Tent cities spring up in LA

[nabraxas]

 

In this chilling BBC clip, a news team ventures to one of LA's new shantytowns made up of people who've lost their homes in the subprime meltdown and now live in tents, improvised shacks or RVs on abandoned land. It's the contemporary Hooverville.

[XipeTotec]

Scary times

[Jesus On Peyote]

Cold days in california..I dont get the sub-prime thing, but i hear about it alot, sounds bad..looks worse.

[FungalFractoids]

A very interesting article from The Guardian, really puts the looming US recession into perspective. Will this indeed be "The Big One"?

America was conned - who will pay?

The South Sea Bubble ended in riots as trust was lost. Wall Street also duped the public

Bear Stearns marks the moment when the global financial crisis went critical. Up until last Friday, it had been possible - just about - to believe that the worst was over and that things were about to get better. That pretence was stripped away when JP Morgan, at the behest of the Federal Reserve, stepped in when the hedge funds pulled the plug on the fifth-biggest US investment bank.

It is now clear that no end is in sight to the turmoil, and the reason for that is that the Fed and the US treasury are no closer to solving the underlying problem than they were eight months ago. The crisis will only end when house prices stop falling and banks stop racking up huge losses on their loans. Doing that, however, will require the US government to intervene directly in the real estate market to end the wave of foreclosures. Ideologically, it is ill-equipped to take that step and, as a result, property prices will fall and the financial meltdown will go on and on.

Ultimately, though, action will be taken because there will be political pressure for it. Indeed, it is somewhat surprising that there is not already rioting in the streets, given the gigantic fraud perpetrated by the financial elite at the expense of ordinary Americans.

The US has just had its weakest period of expansion since the 1950s.

Consumption growth has been poor. Investment growth has been modest. Exports have been sluggish. But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital.

Patriotic

For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it's payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

The debate now is not about whether the US is in recession but how deep and long that recession will be. Super-bears have started to say that this is perhaps "The Big One", by which they mean the onset of a new Great Depression. The need to rescue Bear Stearns has done little to still those voices.

As the economics team at HSBC recently pointed out, there has been a "catastrophic breakdown" of trust, and when that has happened in the past - the US in the 1930s, Japan in the 1990s - chucking extra money at the banks in the hope that they will start lending again proves ineffective.

It's not hard to see why trust has become such a rare commodity: Wall Street at the height of the securitisation mania had, in effect, become London at the time of the South Sea Bubble crisis in 1720. Vast quantities of funny paper were changing hands even though those involved in the deals had no idea of their true worth. Nor did they care. Inevitably, now the bubble has burst and the huge Ponzi securitisation scam has been exposed, there has been a reaction. The securitisation market is dead, there is less money sloshing round the system, banks are hoarding their cash.

Having allowed the housing boom to rage out of control for too long and then delaying cuts in interest rates until the housing market was gripped by recessionary forces, the Fed is now trying to make up for lost time with a burst of hyperactivity. It will cut interest rates on Wednesday and keep cutting them: financial markets expect the Fed funds rate to be 1% by the summer, and they are probably right. In most downturns, easier monetary policy does the trick. Lower interest rates make it cheaper to borrow and also change the trade-off between saving and spending. This may not be the usual sort of downturn, however, with consumers going through a period of debt revulsion after the excesses of recent years, even so the consensus is that after two or three quarters of falling output, a slow and sluggish recovery will be under way.

Deflation

These hopes are likely to be dashed, unless there is intervention at home and internationally to tackle the crisis. Domestically, the priority should be to stop homes that have been foreclosed being auctioned on the open market, since by selling them at a 50% discount property prices are driven down. The US does not seem to have learned the lessons from Japan, which encouraged a fire sale of property in the 1990s and was sucked into a classic debt deflation trap as a result. Those who argue, with some force, that it would be counter-productive to intervene in the market because the US needs to work the rottenness out of its system must recognise that the cold turkey option will be very long and painful.

The second form of intervention should be to shore up the dollar, the collapse of which is worrying countries that rely heavily on exports and is the main reason for the surge in commodity prices. Co-ordinated intervention by the major central banks needs to be at the top of the agenda at next month's G7 meeting in Washington, and there could be action even sooner if the dollar continues to tank.

In the longer term, lessons must be learnt from the turmoil. One is that you don't solve the problems of a collapsing bubble by blowing up another, which is what Alan Greenspan did after the dotcom fiasco in 2001 - the most irresponsible behaviour of any central banker in living memory.

The second lesson is that there has to be far stricter regulation not just of the US real estate market but of Wall Street, to prevent the return of irresponsible lending as soon as the recovery is firmly under way. If this is, heaven help us, The Big One, one of the only consolations will be that the repugnance at the orgy of speculation that has sapped the strength of the US economy will put a new New Deal on the political agenda.

But for this to happen there has to be a political response and even though this year's presidential election will be held in the shadow of recession, there appears not to be a potential FDR among the contenders for the White House. Yet if this crisis really does get as bad as some are forecasting, the public will rightly demand more than a slap on the wrist for Wall Street.

[email protected]

http://www.guardian.co.uk/business/2008/ma...omics.useconomy

Stephen Mayne Writes: Crikey.com

George W Bush will go down as arguably the worst US President in history and it will come back to two points: Iraq and the housing-induced credit crash.

Alan Kohler had a fascinating column in Business Spectator on February 29 reviewing a new book by Joseph Stiglitz, the former chief economist of the World Bank, which blamed the credit crisis on the $3 trillion Iraq war.

The $3 trillion was all borrowed and, as Kohler summed up Stiglitz, this became “the hidden cause of the credit crisis because the Alan Greenspan Federal Reserve colluded with the Bush Administration by flooding the US with cheap credit to keep interest rates down.”

Throw in the various frauds which put loans into the hands of 10% of Americans who couldn’t afford them and then flogged them off to the rest of the world and you have today’s global credit crisis.

The collapse of Bear Stearns is certainly the biggest disaster for Wall Street in a generation. Long Term Capital Management got a Fed-induced $US3.6 billion bailout from its peers, whereas Bear Stearns got $US30 billion of liquidity from the Fed.

Whilst the British Government effectively funded the $150 billion run on Northern Rock, the Federal Reserve has funded the sale to stop the run.

Stand by for a huge backlash against the US investment banks, starting with new US legislation which will make Enron’s Sarbanes-Oxley look like a picnic.

Everyone from gangsters to US Presidents knows that you need a combination of brains and muscle to prosper. American multinationals have long surfed on the coat-tails of US military power and trade negotiations.

Unfortunately, the Yanks went brain-dead over Iraq – producing more expensive rather than cheaper oil – and now can’t afford to maintain their huge military spending, let alone bail out investment banks or guarantee housing for Americans.

When saddled with $US7 trillion in government debt, a banking and credit crisis is disastrous for America. You just can’t keep borrowing $US2 billion a day from the rest of the world to fund huge budget and current account deficits. No wonder the US dollar is free-falling when people start talking about the Fed printing money.

It was largely foreign governments which pumped more than $40 billion into Wall Street banks last year because the US government simply didn’t have the cash.

These foreign governments are collectively more than $10 billion underwater and so this time the Fed had to borrow even more money to facilitate a sale to the only American bank left with a strong balance sheet, JP Morgan.

London has already replaced New York as the world financial capital and what we are seeing here is the rapid decline of American power and prestige.