Wednesday, January 23, 2008

Hair Of The Dog That Bit Us

So - the economy is tanking because the American Consumer's debt burden has finally become overwhelming, and the Federal Reserve's solution to this problem? Make credit cheaper! The Federal government's solution to this problem? Give everybody a tax rebate (except for poor people who don't pay taxes; I'll get to that later), so they'll go out and buy more stuff and prop up the economy!

I guarantee, that if your house is in foreclosure because your $3500 mortgage payment is over 80% of your take-home pay, an $800 tax credit is not necessarily going to cause you to go out and buy something.

Of course, I don't carry credit card debt myself, so my reaction to this may be unusual, but if I had a major debt burden, and I suddenly got $800, my impulse would be to pay something down. I don't think people are doing this yet; I'm reading that they're missing payments on their credit card debt as well as on their mortgages.

This whole economic problem has been caused, IMHO, by running the economy on credit for 40 years (which is about how long we've had credit cards). Everybody says, oh, the world economy is driven by the American Consumer. Guys, the American Consumer is broke. Stony. Maxed out. If you can't pay off the debt you have, making new debt cheaper Will Not Help You. I read one comment that the recent rate cut would make some mortgage resets smaller, so they might only go up $150 instead of $500 a month. Yeah, but if you're already behind on the payments, if you already can't afford the mortgage, making the reset smaller is not a significant improvement.

I remind myself again and again that 90% of the news is made by 10% of the people, but still. I read over and over again about people who've owned their houses for many years, and are now about to lose them because they've refinanced them to take out cash, over and over, and now they can't pay the mortgage, can't refinance because the house value is less than they owe, and can't sell because the market is in the tank. They're going to lose the houses they should have been able to die in, because they over-borrowed. In 1976, the supporters of California's Proposition 13 made a big deal that older people were going to lose their homes because of rising property taxes. Some of the people that are going to lose their homes to foreclosure now are those people; and no constitutional amendment will help them. They did this themselves.
This is running the world on credit, and the bills have come due.

Are we having a recession?? Damn straight we are. Is the rate cut going to help? Not a chance. Frankly, I think the rate cut was a major mistake. Low interest rates are what got us into this mess. If we're not really careful, low interest rates will dump us back into the 70's, a decade I have no desire to rerun, especially as a retiree. Inflation is ticking up just as oil and food prices spike and job creation essentially vanishes; does all this sound familiar? I'm sorry, the European Central Bank is correct here: they just refused to cut rates on the grounds that their primary focus is to keep inflation under control. Ben Bernanke should try to remember that.

Oh, yes, and the tax rebate issue. It's amazing how consistent Dubya is. He wants to restrict tax rebates to people who actually paid taxes, which basically eliminates anybody with children making less than about $75K. (Don't hold me to these numbers. But it's a LOT of people.) In other words, as usual, Dubya wants to give tax help only to people who don't actually need it.


  1. Anonymous9:28 AM

    You know, I doubt a month goes by without getting a group of checks from my bank offering to let me write them for up to how every many thousands that they will just add to my mortage. With the banks pushing it so much it is no suprise that people started taking them up on it.

    Seems like most of the up and coming consumers want to have everything their parents worked most of their lives for, only they want it NOW (my own siblings included).

  2. Anonymous9:14 AM

    Well, the mental midget in the White House is nothing if not fiscally consistent - and consistently wrong.

    Anonymous David

    Any Republican, including John McCain, would ultimately just continue the Republican national franchise machine, to the continued detriment of the United States, especially on the world stage. His few plusses are far outweighed by his militaristic myopia.

  3. Anonymous10:47 AM

    Xdos blogged about this too at his blog space

  4. Anonymous10:48 AM

    And now the link I forgot to paste in:


  5. How utterly predictable.

    The stock market is overbought. The real estate bubble burst, taking the sub-prime mortgage market with it. Our trade imbalance and sinking dollar presage a big decline in national income and employment--

    so what do the Republicans suggest to get us out of this mess???



    This is the proposed "stimulus package" we've all been praying for??? (NOT!!!)

    In a real capitalist system, the banks only lend as much as they can prove equity for, and to those who have a prayer of repaying their loans. In a real capitalist system, shake-outs produce positive changes and healthy realignments of capital into new areas of growth and investment.

    But as Gore Vidal reminds us, in America we have welfare for the rich, and laissez-faire competition for the poor.

    As a reward for managing these corporations, banks and brokerage firms into the red, CEO's and upper-level management are leavened with fat parachute separation packages. While the layoffs and downsizing are punishing workers, the shareholders and their toadies negotiate handsome payouts.

    It just gets better and better and better.