I listened to the economic hearings on CNBC all morning today watching them scratch their heads trying to figure out how to fix the housing crisis and the economy. They all believe that housing and its effects on the banks are what is hurting the economy. There is a simple answer to fix all of this. Drop housing prices in the bubble areas and open the books of the financials which will result in bringing trust trust back into Wall St.
Its obvious we ran this pyramid scheme up to the point where we cannot afford to live. Look at the headlines today on Bloomberg. First the consumer:
"Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years during the fourth quarter, another sign the U.S. economy is slowing, according to an American Bankers Association survey.
``It's an indication of the degree of stress consumers are facing right now,'' said Nigel Gault, director of U.S. research at Lexington, Massachusetts-based Global Insight Inc. ``People overextended themselves, they took out loans they thought weren't a problem as long as house prices kept rising.''
Another big headline today from Bloomberg on jobs:
"Claims for unemployment benefits unexpectedly jumped last week, reinforcing speculation the economy is shrinking.
The Labor Department said the number of Americans filing first-time unemployment benefit claims rose to 407,000 last week, the most since September 2005."
This data shows you that the consumer is in deep trouble. Our ridiculously high mortgage payments are forcing us to stop spending which is killing the economy. As housing prices drop the banks out of fear and insolvency issues are starting to take away our home equity lines of credit which is putting even more pressure on the consumer. This is taking its toll on the economy which is forcing companies to layoff. Fewer jobs combined with a broke consumer is a recipe for a nasty recession.
There is only one way to fix this. Housing must get back to affordability. This means about a 50% drop in the bubble areas and less in others depending on the market. Wall St. and Washington don't want to hear this because its going to be very painful.
One of the quotes that I keep hearing out of DC and Wall St. is "We need to put a floor in housing in order to get things stabilized" You cannot put a floor in housing when people can't afford the house. No piece of legislation is going to fix this unless it forces housing prices down! The only floor that will hold is when houses come down 50% and get back in line with historical incomes!
Wall St. and Washington don't want to hear this because Wall St. will be forced to record its biggest losses in history and many will be forced out of business. Washington DC doesn't want to hear this because they will have to end up bailing out Wall St. which creates a political disaster for them because the American people will be outraged.
As a result, we have to listen to Paulson and Bernanke on TV on a daily basis telling us that they are working on the problems and our economy is strong! There is nothing to work on. Let capitalism run its course and these problems will fix themselves.
I have the answer for this problem when I post tonight. There is a small country that had a housing bubble and fixed it in three years. I think you will find it very interesting. Take a minute to check it out tonight.