----- Original Message ----- From: Doug Henwood To: lbo-talk Sent: Tuesday, December 14, 2004 12:52 PM Subject: [lbo-talk] housing bubble bursts!
[in Australia, that is]
Sydney Morning Herald - December 15, 2004
Investors flee crumbling home market By Jonathan Chancellor, Property Editor [...] ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Why should OZ have all the fun?
This showed up in my inbox today:
Center for Economic and Policy Research:
Economic Summit: Fiddling While Rome Burns Mark Weisbrot Mark Weisbrot is co-director of the Center for Economic and Policy Research http://www.cepr.net/columns/weisbrot/mark_weisbrot_12_14_04.htm [..]
But as foreign central banks lose their appetite for U.S. treasuries, the interest rate that we have to pay on them will go up. That means mortgage rates will also go up.
This could spell very serious trouble for the U.S. economy: our economic growth since the recession of 2001 has been fueled overwhelmingly through the housing market. Not only has demand for housing been unusually strong, but as millions of people took advantage of record-low interest rates to refinance their mortgages, they also borrowed l iterally trillions of dollars. And spent it. Hence our incredibly low personal savings rate (0.2 percent in October), and heavily indebted consumers.
The result has been a big bubble in the housing market, which began nine years ago as a spillover from the stock market bubble. In the past nine years housing prices nationally have increased 40 percent more than the overall rate of inflation; for the four decades prior, house prices increased at the same rate as inflation.
When the housing bubble breaks, it will almost certainly cause a recession -- as the bursting of the stock market bubble did in 2001. How will the federal government respond, with our public debt (65 percent of GDP) already at 50-year records, and the federal budget deficit at near-record levels -- again, as a percentage of our economy, including borrowing from Social Security and Medicare? And will the Federal Reserve continue to raise interest rates as the economy slows? More tough questions for an economic summit, but it doesn't look like anyone will be asking them. [...]