The Bad Moon Is Rising
We’ve been screaming at the top of our lungs that the mortgage and real estate meltdown could lead to the worst economic conditions since the Great Depression. With every passing day, the evidence mounts that this is happening.
Here are a couple of snippets from a post over at Minyanville. The emphasis is mine.
Capital impairment is everywhere and capital impairment is going to restrict the ability of banks to lend.
Bernanke and everyone else who are focused on capacity utilization, oil prices, the U.S. dollar, wheat or food at the local grocery store are simply focused on the wrong things.
The correct focus is on the ability and willingness of banks to lend, and the ability and willingness of consumers and businesses to borrow. Everything else is a sideshow.
The lack of ability to lend and the lack of the willingness of banks to lend led us into the Great Depression of the 1930’s.
In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble—even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.
Sound familiar? Do you see a very dangerous parallel with the past and the present? Need more proof a similar scenario is unfolding before our eyes? Consider this Rueters article “Housing slump ups chance of recession: Goldman Sachs“. Again, the emphasis is mine.
Weakness in construction and consumption will likely shave 2 percentage points from real U.S. economic growth in 2008, and will likely increase the unemployment rate to 5.5 percent from the current 4.7 percent, the U.S. investment bank said.
The effect of a U.S. housing market that is “mired in a full-blown vicious cycle” suggests the risk of recession has risen to a range of 40 percent to 45 percent, Goldman said.
Home prices will likely decline by 15 percent from their peak. But if the United States enters a recession — which Goldman expects the economy to narrowly escape — home prices could fall as much as 30 percent nationwide, it said.
Citing economic weakness, Goldman analysts cut their rating on industries involved in a wide swath of the U.S. economy, including automobiles, airlines, hotels, truckers, human resources and staffing providers.
Although the Fed isn’t taking appropriate actions to avoid a full blown depression, they do see the writing on the wall. Federal Reserve Vice Chairman Donald Kohn made these statements in a Bloomberg article today.
“turbulence” may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than a month ago”.
“Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses,”
There is a bad moon arising and no one is doing anything about it. All of the talk to fix our problems are so far off the mark that disaster is all but inevitable. Meanwhile, the mainstream media and our politicians keep the general public ignorant to the impending disaster.
Buckle up, there is a very rough ride ahead. I do see a bad moon arising.
Bad Moon Arising
Discussion Area - Leave a Comment