Another Dark Cloud on the Republican's horizon

A Liberal is a Conservative Who Got a Foreclosure Notice

I have been saying for some time that Bush's so called recovery was a house of cards built on a sand dune. I discussed why in Booms are always followed by busts! last June. In a nutshell the Bush recovery was built entirely on easy credit and rapidly escalating housing prices, something that can't be maintained. Eventually the tide is going to come in and wash the sand dune away. Over at The Left Coaster pessimist has a great post on how the tide is about to come in and may seriously erode the sand dune before the November elections. He references a post by Elizabeth Warren, the title of which is the quote at the top.

Remember the old law-and-order political sally: A conservative is a liberal who got mugged. Maybe there will be a new version. At least one conservative business analyst is warning his political compatriots that their middle class base may melt away when homeowners begin to experience the coming housing crash. Andrew LaPerriere sounds the alarm in the most recent Weekly Standard, telling conservatives to get some answers ready for the people who are going to lose their homes.

The conservative Mr LaPerriere is concerned and thinks that the day of reckoning may be near.

WITH NEW HOME SALES DOWN 10.5 percent in February, and with home prices declining for the fourth month in a row, it's high time for a sober look at the consequences of a major housing correction. The Federal Reserve, Wall Street economists, and other observers of the U.S. economy are closely watching the housing market because it has been a key driver of economic growth over the past several years.

Roughly a quarter of the jobs created since the 2001 recession have been in construction, real estate, and mortgage finance. Even more important, consumers have withdrawn $2.5 trillion in equity from their homes during this time, spending as much as half of it and thus making a huge contribution to the growth the U.S. economy has enjoyed in recent years (consumer spending accounts for two-thirds of GDP).

But consumers cannot keep spending more than they make. Eventually, home prices will flatten, the flood of "cash out" refinancings will become a trickle, and consumer spending will slow, as will job creation in housing-related industries. The big question is this: Will the housing sector experience a soft landing and slow the economy or a hard landing that pushes us into recession?

Maybe those pesky liberals were right.

Countless articles in the financial and popular press have now been devoted to the question of whether we are in a housing "bubble." It is a favorite topic of many liberal economists, columnists, and bloggers, who argue that President Bush's tax cuts and other policies have created a hollow and unsustainable economy. They are laying the groundwork to hang a housing bust around the necks of President Bush and congressional Republicans.

Silence on the right.

Economic observers on the right have been strangely silent on this debate. A few conservatives have argued that the record appreciation of home prices is justified by economic fundamentals. Others, who apparently slept through the 80 percent decline in the NASDAQ, don't believe bubbles are possible in a free market economy. Certainly most conservatives have an innate optimism about America and the resilience of its free market economy, and a strong and well-justified aversion to doomsayers. And naturally, the White House and congressional Republicans have no interest in highlighting the vulnerabilities of the economy.

What Mr LaPerriere fails to mention is this is just one more example of the failure of the voodoo economics of an unrestrained free market economy and the myth of trickle down economics. It would seem the Republicans have trouble learning from the past in both war and economics. Mr LaPerriere also refuses to blame the irresponsible tax cuts and chooses to blame instead the now departed Alan Greenspan.

Yet the concerns about unsustainable growth in consumer debt and home prices are not easily dismissed. A weakening housing market could transform what has been a virtuous cycle into a vicious one, substantially reducing economic growth during the next couple of years (and going into the 2008 election). If economic analysts on the right ignore this risk, they may be blindsided by a weaker economy. They will also be unprepared to answer those on the left who will blame tax cuts for what could be a painful unwinding of a credit bubble that, in fact, was fueled by a loose monetary policy from 2002 to 2004.

While the major impact will be in 2008 I think it will be a factor in 2006. Foreclosures are already increasing. Here in the Portland area the "Avoid Foreclosure" signs are coming up faster than the spring tulips. You don't have to lose your own house your neighbor losing his will be enough to spook you. And who else can people blame but the Republicans and the Bush administration? They have after all been exclusively in power for nearly six years. The ARMs are starting to come due now and with no real growth in wages and the beginning of housing deflation that will impact the 2006 elections. The real tidal wave will occur in 2008. Last June we discussed the most dangerous form home financing has taken, the interest only loan. These will be coming due before the 2008 elections and could represent the tidal wave that takes the house of cards down.

Articles Referenced in this post.

Betting Against The House, The Left Coaster

A Liberal is a Conservative Who Got a Foreclosure Notice, TPM Cafe

Housing Bubble Trouble , The Weekly Standard