Economy in Crisis

If you have been following my writings about the auto industry, federal bailouts, and the housing bubble, you learned that the housing bubble fueled our prosperity. The housing bubble was fueled by the Democrats insisting that housing loans be made available to unqualified borrowers.

The framework forced lenders into a box if they didn't loan to poor and minority borrowers. The framework of the Community Reinvestment Act threatened lenders who didn't loan to poor and minorities with license revocations, and denial of expansion or mergers.

(See yesterdays article at http://tilting-right.blogspot.com/2008/11/bail-outs )

Although you may not think about it, the housing bubble lifted all segments of the economy. In a previous article, I tried to illustrate just how wide and deep the tentacles of the housing bubble reached. The following is an excerpt of that article.

The economy blossoms with new home building. The construction trades are rewarded with good jobs, the Realty business is rewarded with increased sales, the local lending institutions prosper, demand for housing increases housing values, increased property values put more money into state and local coffers, the furniture and appliance people benefit from increased sales, and the home buyer gets to be the proud owner of a new home. Then there are the manufacturers who supply all of the goods that go into a new house - tools, lumber, appliances, furniture, brick, electrical wiring, and different cements and mortars. I might have left somebody out, but I hope you get the idea.

The demand for new housing helps just about everybody. The wheel of progress continues only if the people who buy the houses pay for them. Like all commodities, housing values depend on demand. When foreclosures become excessive, we get empty houses. Empty houses decrease in value as their numbers increase. The mortgage holders have invested in a house at market value, but now, that value has dropped so the mortgage holder is holding the bag for a home that is not worth the loan value originally made for the home.

Enter the people who financed the bubble. They are the investors who bought the CMO's (Collateralized Mortgage Obligations) collateralized by those mortgage loans. You can read about CMO's here. -- http://en.wikipedia.org/wiki/Collateralized_mortgage_obligation

The investors were the people paying the bills for the economic expansion by investing in the securities created by bundling mortgages into CMO's. In effect, they were financing a large segment of our economy. Things went along great until those high risk borrowers started to default on their loans. Although the defaulters have a story to tell, they would not have been in the position they were in if not for the practices and enforcement of the Community Reinvestment Act by the Democrats.

The refusal to develop our energy is akin to the other foot dropping on our economy. When oil prices reached $150.00/barrel, it shocked the whole economy. All of a sudden, it was more expensive to do everything. We already had high grocery prices stemming from the ethanol fuel derived from corn problem. And now the increase cost of energy exacerbated not only grocery cost but also gasoline, delivery of goods, electricity, and travel. The forecast of $200.00 oil scared auto buyers away from the showrooms of domestic autos. Feeling the pinch of higher fuel cost, the public stopped buying the things that keep our economy humming.

In conclusion, the bursting housing bubble created a surplus of available houses. The slower demand for houses weakened the prices for houses. Because the CMO's were collateralized by mortgages, those investors (the investors were the banks, thrifts, and most large financial institutions) were losing money causing bank failures. Along with the double whammy of high-energy costs, the economy sank.

Now here comes Obama with his ideas of higher taxes for the very people we depend on for jobs in a failing economy. He has stated that he will allow the Bush tax cuts to expire, and raise taxes on anybody making above $250,000. It was the proverbial straw for the markets, they just said phooey on the whole mess. They have been in a tailspin since his election and his subsequent statements.

Cheers,

-Robert-