The Next Wave

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By David Glenn Cox

There is an old joke about a guy who fell off the eightieth floor of a
construction site. On the fortieth floor his friends called out, “Are
you all right?” The man answers, “So far, so good!” The experts and
pundits alike take turns trying to call bottom in this economic
cataclysm, for it is a choice career plum to be the expert who
correctly calls the bottom.

The problem is that this financial
catastrophe has been so well-disguised that it is almost impossible to
name it, let alone determine when it will cross the finish line. First
it was the sub prime crisis, then it was the banking crisis, then the
financial crisis. The experts stood on the corner taking turns shouting
“Now! No, now! No, now! This time for sure! Now!”


They are
trying to pick the winner of the Kentucky Derby without understanding
that what they are looking at is a sawhorse. This is not your father’s
recession, this is the twilight zone. Business will not just gradually
improve until we’ll all forget these difficult times. We are watching
the deconstruction of our economy. Chrysler is in bankruptcy; GM will
soon follow suit. The former automakers will close nearly three
thousand dealerships and lay off, permanently, almost 200,000 workers.

Housing
starts this month, here, in what should be the peak of the home
building season, were at the lowest level since 1945. In 1945 the
population of the United States was one half of what it is today; it
had twelve million men under arms and most of them far from home.
Lumber and building materials were rationed and in many cases
unavailable. So calling a bottom in this economy is like calling out to
the falling man.

Mortgage rates are falling but few are taking;
there is a pall of fear over the rational people in our economy. The
optimism and faith in our economic strength is today totally inverted
into a negative image of itself. Two years ago the foreclosures began
and each time the pundits claimed, “This is the worst of it.” And each
time they have been wrong. Two million homes foreclosed, four million
homes foreclosed, now eight million homes foreclosed, and before
Christmas it will be ten million homes foreclosed.

The first
wave were those living on the margins already, overstretching for a
dream just out of reach and flying too close to the sun. And there were
the speculators trying to make a buck the way their heroes on Wall
Street did it, without breaking a sweat and while using someone else’s
money. They also flew too close to the sun. The second wave were the
adjustable rate mortgages, ticking time bombs set to go off long after
the mortgage bankers themselves had passed the paper along up the
system.

Now we have come to the third wave. “We’re about to
have a big problem,” said Morris A. Davis, a real estate expert at the
University of Wisconsin. “Foreclosures were bad last year? It’s going
to get worse.”

“We’re right in the middle of this third wave,
and it’s intensifying,” said Mark Zandi, chief economist at Moody’s
Economy.com. “That loss of jobs and loss of overtime hours and being
forced from a full-time to part-time job is resulting in defaults.
They’re coast to coast.”

These are prime mortgages, these are
homeowners that once had equity, and their numbers are growing like a
tsunami. In the three months ending in February the number of loans
where the lender took possession of the property rose by almost five
hundred thousand homes. That is an increase of 30% in three months, and
these are not people who bought homes they couldn’t afford or were
trying to flip for a profit. These are people whose jobs have vanished,
who in many cases have lived in those homes for years. Homes that they
can no longer afford because they no longer have jobs.

In dollar
amounts more than $717 billion in loans are now in the distressed
category since February. The Obama administration is offering an aid
package in which the lenders make all the decisions, worth $75 billion.
It is like sending a ten-pound bag of rice to Sudan and claiming we’ve
solved world hunger. It is a rescue for maybe one in ten while the
failure of the other nine negates any benefit; it’s pissing on a forest
fire.

Each foreclosure costs the banks $50,000, and the
accelerating number of losses threatens to swamp the bailout. There is
a certain irony in trying to save the banks while ignoring the people
who, without assistance, then swamp the banks with further losses.

The
government's stress tests for the banks concluded that the banks need
another 75 billion dollars, pushing their overall losses above a
trillion dollars by 2010. But they aren’t just bank losses; they are
our losses, our neighbor’s losses. Our family and friends' losses,
plummeting towards the ground at a remorseless speed.

The losses
accelerate as the speed increases as the pundits try to calculate. But
do they understand what it means when spending at grocery stores falls?
How do you factor into the equation what it means when prime borrowers
are losing their homes and Americans are eating less? That sound of a
whistling in our ears and the sight of the approaching earth growing
larger by the second should scare the hell out of us.

When the
bottom is reached, who will care? The time to act to save the falling
is now! The administration’s band aids and coppers for the poor might
make for good press releases, but when that giant splat comes, and come
it will, what will they matter? What will it matter where the bottom is
if there is no way out of it?