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Economy At The Cliff

By The Reverend Published: November 1, 2007


Let's see. Oil is at $96 a barrel. The FED cut interest rates again, which will cause oil to go even higher. The FED cut was in spite of a 3.9% growth number for the most recent quarter. Warren Buffet and others are talking about the foreclosure and bankruptcy rates being high for the next few years because of the brilliant capitalist cafeteria of "gotcha" mortgages peddled by a deregulated lending industry....and the dollar looks like it's headed for the basement.

Don'tcha' just love the smell of a Republican generated economy in the morning?

The Federal Reserve decision on Wednesday to cut interest rates probably won't do much for banks struggling with rising credit losses as the housing market retreats.

The Fed's decision to cut its key overnight lending rate to 4.50 percent from 4.75 percent will lower a variety of rates pegged to short-term market rates, such as those on credit cards and home equity lines of credit. It may also allow banks to lower rates on deposits. Following the cut, banks began lowering their prime lending rate to 7.50 percent from 7.75 percent.

A Commerce Department report Wednesday showed surprisingly brisk 3.9 percent annualized economic growth from July to September, the highest in 1-1/2 years.

But the Fed said this rate will likely slow, "partly reflecting the intensification of the housing correction." Link

Look at the contradiction. It's glaring at us. The economy grew by 3.9% last quarter but Bernacke and Co. cut rates again ANYWAY. It's counterintuitive....unless the "intensification of the housing correction" is really going to..umm...intensify. And it is....

The 10-city Case-Shiller Index exhibited an annual drop for the month of 5% in prices. That's the largest drop since June 1991. (The all-time record drop was a decline of 6.2% recorded in April 1991.)
Importantly, the index experienced the 21st consecutive month of decelerating annual price movement and the ninth interim of negative annual returns. Sixteen out of the 20 cities in the broader 20-city composite showed drops in prices for the month of August compared with only 10 in the prior month, and 15 of the cities are now year-over-year negative. Tampa (-10.1%) was the worst, followed by Detroit (-9.3%), San Diego (-8.3%) and Phoenix (-8.0%).


We are now at a record level of months of unsold home inventory. With cancellations as high as 50% to 65% at certain public homebuilders, resets accelerating into next year (causing more defaults/foreclosures and supply to come on to the markets) and with lower selling prices and concessions failing to stimulate demand recently, unsold inventory will likely expand in the months ahead.

Household mortgage debt has risen by 135% ($10.1 trillion) over the last eight years. During that period, incomes have materially lagged, causing mortgage debt as a percentage of disposable personal income to rise from 64.5% in 1999 to over 100% in 2007. Shockingly, the ramp from 64.5% to 100% represents a rise greater than in the 45 years leading up to 1999.

Total household debt, adding in credit card and installment debt to mortgage debt, looks as worrisome as it has risen (as a percentage of disposable personal income) from 93.5% in 1999 to 131.3% currently. Link

Paraphrasing: The sh*t is just beginning to reach the fan blades.

It will not least to conservatives who preach a supply side style of shock capitalism. The period we are entering into is simply called a "correction". A f**king "correction".

What was wrong that needed "correcting", I wonder? Do you think it was all those millions of crooked, conniving consumers who were trying to game the mortgage system, huh?

Here's a question for readers...

What happens when consumers can't spend anymore money because their buying power never increases....they can't borrow anymore money...and in addition....their house values decline?

What "invisible hand" is going to clean up that mess?



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