In a few hours President Obama is going to address the nation. It will no doubt be filled with some eloquent soaring rhetoric that he has become famous for. A lot of standard lines too that all Presidents say like our best days are ahead of us, the country must pull together etc. That's all well and good. What's not well and good is what he's going to tell us will fix the problem. The Obama fix is all about consumer confidence. We currently sit at the lowest level since they began measuring consumer confidence in 1967. It has dropped from last February at 76.4 to our new low of 21.2. The Obama plan says these numbers are a self fulfilling prophesy, brought on by the banks freezing credit, which popped the housing bubble, which scared homeowners who slowed their regular consumer behavior, which slowed the economy, which lead to layoffs, and the cycle continues downward. If we can just get Americans to spend like normal, and banks to lend again, that will allow businesses to hire back employees, who will spend more money, which means housing prices return, and we're back to the good ol days! Yea! But that's not how we got in to the mess, nor how we'll get out of it.
We got in to this mess because Americans have been spending like crazy. The saving rate of American citizens starting in 2005 was -1%. That's right America as a whole spent more money than we made. We did this because the federal government drove up the value of our homes starting in 1999. They did that by taking an active roll in getting low income people to share in the American dream of home ownership.
The community reinvestment act was part of the problem, as was the fed keeping interest rates low. Their intention was good. Help poor people own a home which will help save them money on taxes and allow them to save for the future. The fact that there were now more buyers than ever meant home prices started soaring, which lead to a soaring construction industry. The side effect was people started refinancing their houses at lower interest rates and pulling out equity on these artificially inflated prices and used that money for more consumption. Which drove the economy to incredible heights. But the ride can't last. All the poor people got their houses, which meant the prices had to start dropping. Then the poor people started defaulting which threw banks in to a death roll. That's how we got in to this mess.
To get out of it is simple, but quite painful. All those jobs that were created by the consumption, that was made possible by the inflated equity, that was created by poor people buying houses.... those jobs have to go away. Millions of people need to become unemployed. The poor people need to go back to apartments. We need to return the country to the way it was before the government started tampering with the housing markets. Only when we reset, can we start to build again. How long till then? It totally depends on how much President Obama wants to inject his solutions. With no government "stimulus" this trend would have accelerated to the bottom in 2010 by my guess. But if we "create some jobs", those jobs can't last, as American tax payers are already at the tipping point. If we stall foreclosures, we are doing a disservice to ourselves. The houses need to be foreclosed on so we can drop everyones housing value back to a real number.
It's not all doom and gloom however. In the last report issued Americans saving rate is way up to 3.6%. That's a long way from China's 50% saving rate but a big step in the right direction. That 3.6% is also the money President Obama is going to tell you spend tonight to return this country to our past greatness. But as you just learned the past decade was just a mirage, and only a fool would return to a mirage after finding it out.
We got in to this mess because Americans have been spending like crazy. The saving rate of American citizens starting in 2005 was -1%. That's right America as a whole spent more money than we made. We did this because the federal government drove up the value of our homes starting in 1999. They did that by taking an active roll in getting low income people to share in the American dream of home ownership.
The community reinvestment act was part of the problem, as was the fed keeping interest rates low. Their intention was good. Help poor people own a home which will help save them money on taxes and allow them to save for the future. The fact that there were now more buyers than ever meant home prices started soaring, which lead to a soaring construction industry. The side effect was people started refinancing their houses at lower interest rates and pulling out equity on these artificially inflated prices and used that money for more consumption. Which drove the economy to incredible heights. But the ride can't last. All the poor people got their houses, which meant the prices had to start dropping. Then the poor people started defaulting which threw banks in to a death roll. That's how we got in to this mess.
To get out of it is simple, but quite painful. All those jobs that were created by the consumption, that was made possible by the inflated equity, that was created by poor people buying houses.... those jobs have to go away. Millions of people need to become unemployed. The poor people need to go back to apartments. We need to return the country to the way it was before the government started tampering with the housing markets. Only when we reset, can we start to build again. How long till then? It totally depends on how much President Obama wants to inject his solutions. With no government "stimulus" this trend would have accelerated to the bottom in 2010 by my guess. But if we "create some jobs", those jobs can't last, as American tax payers are already at the tipping point. If we stall foreclosures, we are doing a disservice to ourselves. The houses need to be foreclosed on so we can drop everyones housing value back to a real number.
It's not all doom and gloom however. In the last report issued Americans saving rate is way up to 3.6%. That's a long way from China's 50% saving rate but a big step in the right direction. That 3.6% is also the money President Obama is going to tell you spend tonight to return this country to our past greatness. But as you just learned the past decade was just a mirage, and only a fool would return to a mirage after finding it out.
This isn't just some pie in the sky theory I pulled out of nowhere or someplace even less savory. Listen to one of the worlds top economists being interviewed on European Television. This is Peter Schiff
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1 comment:
Interesting blog, thanks.
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