Sunday :: Mar 7, 2004

Bush's Economy Built On Unstable Ground

by Mary

Everytime Bush opens his mouth about the economy he insists that it is strong and getting stronger and the only thing that keeps it going is his "job creating" tax cuts. And everything would be better if we just had more tax cuts, and indeed, by making the tax cuts permanent.

Yet, putting aside the anemic job growth record right now, the economy is growing increasingly unstable and liable to a collapse that could rival the savings and loan bailout in papa Bush's term. The problem is the amount of personal debt Americans hold, especially in their homes and how much that debt is based on adjustable-rate mortgages. Greenspan testified before Congress a few weeks ago saying that consumer debt wasn't too big of a concern because so many people had gotten to refinance or buy their home with these low rates. Yet, as Atrios pointed out, Fed Chief Greenspan is speaking with a forked tongue because he's urging people to go for adjustable-rate mortgages even while he worries about the financial stability of the Fanny Mae and Freddie Mac. He acts like the low interest rates are here to stay. Meanwhile, others in the Federal Reserve are calling to increase the rates. Seeing how Greenspan is suggesting that we need to default on the Social Security trust fund, I worry that he is just setting up the "lucky duckies" for another massive ripoff.

Today, the LA Times reports that in Southern California, people aren't worring about whether enough people hadn't partaken in adjustable-rate mortgages, but the real fear is that perhaps too many had. In Southern California as has been true for a long time in the Bay Area, one real problem is the affordability of buying a home. The cheap interest rates have fueled a housing market and driven up the costs so much that the middle class is being priced out of the market or having to take very risky loans to buy in.

Consumers' ability to buy homes, which has been weakening for some time as prices have shot up much faster than incomes, recently hit record lows in some Southland counties. Such low levels could signal peaks in home prices and sales, economists say.

In addition, more buyers are stretching their finances, contributing to a sharp rise in the use of adjustable-rate mortgages. Although that has allowed people to squeeze into the market with lower initial mortgage payments, it could subject them to much higher payments if interest rates rise as expected. (my emphasis)

Why would interest rates go up? Well, if the economy really does take off, the low cost of borrowing could overheat the economy causing unhealthy inflation. And eventually, the interest rates will have to go up to pay for our deficit spending as our country's debtors ask for higher rates to cover their own risk in backing our spending.

The theory about adjustable-mortgage rates is that people's income will rise as their rates go up. Yet, for most Americans, their income isn't going up much. That last jobs report had the cheery good news that American average wages rose by 3 cents. (3 cents!)

On the bright side, average hourly wages rose 3 cents, or 0.2 percent, to $15.52. Wage growth is crucial for consumer spending, which fuels two-thirds of the economy. But average hourly wages have grown just 1.6 percent in the past year, the lowest level since 1986.

When interest rates go up, there will be a huge number of Americans who have over-leveraged themselves to take advantage of the cheap mortgages. Do you think the government will bail them out? I don't think so, but I'm sure we will be covering the bailout for the mortgage companies. Bush's economy is not a very pretty picture for many except those would have been fortunate enough to benefit greatly from his largess.

Mary :: 1:48 PM :: Comments (4) :: Digg It!