Signs of a longer and deeper recession popping up

First, auto sales went in the crapper in the first quarter, but haven’t hit the bottom of the crapper yet.

Second, four percent of mortgages could be in foreclosure by the end of the year.

Third, many subprime neighborhoods are having more and more foreclosed houses ransacked for scrap copper, thereby intensifying the downward spiral of their neighborhoods.

Fourth, the housing construction decline hit the two-year mark with no signs of immediate lessening.

Fifth, Federal Reserve Chairman Ben Bernanke is upping his economic warnings.

(Links, except the last one, are to individual posts on my blog.)

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WSJ says recession is here and could be bad

And, many of the economists surveyed by the Wall Street Journal expect this one to be worse that those in 1990-91 or 2001.

“The evidence is now beyond a reasonable doubt,” said Scott Anderson of Wells Fargo & Co., who was among the 71 percent of 51 respondents to say that the economy is now in a recession.

Some details from the survey:

Twenty economists now expect payrolls to shrink outright. And the average forecast for the unemployment rate was raised to 5.5 percent by December from 4.8 percent in the previous survey.

Twenty-nine of 55 respondents said they expect the economy to contract in the current quarter and 25 expect it to do so in the second.

The economists also expressed growing concerns that a 2008 recession could be worse than both the 2001 and 1990-91 downturns. They put the odds of a deeper downturn at an average 48 percent, up from 39 percent in the previous survey.

I don’t see how anybody not inside the Bush Administration can deny that we’re in a recession if the nation’s financial newspaper of record says so.

Speaking of that, the one silver lining is that Ben Bernanke, The Worst Fed Head Since Greenspan™, may be out on his ass if a Democrat is in the White House next year:

The economists gave the Fed chairman just a 59 percent chance of being reappointed in 2010. “If a Democrat is elected he won’t be reappointed, and (presumptive Republican presidential nominee John) McCain may opt for another, too,” said David Resler of Nomura Securities. “The problems occurred on his watch,” added Ram Bhagavatula of Combinatorics Capital.

A small blessing, but yes, a blessing.

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An Update On The AWOL Economy

In case there was any doubt after Thursday's bad news (see previous post) that the U.S. economy is sort of absent without leave, Friday's news, and more tidbits from Thursday, probably erased it all.

Here are more economic news nuggets for your dining and dancing pleasure:

-- The Labor Department estimated that the U.S. lost 63,000 jobs in February, far more than analysts had expected.

-- This from The New York Times: "On Thursday, the Mortgage Bankers Association reported that about 7.9 percent of all loans - a record high - were past due or in foreclosure. Until the third quarter of last year, the rate had not climbed above 7 percent since 1979."

-- More from The Times: "Home prices are falling in almost every part of the country, a phenomenon that Fed officials and many other experts until recently thought was all but impossible, and some analysts now predict that average home prices will ultimately fall 20 percent from their peak in 2006."

-- And still more from The Times: "The effect is reducing household wealth. According to data this week from the Fed, net household wealth declined by $900 billion in the fourth quarter of last year."

-- And yet still more from The Times: "Stocks dipped yet again Friday. The Dow Jones Industrial Average fell 146.70 points to close at 11,893.69. The S&P 500 was off 10.97 points to close at 1293.37, while the NASAQ was down 8.01 points to 2212.49."

And then, this platitude from "President" Shithead:

"I know this is a difficult time for our economy, but we recognized the problem early (HAWHAWHAWHAWHAW...) and provided the economy with a booster shot. We will begin to see the impact over the coming months." (There is apparently going to be such impact, I don't know how they're going to afford enough Ex-Lax to handle it.)

Pardon my doubts -- I think the recession is very much unofficially here, and a deficit-stoking tax rebate that will seep through the economy in the summer isn't likely to head it off, in the least.

I speculate here, but I hope with all body and soul that we are finally emerging from a very long era of bad economic policy. The laissez-faire, "free market" model seems to keep rising from the dead, but I don't think that's evidence of its strength. It seems to have been discredited over and over.

Onward.
I think what gives it a perversely enduring strength is its seeming justification for swinish behavior by the economic elite. Consider that these are the folks who give the greatest sums to political campaigns, of both parties.

If you are among the privileged, it's a way to elude guilt. After all, you're hiring gardeners, maids, drivers and cooks. You leave big tips at the country club. Rationalization: How can all this largess not "trickle down?" And then, those nasty government people just want more and more tax money?

I'm actually supposed to help pay for the roads and bridges that I only have my hired help drive over? I'm supposed to help pay for the public library? (Barnes and Noble has all the coffee-table books I want). Those liberals ought to just go out and get themselves honest jobs. Wait, what's this in the paper about outsourcing jobs to India? Oh, OK -- none of my help is affected.

And remember to have that personal secretary keep that subscription to National Review current. God rest Bill Buckley's soul.


Crossposted at Manifesto Joe.

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What Economy, Stupid?

Yeah, the title is an exaggeration. But it comes just after a day of very bad economic news. The recession is not yet official, but I think the question is no longer if, but when. Here are a few news nuggets from Thursday:

-- For the first time since World War II, U.S. homeowner debt now exceeds home equity.

-- In the fourth quarter of 2007, the percentage of U.S. homes caught up in foreclosure proceedings reached a record 0.83 percent.

-- The benchmark crude oil price climbed to a record $105.47. The prices of staple
groceries -- bread, milk, eggs and such -- have been been climbing in tandem.

-- The Dow Jones industrial average fell 214 points Thursday and is flirting with a dip below the 12,000 mark.

I would dare say that Republican "free" market economic policies have been given every chance to work and have proved wanting. I got my "tinkle-down" in the '80s. I'm still waiting for the "trickle-down."

Onward.

The Bush "stimulus" tax sweetie-pie has yet to make its way into the economy, but don't look for it to be an answer. It will add to the deficit; and it won't help people who are about to lose their homes, their jobs, and their cars, right now. It won't help those who have been waiting for years to qualify for SSI disability or Medicaid because of the enormous backlog of applicants facing pared-down skeleton crews. It won't help the millions of medically uninsured, a number of whom are simply sent home to die.

I could stretch this litany on and on, but I won't belabor it. It should be clear that the U.S. has gone through an almost 30-year robber baron revival, a Gilded Age redux. This year, the electorate has one more opportunity to put a stop to it.

Fasten your seat belts. As Bette Davis once told moviegoers, it's going to be a bumpy ride. There won't be anything meaningful done this year because Big Business has just the cretin they chose in the Oval Office. We're looking to January 2009 for any genuine solutions.

One thing that Barack Obama and Hillary Clinton more or less agree on is that taxes on the rich will have to be raised. Clinton, in one of their numerous debates, suggested that the tax structure should be returned to where it was at the beginning of 2001, before George W. Bush pushed through his sweet tax meat for the wealthy and big corporations.

That was the tax rate passed in 1993, the first year of Bill Clinton's presidency, by one vote in the House. It got no Republican votes. The marginal rates were raised, but not even close to what they had been 12 years earlier.

I'll rehash something from a previous post: You remember what happened during those '90s, the Clinton era? Republican opponents of his program predicted economic collapse ...

Unemployment rose to 25 percent. Inflation went double-digit, and interest rates topped 20 percent. There were food riots in the streets of heartland cities. Teenagers, put out of their homes, rode the rails, stole and ate yard chickens and prostituted themselves to degenerates.

The Bonus Army marched on Washington ...

Sorry -- wrong presidents, wrong eras. Seriously, the Clinton plan brought a dramatic turnaround in the federal deficit, because the government was finally collecting enough tax revenue to fund what was needed. The relatively modest tax increase on wealthy individuals somehow accompanied years of strong growth. Future generations will have reason to be grateful -- the national debt would likely be around $12 trillion now, instead of $9 trillion-plus, if it hadn't been for those eight years.

One president we wouldn't likely get any meaningful change out of is John McCain. The leader of the Straitjacket Express appears to have sold out to the Bushies on economic issues. He's committed himself -- pardon the expression -- to the Bush tax smoocherama with the rich and Big Business, pledging to make Bush's bonanzas permanent.

An important thing to remember is that the division in the Democratic Party is going to have to end soon. We're at a critical juncture in the nation's history, and we simply can't afford any more Republican economic policies. We need voters to expand the Democratic majorities in both houses of Congress. And, we need a Democratic president -- yes, I know there are differences between the candidates, but one or the other will be essential -- to sign the bills.

The big word is November. I hope you can pay your mortgage until then.

Crossposted at Manifesto Joe.

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Our Collapsing Economy - How We Got Here

Day before last I was talking about the economy with a friend, discussing why the problems seemed so much worse this time than in the past. One word became the central focus of discussion. Derivitilve. Here is a definition:

"An asset that derives its value from another asset. For example, a call option on the stock of Coca-Cola is a derivative security that obtains value from the shares of Coca-Cola that can be purchased with the call option. Call options, put options, convertible bonds, futures contracts, and convertible preferred stock are examples of derivatives. A derivative can be either a risky or low-risk investment, depending upon the type of derivative and how it is used."

Now, what is described in this definition are the traditional options and futures markets, which have always been a minority part of financial markets, but the underlying stocks and raw materials were always the vast majority and backbone. The deregulation and expansion of ability to form and trade in these derivitive instruments occurred early in the early 1980s with the repeal of the Glass-Steagall Acts and imposition of the Monetary Control Act of 1980, and has continued progressively ever since. It was an undercurrent goal of a core group of Republican business and financial interests (to be fair, Clinton did nothing to abate it and he was smart enough to see and understand it at the time). We all saw the effects in relation to the savings and loan scandal, but few realized that the same acts that allowed the savings and loan mess were also being carried out and applied to the whole financial market. Thus Enron was enabled and, to some extent the dot com rush and crash as well.

Instead of clamping down on the root problem on the grand scale and re-regulating, to prevent this nonsense, we have done nothing but idiotically wait for the next iteration of the same horse manure and then react to only that small piece of the problem when it rears it's ugly head. Each time, we bail ourselves out of one deregulation nightmare by ginning up a new one. Every time it is because we have allowed our economy to be driven by an ever more derivitive market structure instead of bricks, mortar, family farming and substance. However, with the relentless export of manufacturing and middle and lower middle class jobs overseas, and the death of family farming, each time the root problem becomes more serious and pervasive.

There should have been a serious reckoning after the savings and loan scandal, and after that the dot com collapse, but instead the Bush folks exacerbated the problem by further enabling and pushing the derivitive manipulation of mortgage and other credit markets. They created securities, stocks, based upon nothing but groupings of mortgages; and then securities that bought, sold and traded the securities. And thus were engendered multiple layers of derivitives, each layer masking the risk of the other layers that was increasing at an exponential rate. Now the economy is based on this false house of cards and it is falling. Unlike in the past, however, when we still had the bricks, mortar, factories, manufacturing etc., there is, relatively speaking, nothing underneath the house of cards. The foundation is nowhere near as strong as it used to be. That is what is different now.

We drove our derivitive based economic existence over a bridge too far and are now stuck on the wrong side of the river of reality. With a collapsed bridge behind us. Are we now addressing the root problem? Of course not; our pea brain President and glad handing, say and do anything to placate the public and keep themselves in office Congress are going to deficit spend hundreds of billions of dollars to idiotically give everybody $600 dollars so they can buy a meal at Appelbees after buying a new TV at WalMart. Brilliant; that ought to work.

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‘Stimulus plan’ or ‘surrender plan’?

Here’s the details and Here’s the political backstory. (And here’s Krugman’s take.)

Now, here’s the backstory on the backstory:

Shrub on ropes seeking to extend legacy.

Rust Belt House Minority Leader Boehner represents a battered economic area.

Congressional Democrats still surrender.

Speaker Nancy Pelosi, D-Calif., agreed to drop increases in food stamp and unemployment benefits during a Wednesday meeting in exchange for gaining the rebates of at least $300 for almost everyone earning a paycheck, including those who make too little to pay income taxes.

Plus…

The package also includes close to $50 billion in business tax cuts.

A little gift for GOP big biz.

Film at 10.

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A new acronym means recession could be worse than many claim

You’ve learned about CDOs and SIVs; now, it may be time to bone up on CDSs.

John Markman claims credit default swaps by banks and other financial institutions will add extra pain to the current recession:

Nearly seven decades ago, the eight months between Germany’s invasion of Poland in 1939 and its invasion of France in 1940 was known as the “phony war” — a period of escalating anxiety, denial, appeasement, danger and death, but nothing like the murderous global train wreck soon to follow.

Likewise, we may come to look at the period between July 2007 and January 2008 as a sort of phony war in the worldwide credit crisis, because although the market has fallen 15 percent since summer, there have been no defaults of key bonds or asset-backed securities. The curious lack of real blowups has led even seasoned observers to believe that fears were exaggerated and that chaos will be averted.

In reality, however, the skirmishes we’ve seen so far might be little more than a prelude to a deeper, harsher, longer decline than most yet perceive possible. And in a very postmodern twist, it is beginning to look like unexpected consequences of an investment instrument designed to mitigate risk could turn out to be the nuclear option that bombs the globe into the financial equivalent of World War III.

Here’s why CDSs could be a problem, according to Markman:

Because we are coming out of a long period in which debt defaults have been unusually low, hundreds of little-known hedge funds, pension funds and insurers worldwide were lulled by a false sense of complacency into the practice of selling CDSs — and their ability to pay up in the event of widespread defaults amid a long, hard recession is not just in doubt but completely unlikely.

Markman lists various ways these issuers are likely to try to get off the hook. They include contract loopholes, imprecise language not crafted to a specific bond insurance need, whether or not a bond issue’s “restructure” equals a default, available collateral and hedging of CDSs, and more.

Oh, for a good summary list of financial acronyms, visit this Economist story.

[More econ news below the fold]


Housing slump worst since Depression?

For the first time since comprehensive records going back to 1968, housing prices declined for an entire year in 2007. How bad is it? Even the financial guru for the National Association of Realtors was glum:

Lawrence Yun, the Realtors’ chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

In other words, neither a Fed rate cut nor a one-off stimulus package is going to make a lot of difference. The housing market is going to have to suffer through this; I hope part of the price of that suffering is a variety of new regulatory legislation, not only on the marketing of subprime loans, but the use of things such as CDOs and SIVs by financial institutions, AND…

Regulation to address the currently incestuous relationship between these institutions and ratings agencies such as Moody’s.

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For Millions Of Americans, Economic Crisis Is Old News

Things are looking grim for the U.S. economy these days, the politicians and the MSM pundits tell us.

I'm glad they finally noticed. The fact is, tens of millions of Americans have already been living through increasingly lean times over the past decade.

It took a stock market crisis for the Wall Street crowd to finally notice that the nation's economy is going down the tubes.

But that's hardly news for millions of average American workers, who've seen their incomes stagnate since 1980.

For years, the pundits and the politicians celebrated "strong" economic growth when the rest of us were wondering what they were talking about. The pundits also cheered America's low jobless rate. But the rest of us knew it was all a sham, in an era when millions of jobs pay such low wages that nobody could possibly live on them.

Hard economic times are nothing new for the tens of millions of Americans who already work two or three jobs, just to make ends meet. Or the nearly 50 million Americans who can't afford health insurance. Or the 2 million Americans who are about to lose their homes in the mortgage crisis.

I once had a friend from Europe who came to visit me in New York City. He told me that the American economy was widely celebrated then in Europe and that many Europeans marveled at America's entrepreneurial spirit and low unemployment rate.

I explained to my European friend that although America's economy was then in the midst of what the pundits called "prosperity" and was enjoying a stock market boom, the reality was that millions of Americans were left out in the cold and were still struggling.

At the time, my friend and I were in a bustling, prosperous part of Manhattan. Looking around, it appeared that the nation was indeed economically prosperous. I then took my friend on a short tour through surrounding areas, including Harlem, Brooklyn, and Newark. My friend was astonished at the stark difference between the prosperity he'd just seen in Manhattan and the horrible, Third World-like poverty that was only a short distance away.

This episode reminds me of what is going on today. The pundits and politicians are finally starting to wake up to something that's been obvious to millions of us for years. The American economy is in the toilet.

Sure, a tiny elite wealthy class has been enjoying strong stock market gains for years. Now, they're going to have to share some of the pain, like the rest of us.

In fact, in looking at the economic hard times ahead, I think there's actually a silver lining to all of this. That is: an economically distressed America will finally be forced to end its illegal and immoral occupation of Iraq.

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The economic proof is NOT in the Chinese pudding, but the fear is in Bernanke

For months now, Wall Street bulls have been saying any “slack” or “slips” in the U.S. economy could easily be picked up by China. Or India. Well, Monday’s Asian stock market tanking put paid to that theory. Jim Jubak provides analytical details:

The death of this belief in "global decoupling" is likely to have three effects:

• It will shift the harshest bear market action from the U.S. to overseas markets, as overseas investors discover that their economies are slowing, too.
• It raises the odds of a "bear market rally" in the not-too-distant future. Such a rally would leave the bear market intact and end in another painful market downturn.
• And though the death of this myth is essential to finding the bottom in the current bear market, the final end of the bear still depends on a recovery in the U.S. financial and housing sectors, which now looks unlikely until early 2009.

The danger of slowing economic growth is a months-old story to U.S. investors — one reason that the major U.S. market indexes are currently flirting with the 20% loss that defines a bear market. But it's something new for investors in overseas markets, many of whom thought that those economies would be immune to a U.S. recession.

Plus, as Jubak points out, Europeans, like Americans, are familiar with the ideas of stock markets and their vagaries. In China, especially, this is a novel concept; you’ll note that on Monday, the Chinese (and Indian) markets sank far more than the U.S. market on Tuesday (helped, albeit, by the Fed rate cut).

Meanwhile, expect the post-recession recovery to be weak. Says who? Jim Jubak?

No, Ben Bernanke. Now you know just how much panic, and gloom, was behind that rate cut.

Plus side? And, yes, there is one. At least we’re not getting Greenspan bullshit. Now, if Bernanke only can prove to have a pair of Paul Volcker cojones, we’ll be OK in the longer term.

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Yet more economic woes; $1,000 an ounce gold next?

Gold hits $900 an ounce; after oil broke the psychological barrier of $100/bbl, is $1,000 an ounce gold next?

Quite possibly:

“Concerns of a recession will keep pushing up gold prices,” Carlos Sanchez, a precious metals analyst at CPM Group in New York, said. “Depending upon what happens in the economy and in the Middle East, we could see gold testing $1,000 an ounce, maybe even this quarter.”

Consumer confidence, meanwhile, plunges again, to an all-time low:

According to the RBC Cash Index, confidence tumbled to a mark of 56.3 in early January. That compares with a reading of 65.9 in December — and a benchmark of 100 — and was the worst since the index began in 2002.

So, if Bernanke tries much more rate-cutting, gold WILL pop $1,000, and oil WILL threaten $110, even with a struggling economy.

As I have said recently, welcome to the world of stagflation.

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Merrill Lynch says recession is officially here

The financial company says last Friday’s employment report confirms an official recession. But, a regional Fed governor says he doesn’t think Fed head Ben Bernanke has much room to operate:

“I am concerned that developments on the inflation front will make the Fed's policy decisions more difficult in 2008,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia said.

He was referring to the problems faced by the US Federal Reserve, which might want to cut interest rates to avoid a recession, but is worried about inflationary factors such as $100-a-barrel oil.

National Bureau of Economic Research president Martin Feldstein denied Merrill’s claims. No duh… another BushCo flunky trying to defend the throne.

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Oil hits $100/bbl; you can book a recession

Oil prices crashed through the huge symbolic barrier of $100/bbl today. As a result, the Dow fell below $13,000.

Several notes.

1. With this psychological barrier broken, oil stands a good chance of going up, especially going up a lot this summer.

2. This summer is when mortgage resets on adjustable-rate mortgages are set to peak.

3. Ergo, you can just write the word “recession” in on your summer 2008 calendar. Will political candidates be prepared?

4. Beyond that, the price ceiling breakthrough will open the door for Iran, Venezuela and other anti-American countries at the edge of OPEC to renew their calls for dual denomination of oil prices. The Saudis will continue to resist, worried about how much further the dollar, and all their American investments, will fall. Don’t be surprised if some of these members seriously look at going rogue and trying dual pricing on their own.

5. OK, the Kingdom of Saudi Arabia, more than ever, has to put up or shut up on claims it can crank out 12-13 million barrels of oil a day. Guess what? They’re going to have to shut up, or else spin. They can’t produce that much.

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Recession more likely — and around party convention time

Moody’s expects a nationwide housing price drop of 15 percent by 2010 and a California/Florida drop of as much as 30 percent, with full recovery not until 2010.

House prices are forecast to fall 13% from their peak through early 2009. After accounting for incentives home sellers are offering buyers, effective declines peak-to-trough will total well over 15%, the report said.

Punta Gorda, Fla., and Stockton, Calif,, are the hardest hit markets in the United States, with price declines from peak-to-trough forecast at 35.3% and 31.6%, respectively.

"This is the most severe housing recession since the post-World War II period," Moody’s Mark Zandi told Reuters.

Remember, the freeze doesn’t apply to already-delinquent homebuyers, nor does it apply to upside-down loans. And, at a 15 percent drop, not to mention 30 percent in California and Florida, many loans will be upside down.

As for a recession possibility?

The same Moody’s report says housing will knock 1.5 percentage points off economic growth next year, most of that by before the end off summer.

So, a recession — right around the Republican and Democratic national conventions. And, a “reset freeze” that’s like a Band-Aid on a horror flick chainsaw wound.

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So much for the whistling in the dark that the subprime crisis won’t affect Texas

And what it might say nationally and politically

D/FW existing home prices are down 3 percent from a year ago. And, that’s worse than the national average fall-off of 2 percent.

Despite folks in Texas (that’s YOU, Gov. Helmethair) doing this whistling in the dark, this is just another sign that tells me it’s more and more likely we’re facing a recession sometime next year.

As a political issue, then, things that should be on the table are better regulation of banks, mortgage lenders, etc. on subprime loans; better regulation of lending institutions in requiring a higher actual percentage of capital backing outstanding loans, better regulation of CDOs and other investment vehicles, and yes, Chuck Schumer, taxing hedge fund management fees, and other things, as capital gains.

Since $100/bbl oil (or above) will exacerbate the financial situation, we need to have presidential candidates addressing other issues.

Peak Oil. Forget, or get beyond, the shibboleth phrase “energy security.” Actually start talking about Peak Oil. Stop putting blinders on this part of our future. Tell Americans unless major changes are made now, this will be far more gut-wrenching than global warming, with major changes happening sooner.

The dollar, world currencies, inflation, etc. Talk more about why you think a stronger or weaker dollar is better. Be realistic about how much you think China can be made to do with its currency. Maybe Richardson’s idea, of announcing proposed Cabinet appointments in advance of the general election, is one way to signal planned economic policies.

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Latest sign of pending recession?

Three top auto-industry investors, including Kirk Kerkorian, are predicting a 15-year low in U.S. auto sales next year. The most optimistic of the three said sales might “only” slump to 1998 levels rather than 1993.

If oil stays anywhere above $80/bbl, let alone $90, I’m guessing almost all the bleeding would come from the trio of companies once known as the “Big Three,” rather than Japanese companies.

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Housing prices take another tumble

Housing prices fell in August for the eighth month in a row and took the biggest decline in 16 years.

An index of 10 U.S. metropolitan areas fell 5 percent in August from a year ago. That was the biggest drop since June 1991. The lowest ever was a decline of 6.3 percent in April 1991.

Meanwhile, consumer confidence took a tumble, to the lowest point since just after Hurricanes Katrina and Rita in 2005.
I’m still waiting for presidential candidates to address the housing issue and possible recession more, and when they do discuss it, to do something besides offer a simple, guilt-free bailout. Remember, many subprime mortgages were not the lessee’s first home to buy, and in some cases, were even used to buy second or third homes as investment properties.

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Subprime crisis could out-cost 1980s S&L debacle

A new estimate places the final cost of the subprime crisis/housing bubble at $400 billion, while, in inflation-adjusted dollars, the S&L crisis weighs in at $240 billion.

In a new report to be issued today, the Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with subprime mortgages. That estimate is far higher than the Bush administration’s prediction in September of 500,000 foreclosures, which in itself would be a tidal wave compared with recent years. Congressional aides provided details of the report yesterday to The New York Times.

The Joint Economic Committee estimates that the lost of real estate wealth just from foreclosures on subprime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Those figures would cause a decline of $917 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighborhoods with vacant homes.

And, you wonder why people like me warn about a pending recession?

Global Insight, a research firm, predicts that the national average for housing prices will drop 5 percent over the next year and 10 percent before mid-2009, for a total of about $2 trillion. Economists at Goldman Sachs have predicted prices will drop by 15 percent, meaning an overall decline of more than $3 trillion; other forecasters have said the decline could be 20 percent or more.

That’s why.

Don’t forget, we haven’t even talked about spending downturn due to fewer home equity loans being taken out, or ones already on the books turning upside-down due to downturns in home value.

Economists continue to update their predictions on how the loss of housing wealth might affect the overall economy. Nigel Gault, chief domestic economist at Global Insight, said he assumes that consumers reduce their spending by about 6 cents for every dollar of lost wealth.

If prices drop 5 percent next year, that would mean a decline of $60 billion in spending, all else being equal. That would be a noticeable slowdown, but not enough to cause a recession.

In the last several years, Americans have increased spending faster than their incomes by borrowing against the rising value of their homes. Economists estimate that such mortgage-equity withdrawals may have added one-quarter of a percentage point to consumer spending growth — a boost that could now disappear.

That’s why presidential candidates better recognize this is going to be a serious issue next year.

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Temp employment: a leading recession indicator

Temporary agencies are slumping in their hiring. That last happening in the 1992 and 2000-2002 recessions.



That’s not all. Overall, U.S. hiring is the slowest in four years. Mish has this interesting comment on that:

Here is the key idea from the above article: "The slowdown in hiring was not related to last month's credit market turmoil.”

If he’s right, watch employment numbers before the end of the year. Since mortgage resets don’t peak until the middle of next year, a continued slump in employment will indicate not only a recession, but how bad of one.

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Reset ARMs to jump 2 percentage points or more

Come this fall, homeowners with adjustable rate mortgages could be payingdouble-digit interest rates. Here’s that that would mean for an average homeowner:

[O]n a $210,000 loan balance (the average subprime amount in 2006), the additional 2.5 percentage point increase on the interest rate adds about $4,560 a year, or about $380 a month, estimates James Kragenbring, senior investment officer at Advantus Capital Management in St. Paul, Minn.

You think we’ve been seeing a “surge” in defaults already? You ain’t seen nothing yet.

“Given the debt-to-income ratio of the typical subprime borrower at the time they received their loan, it is unclear where the extra cash flow will come from,” says Mr. Kragenbring.

Given the fact that BushCo’s economic non-surge has kept household income flat the last few years, the extra money ain’t coming from any pay increase. So, you get these problems:

As the interest rates have climbed, the percentage of delinquencies is on the rise. Of the loans made in 2001, nearly 30 percent are now at least 60 days past due. Loans made last year now have nearly a 15 percent delinquency rate, a faster growth rate than any other year. Mr. Kragenbring says the most recent loans in 2007 are not performing much better.

Given that the typical subprime loan means you are paying less than the full interest accruing on your mortgage, the first reform needed is a truth-in-lending law similar to what is needed in the credit card industry. Homebuyers need to be shown, at the interest rate of their mortgage, what is the minimum monthly payment they need to make to at least hold interest accrual at zero.

There's more: "Reset ARMs to jump 2 percentage points or more" >>

Two “voices” weigh in on recession possibility

First, former Clinton Treasury Secretary Larry Summers. And, since Summers is now part of a hedge-fund group, he ought to know, right?

But, like a number of Congressional Democrats, he wants the easy way out of letting Fannie Mae and Freddie Mac carry a larger loan portfolio.

To be, this is just one or two steps removed from a full-blown bailout. Bush is probably right that the two agencies need to be reformed first. But, of course, the Fed needs to be reformed even more.

And, the second voice, speaking of reforming? The Fed First, former Clinton Treasury Secretary bent its own rules last week for Citigroup and Bank of America:

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

And, this isn’t a minor issue:

So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America — $25 billion each — is a cause for unease. ….

Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks.

I’m not enough of a financial analyst to tell you where to invest, but I can safely say that if you have any money in stocks, make sure it isn’t in bank stocks.

Financial-industry blogger Mish has more.

There's more: "Two “voices” weigh in on recession possibility" >>