The Liberty Papers

Let’s look back a moment. How many times have we “hit bottom”, according to the financial cheerleaders on TV, over the last year? How many predictions of a “soft landing”? How many people have suggested the subprime meltdown would be “contained”?

Well, even the lenders themselves are now seeing reality:

COUNTRYWIDE Financial, America’s largest mortgage lender, says more borrowers with good credit are falling behind on repayments and that the housing market may not begin recovering until 2009 because of a fall in house prices that goes beyond anything experienced in decades. Some might have to turn to payday loans to afford their mortgage, if some of these people are struggling to pay back their payday loans, it might be useful for them to consider payday loan consolidation as a way to make their loans more manageable.

The news from Countrywide, widely seen as a bellwether for the mortgage market, set off a sell-off in the sharemarket, which is at its most volatile in more than a year.

The S&P 500 Index fell 30.53 points, or 2 per cent, to 1511.04, its biggest one-day drop in nearly five months. The US dollar dropped to a new low against the euro, edging closer to $US1.40.

The housing slump has become the biggest worry for the sharemarket — which just four days ago set records — because of its potential impact on the broader economy.

Countrywide’s stark assessment signalled a critical change in the substance and tenor of how housing executives are publicly describing the market.

Two months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine, with the exception of those made to borrowers with weak credit who were stretched too far.

Executives at Countrywide had for some time been more sceptical than others, but the bluntness of their comments yesterday surprised many on Wall Street. Countrywide chairman and chief executive Angelo Mozilo said home prices were falling “almost like never before, with the exception of the Great Depression”.

It’s pretty simple. The run-up of easy credit in advance of the Great Depression caused asset bubbles, which generated enormous social upheaval as they burst. The exact same thing is occurring right now underneath our very noses, and as much as the financial cheerleaders try to deny it, the result is likely to be the same.

When I hear news like this, I really worry about what will happen if Ron Paul actually won. The next American president is going to face a fiscal crisis at least as severe as the “malaise days” of Jimmy Carter. Given that Ron Paul’s policies will be hated by both parties in Congress, it’s unlikely he can take positive steps to avoid a financial crisis, and if he’s in office when it comes, he might take the blame for it. I’d almost rather that we have a Democrat in the White House simply to discredit whatever lame-brained attempt they make to solve the problem.

We’re headed for rocky times, financially. Our entitlement spending is hopelessly underfunded out into the future. Our job picture is good, but it has been fueled largely by a credit expansion that is now deflating. Government, rather than letting business alone, enacts ever more intrusive regulations in order to “save” businesses, pushing work overseas in the process. There are only three ways to solve this problem: increase taxes, reduce spending, or inflate. Two of those are painful politically, and politicians don’t like pain. I expect a combination of increased taxes and inflation (along with a healthy dose of over-regulation and trade protectionism), so we’re likely headed back to the days of stagflation. And if we see a run away from the dollar as the world’s reserve currency– now a viable option– we’re looking at the Second Great Depression.

We’re headed for a fiscal “perfect storm”. Ron Paul is an excellent weatherman, forecasting the problem, but I’m not sure he will be able to herd the cats in Congress in order to solve it. I wish I could claim that anyone in politics will solve this, but we’re more likely to see a collapse than a solution. Keep hoping for someone like Ron Paul, but I’d highly suggest you prepare for the worst in the meantime.