It gets worse. It costs trillions. No one knows where it will end or if it will work, and there's nothing left over for Social Security, Medicare, Medicaid, and all other essential social and national infrastructure needs.
Hudson puts it this way: "The historic road to serfdom is that of debt peonage to a financial oligarchy concentrating wealth in its own hands....The problem for society....is that finance finds its major gains to lie not in raising living standards, but in promoting a free lunch for its customers -- while turning corporate profits, monopoly rent-seeking and real estate price gains into a flow of interest to itself, by advancing the credit to finance the purchase of these assets and privileges."
The only way out is to "scale back existing mortgages (especially ones with negative equity) to reflect the plunge in property values today." Once principal is "reduced to realistic levels," fixed rate mortgages would replace ARMs.
Financial institutions won't accept this or whatever other ways it costs them, and therein lies the problem. Blaming victims is much simpler along with bailing out culprits - when they're too big to fail. Hudson calls for some high-octane populism to change things. Unfortunately, not a hint of it is in sight, and debt levels are so high they "cannot be paid....given the nation's heavy military and trade deficits." It's hammered the dollar and "rais(ed) dollarized prices for oil and other raw materials."
It gets worse. Foreign central banks and investors keep funding our excesses, and US spending, of course, depends on them. The more they lend us, the more we need in a never-ending dependency cycle. It bankrupted Medici bankers in the Renaissance era and got Adam Smith to conclude that governments don't repay outsized debts. They either default, declare a moratorium, or repudiate them. Not fit subjects for discussion, but you can bet foreign debt holders weigh them as they debate whether to keep the daisy chain going.
It's got plenty of US investors concerned as well, and a notable one is bond guru Bill Gross. In an April commentary he wrote: In his judgment, "the private credit markets have forfeited their privileged right to operate relatively autonomously because of incompetence, excessive greed, and (at times) fraudulent activities."
In an earlier Financial Times interview he also criticized government quick fix schemes. He further blasted hedge funds as "unregulated bank(s)" and a "con" and said complicated financial instruments "exacerbated" credit problems, and over-leveraging "lead(s) to an implosion at the edges....of this new financial marketplace."
He's also very worried about declining home prices that many on Wall Street publicly pooh-pooh. He calls a 20% valuation decline "much more" of an economic shock than falling equities "because the amount of homeowner leverage is so much greater. A 20% negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes 'upside down' - incentivizing them to let their gardens grow weeds instead of lettuce." He believes systemic crisis is possible if the decline isn't stopped. He's not alone in that judgment, but few agreeing get heard.
Consider damage already done. The current Case-Schiller Index shows home prices declining at a 32% annual rate. A year ago, it was 8%. The risk is a huge 4.6 million home inventory or nearly double the 2.6 million past 20 year average. Even more worrisome is that 2.27 million homes sit empty and that's besides all the others banks own from foreclosures. It's double the year ago number.
If these properties keep deflating and hit the dangerous 20% level Gross mentions, millions will lose their equity, consumption and credit will be hit, and banks will keep writing-off greater amounts no one wants to contemplate. Robert Shiller believes home prices may equal or exceed the 30% drop of the 1930s. That's $6 trillion in today's dollars, or $80,000 for every US homeowner. The Fed can keep injecting liquidity but only for so long, and it may not work. If bank losses are great enough, they'll need all they can get to stay afloat, but for some it may not be enough. Not a pretty picture and no way to know how bad things may get.
Placing Blame Where It's Due According to Grantham
Grantham looks back at 2007 and awarded three prizes for "odd prognostications." They're named in Greenspan's honor. First prize went to Citicorp's CEO Chuck Prince for enthusiastically taking on more credit at a time markets were over-extended and peaking. He subsequently wrote off billions of worthless assets, $17 billion in first quarter 2008 alone, risked the bank's solvency, and got himself replaced by a new CEO.
Current Fed Chairman Ben Bernanke took second prize for "incomprehensible misreading of obvious data by an apparently well-informed source." In late 2006, he said what he now regrets (or should) - that "US housing prices merely reflect a strong US economy." His cohort at Treasury, Hank Paulson, got third prize for his spring 2007 comment that subprime problems were "contained."
Not if you own one or too many of those junk assets written down to a fraction of their original value. Grantham calls the crisis the most important one since World War II. It's more global than others. Its tentacles are everywhere. Speculative greed and broad asset overpricing caused it. Loose regulatory and irresponsible Fed policies allowed it. Perpetrators point fingers elsewhere, and no one's got backbone enough to fess up to their to their own mistakes and transgressions.
Before this ends, according to Grantham, it's "likely to make the S & L crisis look contained." As a per cent of GDP, write-downs this time are on the order of two to three times greater now than then. But there's no precise way to know their full impact or to what degree monetary and fiscal stimulus will contain the damage or delay its final resolution. They won't be papered over, and writer/economist William Engdahl puts it this way:
Greenspan was a tool of the monied interests who gave him his job. He "knew who buttered his bread" and returned their favors manyfold. He engineered many crises and used them all to "advance and consolidate the influence of US-centered finance over the global economy, almost always to the severe detriment of the economy and broad general welfare of the population." His 18 year tenure was undistinguished to say the least. "It can be described as rolling the financial markets from successive crises into ever larger ones..."
I am a 72 year old, retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.
