My predictions for last year ended up being accurate enough for me to decide to try again this year. by Walt Thiessen
(libertarian)
Saturday, January 1, 2011
Exactly one year ago, I predicted that the housing market would seemingly start to pick up, only to have those hopes dashed after a spring peak. I suggested that the year would stagnate, that each time unemployment seemed to go down, it would rear its ugly head again.
About the only prediction I made that didn't come true was a slight miss. Contrary to Wall Street expectations, I was right in predicting that the Fed wouldn't want to start increasing rates until the end of the year. Indeed, the Fed insisted on following through with its money creation policies, following "QE1" with "QE2". Meanwhile, interest rates have been creeping up, again as I expected. The only thing missing is that the Fed is still trying to keep interest rates from rising.
The fact that they're rising anyway proves that it's all starting to get away from the Fed. Chairman Bernanke's monetary theories haven't been working out quite the way he expected, although many main-streamers are already praising him for the success of his approach with the economy. Only a very few, such as Congressman Ron Paul of Texas, have taken issue with the Fed's success, correctly pointing out that the Fed certainly bailed out the big banks who created the mess with their monetary creation policies, including absurd lending. They bailed out some major corporations that were heavily invested in the real estate mess. They bailed out McDonalds, because the economy couldn't survive without more plastic hamburgers. They bailed out Harley Davidson, because the American economy would certainly go south if new hogs were not turned out of the factories on a regular basis. They bailed out GE, the company my late father worked for all his life, after GE Capital dove into the mortgage mess from day one and ended up decimating old Tom Edison's once blue-chip company.
But on the other hand, they've done nothing to bail out the millions of families who have already lost their homes. They've done nothing for the tens of millions who suffered either unemployment or underemployment. There was no bailout for the victims of the financial crisis, only for the perpetrators of it. And as for the rest of us who are hanging on by our fingernails, do we get a bailout? For doing the right thing all along by not buying into the real estate bubble? For seeing our own cost of living increase along with everyone else's due to the Fed's absurd easy money policies of the 1990s and early 2000s? Absolutely not! We get to suffer along with everyone else.
Since the banks and the big corporations are now collecting big profits, the Fed's supporters are crowing about a recovery for the rich. To heck with anyone else. After all, it's all about trickle-down...right?
They shouldn't count their chickens before they've hatched!
2011 will start out even more optimistically than 2010 did. Already, official unemployment rates have dropped substantially this past month after hovering in the 10% range for the past two years. Fed supporters will see this as a sign that the economy is finally starting to recover. And, indeed, for the first 5-6 months, it will look like that's exactly what's happening. Even the real estate market will seem to start recovering.
But there's another financial crisis awaiting us by the end of this new year, and if it goes as I expect it will, it'll be 2008 all over again. This time, instead of sub-prime mortgages triggering the event, it'll be Alt-A and Option ARM mortgages leading the reset way.
All but a tiny handful of market watchers seem to have forgotten about mortgage resets, probably because they think the Fed has successfully kept rates so low that the adjustable rate mortgages will likely adjust down rather than up. I think they're in for a nasty shock. They also seem to think that most Americans in mortgage trouble will have refinanced by then into fixed rate loans. That, too, will prove to be a pipe dream.
As I mentioned above, interest rates are already getting away from the Fed. Despite the Fed's desire to keep them low, the rates are insisting on creeping back up again. Already, 30 year fixed rates are back to 5%, and rates as a whole are averaging just one point less than they were in 2008. They've been trending upward for the last six months or so, and there's no reason to believe that trend will stop. By the time the second half of the year arrives, don't be surprised if rates are right back where they were in 2008, when the last crisis hit. In fact, there's a very good chance they'll be even higher!
2008, of course, is when the sub-prime mortgages reset up in peak amounts, borrowers defaulted left-and-right, and the banking industry suddenly realized that it had a major problem on its hands. Fannie Mae and Freddie Mac had already lost most of their stock's value, and major investment banks either went under or got bought out by their peers in the industry. The entire system teetered on the brink.
The experts' answer was a massive bailout, and that's what it's going to take this time as well. The difference is that the Wall Street Reform and Consumer Protection Act of 2010, signed into law by President Obama last July with the promise that the new law would guarantee that there would never be another taxpayer bailout, "Period!", will enable the FDIC to bailout the banks that are too big to fail by dipping directly into the U.S. Treasury without having to do anything as pedestrian as asking Congress for permission. The new legislation gave the keys to the U.S. Treasury to the FDIC, and they'll need them.
Even the U.S. Treasury doesn't have unlimited funds on its own, but the Fed does. So the Fed will create the badly needed funds out of thin air once again and loan them to the U.S Treasury, which will turn around and give them to the banks. It's so much easier to bailout wayward banks when you don't need to convince the American people to permit it!
The problem with all this, of course, is that this newly created money will be highly inflationary, on top of the massive monetary creation already completed by the Fed. The monetary inflation will be immediate. The price inflation will come afterward, although the CPI will continue to show interest rates in 2-3% range, even as Americans find it close to impossible to pay for keeping a roof over their heads, food on the table, and money in the bank. But it won't be inflation, you understand. Not really. The Fed and the other financial leaders will continue to assure us that the big risk is still deflation, and that inflation isn't the issue at all. And so, the biggest bubble of them all, the grandaddy of all bubbles, which has already begun to expand, will accelerate its expansion.
I suspect that our leaders won't admit until 2012 or later that inflation has reared its ugly head, but by the time they do admit it, it will be painfully obvious to everyone else, even as the government continues to tell us, "All is well! Remain calm!"
So what will all this mean for the economy? It'll mean that the second "dip" will be upon us, the one that all the experts claimed would never happen because of the inspiring leadership of the Fed. Foreclosures, after the legal issues with robosigning have been pushed aside, will return to 2010 levels, and by the end of 2011 they'll be accelerating. The already beaten down real estate market will take new hits, possibly driving prices down to levels not seen since the early 1990s. People who thought they had new jobs will suddenly find themselves unemployed again, as employers once again try to stem the bleeding while the economy falls back into stagnation and threatens to go into freefall.
I've been amazed over the past six months as I watch the news via Google News. Mortgage resets as a topic have virtually fallen off the media map. It's like the issue just doesn't exist for them. Well, by the time 2011 is ready wind up and 2012 waits in the wings, I fully expect that the media will once again be paying attention to them, as we all will.
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