The Coming Abyss
Published January 29, 2008
By Benjamin Silverman
The “R” word has loomed its ugly head again. Recession.
Everywhere, the talking heads are in a breakneck clamor not to be left behind in their predictions. Recession is coming, and is likely already here they say with the certainty of astrologers. And by saying so they ensure it’s eventuality. You know that saying, “When you think of the devil, the devil thinks of you?”
After the dot-com/tech boom crashed in 2000, a housing bubble was manufactured as a replacement. By cutting taxes for the wealthy, the rich could buy more McMansions and supply Sub-Prime mortgages to the those less affluent so they could buy McMansions. Consumerism literally upheld by debt.
The problem is that these Sub-Prime mortgages (supplied to those who couldn’t really afford them) have something called an “adjustable rate,” so after a given amount of time the interest is designed to increase way above the soon to be ex-homeowner’s means of paying.
Men like Ben Stein have been quick to blame the victims in this situation, saying these people should pay the price for their folly, that they shouldn’t have even received the mortgages in the first place. Well duh. But this was intentional by the mortgage lenders to scam these people out of hearth and home, not the other way around.
People can argue the morality of bail out until their faces turn blue. The practical point is some 2 million homes will be foreclosed in the next two years after their adjustable rates are scheduled to adjust up.
In the last 4 years, 700,000 new jobs have been created either directly or indirectly because of the housing market bubble (construction, realtors, ect.). All of these jobs are now threatened. In December alone, 49,000 construction based jobs were lost. The residential housing market in general accounts for 16% of the total U.S. economy.
The human toll cannot be easily counted. Lives will be ruined, families shattered, tuition will become harder to ever pay back. With recession comes unemployment (up to 5% last December, 7.6% among minorities). With unemployment comes increases in the rates of crime, suicide, alcoholism, domestic disturbances and just general instability. A rise in bigotry is expected as the status quo desperately tries to find some scapegoat for all of this (illegal immigrants in our case).
Because the market is all connected, no mater how removed you believe your career is from the housing bubble all jobs and people will presumably affected as the malignancy spreads.
So what can we do?
The United States Federal Reserve is going to continue to cut interest rates in an attempt to convince banks to lend more. This method doesn’t even qualify as a band-aid cure, and the banks have been put on the defensive due to this credit crisis.
Beside that there are two principal methods of recession relief: Keynes and Friedman.
Under Friedman we have privatization and cuts in government spending on a massive scale. The idea is to pander to foreign speculators and convince them to invest into that nations economy, in this way purposely attacking inflation at its source. The problem is the plan has had few success stories and is known to cause massive unemployment and drops in standards of living.
A Bush-era version of the Keynes approach looks like it will be put into practice this time around after the President announced plans to put over $130 billion into the economy through tax rebates. The idea is that massive government spending can literally help to pull the economy up out of the mud by its boot straps. The method is tried and proven (remember the New Deal) but does increase the national debt (which is large enough already) and may cause some inflation.
Whatever the case we’re screwed.
Or.
We’ll probably be ok, eventually. A new boom will be found eventually, and the market will continue to put down the tracks right in front of the train. But no one knows how long this will take and how deep in it we are going to get.
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