I put Middle Earth Journal in hiatus in May of 2008 and moved to Newshoggers.
I temporarily reopened Middle Earth Journal when Newshoggers shut it's doors but I was invited to Participate at The Moderate Voice so Middle Earth Journal is once again in hiatus.

Monday, October 30, 2006

Housing Bubble

The so called Bush recovery was smoke and mirrors based on easy cheap money and inflating housing prices. It was not a recovery that could be sustained. There is now plenty of indications that the bubble has or is about to burst. In Bursting Bubble Blues Paul Krugman takes a look at where we are at and where we might be going.
Here are the five stages of housing grief:

1. Housing bubble? What housing bubble? “A national severe price distortion [in housing] seems most unlikely in the United States.” (Alan Greenspan, October 2004)

2. “There’s a little froth in this market,” but “we don’t perceive that there is a national bubble.” (Alan Greenspan, May 2005)

3. Housing is slumping, but “despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon.” (Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)

4. Well, that was a lousy quarter, but “I feel good about the U.S. economy, I really do.” (Henry Paulson, the Treasury secretary, last Friday)

5. Insert expletive here.

We’ve now reached stage 4. Will we move on to stage 5?
And this is significant and is perhaps the most dangerous aspect of the bubble economy.
But the housing boom became a bubble, fueled by a surge of irresponsible bank lending, which continues even now. (Yesterday’s Denver Post tells of a runaway prisoner who managed to borrow enough to buy three expensive houses while on the lam, then bought two more while in prison.) The question now is how much pain the bursting bubble will inflict.
We are seeing the results of this "irresponsible bank lending" as the foreclosure rate skyrockets. This will only increase as housing prices deflate. But the building continues.
But I think the pessimists have a stronger case. There’s a lot of evidence that home prices, although they’ve started to decline, are still way out of line. Spending on home construction remains abnormally high as a percentage of G.D.P., because banks are still lending freely in spite of rapidly rising foreclosure rates.

This means that home sales probably still have a long way to fall. And you don’t want to make too much of the fact that some housing indicators have turned up; those indicators tend to bounce around a lot from month to month.

Moreover, much of the good news in the latest economic report is unsustainable at best, suspect at worst. Almost half of last quarter’s estimated growth was the result of a reported surge in automobile output, which some observers think was a statistical illusion, not something that really happened.

So this is probably just the beginning. How bad can it get? Well, you don’t have to go far to find grim forecasts: Merrill Lynch predicts that the unemployment rate will rise from 4.6 percent now to 5.8 percent by the end of next year.
The economic catastrophe may become part of the Bush legacy but that will be wrong.
In case you’re wondering, I don’t blame the Bush administration for the latest bad economic numbers. If anyone is to blame for the current situation, it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending.
That's right, when it comes to the economy it's all about Alan Greenspan.

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