Today's GOP Versus Reagan

I and many others have noted that Ronald Reagan - the claimed icon of the GP universe - could not secure the GOP nomination nowadays because he was not extreme enough, wasn't virulently anti-union, and did not preach religious based hatred.  Worse yet in the eyes of some who now constitute the reality untethered GOP base, Reagan would have likely rejected the current GOP's efforts to destroy the nation's economy for short term political gain.  Reagan for all his faults held some compassion for other humans.  That's a trait that has vanished from today's GOP and yet another reason I cannot be a Republican.  A column in the New York Times looks at Reagan's economic views versus those of Mitt Romney, Paul Ryan and others who seem to care nothing about the damage their proposals would do to average Americans.  Here are some highlights:

There’s no question that America’s recovery from the financial crisis has been disappointing. In fact, I’ve been arguing that the era since 2007 is best viewed as a “depression,” an extended period of economic weakness and high unemployment that, like the Great Depression of the 1930s, persists despite episodes during which the economy grows. And Republicans are, of course, trying — with considerable success — to turn this dismal state of affairs to their political advantage. 

They love, in particular, to contrast President Obama’s record with that of Ronald Reagan . . .  the more relevant comparison is with George W. Bush, who, at this stage of his administration, was — unlike Mr. Obama — still presiding over a large loss in private-sector jobs. And, as I’ll explain shortly, the economic slump Reagan faced was very different from our current depression, and much easier to deal with. 

Still, the Reagan-Obama comparison is revealing in some ways. So let’s look at that comparison, shall we?

For the truth is that on at least one dimension, government spending, there was a large difference between the two presidencies, with total government spending adjusted for inflation and population growth rising much faster under one than under the other.

Reagan, not Obama, was the big spender. While there was a brief burst of government spending early in the Obama administration — mainly for emergency aid programs like unemployment insurance and food stamps — that burst is long past. Indeed, at this point, government spending is falling fast, with real per capita spending falling over the past year at a rate not seen since the demobilization that followed the Korean War. 

Why was government spending much stronger under Reagan than in the current slump? “Weaponized Keynesianism” — Reagan’s big military buildup — played some role. But the big difference was real per capita spending at the state and local level, which continued to rise under Reagan but has fallen significantly this time around. 

In short, if you want to see government responding to economic hard times with the “tax and spend” policies conservatives always denounce, you should look to the Reagan era — not the Obama years.  

[T]he slump of the 1980s — which was more or less deliberately caused by the Federal Reserve, as a way to bring down inflation — was very different from our current depression, which was brought on by private-sector excess: above all, the surge in household debt during the Bush years. The Reagan slump could be and was brought to a rapid end when the Fed decided to relent and cut interest rates, sparking a giant housing boom. That option isn’t available now because rates are already close to zero. 

America is currently suffering from a classic case of debt deflation: all across the economy people are trying to pay down debt by slashing spending, but, in so doing, they are causing a depression that makes their debt problems even worse. This is exactly the situation in which government spending should temporarily rise to offset the slump in private spending and give the private sector time to repair its finances. Yet that’s not happening. 

The point, then, is that we’d be in much better shape if we were following Reagan-style Keynesianism. Reagan may have preached small government, but in practice he presided over a lot of spending growth — and right now that’s exactly what America needs.

The GOP and Austerity - A Bridge to Nowhere

I will be the first to concede that government spending needs to be reined in.  However, the Republican idea of austerity is slashing social programs, adding even more money to defense, and giving huge tax cuts to the already very wealthy.  Why is it only the poor and average Americans are supposed to live with austerity while the favored targets of GOP largess party on?  Oh, we know part of the answer: austerity and slashes in government spending ill impede economic recovery and make Barack Obama more vulnerable in November, but beyond that the Republicans don't seem to give a damn for the harm done to the rest of the population.  And the Kool-Aid drinking crowd are too stupid to figure out that they are getting screwed by the GOP as long as pet enemies like Planned Parenthood are denied funding.  Indeed, I increasingly believe that to be a member of the GOP nowadays one must be either (i) consumed with greed and disdainful of the less fortunate or (ii) have had a lobotomy.    With the rejection of austerity in France - where it has harmed the economy - the issue is whether Americans will wake up to the GOP's disingenuous ploy.  Columns in the New york Times and Washington Post look at the rejection of austerity.  First these highlights from the Times:

The French are revolting. The Greeks, too. And it’s about time. Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing.  Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. 

[C]laims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper. Moreover, there seems to be little if any gain in return for the pain. 

Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.

The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.

Will Americans learn from what's happened in Europe?  Probably not give America's delusion that it can do what others could not - a delusion that Afghanistan should have killed, but hasn't - at least not among the military leadership and many conservatives who still blather about American exceptionalism and similar fantasies.  Here are highlights from the Washington Post piece:

Economic austerity is a dangerous, self-defeating intellectual fad. Perhaps I should say that’s what it was, given Sunday’s election results in Europe. Perhaps I should also say good riddance. Voters in France, Greece and even Germany — a hotbed of the austerity cult — told their political leaders, in no uncertain terms, that boosting economic growth is more important than cutting government spending. Here in the United States, I hope that Democrats, at least, were paying attention; I fear that the addled ideologues who control the Republican Party will never get the message.

Sarkozy and German Chancellor Angela Merkel agreed on a common policy of budget cuts and partial “reform” — a euphemism for “dismantling” — of the welfare state. This, they decided, was the way to return Europe to prosperity and save the European Union’s common currency, the euro, from collapse.

But on Sunday, even Merkel got a message from voters: Her party was punished in local elections in the northern German state of Schleswig-Holstein, where it appeared that a center-left, anti-austerity coalition would end up in control.

But another clear lesson is that austerity has to be seen as a means, not an end. The goal is to recover from the massive blow inflicted by the global financial meltdown and return to prosperity. This may involve a measure of austerity — but definitely requires considerable economic growth, which should be policymakers’ first priority.

The reason is simple: If you can get the economy growing again, all other aspects of the crisis become more manageable. Debt and deficits shrink as a percentage of national output. Unemployment declines, as does the need for social spending.

But putting a chokehold on government spending at a time when economies are just sputtering back to life — as the austerity fetishists have tried to do in Europe, and as Republicans solemnly pledge to do in the United States — is monumentally self-defeating.

In Britain, the economy was growing when Prime Minister David Cameron took office two years ago. Adhering to the platform of his Conservative Party, Cameron took the austerity route with a host of gloom-and-doom budget cuts. Now unemployment is rising and the economy has slipped back into recession. Nice job, Tories.

Mitt Romney and the GOP subscribe to the pro-austerity view. They are, of course, entitled to their opinion, even if it happens to be wrong. I sincerely wish them all the electoral success their ideological allies are having across the Atlantic.

Throwing the Unemployed Under the Bus

This Toles cartoon pretty much sums up what the debt ceiling deal is messaging to the unemployed and the under employed. Spending cuts will equate to less jobs and the joblessness plague will continue. No doubt the far right will believe that somehow the unemployed deserve their fate despite the objective facts that argue otherwise. I mean, God must be punishing them for some reason, right? With the European stack markets down one can only hope we don't see another blood bath on Wall Street today.

The Very Real Chance of Another Great Depression

An article in the New Republic has an unsettling analysis of why the USA could be heading towards another Great Depression - what's truly upsetting is that the main underlying cause should the worse case play out is that we NEVER learn from history. The article parallels the mistakes made in the 1930's with political/economic actions today and indicates we are making the same mistakes all over again. Leading the way in the march toward the potential fiasco, of course, is the GOP which never seems to want to avoid repeats of past disasters. A sure mark of insanity is doing the same thing and expecting a different result. Not that there is much doubt that the GOP is increasing controlled by the insane. Democrats, however, have no excuse for lacking the political will to speak out against such stupidity. Here are some article highlights:
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When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression . . . Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression.
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But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.
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Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II.
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Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers.
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Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s. The May jobs report should have provided the sort of stiff kick that is needed to revive discussion of additional stimulus. Instead, it seems to have barely shaken Washington’s ongoing obsession with deficits.
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In policy circles, there seems to be an absurd faith that demand in the economy will arise out of nowhere if we are just virtuous enough in reducing the deficit. That is not the way the economy works. Demand must come from some discrete source and it is very difficult to see where that might be if the country continues on a path of deficit reduction.
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To see why this is the case, first note that nearly 70 percent of demand in our economy is from consumption, but consumption has been growing slowly for two reasons. The first is that the economy has been creating few jobs. Furthermore, in a weak labor market workers do not have the bargaining power to push up their wages. The slow growth in jobs and stagnant wages mean that most families, who get nearly all their income from working, are seeing little growth in income. Slow growth in income means slow growth in consumption.
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The second factor depressing consumption has been the continuing deflation of the housing bubble. To date, the decline in house prices has destroyed nearly $7 trillion in housing equity. And prices are still falling. . . . The loss of this wealth will lead homeowners to cut back their consumption further in order to rebuild their savings.
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With these other sectors accounted for, this leaves the government as the only remaining candidate for boosting the economy. But additional stimulus is not even on the agenda in Washington. Instead, we are seeing cutbacks at all levels of government. These cutbacks led to a loss of 29,000 jobs in May. The pace of job loss is only likely to increase when states impose another round of cuts on July 1, the beginning of a new fiscal year for most of them.
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Moreover, there are more factors pointing to slower growth than faster growth going forward. In addition to the state and local cuts kicking in next month, the new fiscal year for the federal government begins October 1. This is also likely to involve further cuts in spending. And the payroll tax cut is scheduled to end 3 months later, as is the extension of unemployment benefits. At some point, the pain of high unemployment across the country may lead to some new thinking in Washington, but until that time, welcome to the second Great Depression.

McDonald's Operations Chief Basically Tells U.S. Gays to Go to Hell

I never cease to be amazed at the willingness of self-righteous "Christian" to attempt to inflict their religious beliefs on all - even in the business world where one ought to be courting every segment of consumers. Not so McDonald's operations chief, Don Thompson (pictured at left), who finds gays offense to his religious beliefs and has flatly rejected any U.S. advertising that might suggest that LGBT Americans are as welcome in McDonald's locations as say - blacks. Nope, that would offend Thompson as a Christian, so even though the gay accepting McDonald's ad running in France has done well - indeed, it probably made a positive impression on many LGBT consumers - Thompson has made it clear in an interview with the Chicago Tribune that no such ad will be seen in the USA. My response? I'm not big on fast food, but to the extent I will be buying any on car trips, etc., there are plenty of options besides McDonald's which will not be seeing a penny of my money. Here are highlights from the Tribune interview:
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Tribune: A French TV ad featuring a gay teen and his father has stirred some controversy — not there, but here. Can you talk about that?
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Thompson: It is an example that markets, cultures are very different around the world. (For instance), I've never shied away from the fact that I'm a Christian. I have my own personal beliefs and I don't impose those on anybody else. I've been in countries where the majority of the people in the country don't believe in a deity or they may be atheist. Or the majority of the country is Muslim. Or it may be the majority is much younger skewed. So when you look at all these differences, it's not that I'm to be the judge or the jury relative to right or wrong. Having said that, at McDonald's, there are core values we stand for and the world is getting much closer. So we have a lot of conversations. We're going to make some mistakes at times. (We talk) about things that may have an implication in one part of the world and may be the cultural norm in another part of the world. And those are things that, yes, we're going to learn from. But, you're right, that commercial won't show in the United States.
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Mr. Thompson, short of a public apology from you, you won't see me darken the door of any McDonald's location - EVER again. Sir, you are a bigot.

Sarah Palin: Underwhelming and a Liar

The boyfriend and I watched most of Sarah Palin's speech last night and, to be fully candid, I don't know where all the GOP representations that she's a fabulous speaker came from. Her delivery was so-so and the substance was certainly lacking when not downright untruthful. Not as bad as the Chimperator, but close in my view. I found the snide remarks made by both Palin and Rudy about "community organizing" little less than non-subtle racist comments. But then, the GOP has become a Christianist/racist party plain and simple. Finally, she made me so nauseated that we turned off the last few minutes. Yahoo News has a good article that looks at Palin's less than honest statements. Of course, Palin was not the only liar of the evening. Here are some highlights:

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In some cases, the reproach and the praise stretched the truth. Some examples:

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PALIN: "I have protected the taxpayers by vetoing wasteful spending ... and championed reform to end the abuses of earmark spending by Congress. I told the Congress 'thanks but no thanks' for that Bridge to Nowhere."

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THE FACTS: As mayor of Wasilla, Palin hired a lobbyist and traveled to Washington annually to support earmarks for the town totaling $27 million. In her two years as governor, Alaska has requested nearly $750 million in special federal spending, by far the largest per-capita request in the nation. While Palin notes she rejected plans to build a $398 million bridge from Ketchikan to an island with 50 residents and an airport, that opposition came only after the plan was ridiculed nationally as a "bridge to nowhere."

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PALIN: "The Democratic nominee for president supports plans to raise income taxes, raise payroll taxes, raise investment income taxes, raise the death tax, raise business taxes, and increase the tax burden on the American people by hundreds of billions of dollars."

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THE FACTS: The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, concluded that Obama's plan would increase after-tax income for middle-income taxpayers by about 5 percent by 2012, or nearly $2,200 annually. McCain's plan, which cuts taxes across all income levels, would raise after tax-income for middle-income taxpayers by 3 percent, the center concluded. Obama would provide $80 billion in tax breaks, mainly for poor workers and the elderly, including tripling the Earned Income Tax Credit for minimum-wage workers and higher credits for larger families. He also would raise income taxes, capital gains and dividend taxes on the wealthiest. He would raise payroll taxes on taxpayers with incomes above $250,000, and he would raise corporate taxes. Small businesses that make more than $250,000 a year would see taxes rise.

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MCCAIN: "She's been governor of our largest state, in charge of 20 percent of America's energy supply ... She's responsible for 20 percent of the nation's energy supply. I'm entertained by the comparison and I hope we can keep making that comparison that running a political campaign is somehow comparable to being the executive of the largest state in America," he said in an interview with ABC News' Charles Gibson.

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THE FACTS: McCain's phrasing exaggerates both claims. Palin is governor of a state that ranks second nationally in crude oil production, but she's no more "responsible" for that resource than President Bush was when he was governor of Texas, another oil-producing state. In fact, her primary power is the ability to tax oil, which she did in concert with the Alaska Legislature. And where McCain called Alaska the largest state in America, he could as easily have called it the 47th largest state — by population.

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FORMER MASSACHUSETTS GOV. MITT ROMNEY: "We need change, all right — change from a liberal Washington to a conservative Washington! We have a prescription for every American who wants change in Washington — throw out the big-government liberals, and elect John McCain and Sarah Palin."

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THE FACTS: A Back-to-the-Future moment. George W. Bush, a conservative Republican, has been president for nearly eight years. And until last year, Republicans controlled Congress. Only since January 2007 have Democrats have been in charge of the House and Senate.

Update - U.S. Home Prices Fall At Record Rate

The reverse Midas touch of the Republican/Chimperator "who needs regulation" mentality continues to unfold. Those being harmed are millions of homeowners, most of whom did not engage in hair brained loan transactions. MSNBC is reporting the the monthly decline in home prices for April, 2008, is the largest in more than 20 years. Yet the GOP and McCain can only think of less regulation, intermixing religion and the civil laws, and more tax breaks for the most affluent. Even in this area where prices are usually somewhat insulated due to the annual relocation of military personnel, prices have begun to slide. Meanwhile, everyone who makes their living off of the residential real estate industry - like 129 employees of a plywood plant in Chesapeake who will lose their jobs when the company closes its plant in August- and me included is undergoing extreme financial strains. Thanks a lot Chimpy! Here are some highlights:

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The Standard & Poor’s/Case-Shiller home price index of 20 cities fell by 15.3 percent in April versus a year ago, according to Tuesday’s report. . . . Meanwhile, a report from the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 4.6 percent in April from the same month last year, when the index peaked. That marked the biggest decline ever in the agency’s monthly index which dates back to January 1991.

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No surveyed city stayed above water, according to the Case-Shiller index. The last holdout, Charlotte, N.C., finally succumbed to the national housing downturn, with prices there slipping 0.1 percent from a year ago. Las Vegas and Miami both continue to post the largest declines, falling 26.8 percent and 26.7 percent, respectively.

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The housing slump, along with higher food and fuel prices and disruptions in the credit markets, has taken its toll on consumer sentiment. An industry group Tuesday said U.S. consumer confidence fell unexpectedly sharply in June to the fifth-lowest level ever. The Conference Board’s reading of consumers’ expectations also hit an all-time low.

U. S. Consumers Hit the Wall

This op-ed piece from today's New York Times (http://www.nytimes.com/2008/01/21/opinion/21cohen.html?em&ex=1201064400&en=e7f127ada05a9485&ei=5087%0A) explains why it may be far harder for the U. S. economy to dig itself out of the developing recession. As noted in the piece, the country's consumers have out spent their incomes and with the falling real estate market, they can no longer refinance and pull additional equity out of their homes to pay down their consumer debt. Thus, out of control consumer spending that has kept the economy grinding along may be about to hit a brick wall. It is shaping up to be a very nasty situation. Here are some Highlights:

And here we are, with the rainy day our grandparents always droned on about appearing in the form of a deluge, and no savings stashed for it, and President George W. Bush, the debt-spender par excellence, conjuring up a $150-billion stimulus package that evokes the injection of steroids into a prone athlete wrecked by a marathon. This "shot in the arm," as Bush put it, may dampen a little pain. But this patient will be in intensive care for a long time.

As Stephen Roach, the chairman of Morgan Stanley Asia, said to me: "The very low U.S. savings rate, and related huge balance of payments deficit to attract funds from overseas, are not sustainable things." The adjustment is likely to be long and painful. Roach estimated U.S. net national savings at a tiny 1.4 percent of national income and household debt at 133 percent of personal disposable income. That last figure means middle class families are tapping into home equity - borrowing against their homes - to buy their kids socks. And if they can't pay the resulting never-sleeping debt, they lose not a room or two, but the house.

Beneath the staggering U.S. corporate losses - over $100 billion since the credit crisis began - lie the individuals suckered into taking on debts they won't be able to pay, whatever Bush hands back in tax rebates. "The median American family is going into what looks like a recession owing more than 100 percent of its income," Warren said. No wonder Citigroup just set aside $4.1 billion to cover possible defaults on home-equity loans, credit cards and auto loans - shoes that have yet to drop.

I expect the United States to bounce back, but not quickly. The central fact confronting the next president will be the new limits on U.S. power, both military and economic. The central challenge will be the provision of needed reforms, primarily universal health care, that begin to alleviate the financial strains on median American families and allow them to get back to saving rather than leveraging assets in a phony consumption boom.

When Will the Housing Slump End?

As I have been saying repeatedly, I believe that things in the housing market - and therefore the larger economy - are going to get much worse before any improvement begins to set in. Newsweek is reporting a similar view in this article (http://www.newsweek.com/id/68638) Here are some highlights:

At the height of the boom, author and former Wall Streeter John Talbott warned of the crisis to come. Unfortunately, his latest predictions aren't promising. Talbott is a former Goldman Sachs banker and economic consultant. He's also the author of two books that more or less foretold the pain homeowners are now experiencing. "When I turn on the news, it's as if they're reading out of my books, but in real time," says Talbott, who in 2003 wrote "The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment."

Talbott began writing that book, he told me last week, after hearing that a friend—a teacher in San Diego who earned $45,000 a year—had just refinanced his condominium and borrowed $255,000 against its rising value. From his days as a Wall Street financier, Talbott questioned whether someone with that income could handle such a large mortgage. His friend's experience led him to begin exploring how home prices had risen and lending practices had changed over the last few years. Most of all, he concluded that homes were overvalued.

Near the back of "Sell Now!" is a chart listing the metro areas Talbott believes are most likely to decline sharply. I read the chart with particular interest: my own home is located partway between Boston (no. 19, where Talbott believes home values are destined to fall 49 percent) and Worcester, Mass. (no. 26, with a predicted fall of 44 percent). If Talbott's predictions are accurate, my neighbors and I are in for a world of hurt.

Talbott believes we're still near the beginning of a five-to-seven-year cycle in which home values will fall back to the levels of 1997, when banks and mortgage lenders began letting so many Americans take out so many kooky home loans, which were the primary fuel for the boom. He also expresses surprise that the continuing stream of bad news from the housing market hasn't taken more of a toll on the stock market. Over time, it will.

Recently a congressional subcommittee predicted that the subprime mortgage crisis will result in 2 million foreclosures over the next few years. Talbott wonders if people really understand the magnitude of the suffering that will cause. "When people talk about 2 or 3 million people losing their homes, that makes Hurricane Katrina look like small potatoes," he says. "[And] this is spread out over the whole country."

If Talbott is even remotely correct, the financial pain is going to be extreme and many homeowners will find themselves with mortgage debt far above the value of their homes. Obviously, consumer confidence will go through the floor as that trend sets in.

U. S. Economy Shows New Signs Of Stress

Not that I want to play the role of a Cassandra, but some of the continued negative economic news should not come as a surprise to anyone who seriously follows the news and keystone industries such as housing. The housing free fall cannot help but drag the rest of the economy down. Moreover, with many consumers either stressed under the weight of adjustable rate loans or fearful that housing values will fall and leave them with little or no equity (or even owing more than their home is worth), it should be a no brainer that consumer spending will slow. Moreover, if people are having trouble paying their mortgages, obviously they will let credit card and auto loan bills slide as they struggle to keep their homes. And so the downward spiral begins. I still do not believe that the current regime has any clue as to what is going on with normal people and their financial struggles. Today's Washington Post covers some of these issues (http://www.washingtonpost.com/wp-dyn/content/article/2007/10/24/AR2007102402570.html?hpid=moreheadlines). Here are some highlights:

Many of the nation's biggest companies have cut back their sales expectations in recent days and the financial system is showing signs of new stress, evidence that the U.S. economy is more threatened by the sharp downturn in housing than it appeared to be only a few weeks ago. The investment firm Merrill Lynch yesterday reported its first quarterly loss in six years and said the value of assets on its books had fallen $7.9 billion. The National Association of Realtors reported that the number of existing homes sold in September was the lowest in the eight years the data have been tracked.

"On the fundamental economics, there's a perception that things are getting worse," said Kenneth Kim, an economist at Stone & McCarthy Research Associates. "On the credit-market problems, people had started to think the worst was behind us. Now they think that's not necessarily the case."

The problems started last week in the banking sector. Citibank, Bank of America and Wachovia each reported disappointing earnings, mostly from losses on a variety of credit products. The banks indicated that their portfolios of home loans, credit card debt and some forms of corporate debt were worth less than was previously thought, and led to write-downs of $2.2 billion at Citigroup, $4 billion at Bank of America and $1.3 billion at Wachovia. Bank of America said last night that it would lay off 3,000 employees at its investment-banking division and reevaluate the unit's strategy.

Last week, the construction-equipment maker Caterpillar warned that the housing downturn was spreading to other parts of the economy, raising fears about the economy's strength and its ability to avert a recession. Capital One Financial of McLean, meanwhile, last week posted its first-ever quarterly loss and said it had an increasing number of delinquencies and defaults in both the credit card and auto finance sectors.

The National Association of Realtors reported that sales of existing single-family houses, townhouses, condominiums and co-ops declined 8 percent in September from August, to a seasonally adjusted rate of 5.04 million units. The pace is the lowest since the association began tracking such data in 1999. Sales were down 19.1 percent compared with September 2006.

"I can't see a light at the end of the tunnel for declining home sales," said Stuart G. Hoffman, chief economist for PNC Financial Services Group in Pittsburgh. "Before we hit bottom, which may not be until next spring or summer, [the market] is going to be down another 5 to 10 percent from where we are now." "Housing is a black hole, but it hasn't quite sucked in the energy of the rest of the economy," Hoffman said. "But my forecast is that when we close the books on this holiday season, this is not a holiday [retailers] are going to remember very fondly."

All in all, NOT a pretty picture or one that adds to one's sense of financial security. I know of people who have been trying to sell homes for up to a year while making double mortgage payments. Eventually, they will be tapped out.

US Loan Default Problems Widen

As if the mortgage and housing market concerns were not bad enough, now the credit markets are showing other areas of weakness (http://www.ft.com/cms/s/0/7c453090-7ff7-11dc-b075-0000779fd2ac.html):

Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets. US banks have raised reserves for loan losses by at least $6bn over the second quarter and by even larger amounts from last year, indicating financial executives believe consumers will be increasingly unable to make payments on a variety of loans. Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

Dick Bove, analyst at Punk Ziegel, said bank earnings indicated “there are problems with consumer debt that extend beyond the well-known issues in the real estate markets. Auto loans are clearly a new area of concern”. At Wachovia, the fourth largest US bank by assets, credit loss provisions more than doubled from the second quarter to $408m. Troubled loans that could turn into losses also more than doubled. Ken Thompson, chief executive, said the housing market could remain weak through next year. Wachovia’s poor earnings fuelled a stock market rout on Friday.

Problems can be seen at banks across the US. At KeyCorp, in Cleveland, non-performing assets rose $241m from last year and loan-loss provisions doubled. In Dallas, Comerica’s loan loss provisions tripled from last year to $45m. Net credit losses jumped from $663m last year to $892 at Wells Fargo, in San Francisco, due to home equity and car loan losses. Loans more than 90 days past due and still accruing increased to $5.53bn from $3.66bn last year.

Yet despite all of this, the Chimperator continues to claim that the economy is fine. Perhaps for him and his wealthy friends (many of whom have made millions from no-bid sweetheart deals), but not for many regular people. The man is either an idiot or delusion (or maybe both).

It's The Economy, Stupid

I very much agree with the premise of this article (http://nationaljournal.com/crook.htm) - while Iraq, health care and taxes are the main campaign issues today, if things pan out as I fear they might, the economy and a recession may be the bigger issues in 2008. If that happens, I suspect the GOP's difficult prospects will become far worse. I have mixed emotions - I do not want economic hardship for anyone, yet a crushing defeat for the GOP may (A) get the country on a new course economically and socially and (B) flush "values voter" issues down the toilet for years to come. Both are very much needed. Here are some highlights:

I am not an economic forecaster, but anyone can dream. And if I had to guess, I would say that the chances are better than even that next year's presidential contest will be fought against the backdrop of a recession. The stock market, so far, appears to disagree. You might prefer to trust the collective wisdom of a million investors betting real money. Usually I would advocate that. But you might also ask yourself, as I am, what on earth is Wall Street thinking?

Roubini said last year that the problems in the housing market would get worse before they got better. He and only a handful of others predicted that house prices would soon fall (on a national aggregate basis) year-on-year for the first time since the Great Depression. Until recently, most economists were expecting no worse than a slowing rate of increase, and a good number recommended housing as an investment. House prices are now falling across the country as Roubini said they would, and the backlog of unsold houses (suggesting lower prices to come) is growing.

Roubini made a second prediction. He said that stresses in the housing market would feed into the broader financial system. One of the forces powering the housing boom, he pointed out, was the explosive growth in subprime mortgages. That growth, in turn, had been driven by financial innovation -- especially by the repackaging of those mortgages into securities that could be sold to investors across the wider financial market. As defaults began to rise on those poor-quality mortgages, Roubini predicted, the pain would not be confined to the victims of foreclosure or to the reckless new lenders that had granted the loans in the first place but would also extend to their backers at one or more removes in the capital market. And again, so it proved.

Were soothing words from the Fed and a tweak to interest rates all that was needed to put things right? Treasury Secretary Henry Paulson Jr. does not seem to think so. The slump in the home-building industry, in other words, is still gathering momentum. Sales of homes in Southern California, until recently one of the hottest markets in the country, fell 30 percent between August and September, and are now down 50 percent from a year ago. Only when sellers are ready, or are forced, to face their losses and let the market clear will a floor for prices be established. Wherever that floor might be, we are not there yet.

Another economist with a disturbingly good track record of calling market slumps is Yale's Robert Shiller. Long in a small minority, he foresaw the big stock market fall of 2001-02. Since then he has been sounding the alarm about house prices. According to his recent calculations, prices would need to fall by approximately 50 percent to re-establish a historically normal ratio of prices to rents. Even a far smaller decline would still be enough to push mortgage foreclosures to highs, to worsen the plight of homebuilders, to tear bigger holes in the earnings of banks and investment firms, and, most important, to severely dent consumer spending.

Everything depends on what consumers do next. Roubini thinks that they will retrench, and he is still predicting a "hard landing." It is the only aspect of his earlier forecasts that has not yet come true, and I would not bet against it. Distressed debtors and foreclosures are already on the rise and the economy is still strong. What would a downturn do to those housing market numbers, and how would they then feed back on the broader economy?