Double Dip in the Wings

SUBHEAD: Debt and housing crisis will lead to double-dip in overall economy as we go into second half of 2010.

 By Ilargi on 21 June 2010 in The Automatic Earth - (  
Image above: House with negative equity is "underwater". Illustration from (

No, the biggest, the main, the major threat to the US economy hasn't gone away. In fact, it hasn't gone anywhere. It’s merely been veiled and papered over. And that means it will come back onto the scene with a vengeance.

When exactly it will do so basically depends on one issue only: how much longer the US government decides (or should we say "believes") that it can and should throw its citizens' grandchildrens' future tax revenues at obligations incurred yesterday, an idea, accidentally, that's hard to beat for braindead perversity. Who are we to hand our problems to our offspring to solve?

Then again, that's also what we're doing in the case of the Gulf of Mexico, so there's nothing new under the sun, it's fast establishing itself as a theme familiar to our generation(s). There are native tribes in North America who to this day maintain an ancient pledge to preserve the world they were born in for the next seven generations.

If we were to have such a pledge, it would be about the opposite: we ruin the world for the next seven generations. That main threat to the US economy, of course, is housing.

Grossly overpriced housing, to be precise, "paid for" with mortgages that an increasing number of "homeowners" can't possibly afford anymore. This morning on CNBC, Meredith Whitney stated that while the risk of a double-dip in the overall economy is "greater than 1%", a housing double-dip is assured.

But that's all just semantics, and of course she knows it; it's just not a popular way to look at things. In reality, neither housing nor the economy as a whole ever got out of the first dip. A trillion dollars a month worth of future obligations just made it look like they did.

Whitney pointed to the rising numbers of foreclosures and short sales as signs of deterioration. Banks are becoming more aggressive towards borrowers in default, and they're selling off properties faster as well, often at steep discounts of 50 or 60 cents on the dollar. Talk about capital destruction!

All this additional inventory on the market, in which the soon to be delisted government-owned zombies Fannie Mae and Freddie Mac play the title roles, can do but one thing: bring prices down further.

Banks that have kept bad loans on their books just to profit from the extend and pretend don’t look don't tell appearance game of face value now need money, cash, at - at least soon- almost any price.

We have longtime since established the link between housing and unemployment. Whitney connects the dots talking about US states and their financial predicaments. They will receive $50 billion from Washington, but they need $200 billion (and that's still a very conservative estimate).

Which is why the states, in Whitney's words, are "cutting jobs in a mercurial way for the first time on record." And lay-offs are not the only measure taken at state level, where, unlike in Washington, the law dictates budgets must be balanced.

Mary Williams Walsh writes in the New York Times: In Budget Crisis, States Take Aim at Pension Costs. In case you hadn't noticed, the pension plan situation across the board and around the world is worsening fast. And at state level in the US, it could all well get worse. In that regard, there's one paragraph in Walsh's piece that jumps out:
If a state pension fund ran out of money, the state would be legally bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.
Now that spells trouble. Walsh: "Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year." Look, if state services for the newly and longtime laid-off and foreclosed-on are cut because scores of civil servants must be paid $100,000 a year, we're stirring up a dangerous brew. We're creating a theater for a fight that cannot possibly have any winners. And it's the federal government with its moronic messages of economic recovery and all that which is responsible to a large extent for the fact that people get into these fights without any idea of what the outcome will and must inevitably be. Which takes me right back to Fannie and Freddie and Meredith Whitney's prediction for a housing double-dip. The Congressional Budget Office said in January that the final losses for American taxpayers in the Fannie and Freddie morass, which now stands at some $150 billion, could reach $389 billion, but anyone with one remaining functioning neuron and/or a calculator can figure out what the $5.5 trillion or so they hold in loans could cause in losses when home prices dive another 20%, or 50%. And then we're not even yet talking about the mortgage-based derivatives these publicly owned walking dead are involved in. Delisting Fannie and Freddie looks to me like an invitation to go even crazier with the whole shebang. And by now, and I’ll volunteer to be the first one to admit it, there are very few options and alternatives left. If you let them fall, the whole banking system, read: economy, falls with them. But that doesn't mean it’s possible to keep them upright forever. The banks that are feeling squeezed ever more will in turn squeeze their borrowers, take away their homes and sell them to a neighbor at a 50% discount. The Mary Williams Walsh article deals with a bunch of real estate folks whose only business is exactly that, selling your home to someone else for half the price, wheras you yourself might have been able to afford that too. Which makes me wonder how many homes need to be sold at half price before people start noticing that Fannie and Freddie's $5.5 trillion portfolio is worth $3 trillion or less. And that the American population has then lost $2.5 trillion, just like that. Anything else is just an illusion, a hologram, that persists because heretofore successful businessmen and the incumbent politicians they have purchased deem it best, so far, for their own short term personal interests, to let people believe for a bit longer that all is and will be well. It doesn’t all seem that hard to comprehend, if you ask me, at least when it comes to the numbers. The consequences may take a while longer to sink in. [Editor's note: The video below is preceded by advertizment.] Video above: Meredith Whitney on CNBC is bearish on economy. From ( .

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