Post-Election Recession:

Republican Chicanery

"Maybe what we need, as a good kick in the collective ass, is a deep painful recession. With enough pain working- and middle-class Americans may rise up in revolt."

by Joel Hirschhorn

9/30/06

Take a break from anguishing about an attack on Iran, the insanity of the Iraq war, and fraudulent upcoming elections to consider another piece of Republican chicanery. Right now you are being fed a load of economic propaganda by both the Bush administration and most mainstream media. The goal of the establishment is to keep American consumers happy about the economy so that they keep doing the patriotic thing – SPENDING AND BORROWING. In reality, many sharp people see a likelihood of serious economic recession coming soon. When will you hear the truth? After the coming elections!

Slowly, the truth has emerged about the housing bubble bursting, but it has not produced headlines because of distraction or media cowardice. Ask yourself this: What happened to slow home buying and lower home prices? Something was affecting the public's ability to keep paying high prices for new homes, despite pretty low interest rates and new types of seductive mortgages. Wage stagnation and higher living costs have finally put a serious squeeze on people, at least the ones with jobs.

Understand this about the housing bubble: The government and the financial industry created ways to make housing artificially affordable. The housing market was inflated with cheap money, only to be popped by economic reality, dumping many people into financial disaster.

Reading about the economy and economics is probably not your favorite activity, but you need to read a taste of economic reality from various sources, that the mainstream media are ignoring – pay attention to what is said about consumer spending and housing:

Tucker Hart Adams, chief regional economist for U.S. Bank, has given a grim assessment of economic trends. "I'm quite confident there's going to be a recession," she said, putting the probability at 75 percent. "The only question is how hard the landing is going to be." Of the 75 percent chance of a national recession, she said, there was a 40 percent chance of a "hard landing," a 30 percent chance of a "soft landing" and a 5 percent chance of a Great Depression-level "disaster." Consumers have been saving incredibly little, banking on home equity while charging their credit cards, Adams said. As home prices head south, they will have little to fall back on. The resulting hit to consumer spending - which constitutes 70 percent of the economy - will be felt everywhere, she said. She also said "Perhaps it will be a drop in home prices that causes the whole house of cards to come tumbling down. ...There is a high probability that a recession will be underway before the end of 2007. As we've said before, it is a case of when, not whether, falling consumption will precipitate the next downturn." What power consumers have!

On FXStreet.com the headline was "Is the US in the verge of a recession?" Héctor Bove had this to say: "Let me tell you that even if Consumer Confidence edged up last month, this is not going to change the fact that the US is going to have a hard landing. If you are skeptic about this the only thing you need to see is the chart of the US Yields and see that this market (the most reliable and precise of all) is already pricing in a recession in the US, and today nearly 12% of the analysts surveyed by Bloomberg are calling for rate cut as early as next year."

Reuters reported that "Chief financial officers of U.S. corporations are increasingly pessimistic about their business and the overall economy, and put the chance of a recession within the next year at 33 percent. ...The level of pessimism about the U.S. economy is the highest in five years, the survey by Duke University and CFO Magazine found. ...The proportion of executives saying they are more optimistic about the economy -- 19.8 percent -- is down from 24 percent in the previous survey and down from 42 percent six months ago." Here is what is most important: "Sliding consumer demand tops their list of worries." This is exactly the time when some progressive political leaders could be asking for and threatening a slowdown in discretionary spending by consumers in order to get some political concessions from congress and President Bush.

In England, the Telegraph story headline was "Oil prices tumble over fears of US recession." Edmund Conway, economics editor, said: "Oil prices have dropped to the lowest level in six months, as markets' concerns about geopolitical instability are replaced with worries about an impending US-led economic slowdown. ...Hedge funds and oil traders are selling their crude holdings because of fears that the US economy could slump next year, dragged down by the stalling housing market."

Clive Crook, a senior editor of Atlantic Monthly and a columnist for National Journal, said: "...a slowdown of one kind or another is coming. That's because of what's happening in the housing market. House prices all across the country are finally topping out. In some places, they're falling. Some economists talk about a housing bubble, like the dotcom share-price bubble of the late '90s. If that's right, and the bubble goes pop instead of gently deflating, a full-fledged recession is likely. Many more people invest in houses than they ever did in the dotcoms. So people will have a heck of a lot more to complain about. ... Between now and 2008, [the economy] might just tip over."

David Rosenberg, chief North America economist at Merrill Lynch & Co., forecasts a 45 percent risk of a U.S. recession next year.

The chief investment strategist at stockbrokers Charles Schwab & Co. and a well-known New York economic consultant, Nouriel Roubini put the odds of a recession at 50-50.

Economist Beata Caranci at the Toronto-Dominion Bank, believe there's a one-in-four chance of a recession.

In England the Guardian reviewed serious analyses of the U.S. situation. They concluded that the risk of a U.S. recession within 12 months was 31%.

Morgan Stanley's New York-based chief economist, Stephen Roach, said the ''odds of a U.S.-led global recession are rising in the 2007-08 period and cannot be taken lightly.''

HSBC economist John Butler said: "We are concerned about the possibility of recession in the US."

In Dubai a news story said: "Economists and currency experts are warning of a possibility of outright recession in the US economy." Addressing a group of corporate customers in Dubai, David Bloom, Global Head, Market Strategy - HSBC Global Markets ... said that there is a growing risk of outright recession in the US economy. "The US has become a 'push-me, pull-you' economy: companies may be profitable but households, who have been the key drivers of growth, are in trouble. A cocktail of higher energy prices, tighter monetary policy, an end to tax cuts and, more recently, a housing market that appears to be in free-fall threatens to poison the upswing," Bloom said. He believes that recent economic growth was built on the most fragile of foundations. Loose monetary and fiscal policies led to unwarranted gains in the housing market which are now reversing. "The US is now facing an economic adjustment, with feast followed by famine. We are cutting our 2007 US growth forecast to just 1.9 per cent and issuing a 'recession risk' warning" Bloom said.

Mike Doyle, chief credit officer at US Bancorp, said that consumers have started paying down their debt at a faster rate and will remain able to make payments as long as unemployment doesn't spike upwards. But what about all the layoffs associated with the downturn in housing and at auto companies, continued mass illegal immigration, and continued outsourcing of good jobs? Doyle said that with consumption largely supporting economic growth "we don't want a consumer-led recession." Yes, consumers have the power to control the economy, which means they have the power to get better government decisions and actions!

In the Asia Times Jephraim P Gundzik wrote: "The risk of economic recession in the United States in 2007 is increasing rapidly. Rather than overly tight monetary policy at the Federal Reserve, the declining value of US homes is undermining personal consumption expenditure. The decline in home values is likely to accelerate next year as housing oversupply is met by increasingly weaker demand for new homes. ... the US economy slowed sharply between the first and second quarters. This slowdown was led by weakening personal consumption expenditure, which declined from an annual rate of 4.8% in the first quarter of 2006 to 2.8% in the second quarter. ...With monetary policy still very accommodative and likely to remain so until after crucial mid-term US elections in November, the primary factor undermining personal consumption expenditure in the second quarter was much weaker gains in home values. ...Since 2001, rapidly rising home values have fueled US personal consumption expenditure by increasing household income via cash-out mortgage refinancing. [Pay attention to this.] According to statistics produced by Freddie Mac (the Federal Home Loan Mortgage Corp), one of America's largest mortgage lenders, cash-out mortgage refinancing accounted for about 50% of all mortgage refinancing between 2001 and 2004. In 2005, cash-out mortgage refinancing accounted for 73% of all mortgage refinancing. In the first half of 2006, cash-out refinancing accounted for a staggering 87% of all refinancing. If US home values contract in 2007, household income will also contract. This could lead to much weaker or even contracting real growth of personal consumption expenditure in the US. Lower official interest rates are unlikely to reverse the fall in home values because the overhanging inventory of unsold homes is so large. Home prices must decline to clear this inventory." In other words, the current busting of the housing bubble means likely reductions in consumer spending, especially with wage stagnation, pushing the economy into recession.

In the India Daily a story talked about the U.S. situation: "Early signs of deep recession as investment bankers start cutting costs to survive the downturn - Credit Suisse takes the lead. It is another sign of coming recession - a very early one from those feeling the impact first. According to a media report Credit Suisse has internally banned color copying to cut costs fast. That is producing a ripple effect in the financial world. At the dotcom bubble burst, investment bankers were the first to start cutting unnecessary costs. ...No one knows how bad the coming recession will be. It may be time for the Fed to preempt fast with aggressive interest rate cut." But the Fed can't do that before the elections and also play Republican politics.

So what do Republicans most fear? One, that our sagging economy could become a major news story before the elections. Two, that this news will lower consumer confidence (as it should) and cause people to stop borrowing and spending, and start saving and paying off debt. They hope that the rigged cut in gas prices will be enough to keep people voting for Republicans, despite the housing bubble burst and the looming recession.

WE THE PEOPLE HAVE CONSUMER POWER. WHEN WILL WE USE IT AS POLITICAL POWER? Maybe what we need, as a good kick in the collective ass, is a deep painful recession. With enough pain working- and middle-class Americans may rise up in revolt.

[Learn about the authors new book on www.delusionaldemocracy.com.]

www.delusionaldemocracy.com

Joel S. Hirschhorn is the author of Delusional Democracy - Fixing the Republic Without Overthrowing the Government. His current political writings have been greatly influenced by working as a senior staffer for the U.S. Congress and for the National Governors Association. He advocates a Second American Revolution.