December 14, 2005
At Least There's the Economy
By Froma
Harrop
At least there's
the economy. That's what Republicans are saying as their poll
numbers tank over deficits, corruption and the hard slogging in
Iraq. America saw strong economic growth in the third quarter,
they sing, and a good jobs number for November.
All true, but all
temporary. And, by the way, the tax cuts had little to do with
it.
President Bush was
recently in North Carolina, urging factory workers to give thanks
for the tax cuts. In full folksy mode, Bush criticized "some
of those people up in Washington" who doubted that the tax
cuts would make the economy golden.
It happens that some
of those folks up on Wall Street are also doubters. They think
the economy is about to turn really crummy. And though they are
genuinely grateful for the tax cuts on a personal level -- after
all, they're rich -- on an economic level, they see them as a
problem. Lower tax revenues and a spending spree have set off
an explosion of federal borrowing, which pushes up interest rates.
And this brings us
to the housing bubble. Rising house prices, fed by low interest
rates, have helped keep this economy going. That party's closing
down.
Merrill Lynch economist
David Rosenberg regards the splattering bubble with some alarm.
He notes that activity related to housing (construction, furniture
and appliances) now accounts for 22 percent of the gross domestic
product. A significant drop in that demand is going to hurt.
Low interest rates
were the gin in the punch bowl. They empowered people to take
out enormous mortgages -- giving them the wherewithal to bid up
house prices. Household real-estate assets have now risen to a
record-smashing 150 percent of GDP. As Rosenberg put it, "Caveat
emptor (buyer beware) whenever anything approaches 150 percent
of GDP."
You don't have to
be Sherlock Holmes to see the steam already fizzing out of the
housing market. The shares of home-building companies have taken
a dive in recent weeks. House prices in previously hot markets
are flat or falling. In the Boston area, for example, asking prices
are coming down in $100,000 chunks.
One statistic that
Bush forgot to share with the workers was the personal savings
rate. In September, it fell to an extraordinary minus 1.5 percent.
That means Americans were spending more money than they had coming
in. Where did they get the bucks? By borrowing off the equity
in their houses. Homeowners have thus obtained $160 billion in
cash this year.
In a recent paper
titled "Spendthrift Nation," Kevin Lansing, a senior
economist at the Federal Reserve Bank of San Francisco, largely
blamed the housing bubble for this orgy of borrowing. Rising house
and stock prices, he wryly noted, are something that "households
apparently view as a substitute for the quaint practice of putting
aside money each month from their paychecks." As a result,
household debt relative to income has smashed records, which is
not healthy.
Lower house values
will make people less willing or able to take more money out of
their homes. That means they'll have less cash to leave with the
merchants. And that's not good for a country in which consumer
spending accounts for 70 percent of the economy.
Another thing that
scares economists is the proliferation of risky mortgages. These
are the loans that require little or no down payment -- and ask
few pointed questions about the borrower's finances.
Many new mortgages
are the adjustable-rate type, in which the interest charges rise
when certain other rates do. As a come-on, lenders offer super-low
payments for the first few months. When these fantasy rates expire,
borrowers will face real-world interest charges that could hike
their monthly payments by a third or more. Add on higher energy
costs, and a lot of these Americans will have no choice but to
unload the house in a falling market.
Oh yes, there's another
economic indicator the president failed to mention: the price
of gold. It recently hit its highest levels in a quarter-century.
Gold goes up when investors feel queasy about economic stability.
Some Republicans
are nonetheless advising Bush to talk more about the recent sunny
numbers for growth and jobs. He had better work fast. Winter is
coming on.
Copyright
2005 Creators Syndicate
