Not Housebroken

Martin Sosnoff still doesn’t think there’ll be a recession, but is considerably less optimistic than the last time I saw his column:

The vise on new home construction tightens inexorably. Cancellation rates run close to 35% and the glut of existing homes for sale swells. Not only is it unlikely for the home building cycle to bottom before 2009, but prospective bankruptcies of home builders with national footprints could mar the 2009 landscape. Loan covenant violations could loom by mid 2008. Home building is capital intensive, and many banks are involved. . . .

The cresting of home prices is a critical macro event as it limits the wherewithal of consumers to spend more than their normalized amount of disposable income. For several years, middle America has monetized home equity and increased spending by a couple of percentage points. Housing stock is more than half the net worth of many individuals. Even a 10% decline in home value runs into trillions of bucks.

Retailing is impacted directly and the stock market indirectly, as corporate profits flatten out, maybe decline even if the Fed cuts the Fed Funds rate in lock- step fashion. Clearing our existing homes inventory could take years. After all, prices elevated for a couple of decades. . . .

Today, systematic inflation is not a policy issue, just a worry.

Maybe not. John F. Ince looks at debt:

Debt today in the United States is at an all-time high in each of the three primary sectors: public, corporate and consumer debt. The national debt last week topped $9 trillion, up from approximately $5 trillion when George Bush took office. . . . Consumer credit is now at scary levels almost: $2.5 trillion, and analysts are beginning to speculate that credit card debt could be the next bubble to burst. . . .

25 years ago the United States was the world’s largest lender nation by far. Today we owe more to other nations than the rest of the world combined. Almost 5 percent of our GDP flows into foreign hands every year, as reflected in our current account trade deficit of approximately $700 billion annually.

How bad could it get? The Fed will likely put it in a position where the only option is to monetize the public debt. . . . Kenneth Rogoff, a Harvard economics professor and former chief of research for the IMF, puts it bluntly: “People who think that the government will never monetize the debt are just out to lunch.”

The United States doesn’t have to default on its debt. It can simply pay back lenders with dollars that are worth less than the dollars that were borrowed. And if this happens to the public debt, private debt will be similarly affected and the entire monetary system will be destabilized.”

That would raise inflation, which the Fed keeps claiming its policies are intended to prevent.

With America now addicted to foreign imports, it is unlikely that our appetite will go down significantly. Classic economics says it will, but a lot of pain will be felt along the way. So the American standard of living will decline and people living on the margins are pushed ever closer to the brink.

Mike Whitney points out that it is getting harder to get any financing for mortgates. Referring to a bank run in Britain that compelled the government to guarantee the full value of deposits, Whitney writes:

A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model [“borrowing short to go long” in financing their mortgages] as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the U.K right now. The only difference is that the U.S. economy is already listing from the downturn in housing and an increasingly jittery stock market.

Whitney also makes explicit Ince’s point about imports:

Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.

James Cumes writes in the Asia Times:

When everyone in the house is crazy, only the sane seem like fools. So it was when the financial addiction spread everywhere. Then everyone who was not taking his daily dose of heroin or cocaine became the fringe-dweller, the oddball, the brake on progress, the party-pooper at the greatest no-cash-down, how-to-spend-it shindig that our planet has ever known. Debt piled on debt everywhere: in households, corporations, public finances and international deficits, in magnitudes that had never been even glimpsed in the most creative imaginations before. . . .

The “value” of the creative financial paper circulating the globe is calculated, as close as one of our “experts” can reasonably count it, to be US$480 trillion. The Bank for International Settlements puts its count at $600 trillion. In fact, we do not know what the precise sum may be, but we do know that it is so mind-boggling that it seems to lie outside all reality.

The value of the dollar is in decline, raising the specter of a collapse:

“This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. “We could finally see the big kahuna hit.” . . .

[T]he dollar could be adjusting gradually as the U.S. economy becomes driven less by lending on the back of rising home price.

The problem, as every economist knows, is that the current account deficit – about $770 billion – is still colossal in absolute terms.

And foreigners are being asked to provide those dollars at a time when the subprime turmoil is threatening to spill over into the broader economy.

Put another way, at a time when the psychology of crisis has gripped financial markets, intangible attitudes toward the dollar have become all the more important. And with growth strong elsewhere in the world, there are appealing places to go besides the dollar.

Cumes argues that the result could spread around the world:

The dollar is almost certain to decline in value, perhaps precipitously, especially in gold and key-commodity terms, and force a reduction in demand for imported goods. This will be in part beneficial for US exports; but domestic industries, especially in the more basic consumer sectors, are unlikely to be able to replace, at least in the short term, supplies from overseas. No longer the consumer without limit, the US will almost certainly infect other countries with its slowdown, recession or depression, and that in turn will reduce growth, investment, employment and output around the world.

Women have told me they can’t even find a doctor to perform a tubal ligation. And they say that Planned Parenthood can’t do it, because this is an inpatient procedure.

And this is in the supposedly liberal San Francisco Bay Area.

And it is in sharp contrast to my own experience over twenty years ago when I sought and obtained a vasectomy. I was 24 years old, my doctor said I was a little young but, following a couple appointments, performed the procedure in his office, in Selma, California, a small town in relatively conservative central California.

So now I read this about a woman who was denied a tubal ligation in Canada by a Catholic hospital:

Leann Gunther lodged the complaint, alleging St. Elizabeth’s Hospital [in Humboldt, Saskatchewan] had discriminated against her on the basis of gender and religion by denying a public service. The [Saskatchewan Human Rights Commission] announced Thursday that the hospital has paid Gunther $7,875 as compensation. The settlement means there will be no hearing before a tribunal.

But in the United States, it is okay for pharmacists to deny emergency contraception when it conflicts with their own personal moral views. In the United States, the right to make moral decisions seems tilt in favor of using a woman’s body for nine months, for purposes other than her own, at the same time that we continue to promulgate the rape myths that fuel men’s sense of entitlement to women’s bodies.

Perhaps more significantly, this right tilts in favor of allowing people in positions of power to impose their own moral judgments on others.

“What is a woman supposed to do in rural America, in places where there may only be one pharmacy?” asked Nancy Keenan, president of NARAL Pro-Choice America, which is launching a campaign today to counter the trend. “It’s a slap in the face to women.”

By the time Suzanne Richards, 21, finally got another pharmacy to fill her morning-after pill prescription — after being rejected by a drive-through Brooks Pharmacy in Laconia, N.H., one late Saturday night in September — the 72 hours had long passed.

“When he told me he wouldn’t fill it, I just pulled over in the parking lot and started crying,” said Richards, a single mother of a 3-year-old who runs her own cleaning service. “I just couldn’t believe it. I was just trying to be responsible.”

Japanese Prime Minister Shinzo Abe has announced his resignation, “after a bruising election in July and poor poll ratings.” He had previously “hinted he may quit if Japan’s mission in Afghanistan was not extended. . . . The mission involves Japanese vessels in the Indian Ocean providing refuelling and other logistical support to US military planes, and the US has made clear it sees these activities as vital.”

Here is the most pessimistic assessment of the current economic situation I have seen. It’s pretty scary.

It is a little too much to believe. The transcript of Osama bin Laden’s latest video includes this:

Burning living beings is forbidden in our religion, even if they be small like the ant, so what of man?!

So taking passenger jets fully loaded with fuel and passengers, then turning them into missiles at tall buildings, also filled with people, and starting fires that undoubtedly burned some people to death is okay? He continues, however:

The holocaust of the Jews was carried out by your brethren in the middle of Europe, but had it been closer to our countries, most of the Jews would have been saved by taking refuge with us. And my proof for that is in what your brothers, the Spanish, did when they set up the horrible courts of the Inquisition to try Muslims and Jews, when the Jews only found safe shelter by taking refuge in our countries. And that is why the Jewish community in Morocco today is one of the largest communities in the world. They are alive with us and we have not incinerated them. . . .

He also blames corporations for the assassination of John F. Kennedy. After pointing to numerous imperial massacres, he accepts blame for the 9/11 attacks:

Then you claim to be innocent! This innocence of yours is like my innocence of the blood of your sons on the 11th – were I to claim such a thing.

He also offers ample fodder for neoconservatives who accuse peace activists of supporting terrorism and for bigots who link Islam to terrorism. This transcript recalls the tit-for-tat exchange following 9/11, where bin Laden would release a video inflaming “American” citizens, thus supporting Bush, and Bush would, in turn, do something outrageous, inflaming Muslims, who would join up with al-Qaeda.

Nothing good can come of this.

This time, it is Michael Brush at MSN Money asking, “Is a CEO worth 364 times the average Joe?”

Of course, the answer is no. Brush writes:

In recognition of the just-completed Labor Day weekend, I’d like to offer a salute to American workers, who the United Nations just reported are second only to Norway’s laborers when it comes to productivity. And now, a bit of bad news for those same workers: You’re not getting credit for that productivity. Instead, top executives at your companies are reaping the rewards in the form of increasingly fat paydays.

The pay gap in the US is larger than in Europe, even though European companies are larger than US companies. Moreover, it has grown spectacularly:

CEO pay in the U.S. has grown to become 364 times the average worker’s pay. It was just 40 times the average pay in 1980. It’s hard to imagine that top leadership skills have grown so much scarcer in the past 37 years.

Ultimately Brush blames cozy relationships between CEOs, “board compensation committees,” and consultants. He leaves essentially unchallenged however a fundamental mythology that success in this economy is tied to merit. Yes, he attacks cronyism, but that cronyism derives from a myth that associates financial success with “merit.”

Merit, sociologists can tell you, has little to do with it. If a large portion of wealth is inherited, so too is access to Ivy League schools, social networks, and health care. These rich kids bear little relation to Horatio Alger’s heroes, even if they have Andrew Carnegie’s attitude.

Dean Baker writes:

The country is now seeing the beginnings of an unprecedented drop in housing prices. House prices in many formerly hot markets, like Las Vegas, San Diego, and Miami, are now falling at double-digit annual rates. Prices are also falling in many other cities, although at a somewhat less rapid pace. For the first time since the depression the country will be seeing nominal declines in house prices nationwide.

He not only foresees recession, but sees it as an extension of the stock market crash-induced recession of 2001. He argues that the Fed pushed a housing bubble to keep the economy going through that recession, leading to the present problems.

But that’s not the end of it. Nor are widespread concerns that, as Baker writes, “homeowners can no longer use their homes as ATMs when there is no equity against which to borrow.”

“Florida Democrat” writes in response:

The crash isn’t confined to just housing foreclosures but the soon to be crashing employment numbers. Many of the employees in construction are not qualified for other jobs. Over the last few years with the pace of construction these employees have received fairly high wages for their education levels. There will be no alternative employment available that will pay those same wages. Even if the employment numbers don’t crash than these employees will assuredly be working for other employers (Wal-Mart) at significantly lower wages.

Um. Good point.

From what I can see, the financial markets and policymakers appear to be in denial of the severe problems that a decline in housing prices can pose.

Michael Connolly at the Wall Street Journal writes in an e-mail bulletin:

The U.S. Federal Reserve historically has had two major economic functions: maintaining financial stability is one; controlling inflation while preventing recession is the other. To Alan Greenspan, chairman of the Fed from 1987 to 2006, market confidence was so intertwined with economic prospects that the two were often inseparable.

When Ben Bernanke was nominated to head the U.S. Federal Reserve in 2005, he promised to “maintain continuity with the policies and policy strategies established during the Greenspan years.” But, as Greg Ip reports, in handling his first financial crisis, Mr. Bernanke shows signs of a clear break with Mr. Greenspan. Mr. Bernanke distinguishes between the two functions.

That shift is important to understanding why Mr. Bernanke hasn’t cut the Fed’s main interest rate, and it could alter investor perceptions of the way theBernanke Fed will function. But if Mr. Bernanke eventually cuts the federal-funds rate, as markets anticipate, the contrast with Mr. Greenspan will fade and some may criticize Mr. Bernanke for moving slowly. Mr. Bernanke will elaborate on the outlook Friday at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming.

But inflation, to what little extent it exists in the present economy, can be attributed not to financing rates or even economists’ favorite scapegoat, labor costs, but energy costs, which affect transportation costs for everything else, including labor. Nearly a year ago, when an “impending US-led economic slowdown” was feared, oil prices also dropped. Gasoline prices “recovered” from that drop, as they apparently are again, but are now, in most places around the United States, lower than they were a year ago.

Katherine Conrad at the San Jose Mercury-News writes:

The stock market rallied today, with the Dow Jones industrial average gaining almost 250 points, as investors searched for bargains after Tuesday’s tumble.

Emboldened by the expectation that the Fed will cut interest rates on or before Sept. 18, buyers were also heartened by strong signs from oil and tech companies. The Associated Press calculated that the Dow rose 247.44, or 1.90 percent, to 13,293.44, near its highs of the session.

The Dow fell 280 points Tuesday.

Still, the housing sector remains weak. AP reported that mortgage-application volume, refinance volume and purchase volume all fell about 4 percent during the week ended Aug. 24 compared with the prior week, according to the Mortgage Bankers Association’s weekly application survey.

It is, I guess, old news, now, that weakness in the housing sector undermines the ability of many consumers to finance the spending that has reportedly kept the US economy afloat through two major recessions. If we thus imagine the economy like the old television cartoon, George of the Jungle, swinging from vine to vine–much like many people struggling to get by–with the adage to “Watch out for that tree!” we see the question not so much as a tree obstructing George’s progress, but the absence of a next vine to grasp.

With or without Pakistani permission, United States and puppet Afghan forces attacked “Taliban positions inside Pakistan in fresh clashes with the extremist militia that left at least 19 rebels dead, security forces said on Sunday. . . . A Pakistani military spokesman denied any permission was given.”