In the case of households, debt rose from about 50% of GDP in 1980 to a peak of 100% in 2006. In other words, households now owe as much as the entire U.S. economy can produce in a year. Much of the increase in debt was used to invest in real estate. The result was a bubble; at its peak, average U.S. house prices were rising at 20% a year. Then ”” as bubbles always do ”” it burst. The S&P Case-Shiller index of house prices in 20 cities has been falling since February 2007. And the decline is accelerating. In June prices were down 16% compared with a year earlier. In some cities ”” like Phoenix and Miami ”” they have fallen by as much as a third from their peaks. The U.S. real estate market hasn’t faced anything like this since the Depression. And the pain is not over. Credit Suisse predicts that 13% of U.S. homeowners with mortgages could end up losing their homes.
Banks and other financial institutions are in an even worse position: their debts are accumulating even faster. By 2007 the financial sector’s debt was equivalent to 116% of GDP, compared with a mere 21% in 1980. And the assets the banks loaded up on have fallen even further in value than the average home ”” by as much as 55% in the case of BBB-rated mortgage-backed securities.
To date, U.S. banks have admitted to $334 billion in losses and write-downs, and the final total will almost certainly be much higher. To compensate, they have managed to raise $235 billion in new capital. The trouble is that the net loss of $99 billion implies that they will need to shrink their balance sheets by 10 times that figure ”” almost a trillion dollars ”” to maintain a constant ratio between their assets and capital. That suggests a drastic reduction of credit, since a bank’s assets are its loans. Fewer loans mean tighter business conditions on Main Street. Your local car dealer won’t be able to get the credit he needs to maintain his inventory of automobiles. To survive, he’ll have to lay off some of his employees. Expect higher unemployment nationwide.
Anyone who doubts that the U.S. is heading for recession is living in denial. On an annualized basis, real retail sales and industrial production are both declining. Unemployment is already at its highest level in five years. The question is whether we’re headed for a short, relatively mild recession like that of 2001 ”” or a latter-day version of what the world went through in the 1930s: Depression 2.0.
Housing Bubble! To whom did the Boomers think they were going to sell the houses? To the children they chose NOT to have? And were the (few) children of the Boomers just as stupid as their parents? And these are the future leaders of the USA who want “Change”!Kyrie eleison. Statmann
“To whom did the Boomers think they were going to sell the houses?”
Hmm. That’s also an argument against Boomers buying stocks and other long-lived assets.
In any event, we should all beware the notion that “your home is your best investment” and that paying rent is like pouring money down the drain. Sometime renting is cheaper than buying; sometimes not.
We should also give careful thought to how much home we actually need. During the 1950s, people had larger families and smaller houses than now. There is no evidence they were less happy.
Haven’t yet read the article in full. Hope to do so later. But the headline struck me. I remember Francis Fukayama’s bold prediction re: “The End of History” following the end of the cold war in about 1990.
We all know how that worked out…
So consider me really skeptical of these “The end of __________” headlines.