Commentary: Foreclosure Hole?

When is our economy and the housing market going to recover?  If you step back and look at the big picture you can see that the cause of our current recession that started in 2006 (sudden gas price increases to $4.00 plus a gallon, which led to the bursting of the housing bubble) is much more malignant than the root cause of the Great Depression.  The cause of the Great Depression was the over exuberance of consumers who suddenly thought they were wealthy – and then wanted their money, which caused a run on the banks causing them to fail en masse.  In 2010 we have banking instability and bank failures but not a wholesale banking failure.  But, we have a host of problems that we didn’t have during the Great Depression, which is why some economists think it could be 2014 or 2015 or later before we get our economy back on track.  First among those contemporary problems is a Federal Government that is sucking the blood (we now have the highest corporate taxes in the world) out of its productive citizens to fund an entitlement juggernaut that now consumes close over ½ of the Federal Budget.  Second, manufacturing companies of every type, especially heavy manufacturing have left the US for Mexico, Vietnam, China and a myriad of other countries that have NO minimum wage and NO environmental extremists to hover over and regulate the lifeblood out of their operations.  Third, we are importing over 50% of our energy (oil) from oversees.  Fourth, we’ve given a huge chunk of our wealth to welfare supplicants instead of using that cash to invest in new businesses, education and productivity enhancements.  Finally, we have fallen into a “foreclosure hole” that is proving to be hard to dig out of – see national foreclosure map by clicking here (http://www.washingtonpost.com/wp-dyn/content/graphic/2010/10/18/GR2010101806640.html?sid=ST2010101806160).

Why in the world would any bank, savings & loan or company lend hundreds of thousands of dollars to people who hadn’t graduated high school, who didn’t have a job, who couldn’t even prove their creditworthiness?  Simple – mortgage bankers who were focused on bonuses who were given free rein by Fannie Mae and Freddie Mac (Federal Government wonks).  Now, three years into the bursting of this foreclosure bubble (starting in 2006) foreclosures continue to kill the new home industry and jobs – and any chance for serious economic recovery.  According to the Wall Street Journal, “Mortgage Bankers are pushing the housing recovery out to 2012 or beyond.  On Tuesday, the nation’s mortgage bankers released a report saying that they expect the housing market to continue limping along into next year.  Things could pick up, they say, in 2012 (that’s, what, five or so years of the housing bust…but who’s counting?) http://blogs.wsj.com/developments/2010/10/26/mortgage-bankers-push-housing-recovery-to-2012/

Until the bulk of the foreclosures are absorbed NO ONE can predict an end to the housing crisis and our national economic malaise.  Right now there is no light at the end of the tunnel.  According to Rick Sharga, a VP at RealtyTrac, “Next year could very well be a peak year for foreclosures.  The market is expected to tally about 1.2 million bank repossessions in 2010, up from 900,000 in 2009, he says.  We expect we will top both of those numbers in 2011.”   Despite this, continued high unemployment also is expected to exacerbate the foreclosure problem in 2011 as well as upcoming interest-rate resets on ARM’s for many homeowners.  So, is the turnaround coming in 2011, 2012, 2013, 2014 or further out?  No one can make a good guess on when the correction will begin until the majority of these foreclosures have been absorbed and the new housing market starts adding new jobs again.

The news from Ben Bernanke is somber.  He recently told CBS’s 60-minutes the following:

  • It will be 4 or 5 years before we see recovery where unemployment goes down to 5 or 6%.
  • The Fed will commit $600B of the Fed’s (our) money to fight inflation to keep down interest rates.
  • The economy has lost 8 million jobs and may lose more in the next 4-5 years
  • Real unemployment is over 12% if you factor in all those who are off the unemployment rolls; 40% have been unemployed for over 1 year.
  • He said the Fed is NOT printing money; they are buying treasury bonds and notes.
  • A double-dip recession is NOT likely; housing has been weak and can’t get weaker.
  • 2% GNP is self-sustaining; so we need to surpass that level to add jobs.

Mr. Bernanke has a big idea:  Clean up the US tax code.  What genius!  I should have thought of that one.  This is the same idea that the debt commission has come up with. He said that the Federal Reserve caused the Great Depression in the ‘30’s by adhering to a “tight money policy”.  So, to avoid another Great Depression in 2008, the Federal Reserve made 21,000 loans to Banks (all the big ones), Industry (GM/Chrysler are just a few), Foreign Banks (Bank of England), and other “critical entities”.  He admitted that he didn’t see this crisis coming.  He said that our long-term outlook is good.  What else could he say?

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