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In
yesterday's initial flashback to the events of
September three years ago, it was noted that there was a lot of discussion
about the "root cause" of the financial market meltdown that, when
the item below first appeared on September 22nd, 2008, was well underway.]
ooo
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.
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