The root of the looming economic crisis

When I was at university, a professor described the difference in American economic attitudes today and fifty years ago. His claim was that in the 1950s, the "great American dream" consisted of owning a home, a car, and raising a family. Today, in contrast, Americans are successful when they carry six-digit debts and own nothing.

You borrow hundreds of thousands of dollars to buy a home, which you never really own (the bank owns it); you borrow twenty-thousand dollars to buy a car, which you probably sell the moment you've paid off the debt. And you carry probably two or three credit cards with revolving debt. In fact, modern Americans would be be hard pressed to have a home, car, or university education without expansive debt.

Clive Crook writes in today's Financial Times that this culture of cheap debt expectations is the root of the looming economic crisis:

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Economy worse than the Whitehouse admits

Economic indicators point to an American economy worse than the Whitehouse is admitting.

"This quarter will be our weakest quarter," [Edward Lazear, chairman of the White House Council of Economic Advisers] said. "There are indicators suggesting that growth will pick up and pick up quickly. So the question is how quickly will it pick up."

He highlighted what he said was the good news in Friday's jobs report: that the unemployment rate dipped, wages grew and weekly hours stayed the same. However, the jobless rate fell to 4.8 percent in February from 4.9 percent because so many people left the labor force, perhaps discouraged by the difficulty of finding work. And average hourly earnings for jobholders rose only an anemic 0.3 percent from the previous month.

"Obviously we were disappointed," Lazear said about the job losses.

Bush focused even more on optimism than his adviser. "Our economy will prosper," the president said.

But we're seeing more than "disappointing" job numbers.

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The Politics of a Bubble

I am sure you have all heard of the housing "bubble" which is now collapsing.  You are probably also aware that there was a huge runup in the housing market from 2000-2007, and that this runup was  preceded by another collapsing bubble.

If you are into stocks, you are probably aware that AAPL used to trade at nearly $200, but is now at around $120 (and that AAPL used to trade at $50 not too long back).  You are probably aware of similar bubbles that have formed and collapsed in many other stocks.

Decisions having to do with buying and selling are made by rational people (one hopes, at least).  So why would any rational individual  have bought a house in June 2007, when all signs were pointing to an imminent collapse.  Why would anyone have bought CISCO stock in March 2000 at $ 78 (as I did), just prior to the imminent collapse which was quite expected.

And does that hold any lessons in politics ?  

The answer is quite simple really: humans are like penguins, and yes, it holds a lesson in politics.

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Surprise! It's a Recession

About three years ago when traveling though the Midwest I happened upon a conversation that struck me very odd. The discussion going on was about the mortgage crisis. The point of the conversation was clear, Midwesterners, the salt of the earth, the no need for government help kinds of people, or as I like to put it, the responsible Americans, were talking about walking away from their home loans and being in essence irresponsible. That conversation didn't compute well in my head so I probed a little. I asked why? Why would these people known for their practicality born out of surviving extreme harsh winters walk away from loans and houses that they had called home? The answer was simple and direct. They were walking away from their homes because they simply couldn't afford the loans that they had taken out. It was either eat or pay everything to the mortgage and eating is kind of vital to life. The stigma of bankruptcy still runs deep in these parts. The pain they felt added creases to their faces that previously weren't there. They were walking away because that was their only choice. I came to the conclusion that something had gone terribly wrong. This disturbed me so much that I tried desperately to put it out of my head.

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Where the Democratic Candidates Stand on Housing

Gen Fujioka, a well-respected housing attorney in San Francisco, wrote the following for today's Beyond Chron.

With the California primary elections less than two months away, what are the positions of the leading Democratic candidates with respect to housing and low income communities? While few of us concerned about housing look to either party for salvation, at minimum some of us hope that the Democratic candidates will bring some attention to deepening housing crisis that impacts millions of low income Americans.

To assess the campaign season's attention to housing issues, I looked at what was posted on the official websites of Clinton, Edwards, and Obama. This may be an imperfect gauge for what the campaigns' positions are. Talk is (relatively) cheap. There are no guarantees any policy proposal offered during a campaign will ever be pursued. But the issue statements on websites do set forth at least the highest aspirations of the candidates and their advisors. We rarely get more than what they promised during campaigns--we probably will get less. Websites and policy statements also tell us who candidates are trying to mobilize and with whom they are seeking to build a base.

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