Tuesday, January 29, 2008

Hindsight and the Housing Bust

On the lips of every "Lawmaker" in Congress, all you hear these days are the words about the collapse of the "Subprime" credit market and the foreclosure of, perhaps, as much as 1% of the homes in this country. There are demands for reform and the blame is being thrown farther and faster than the blame had been thrown about the intelligence problem on WMD's in Iraq. If you listen to them, they seem perplexed that this is happening and that no one saw it coming. And, of course, President Bush is at fault because it happened while he was President.

However, if our lawmakers had spent as much time looking at business news stories and business-related commentary over the last 4 or 5 years, as they had spent looking at political "polling", they might have been able to head off this problem. But, like every other crisis in this country, everyone has great hindsight and doesn't hesitate to sling blame to avoid having the blame for this problem stick to themselves. And, when it comes to hindsight, it's "always" too late to fix the problem.

Business professional, economists, and the investment community have been predicting the problem for "at least" 3 years. As an example, here is a commentary from Forbes.com that was written in 2005. (See Full Story) And, in another, former blog of mine (now defunct), I wrote the following in January of 2006:
"Slightly over a week ago, I wrote a post to this blog that hinted that the Federal Reserve’s tightening (raising of interest rates) may have been too much in light of rising oil prices and may have caused the housing market to burst and may shut down consumer spending..... Adding 13 straight rate increases (a total of 4.25 percent) without pausing to see what effect those increases have had is just ridiculous. Over-tightening by the Federal Reserve has always been a problem because the effect of their tightening takes months to materialize. Historically, we have had an average inflation rate of about 3-1/2 percent. I think the “Fed” should have stopped at that point and waited 6 to 9 months to see if the economy could handle more. I just think that when it comes to rate increases, our economy, metaphorically, shouldn’t be treated like a contestant in the Nathan’s Hot Dog Eating contest!"

And the warnings weren't just scattered or uncommon. If our congressional personnel had listened to any business commentary on TV or read business magazines over the last 4 or 5 years, they would have heard or read, at least once a week, warnings about the potential of a housing bust.

So, who is really to blame? To me, everyone in Washington can be blamed! And, again, to me, the primary blame lies with the Federal Reserve and Alan Greenspan. The Federal Reserve's paranoia over inflation stems from an outdated viewpoint that unemployment under 6% is inflationary. But, that is so 1950's. In that time period, we, as a country, heavily exported our manufactured products to the world and we imported less than 5% of the goods we consumed. In today's economy, it's almost the opposite. Salaries don't move up because we are competing with imports from China, Indonesia, India and the rest of the world. If wages rise too fast, those jobs just leave and go overseas; and, that keeps salaries in check.

Further, rapidly rising oil prices and rapidly rising commodity prices (gold and other industrial metals, food, etc) aren't inflationary. They are more like a new "tax increase" on the consumer. And without an economy that is able to adjust wages to compensate for these rising prices, the consumer has no other choice but to stop spending; and, that is recessionary. The bottom line rationale for the subprime, home-loan meltdown and the potential of a recession is the fact that the tightening of credit by the Federal Reserve, without a commensurate rise in wages, created an imbalance whereby people who had inflation/rate adjusted mortgages saw their monthly mortgage rates go up rapidly without any upward adjustment in their salaries. And because our Congress failed to approve new "domestic" sources of oil in order to contain the rising oil prices, the recessionary potential was exasperated by rapidly inflating oil prices and the increasing diversion of corn to make ethanol which has "driven" basic corn and fuel dependent food prices through the roof.

That is why the Federal Reserve is now scrambling to lower interest rates; with a nearly 1.25 percent drop in rates in the last two months. And, to me, their lowering of rates is just an "admission" that they were overly aggressive in raising interest rates (as noted in my old blog commentary, above, from 2006), And, further, our current Congress, without mandating new domestic oil production (like off-shore drilling and drilling in ANWR) has just committed us to more energy inflation and more food inflation that will continue to rise faster than wages in this country. There is no way that the conservation of energy (as in the recently passed energy bill) through the increasing fuel economy standards by year 2020, and the diverting of more corn to make more ethanol by 2022, will help this economy out of the bag that it is now in. By the time that the "full" fuel economy standards are imposed on the automobile manufacturers by the year 2020, it will take another 18 or more years past that date to replace every car on the road and see the complete effect of this new energy bill. That is because the average automobile in this country is over 9 years old (with increases in that average age occurring each year as quality of cars improve). That means that the energy bill that was passed last month, won't be fully effective until the year 2038 or later. By that time, the effect of these new fuel economy standards will be completely washed-out by the growth in our population, and by he commensurate growth in our energy demands.

And, as far as the "Stimulus Package" that is being proposed in Congress is concerned, it is too little; too late. The damage is already done. It is like a bad heart that hasn't, yet, seen the full effect of the bad lifestyle that clogged those arteries. A quick adjustment in rates and a minuscule rebate to taxpayers isn't going to fix the problem. Like the heart patient, a complete change of lifestyle is needed beyond the quick-fix of bypass surgery.

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