The bottom line is that, in the United States and across the advanced capitalist world since 2000, we have witnessed the slowest growth in the real economy since World War II and the greatest expansion of the financial or paper economy in U.S. history. You don’t need a Marxist to tell you that this can’t go on.
Of course, just as the stock market bubble of the 1990s eventually burst, the housing bubble eventually crashed. As a consequence, the film of housing-driven expansion that we viewed during the cyclical upturn is now running in reverse. Today, house prices have already fallen by 5% from their 2005 peak, but this has only just begun. It is estimated by Moody’s that by the time the housing bubble has fully deflated in early 2009, house prices will have fallen by 20% in nominal terms — even more in real terms — by far the greatest decline in postwar U.S. history.
Just as the positive wealth effect of the housing bubble drove the economy forward, the negative effect of the housing crash is driving it backward. With the value of their residences declining, households can no longer treat their houses like ATM machines, and household borrowing is collapsing, and thus households are having to consume less.
The underlying danger is that, no longer able to putatively “save” through their rising housing values, U.S. households will suddenly begin to actually save, driving up the rate of personal savings, now at the lowest level in history, and pulling down consumption. Understanding how the end of the housing bubble would affect consumers’ purchasing power, firms cut back on their hiring, with the result that employment growth fell significantly from early in 2007.
Thanks to the mounting housing crisis and the deceleration of employment, already in the second quarter of 2007, real total cash flowing into households, which had increased at an annual rate of about 4.4% in 2005 and 2006, had fallen near zero. In other words, if you add up households’ real disposable income, plus their home equity withdrawals, plus their consumer credit borrowing…
The national recession upon us is a reflection of 100,000 similar circumstances across the United States: of local government and zoning councils folding neatly into the meringue of Wall Street compensation schemes and the most egregious asset bubble in modern history– far outpacing the consequences of the internet stock mania.
The Fourth Estate has been as delinquent reporting the national economic morass as its failure to report the lies and misinformation that led to the war in Iraq.
Yesterday, the Wall Street Journal showed in its own form of Rip Van Winklism: “Financiers reap riches even as deals wobble”. It’s the center of page, above the fold story, “At every level of the financial system, key players… often get a cut of what a transaction is supposed to be worth when first structured, not what it actually delivers in the long term.”
Well, the point is that the mainstream press never questioned whether the trillion and a half dollars of debt that fueled the housing bubble, generating massive fees to bankers, lawyers, and the lobbying class, was a Ponzi scheme for which no one will ever go to jail.