The homebuilding industry is in real trouble

From Calculated Risk:

The public builder BKs are coming. I'm not saying Horton will go BK [bankrupt], but more of the public builders probably will (like Levitt & Sons). There is simply too much capacity in the industry, plus too much debt, too much inventory, and poor demographics for housing in general. The next few years will be very difficult for the homebuilders, and I suspect 2008 will make 2007 look like a good year.

Greenspan kept the U.S. economy afloat during the Bush administration by lowering interest rates and encouraging both mortgage lending and the taking our of second mortgages to pay off credit card debt.

Consumer demand has been 70% of total demand and demand determines the level of the economy. Since real wages have not increased since 2000, the only source for increased consumer demand has been debt (credit card and then second mortgages or total refinancing to get access to the increased value from housing price increase during the housing bubble) or more work - moonlighting or overtime, or more work by the spouse - to fund consumer spending.

Now the housing bubble has collapse followed by the mortgage market, and as a reaction the credit markets which had expanded by borrowing on the supposedly secure home mortgages has also collapsed. The impact on the homebuilding industry is only just beginning.

Atrios points out that the unemployment rate is inching up. The CNBC report he links to also points out that inflation is creeping up. the New York Times also points out that Federal Reserve is pumping money into the economy by letting banks borrow directly from the fed - that indicates that the banks can't get the money they need to keep operating from the markets, so they are going hat-in-hand to the fed. That money being pumped into the economy, together with increased prices for imports (especially oil) as the dollar drops is going to cause more inflation.

The fed is trying to keep the inevitable 2008 recession from being a serious one, but what they are really doing is kicking the can down the road so that the coming Democratic President is in office before they let the full force of the Recession hit. Like Greenspan did in Bush's first term, the fed will keep interest rates as low as possible during the Republican administration, then turn around and deal with the inflation they are currently causing by sharply increasing interest rates in 2009.

This is not a conspiracy theory. Look at what Greenspan did - lowered interest rates through the 2004 Presidential election and released the mortgage brokers to issue junk mortgages to people who couldn't pay them back. Then, immediately after Bush was sworn in the second time he started increasing the interest rates sharply, killing the housing bubble he had created. The timing makes it clear that it was all about manipulating the economy to ensure Bush's reelection.

Bernanke is kicking the can of recession down the line until after the November 2008 election to protect as many Republicans as possible. Then, the Federal Reserve will have to deal with the inflation the only way possible - make the Recession even worse by increasing the interest rates.

The Wall Street Republicans got us into this mess to keep Bush in office. They will do everything they can to prevent the Democrats from being able to deal with the problems.

Count on it. Watch the the fed let inflation grow in 2008 along with a mild recession, then watch the fed crack down in early 2009 and end the inflation with increased interest rates that cause a hard recession. The Wall Street Republicans wouldn't have it any other way.