Meltdown: THE HARD FACTS

"Hard Facts" from CBC's Meltdown Series:

• Half of America owns only 2.5% of country's wealth. The top 1% owns a third of it.
• The gap between the top 0.01% and everyone else hasn't been this bad since the Roaring Twenties.
• In 1950, the ratio of the average executive's paycheque to the average worker's paycheque was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
• In 2008, the total national household debt in Canada has reached an all-time high of$1.3 trillion. A survey found that 42% of respondents said their personal debt was rising in the past three years, and 21%said they couldn't manage their debt.
• 61% of Americans "always or usually" live paycheck to paycheck, which was up from 49% in 2008 and 43% in 2007. The numbers are similar in Canada.
• A staggering 43% of Americans have less than $10,000 saved up for retirement.
• In America today, the average time needed to find a job has risen to a record 35.2 weeks.

• In 2008, the World Economic Forum rated Canada's banking system No. 1 in the world. The U.S. came in right behind — Namibia.
• It is being projected that the U.S. government will have a budget deficit of approximately1.6 trillion dollars in 2010. How much is that? If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.
• In February 2010, there were 5.5 unemployed Americans for every job opening.
• In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure.
• U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a35% jump from the first quarter of 2009.
• In May 2009, the number of Canadians getting regular employment insurance benefits in reached 778,700, the highest level on comparable records going back 12 years. During the month, the number of people getting EI benefits grew by 9.2%, from April.
• More than 24% of all homes with mortgages in the United States were underwater (the mortgage is more than the current market value of the home) as of the end of 2009.

• This recession has erased 8 million private sector jobs in the United States.
• 39.68 million Americans are now on food stamps, which represents a new all-time record. But things look like they are going to get even worse. The U.S. Department of Agriculture is forecastingthat enrollment in the food stamp program will exceed 43 million Americans in 2011.
• The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.
• If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).
• Approximately 21% of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.
• In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.
• In 2009, U.S. banks posted their sharpest decline in private lending since 1942.
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• During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.
• As of February 2009, there were 111,500 employees working in motor vehicle assembly and parts, down 37% from its peak in 2001, according to a Stats Canada report.
• According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.
• For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

Source: CBC

HOUR 2: A Global Tsunami

HOUR 2: A Global Tsunami

The meltdown's devastation ripples around the world from California to Iceland and China. Facing economic ruin, desperate world leaders are at each other's throats.



Source: CBC

This is how we let the credit crunch happen, Ma'am ...

Queen told how economists missed financial crisis
The Queen has been sent a letter by a group of eminent economists explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis, it was reported.The Financial Times reported, There is nothing like a monarch’s pointed question to make the great and good squirm. Queen Elizabeth stumped her hosts at the London School of Economics by asking why no one had seen the financial crisis coming. Scholars at that and other universities should feel the sting: if they cannot be counted on to spot dangers to the economy, why have economists at all?

Some of Britain’s leading economic experts have now sent the Queen a reply. They point out that some did foresee the crisis, prominent economists included. What failed was the “collective imagination of many bright people”.

More can be said. The economics profession’s obliviousness to imminent collapse has led it to search whatever soul it may have to learn where it went astray. A prime suspect is a theory too optimistic about the rationality of people’s choices and the possibility of capturing them in mathematics.

The truth may be simpler and more depressing: that no economic theory can perform the feats its users have come to expect of it. Economics is unlikely ever to be very good at predicting the future. Too much of what happens in an economy depends on what people expect to happen. Even state-of-the-art forecasts are therefore better guides to the present mood than the future. though they may also be self-fulfilling prophecies.

Dabbling in paradox limits the use of economics as a practical guide. Today the profession’s best advice must convince politicians and the public to combat a crisis born of insufficient thrift by a recourse to record borrowing. Those who saw danger had no easier task: even reminding people of gravity’s existence is a hard sell when everything is going up.

If predictions of physics-like precision are in demand, they will be supplied. Collective delusion must therefore be blamed as much on the consumers of economics – companies, investors, the media – as its producers. But its irresponsible use does not mean economics is useless. It is rather good at explaining the past and guessing unintended consequences of well-meaning policies – invaluable tools for cleaning up financial markets.

So we do need economists in public debate, but ones not blinded by mathematical sophistication or paradoxes beyond the lay public’s grasp. The public intellectual’s virtues – curiosity about other fields, aversion to dogma – could do the discipline much good. Unfortunately these are no longer much valued in the academic hierarchy. University presidents should perhaps take up Her Majesty’s query.

Luis Garicano at LSE shows Queen Elizabeth II a chart explaining how the credit crunch was caused. Photograph: Kirsty Wigglesworth/PA Archive/Press Association Ima

Bush's House of Cards

Dean Baker correctly predicts the bursting of the housing bubble. In an article entitled, "Bush's House of Cards," published in the Nation Magazine in 2004, Professor Baker outlines the causes and failures of the Bush economy. Why was his voice ignored? I don't know, but this article by Mr. Baker correctly correlates housing prices with rents. Peter Schiff as well as other noted economists and financial gurus also note the increasing housing prices with the rent prices. Dean Baker was yet another, in a long line of smart economists that warned of the financial meltdown, credit crisis and housing market bubble.

Dean Baker writes on August 9, 2004: The latest data on growth suggest that the economy may again be faltering, just when President Bush desperately needs good numbers to make the case for his re-election. As bad as the Bush economic record is, it would be far worse if not for the growth of an unsustainable housing bubble through the three and a half years of the Bush Administration.
The housing market has supported the economy both directly--through construction of new homes and purchases of existing homes--and indirectly, by allowing families to borrow against the increased value of their homes. Housing construction is up more than 17 percent from its level at the end of the recession. Purchases of existing homes hit a record of 6.1 million in 2003, more than 500,000 above the previous record set in 2002. Each home purchase is accompanied by thousands of dollars of closing costs, plus thousands more spent on furniture and remodeling.


The indirect impact of the housing bubble is at least as important. Mortgage debt rose by an incredible $2.3 trillion between 2000 and 2003. This borrowing has sustained consumption growth in an environment in which firms have been shedding jobs and cutting back hours, and real wage growth has fallen to zero, although the gains from this elixir are starting to fade with a recent rise in mortgage rates and many families are running out of equity to tap.

The red-hot housing market has forced up home prices nationwide by 35 percent after adjusting for inflation. There is no precedent for this sort of increase in home prices. Historically, home prices have moved at roughly the same pace as the overall rate of inflation. While the bubble has not affected every housing market--in large parts of the country home prices have remained pretty much even with inflation--in the bubble areas, primarily on the two coasts, home prices have exceeded the overall rate of inflation by 60 percentage points or more.

The housing enthusiasts, led by Alan Greenspan, insist that the run-up is not a bubble, but rather reflects fundamental factors in the demand for housing. They cite several factors that could explain the price surge: a limited supply of urban land, immigration increasing the demand for housing, environmental restrictions on building, and rising family income leading to increased demand for housing.

A quick examination shows that none of these explanations holds water. Land is always in limited supply; that fact never led to such a widespread run-up in home prices in the past. Immigration didn't just begin in the late nineties. Also, most recent immigrants are low-wage workers. They are not in the market for the $500,000 homes that middle-class families now occupy in bubble-inflated markets. Furthermore, the demographic impact of recent immigration rates pales compared to the impact of baby boomers first forming their first households in the late seventies and eighties. And that did not lead to a comparable boom in home prices.Environmental restrictions on building, moreover, didn't begin in the late nineties. In fact, in light of the election of the Gingrich Congress in 1994 and subsequent Republican dominance of many state houses, it's unlikely that these restrictions suddenly became more severe at the end of the decade. And the income growth at the end of the nineties, while healthy, was only mediocre compared to the growth seen over the period from 1951 to 1973. In any event, this income growth has petered out in the last two years.

The final blow to the argument of the housing enthusiasts is the recent trend in rents. Rental prices did originally follow sale prices upward, although not nearly as fast. However, in the last two years, the pace of rental price increases has slowed under the pressure of record high vacancy rates. In some bubble areas, like Seattle and San Francisco, rents are actually falling. No one can produce an explanation as to how fundamental factors can lead to a run-up in home sale prices, but not rents.

At the end of the day, housing can be viewed like Internet stocks on the NASDAQ. A run-up in prices eventually attracts more supply. This takes the form of IPOs on the NASDAQ, and new homes in the housing market. Eventually, there are not enough people to sustain demand, and prices plunge.

The crash of the housing market will not be pretty. It is virtually certain to lead to a second dip to the recession. Even worse, millions of families will see the bulk of their savings disappear as homes in some of the bubble areas lose 30 percent, or more, of their value. Foreclosures, which are already at near record highs, will almost certainly soar to new peaks. This has happened before in regional markets that had severe housing bubbles, most notably in Colorado and Texas after the collapse of oil prices in the early eighties. However, this time the bubble markets are more the rule than the exception, infecting most of real estate markets on both coasts, as well as many local markets in the center of the country.

In this context, it's especially disturbing that the Bush administration has announced that it is cutting back Section 8 housing vouchers, which provide rental assistance to low income families, while easing restrictions on mortgage loans. Low-income families will now be able to get subsidized mortgage loans through the Federal Housing Administration that are equal to 103 percent of the purchase price of a home. Home ownership can sometimes be a ticket to the middle class, but buying homes at bubble-inflated prices may saddle hundreds of thousands of poor families with an unmanageable debt burden.

As with the stock bubble, the big question in the housing bubble is when it will burst. No one can give a definitive answer to that one, but Alan Greenspan seems determined to ensure that it will be after November. Instead of warning prospective homebuyers of the risk of buying housing in a bubble-inflated market, Greenspan gave Congressional testimony in the summer of 2002 arguing that there is no such bubble. This is comparable to his issuing a "buy" recommendation for the NASDAQ at the beginning of 1999. More recently, Greenspan has done everything in his power to keep mortgage rates as low as possible, at one point even offering markets the hope that the Fed would take the extraordinary measure of directly buying long-term Treasury bonds. The man who testified that the Bush tax cuts were a good idea apparently has one last job to perform for the President.

Source: Nation, 4 August 2004, by Dean Baker.

Dean Baker - The Rise and Fall of the Bubble Economy