In the Asia Times Jephraim P Gundzik wrote: "The risk of economic recession in the United States in 2007 is increasing rapidly. Rather than overly tight monetary policy at the Federal Reserve, the declining value of US homes is undermining personal consumption expenditure. The decline in home values is likely to accelerate next year as housing oversupply is met by increasingly weaker demand for new homes. ... the US economy slowed sharply between the first and second quarters. This slowdown was led by weakening personal consumption expenditure, which declined from an annual rate of 4.8% in the first quarter of 2006 to 2.8% in the second quarter. ...With monetary policy still very accommodative and likely to remain so until after crucial mid-term US elections in November, the primary factor undermining personal consumption expenditure in the second quarter was much weaker gains in home values. ...Since 2001, rapidly rising home values have fueled US personal consumption expenditure by increasing household income via cash-out mortgage refinancing. [Pay attention to this.] According to statistics produced by Freddie Mac (the Federal Home Loan Mortgage Corp), one of America's largest mortgage lenders, cash-out mortgage refinancing accounted for about 50% of all mortgage refinancing between 2001 and 2004. In 2005, cash-out mortgage refinancing accounted for 73% of all mortgage refinancing. In the first half of 2006, cash-out refinancing accounted for a staggering 87% of all refinancing. If US home values contract in 2007, household income will also contract. This could lead to much weaker or even contracting real growth of personal consumption expenditure in the US. Lower official interest rates are unlikely to reverse the fall in home values because the overhanging inventory of unsold homes is so large. Home prices must decline to clear this inventory." In other words, the current busting of the housing bubble means likely reductions in consumer spending, especially with wage stagnation, pushing the economy into recession.
In the India Daily a story talked about the U.S. situation: "Early signs of deep recession as investment bankers start cutting costs to survive the downturn - Credit Suisse takes the lead. It is another sign of coming recession - a very early one from those feeling the impact first. According to a media report Credit Suisse has internally banned color copying to cut costs fast. That is producing a ripple effect in the financial world. At the dotcom bubble burst, investment bankers were the first to start cutting unnecessary costs. ...No one knows how bad the coming recession will be. It may be time for the Fed to preempt fast with aggressive interest rate cut." But the Fed can't do that before the elections and also play Republican politics.
So what do Republicans most fear? One, that our sagging economy could become a major news story before the elections. Two, that this news will lower consumer confidence (as it should) and cause people to stop borrowing and spending, and start saving and paying off debt. They hope that the rigged cut in gas prices will be enough to keep people voting for Republicans, despite the housing bubble burst and the looming recession.
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