03/25/10 Taipei, Taiwan – Markets proved they could still fall yesterday. After having rallied for 15 of the previous 18 sessions, we were beginning to wonder if it were still possible…
In an interesting turn of events, investors actually succumbed to the harsh economic realities of the day. There’s no telling how long this momentary lapse of unreason may last, of course, but we’ll take what we can get while we can get it.
The primary catalyst for the relatively minor pullback in stocks was a relatively major slump in the sale of new houses. Figures from the United States Department of Commerce revealed that, during the month of February, new home sales decreased 2.2% to an annual pace of 308,000, a record low. Pundits blamed blizzards, unemployment and foreclosures for the depressing statistic.
The infamous “Snowmageddon” weather earlier this year may have been uncharacteristically severe…but the level of unemployment and the alarming rate of foreclosures are characteristically severe…characteristic of a depression, that is. In other words, the former variable may be fleeting, but it would be unusual, to say the least, if the latter two magically improved with the turn of the season.
Officially, unemployment is hovering around a quarter-of-a-century high, near 10%. The broader “U6” figure – which also factors in “discouraged workers,” “marginally attached workers” and those who want to work full time, but cannot due to economic reasons – is closer to 17%. And that’s not even the worst estimate. The alternate rate provided by John Williams of Shadow Government Statistics, sits just shy of 22%; again, figures one might deem as characteristic of a depression.
As for foreclosures, RealtyTrac Inc. forecasts that figure will reach a record 3 million this year. Other sources give much higher estimates, citing a worsening job scenario and the expiration of first-time buyer tax credit as points of lingering concern. Meanwhile, as Wall Street indexes march ever higher, American home “owners” continue to receive their marching orders.
The city of Las Vegas, for example, recorded over 3,000 foreclosures in February, up almost 30% from the previous month. Spring, a small town in Texas, witnessed a 45% spike from January. And in Janesville, Wisconsin, even would-be politicians can’t afford to keep a roof over their head. According to a local paper, a candidate for city council K. Andreah Briarmoon has already lost one of her local properties…with three more already in foreclosure. Not content with personal bankruptcy, Briarmoon now has her sights set on running for local office.
As the paper reports, “Briarmoon has been campaigning on a platform urging the city to buy properties at sheriff’s sales and sell them back to the former property owners on land contracts at much lower interest rates.”
There’s nothing wrong with someone wanting more than they can afford…it’s when they get it that the cracks begin to appear. All over America, banks made loans they couldn’t afford to make to people who couldn’t afford to repay them. The solution, as fellow reckoners have already guessed, would be to allow the market enough space to establish real world price discovery. Prices must be permitted to fall to “affordable” levels, in other words; levels that would inspire some level of market clearing.
Alas, what is good for the economy and what is politically expedient is rarely one and the same thing. The voting public, by and large, won’t tolerate a “leave alone” government. They want their elected leaders to “do something,” to step in and relieve them from the financial pains of a generation worth of overconsumption. In short, they want their government to force someone else – anyone else! – to pick up the tab for them.
A recent survey conducted by Bloomberg reveals as much:
“Nine of 10 Americans believe that cutting the deficit, which is projected to reach a record $1.5 trillion this year, will require sacrifices from middle-class Americans. Still, when asked about a range of potential tax increases and spending cuts to address the problem, the large majorities of Americans favor tax increases that only affect the wealthy.”
In other words, almost everyone is in favor of cutting the deficit…as long as it’s someone else doing the cutting. Meanwhile, they still need the government to pitch in and save the auto industry…the banking industry…their local plants, hospitals and schools. They need universal healthcare and “green jobs” initiatives. They need welfare programs, safety nets, longer holidays and shorter working hours and a community hall. They need the government to stimulate the economy, to get it out of this slump.
They don’t realize that the more the government does, the more it guarantees the opposite.
Joel Bowman
for The Daily Reckoning
Joel Bowman
Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Unfortunately,you’ve fallen for the right-wing line of “people borrowing more than they could afford to pay.”
When the borrowers first took out their loans the banks ran the numbers on a fixed amount of income provided by the borrower,the borrowers qualified for their loan at the outset of the loan.
The problem,Bank’s forced many borrowers into risky adjustable rate mortgages.
When the interest rates began to move upward with more riskier loans being given out by Bank’s,the borrowers were forced out of qualification for that adjustable rate loan because the reset hike in their monthly payment was more than their monthly income would allow them to pay.
Bank’s gave out risky adjustable rate loans because they made way more money on that type of loan than they would on a fixed rate loan,even credit qualified home buyers were forced into ARM’s.
Borrowers were pushed into disqualification for the loans they took,they didn’t have the income to meet the reset rate,forcing the borrower into foreclosure.
Most of the ARM borrowers didn’t even qualify for a refinance loan,because they didn’t qualify for the adjustable rate loan at the new interest rate to begin with.
History will prove this out,in the meantime,I wouldn’t get caught parroting any right-wing talking points from now on,they’re libel to blow up in your face.
tintanbite- How is it that people were forced into ARM? By ARM twisting? I don’t suppose so. When offered a loan in the first place the rule of thumb is what? Make sure that payments are less than 20% of income. So if the “index” is high, it could come out more than that 20 percent, no? It’s not Republican/Democrat its sound business and investing to think about the potential hazards of Investment, the what if. If the cons outweigh the pros- it’s usually a bad investment or the loss won’t hurt. If one is going to refinance or get a loan, one does the research on the fees involved, why is it too much to ask an investor/homeowner to research and read what one is getting to take into account, the What if I lost my job? Another rule of thumb, if it sounds to good to be true…it probably is. I really hate to say this, you obviously a fellow Reckoning reader, but you sound just like the people that got us into this mess. Damn the consequences these people are going to get the house. Yes, the Banks/financiers are at fault, no getting around that, they just happen to have more clout, being the backbone of economics..But since when has the consumer become nothing in business? Do they not drive demand? I’d say that if there was no market for crappy ARM loans, then there wouldn’t be so many defaulting.