08 June 2010

Let the Dominoes Fall Where They May

Another comment from someplace else. This time it's a Seeking Alpha thread, a review of Roger Lowenstein's review of the Great Recession, "The End of Wall Street". In the comments, is the assertion that the Great Recession was sparked by oil prices. Not even close. Oil, even with manipulation is a lagging indicator.

No. The crash was caused by the stagnation of median income, which is the root cause of all previous recessions/depressions (and this one too). Read economic history. Since Reagan, median income has either fallen or stagnant (depends on when you measure).

The dominoes:
- median income stagnates under Reagan/BushI
- demand for goods stagnates, as a result
- Greenspan cuts interest rates hoping for a monetarist recovery, as a result
- Wall Street (funds, largely) seek higher returns on "risk free" instruments, as a result
- housing, since it involves no heavy capital expenditure in the way manufacturing does and gets considerable government support, is the logical source of such instruments, as a result
- excess fiduciary capital exists in China, India, and it, too seeks such "risk free" instruments, as a result
- builders, seeing the inflow of money, decide to ignore the SMSA income data, and build out subdivisions at prices far in excess of established norms; median income and house payment track (until this mania) exactly; they make out like bandits (well, they are)
- subprime, Alt-A, and all other non-conventional loans depend on two assumptions: 1) household income will rise to meet the adjusted payment (it hasn't been for years, and there is no reason to conclude it will) and 2) prices will continue to rise sufficient to cover the adjusted payment and equity withdrawals (which are made to level consumption in the face of stagnant median income); neither is true

when the exotics begin to re-set, the Ponzi scheme falls. The only winners are the builders, who've gotten the money, dumped the houses, and fired all those nail hammerers. Well, the ones smart enough to realize what they were doing. Not all were.

All of this was obvious as early as 2003. It was to me, anyway, and it turns out, the Fed, recently reported. I felt so much better.

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