Tuesday, August 23, 2011

Spending more time with the family or the FBI

The top man at Standard & Poor’s, Deven Sharma will quit before the end of the year. The Wall Street Journal says that he will be replaced by Douglas L. Peterson, currently the Chief Operating Officer of Citibank, one of the world’s biggest banks. No reason was given for Mr Sharma leaving but there is an ongoing investigation of S&P’s practice of fraudulently rating worthless sub-prime debt as AAA for banks much like Citibank for example.

Sales of new homes were down for the third straight month in July, this puts a further drag on the economy. At the current rate, 2011 will be the worst year for new-home sales in nearly half a century. This is only since they started keeping track, prices already have dropped by more than during the last Great Depression and are still falling, making the market “weak”.

New homes are less than 20% of the housing market, but they have a much larger impact on the economy. Building each new home creates an average of three jobs and $90,000 in taxes, this is according to the National Association of Home Builders.

Sales of existing homes are also weak and the total is expected to be below last year's 4.91 million sales. In a healthy economy, you should sell roughly 6 million existing homes each year, and a high percentage of this year’s sales are “distressed” which is helping to drive prices down.

A report that came out last week showed that more home sales than expected fell apart at the last minute, often because appraisals come in far below the agreed to price. At least one in six deals were canceled head of closings last month which is four times the rate in May.

The collapsed housing industry is hurting the broader economy, in the past half century following a recession, housing contributed up to 20 percent to economic growth. That has fallen to 4 percent in the current Depression and is falling still. And it took 19 years for prices to fully recover after the Republican Great Depression.

If you are hoping to recover lost home value, you are not going to see it. While prices will start rising eventually, it will be mostly from inflation. The big run up in home prices during Bush was a bubble deliberately created by Greenspan and the Republicans to hide the real state of the economy. Except in really hard hit areas, this is about what prices should be and as wages continue to fall even these prices cannot be supported in real dollars.

In 1937 the Republicans that were newly elected to Congress pushed through a balanced budget and plunged the recovering economy back into the Depression. We are of course repeating history, not because this history is unknown and we are thus doomed, but because the Republicans want to get it right this time. They let the country slip away from them then, and its taken Republicans 70 years to put themselves again in a position to end America as a democracy and as the land of opportunity for anyone but the Rich. They have indeed learned from their mistakes and are the odds on favorites to pull it off.  www.prairie2.com