the extended recovery that followed the 2001 recession, some economists call that period of expansion a "CEO's recovery." Real wages were mostly flat, poverty ticked upward and an unusual number of people had a hard time finding work -- a fact masked by relatively low overall unemployment rates.
Business Week goes on to tell us that the previous decade of economic growth may well have been built on credit.
The past 10 years will go down as one of the greatest consumer-lending sprees ever. Adjusted for inflation, consumer debt—including mortgages—rose an average 7.5% per year since 1997, far faster than the 4.2% rate of the previous 10 years. The last time debt rose so fast was the 1960s, as the postwar generation bought homes and autos. If Americans had kept borrowing at their pre-1997 pace, they would have had about $3 trillion less in debt.
Yes, there's been a profit boom in recent years. Corporate earnings, as measured by government statisticians, have averaged 8% of GDP over the past decade, up from a low of 6.5% in the early '90s. That has helped propel stocks upward.
But here's an unfortunate truth—the profit surge has been mainly in one area, financial services. Financial institutions have benefited from the consumer credit boom, the proliferation of new financial instruments, and relatively low rates. By contrast, the earnings of nonfinancial companies over the past decade have averaged about 5.3% of GDP, about the same since the mid-1980s. There are few signs of any acceleration, even after years of restructuring.
The question now is how much of the gain in financial profits is sustainable and how much will simply evaporate once the credit binge is over. The problem: No one knows yet how badly the banks will be hit.
Surely people had figured this out before the crash, right? I mean, we've had these numbers for years. Actually, I know I noticed some of this stuff before any crash. The flat wages, the rising credit debt; this has all been evident for years. I don't understand why this comes as a surprise. In one of my previous posts I linked to an article talking about a coming credit crunch which was written well before any subprime mortgage mess.
Anyway, back to the mess at hand. In another article, we see how the cycle is self-reinforcing:
The connection to real estate appears clear. Rapidly falling home prices in many parts of the country mean consumers can no longer draw upon the equity in their homes for extra cash—something many had done with abandon during the boom. "Their ATMs, their homes, are now spitting out blank slips," says David Easthope, a financial services analyst at Celent.
Fearful bankers are making matters worse by tightening their lending standards, which makes all sorts of consumer loans more expensive and scarce. The banks' caution comes out of sheer necessity. Their balance sheets are devastated after the huge mortgage write-downs of the last two quarters. And the industry's new conservative lending posture will make it difficult to resuscitate consumer spending with another jolt of interest-rate cuts. Banks are likely to keep raising rates on credit cards and other consumer loans no matter what Federal Reserve Chairman Ben Bernanke does.
And one final paragraph from BW giving some numbers to the link between this subprime mortgage mess and credit cards.
Buoyed by rising prices, borrowers increasingly tapped into the equity on their properties to finance a new car, renovations, or even a down payment, making equity a key source of consumers' strength. But with the housing market in disarray and prices plunging, the business of home-equity lending is souring. At least $14.7 billion in loans and lines of credit were already delinquent through the end of September—the highest level in a decade. "After subprime, home-equity lending is the biggest problem the industry has right now," says analyst Frederick Cannon of Keefe, Bruyette & Woods.
One tiny teaser (from BW) about how this may become a global recession:
Asia-Pacific markets last year were propped up by investor confidence that China and its hot economy would offset negative impact from any slowdown in the U.S. That Chinese life raft is now seriously leaking. Stock markets throughout Asia took a hammering on Jan. 21. And with the U.S. futures markets expecting a 500-point plunge in the Dow Jones industrial average when American markets reopen, the rout continued on Jan. 22 in Asia as worries about a recession in the U.S. and a slowdown in China continued to scare away investors.
What they're saying is it's bad all over. This is not going to be an easy recession, and anyone telling you that $600 back on your taxes is a magic cure-all is selling you snake oil (including the Democratic Congressional leadership).
It will have an effect, just not a noticeable one, and certainly not enough to stave off a recession. Even if they were to hand out $300 a month for the rest of the year, a puny $3600 for every income earner, it just wouldn't make a dent in the average person's debt. I don't mean that most people just have extraordinary credit card debt. Based on the Survey of Consumer Finances I think people carry an average of less than $10k on credit cards, but I don't think comprehensive numbers exist that show how much people actually have in other debt such as auto loans, mortgages, hospital bills, etc. In other words, actual debt for the average American is probably quite a bit higher. But even if we invest enough money in people to clear off all their debt, that still doesn't alleviate the underlying issues of flat wages and inflation squeezing the earnings of the average American. And, unless we want to encourage people to get back into debt, we have to keep them from having credit unless they can afford it.
Well, it's far too late for me to think on this any more. Take what you will out of this. Just expect some hard times in the near and not-so-near future.