Bubble Trouble: Tom Paine

Bubble Trouble

The cover story in this week’s issue of The Economist shows a brick, labeled “House Prices” plummeting earthward, underscored with the headline, “After the fall.”
The prospect of a bursting U.S. housing bubble is the most significant near-term threat to the American economy, yet there is hardly a peep from Democrats.
This is not to say that preserving Social Security, making health care affordable and restoring a fair and sustainable international trading system are not worthwhile tasks. Indeed, they represent three of the most important medium- to long-term hazards facing the nation. The problem is, the housing bubble represents a near-term threat whose consequences are staggering. A collapse in the U.S. housing market threatens to decimate the main pillar of retirees’ capital assets, a significant source of disposable income for working families, and trigger a chain reaction that could result in an unprecedented global economic downturn.
Besides military spending, which itself is unsustainably financed by government debt, the housing sector—and the consumer spending it has facilitated—has been the only significant source of growth and jobs in the economy for the last five years. Indeed, the housing bubble has been the platform for the American economy for the last five years.
That’s because the housing bubble was created by the Federal Reserve bank as a way of deflecting the pain from the tech bubble burst in 2000.
As in any classic speculatory bubble, prices and debt got out too far ahead of fundamentals. What is confusing, however, is just when the housing bubble will actually burst. Greenspan’s Federal Reserve has tried gradual pin pricks but interest rates have stayed both stable and low. Most analysts agree that this is in large part due to the persistent foreign demand for American debt, led by China and Japan. America continues to run record trade deficits, meaning as a nation we are wracking up more and more debt. That means that not only are the market fundamentals weak here at home, the U.S. housing bubble is throwing the global economy way off balance.
And that is the most worrisome aspect to this whole situation. No one, including Greenspan, knows how or when this bubble will burst—much less how to get it under control. The economy is not responding to normal measures.
For Democrats to be silent about this looming crisis is foolish. Anyone who owns or wants to own a house is seriously concerned about this issue, and the Dems are silent. The time is now for Dems to start looking at the fundamentals of the economy, especially the housing bubble. Certainly, there are no easy answers, but that’s really the message of the bubble itself: the American economy needs a massive rethink.
Property Rights:
http://www.nytimes.com/2005/06/23/politics/23wire-scotus.html?ex=1277179200&en=15be0deff62f7ed7&ei=5088&partner=rssnyt&emc=rss