The American Housing market and the coming financial disaster.

What is going to happen with the American housing market now that the "housing bubble" has started its slow-motion deflation?

First, go look at what Rick Perlstein has to say. All the rhetoric out of the White House about trying to make every American a homeowner has been just that - rhetorick, with no connection to what they have actually done. What the Bush administration has done is to deregulate home mortgages to the extent that the most recent ones are called "NINJA" mortgages. That is, a person could get one with No Income, No Job, No Assets.

That was intended to boost the economy. About two-thirds of American Gross Domestic Product is bought by consumers. Essentially the U.S. economy has operated on government spending and consumer spending since 2000, with consumer spending being the more important. Since Bush took office those consumers have not gotten an increase in after-inflation pay, but they had to get money to spend from somewhere. It has come from refinancing and second loans on the value of the homes they have title to, which required ridiculously easy lending policies and ever-increasing home prices. The home prices have peaked and in the highest markets have already begun dropping. That has led to the slow-motion collapse we are watching in the sub-prime mortgage market.

The drop in home prices is working itself out a lot slower than would a similar drop in demand for stocks or bonds because the morgage market works differently. A mortgage holder doesn't go into default for a few months, and then a foreclosure doesn't occur for about six months. After than the mortgage holder can sometimes sell the asset they got in foreclosure, but that too takes time. None of this affects the mortgage markets until the numbers begin to build up a lot. We are just now beginning to see this occur.

This article in daily Kos by BondDad describes the collapse of two large sub-prime mortgage hedge funds which has just occurred.

This is a bellweather. The federal reserve might consider decreasing the interest rates and helping out, but the dollar is now above $2.00 to the pound for the first time in over two decades. It is also dropping against the EURO and the Yen. To keep the dollar up, the fed needs to increase domestic interest rates, not lower them. So the fed is in a bind and it won't be able to help the mortgage market much if at all.

I don't think there is a lot remaining, fair or foul, that the Bush administration can do to prop up the American economy. They are just playing for time so that they can blame the financial problems we are going to inevitably have on the Democrats. That's how idiotic and out of touch with reality they are.

Go read those two articles, especially the ones by Rick Perlstein. He makes a lot of sense. Oh, and if you see a Republican politician drowning, hand him back some of the many anchors they have been passing off to normal americans over the last six years. A drowned Republican is a good Republican. There aren't any other good ones.