Wikinvest Wire

Blissfully unaware of the real root causes

Tuesday, October 13, 2009

[We are now just a day or two from home and the normal fare will soon return to these pages. Between now and then, another look back at a year ago, September 22, 2008 to be exact, as the mainstream media struggled to explain the financial market meltdown.]

Two reports in major newspapers today provide compelling evidence that we are a long, long way from correcting what ails financial markets and the economy these days.

Some writers seem to think they have identified the root causes of recent problems as falling home prices and a skittish consumer when, in fact, these are just symptoms of the real root causes.

In this LA Times report, Michael A. Hiltzik seems to think that if we could just get home prices to stop falling, the world would be a much better place.

The government's $700-billion plan to bail out the banking system may calm panicked financial markets, but its real value may be in buying time to address the root problem: the continuing slide in housing values.
The rescue plan does nothing in itself to shore up the housing market. Rising defaults and foreclosures on home loans, spurred partially by declines in home values, are the cause of the collapse in price and tradeability of the mortgage-backed securities on the books of banks and investors.

But without government action to aid battered banks, financial experts say, mortgages would remain difficult to get and the housing market's recovery would be further delayed. The most recent sales figures for Southern California show that median prices were down 34% last month compared with a year earlier. About half the homes sold were foreclosures.
No. Falling home prices are not the root cause of the current mess. The root cause of the problem in housing today is that, for the last twenty years, the U.S. has had a "bubble economy" where money flows from one asset class to another, inflating prices beyond any reasonable measure of fair value.

By any historical standard, home prices are still too high. To think that if we can just stop home prices from falling and then, maybe, get them to go back up is a child-like view of the fundamental problems facing us today.

Until more people realize this, progress toward real solutions will not be made.

In this USA Today report, Barbara Hagenbaugh views a slowdown in consumer spending as a major threat to the U.S. economy.
Business was already down at the Muddy Cup Coffee House this year. Now, Jim Svetz, owner of nine coffee shops in Upstate New York, fears things are only going to get worse.

Consumers "see the news, it's big news, it ends up being on the major news channels, and then everyone becomes worried, and it affects their spending," Svetz says. "It's very tough out here."
"We're in a danger period for the next six or eight months," until house prices are expected to bottom, Carnegie Mellon economics professor Marvin Goodfriend says.
Consumer spending accounts for more than two-thirds of all U.S. economic activity. Even before the recent market events, consumer spending was slowing. Two retail groups last week predicted the holiday shopping season would show the smallest gain in sales since 1991. If spending were to actually decline this quarter or next, it would be the first time since 1991, when the U.S. economy was in a recession.
No. The popular belief that we, as a nation, could spend more than we made because our home prices or stock investments would rise in perpetuity is in the process of coming crashing to the ground.

That's the real root cause here.

A system where two-thirds of economic activity comes from personal consumption is wholly unsound and, until we begin to move away from a financial system and culture that condones "buying things that you don't need with money you don't have", we'll never have a good long-term solution for what ails us.

From time to time you hear some enlightened discussion of the real root causes of the current mess but, for the most part, the entire nation still thinks that we can turn back the clock and somehow relive the last twenty years.

That's just sad.


Vespucian said...

Tim, this also sums things up nicely, don't ya think?

The Real Deal said...

Tim, you're only half way to identifying the *real* root cause. The rock bottom root.

What is that? What made the bubbles in the first place?

Too much money.

Why was the US able to create so much money without the economic fundamentals necessary to support it? Like, the US did not raise a trillion of extra tax revenue. Like, American business did not invent how to make gold out of nothing, or produce a working nuclear fusion plant that it can sell to the world at $50B a pop. Where did a couple of trillion dollars of extra money come from?

It was created out of thin air, as in absolutely nothing. Why?

Because Greenspan thought he can get away with it. As in Free Lunch. This way, he gets to be crowned for all history for helping finance the American empire, while the stupid foreigners continue to pour their hard-earned savings and products into the US. And being paid with money which the US can create with a few keystrokes to any amount without effort. I did say 'stupid' foreigners, while the Wall Street gang is supposed to be the 'master' right?

The Root Cause, is that power-that-be in Washington believe they, the captains of the sole imperial power, are in charge of the world economy where they get everything for free. That the whole world must pay tribute to finance US economy, finance US military interests and imperial wars. That the US is entitled to free lunch economics in exchange for protection of the world order.

For a while, foreigners did pay a great deal of tribute to the master. Which financed the great bubbles.

You know, even the Roman Emperors knew they have a limit. Because even the Ceasers must fight and win bloody wars in order to earn an imperial living. But the Wall Street paid-for money gang in DC were convinced that there can be no such limit to American power.

Absolute power does corrupt absolutely. Especially the minds.

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