Housing Bubble Smack-down
By Mike Whitney
Clearing House" -- -
Give me 5 minutes and I’ll convince you that you should sell
your house immediately and invest your life-savings in gold
or a Swiss bank-account.
For some time now we’ve been hearing about the so-called
housing bubble and what effect it could have on your net
worth and future. Well, the numbers are finally in and you
can decide for yourself whether its time to sell now or try
to ride out the storm.
In 2000 the total value of homes in the US was $11.4
trillion. Today that number has shot up to $20.3 trillion;
At the same time, mortgage-debt in 2000 was a trifling $4.8
trillion (about half) while in 2006 it skyrocketed to a
whopping $9.3 trillion.
So, how do we explain these enormous increases in value?
After all, wasn’t the housing boom just the natural outcome
of “supply and demand”?
No it wasn’t. That’s an unfortunate myth that should be
interred with the withered remains of Milton “free-market”
If we really want to know what’s going on, we need to look
back at the machinations at the Federal Reserve in 2001,
that’s when Greenspan lowered interest rates to 1.5% to
soften the blow from the stock market meltdown. Rather than
tighten interest rates and let the country to go through a
period of recession, Greenspan lowered rates and ramped up
the printing presses to “full-throttle”.
Voila; the housing bubble! Or what the conservative
“Economist” magazine calls “the largest equity bubble” in
The housing bubble has nothing to do with supply and demand
or with the fictional increase in workers salaries. (which
have actually gone down since Bush took office) Rather, it
is the predictable result of dramatically increasing the
money supply while expanding personal debt via
Remember, the central banks are not in the mortgage
business; they are in the “money-pedaling” business. And the
way you sell more money is by making it as cheap as
possible. The Fed intentionally inflated the bubble with
cheap money so they could keep the printing presses
whirring-along. They worked in concert with the banks to
lower the requirements for mortgages so they could attract
an endless swarm of “unqualified” customers who wanted to
join the feeding-frenzy.
Isn’t that what happened?
And, didn't that make it possible for every Tom, Dick and
Harry to borrow hundreds of thousands of dollars on “no-down
payment”, “interest only”, ARMs or other equally risky
Of course it did.
There are some who will argue that the Federal Reserve just
made an honest mistake and were merely trying to steer the
country away from impending recession.
That may be true, but let’s consider the facts before we
draw any hasty conclusions.
Did the Federal Reserve double the money supply in the last
Did they know what they were doing?
Did they know that printing more money creates inflationary
pressures and reduces the value of money already in
Did they realize that the money was going directly into the
real estate market where it was creating an “unsustainable”
equity bubble that would eventually crash and destroy the
lives' of hundreds of thousands of Americans whose greatest
asset is their home?
Of course, because it's the Federal Reserve which produces
all the relevant facts and figures, charts and graphs, about
increases (and trends) in the housing market. How could they
In other words, they doubled the money supply and then sat
back and watched while $4.5 trillion went directly into the
real estate market via mortgage loans to people who were
“under-qualified”.(knowing that these same people would
eventually fail to meet their payments and adversely effect
the entire market)
The Federal Reserve knew all of this. In fact, they knew
where every dime was going, but decided to persist in their
swindle to the bitter end.
Have the real effects of this monster-bubble been softened
by the huge trade deficit?
Yes, because America currently borrows $800 billion a year
from China, Japan etc. which keeps the economy sputtering
along while our manufacturing sector continues to be
The $800 billion account deficit is like a sedative which
lulls us to sleep while the country is looted right in front
of our eyes. For example, in the last 12 years, foreign
ownership of US assets has soared from $3 trillion to over
$12 trillion.(400%) At the same time, over 13,000 major US
companies have been sold to foreign corporations since 1980.
Nevertheless, Americans are only-too-happy to ignore these
unpleasant facts as long as they can totter off to Wal-Mart
to buy little Johnny his new video-game. It’s only a matter
of time before the scattered, bleached bones of American
industry appear everywhere across the American heartland.
And, does the Fed realize that Americans borrowed another
$825 billion from their home equity in the last 12 months
(to spend on house repairs, shopping, boats etc) and that
without that consumer spending the nation’s growth rate
(GDP) will shrivel to nothing?
Yes, because they provide all that data, too.
So, what does this mean for the homeowner whose future
depends on the steady increase in his home equity? What can
Well, first of all, you can ignore all the gibberish you
hear on the business channel about “soft landings” and a
There’ll be no soft landings. This is the Big One; Real
Estate Armageddon followed by a plague of locusts.
JUST LOOK AT THE NUMBERS! There’s a $10 trillion difference
between the aggregate in 2000 and 2006! $4.5 trillion of
that is new mortgage-debt! That’s more than a little “froth”
as Greenspan likes to say. In an economy that’s currently
growing at a feeble 1.6%, a plummeting housing market could
pave the way for another (dare I say it) Great Depression.
$10 trillion!?! Some things are worth repeating.
First of all, (if we compare our situation to what happened
in Japan during the 1990s) we can expect that prices will
continue to fall for years to come, perhaps, a decade or
more. Many of the slower markets are already showing a
decline of 10% to 20%. This is a trend that is likely to
speed up dramatically in 2007 when $1 trillion in ARMs
reset. That’s when we’ll begin to see a truly new phenomenon
in the US, that is, people who’ve always been solid members
of the middle class sliding downwards into the ranks of the
By 2008, if the present trend-lines persist, housing prices
will probably drop to 25% to 30% of their 2005 value;
diminishing equity value by approximately 45% to 50% for
If you own your home outright; you can sweat it out, but if
you got into the market late; you’re toast. You’ll be
joining the throng of mortgage-slaves who are shackled to
loans that are significantly higher than the current value
of their house.
Imagine paying off a loan for $400,000 when your house has
been reassessed at $250,000 or $300,000; that’ll be the
reality for an estimated 30 million Americans. Meanwhile,
inventory will continue to grow (already at an 8 month
backlog) the economy will continue to contract, and the
dollar will continue to weaken. (Many of the major home
builders; Centex, Beazer and Toll Bros, are reporting that
profits are down by nearly 65%.)
At the same time the Fed just issued another $10 billion in
Treasury Bonds last week raising the national debt to a
mind-boggling $8.6 trillion. This loosey-goosey approach to
printing fiat money and creating debt explains the recent
surge in the markets. As “The Daily Reckoning’s” Richard
Daughty says, the “bull market is manufactured from rampant
government deficit-spending and financed by the Federal
Reserve creating the money.”
Amen. Its all fluff and there's nothing to it. It's just
loose money finding a temporary perch before the approaching
squall. Don’t trust the smoke and mirrors. Behind the
merriment and gusto, Wall Street analysts are expecting a
How soon, you ask?
Well, Daughty also notes that “revolving credit like credit
card loans grew by $2.85 billion, or at an annual rate of
4.00%, to $857 billion.”
So, credit card debt is going up, which is an indication
that the people who were siphoning money from their home
equity have switched over to plastic. That’s sure sign the
writhing consumer-beast is in its last throes. The end is
Why should I care about Net Long-term Capital Inflows?
In another bit of disheartening news the net long-term
capital inflows fell short of what the US needs to cover the
current account deficit. The inflows were only $65 billion
when we need $70 billion to make ends meet. This is another
way of saying that foreigners are no longer mopping up our
red ink. Interestingly, foreign central banks are buying
considerably fewer Treasurys; $9 billion in US securities
and a paltry $8 billion in Treasury bonds.
What does it mean? It means that no is dim-witted enough to
buy our debt anymore because we’re no longer a good risk.
That’s a very bad sign. Under different stewardship the
"full faith and credit" of the US Treasury meant something.
That's no longer true.
Also, according to Marketwatch, “US residents purchased a
net $22.9 billion in foreign securities, up from $2.7
billion in August. Foreign holdings of dollar-denominated
short-term securities, including Treasury bills, fell by
Foreign investments are up $20 billion in one month?!? Are
you kidding me?
So, the smart money is getting out of Dodge pronto; leaving
the rest of us behind in a leaky canoe.
Some of you may have seen Alexander Cockburn’s shocking
article “Lame Duck” last week on Counterpunch. Cockburn
refers to a report published by the Financial Services
Authority (FSA) “a body set up under the purview of the
British Treasury to monitor financial markets and protect
the public interest by raising the alarm about shady
practices and any dangerous slides towards instability.”
The report “Private Equity: A Discussion of Risk and
Regulatory Engagement” states clearly:
“Excessive leverage: The amount of credit that lenders are
willing to extend on private equity transactions has risen
substantially. This lending may not, in some circumstances,
be entirely prudent. Given current levels and recent
developments in the economic/credit cycle, the default of a
large private equity backed company or a cluster of smaller
private equity backed companies seems inevitable. This has
negative implications for lenders, purchasers of the debt,
orderly markets and conceivably, in extreme circumstances,
financial stability and elements of the UK economy.”
The problem is even greater in the US where unregulated
fractional lending has allowed banks to loan unlimited
amounts of money on measly reserves. Hence, “the default of
a large private equity company is inevitable”. The whole
deregulated banking scam has turned the system into a
Vegas-style “crap shoot” with no guarantees that you’ll ever
see your money again. The same is true with the new-fangled
investment “instruments” like hedge funds which contain few
tangible assets and more and more “collateralized debt”.
That means that they depend heavily on the “worker bees” at
the bottom of the economic Totem Pole, who are expected to
continue making their payments even while the economy begins
The present system is fraught with peril and likely to come
crashing down in a heap. As Cockburn sagely notes, “The
world’s credit system is a vast recycling bin of untraceable
transactions of wildly inflated value.”
“Market transparency” has gone the way of the Dodo. The new
“deregulated” markets are intentionally opaque so the
medicine men and hucksters who designed them could fleece
the public from the comfort of their Wall Street enclaves.
No one should be too surprised that the whole rickety
contraption is tilting towards the dumpster.
Happy Days in the Weimar Republic
So, what was the “Grand Plan” the Fed had in mind when they
decided to anesthetize the American public with low interest
rates and flood the planet with worthless green scrip?
Did they think that Bush would corner the oil market and,
thus, force the rest of the world to take our anemic
greenbacks? Or were they just planning to steal every last
farthing from the American people before they loaded the
boats and fled to more promising markets in Asia?
Or perhaps they were delusional enough to believe that
really wonderful things would happen if they just kept
tossing banknotes into the Jet-stream like New Year’s
Whatever the madcap rationale might have been, the country
is now facing an agonizing wake-up call as the full-effects
of Greenspan’s tenure materialize and the stronghold of
global consumerism deteriorates into Weimar USA.
In the long run, Greenspan’s treachery will loom larger then
that of his “would-be” understudy, Bin Laden. He put the
country on the fast-track to disaster.
Just watch as the “For Sale” signs go up on lawns across
America in Dear Alan’s honor.