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Re: SC59

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January 22, 2008 09:02PM
http://www.solidarity-us.org/node/1297

Devastating Crisis Unfolds

...........................Bursting Bubbles

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, plus their capital gains realization, you find that the money that households actually had to spend had stopped growing. Well before the financial crisis hit last summer, the expansion was on its last legs.

Vastly complicating the downturn and making it so very dangerous is, of course, the sub-prime debacle which arose as direct extension of the housing bubble. The mechanisms linking unscrupulous mortgage lending on a titanic scale, mass housing foreclosures, the collapse of the market in securities backed up by sub-prime mortgages, and the crisis of the great banks who directly held such huge quantities of these securities, require a separate discussion.

One can simply say by way of conclusion, because banks’ losses are so real, already enormous, and likely to grow much greater as the downturn gets worse, that the economy faces the prospect, unprecedented in the postwar period, of a freezing up of credit at the very moment of sliding into recession — and that governments face a problem of unparalleled difficulty in preventing this outcome.............

And this outlook isn't even factoring in Peak Oil, Climate Change, Water Scarcity, etc, etc.
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SC59

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