coming soon to a bank near you by Walt Thiessen
(libertarian)
Thursday, October 21, 2010
President Obama said it couldn't happen. Our financial leaders have told us over and over again that we avoided the Great Depression II. The Wall Street Reform and Consumer Protection Act of 2010 was signed with a promise from the president that there would never, ever be another big bailout. He even said, "Period!" Never mind that the legislation actually included, for the first time in American history, a provision that gives the FDIC the keys to the U.S. treasury the next time a failed bank has more losses than the FDIC can cover out-of-pocket.
This past January, I offered my predictions for this year. Let's see how I've done so far. I wrote:
The truth is that the economy will appear to pick up in 2010, but it will ultimately prove, once again, to be an illusion. Many newly created jobs will appear and then ultimately disappear, many within the same year. Large numbers of people who are no longer counted as "unemployed" because they've been without a job so long that they no longer qualify for benefits will spend the year bouncing between joblessness and temp work. This will encourage commentators to claim that the "green shoots" have taken root.
Some real estate prices will temporarily recover in the spring, but overall foreclosure rates, which had seemingly slowed in 2009 will suddenly become a big issue again. The net result for the year is that prices overall will be stagnant at best and quite possibly declining again by year's end.
That certainly summarizes the year so far. People started to get a bit optimistic in March and April, but by June it became clear that the optimism was unwarranted. The only thing holding the real estate market together was the Federal government's housing tax credit, and when that ended, so did the real estate market, which plummeted in July. Meanwhile, in the third quarter, nearly one million homes received foreclosure notices from their banks.
Additionally, official unemployment remains hovering around 10%, while those who are long past being eligible for unemployment, but still haven't got a job, remain off the country's radar. Shadowstats.com reports that the grand total of unemployment combined with underemployment is over 22%.
Now we're beginning to hear about how thoroughly the banks have mucked up the foreclosure process, to the point where the entire foreclosure gravy train has temporarily frozen solid and 50 state attorneys general investigate how thoroughly the foreclosers have flouted the law over the years. The longer this latest version of the crisis plays out, the greater the likelihood of economic chaos.
Back to my January article, where I continued:
Meanwhile, the big question that the financial media will focus on is: when will the Fed start to pull back on their "stimulus"? The Fed has shown every indication that they'll be very reluctant to do so, keeping rates relatively low. The further through the year we get, the more dire the situation will become. Parts of the economy (likely health care among them) will show signs of exploding, while other parts of the economy will remain stagnant and depressed. Eventually, the Fed will decide to start raising interest rates by the end of the year, just as mortgage resets reach numbers not seen since 2007 and early 2008.
The only part of this prediction that has not yet come true is the raising of interest rates by the end of the year. Fed rates remain near zero, but interestingly, mortgage rates, while reaching lows not seen in years, still remain well above 4% for 30-year fixed loans. No so surprisingly, banks continue to offer variable rate loans, which played such a large role in Round 1 of the crisis in 2008 and will again play a major role in Round 2 of the crisis. Despite all this, credit remains relatively frozen, and hundreds of thousands of home owners wanting to refinance or restructure find the banks strangely reticent to do so. The reason for this, of course, is that the banks (a) don't want to have to declare any more losses (which refinancing would do), and (b) have a long history of tightening up credit dramatically whenever a financial panic hits.
The Fed, meanwhile, is engaging in what is euphemistically being called, "quantitative easing II", a genteel term for monetizing the debt and currency debasing. It's possible that they won't start to raise rates before the end of this year, which would be a black mark against my January prediction. On the other hand, there's still more than two months left in the year, so there's still time. Essentially, they're engaged in a game of global "chicken" with the Chinese, the Europeans, and the Japanese, and talk of "currency wars" is creeping up in the news. That could easily become inflationary enough that the Fed decides to reverse gear and start to raise rates before the year is up. But even if that doesn't happen, they're going to have to do it in 2011 anyway, so my prediction won't be THAT far off.
I also wrote:
The mid-term elections of 2010 will prove to be disastrous for incumbents in Congress, comparatively speaking to what they normally expect, with both parties losing more than 40 seats, although unfortunately the vast majority of those who replace them will prove to be no different than the ones they replace.
Even though we're still two weeks away from Election Day, that prediction is looking solid. In fact, I may have underestimated the damage to the Democrats. Right now, Real Clear Politics tracking poll aggregates suggest that Republicans are already a solid 35 seats ahead of the Democrats, with 42 seats too close to call. Democrats currently hold a 31 seat majority, so if the 42 toss-ups split evenly, that would give the Republicans a net gain of 66 seats. But as I observed, this massive change will amount to little more than a tempest in a tea pot, as the tea parties have lost their economic and constitutional thrust and are, due to massive corporate giving, leaning now toward emphasizing "guns, gays, and God" instead. It appears that the hard core tea partiers are easily swayed by the Republican operatives who have taken over the tea party movement and reintegrated it back into the party fold, from whence most of it originally came. Unless there's another tea party within the tea party, a revolt against where the tea party's leaders have taken it, we can pretty much declare the tea party to be dead.
All of this is prelude to the next financial crisis, coming in the fall of 2011, when mortgage resets peak once again at roughly the same level they did in the fall of 2008, setting off Financial Crisis II and putting us on the brink, once again, for Great Depression II. And if the current foreclosure mess turns into an absolute rout in November, as is very possible, 2011 will be a very, very bad year indeed.
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