Why home prices are about to plummet--and take the recovery with them.

... during the last week in February, when Greenspan recommended that the home-owning public take a good hard look at switching from fixed-rate mortgages, under whose terms payments stay the same no matter what interest rates do, to adjustable rate mortgages (ARMs), where payments fluctuate along with interest rates--which, right now, makes close to zero sense.

Interest rates are lower than they've been in 30 years, and, with all economists predicting a general economic upturn, and Bush's budget deficit and the weak dollar sucking up capital, little doubt exists that interest rates must rise, in which case, switching from a fixed-rate to adjustable-rate mortgage would be pretty costly for any family naïve enough to take Greenspan at his word. The episode did not pass completely without critical notice. It was "the strangest bit of advice ever to be proffered by an American central banker," Jim Grant, publisher of Grant's Interest Rate Observer, told the San Francisco Chronicle. Then the press moved on: "Oh, it's just Greenspan."

But sometimes wacko ideas can betray deeper truths. It is tempting to ask what stake the chairman might have in trying to convince millions of people to do something so contrary to their own interest. One theory floated by Fed-watchers is that the chairman is trying to help out his classic institutional constituency, the big banks, which hold trillions of dollars in fixed-rate mortgage paper. There may be something to that theory, but there is almost certainly a deeper and more important motive behind this curious advice. Quite simply, Greenspan is trying to keep a wobbly and fragile recovery alive--and using mortgage refinancing to do it.

There are many strange things about the choppy recovery we're in, but among the most curious is that it is being fueled largely by consumer spending. Why consumers should continue to spend, and why they've done it throughout the recession, is not immediately obvious. After all, average income growth has been puny in the last few years. There's been a big falloff in jobs. Health care and tuition costs have only been going up. And the stock market has spent the last three years unsuccessfully huffing and puffing to get back to the level where it was in early 2001. Why have consumers been spending so much?

Economists have advanced two main reasons. One is that Americans have so lost their moorings that they've had few qualms about going deep into debt. That's certainly true. The average person's debt as a percentage of his income is now higher than it's ever been. But there's another reason, too: Americans have been using their homes as ATM machines, refinancing their mortgages in order to fund their spending. This, of course, makes sense. The one sector of the economy that has consistently swelled has been housing prices. This has intrigued and surprised many economists, because housing is supposed to operate in sync with the economy, expanding during flush times and contracting when things go poorly. But even in a down economy, prices have soared.

Because of these rising prices, people have felt that despite all the ups and downs in stocks and salaries, that their overall situation was okay. Homes are the biggest asset most families own, and their value has been rising nicely. For that reason, Americans have felt more comfortable buying big-ticket items, from SUVs to new computers to Disney World vacations. Much of that spending has gone right onto the VISA card. But that debt has been kept somewhat manageable by another factor in housing prices: mortgage refinancing.

With home prices rising and the Fed keeping rates low, a mortgage refinancing industry that barely existed 15 years ago exploded into one of the fastest growing sectors of the financial services industry. Last year, one-third of all homeowners used cash-out mortgages to refinance their homes, a rate roughly consistent over the past five years. Savvy investors, says Harvard economist William Apgar, are likely to have refinanced "two or three times in the last two years." Each time they do, they have either been able to lower their monthly payments, or walk away with a chunk of cash. And where does that extra cash go? The ubiquitous Ditech TV ads say it all: "I just refinanced my home and paid off my credit cards!" American homeowners have gained $1.6 trillion in cash from refinancing in the last five years, and those gains have flowed almost wholly into purchases of consumer goods. The resulting spending, says Wharton's Susan Wachter, is "propping up" the American economy.

Greenspan has played enabler to this boom. But with the Fed fund's rate at 1 percent, the chairman can't do much more to sustain it. Tens of millions of Americans have already refinanced their mortgages, and at current rates, can't be induced to do so again. This small window is closing, fast: For six months, refinancing has been tapering off, and economists expect it to narrow further--many economists have argued the gains from refinancing are likely to halve ths year. Moreover, as soon as interest rates rise (as Greenspan himself has said they will within the next year), virtually all refinancing will cease.

Greenspan's rather ham-handed effort to get them to go for ARMs, is a sign not of the chairman's own eccentricity or advanced age, but, instead, of the economy's current unsteadiness. Greenspan knows, perhaps better than anyone, that this economy is perched nervously on top of a wobbly, Dr. Seuss-like tower. Our recovery is propped up by consumer spending, which is in turn propped up by mortgage refinancing, and if that refinancing dries up before more props can be put in, the whole edifice could fall. "Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM," Peter Schiff, president of Euro Pacific Capital in Los Angeles told the San Francisco Chronicle.

Let's assume for a moment that enough people get fooled, and the refinancing boom gets extended for another year. Then what? The real problem hits. Because if you think Greenspan's being cagey on refinancing, the truth he's really avoiding talking about is that we're in the midst of a huge housing bubble, on a scale only seen once before since the Depression. Worse, the inflated housing market is now in an historically unique position, as the motor of the rest of the economy. Within the next year or two, that bubble is likely to burst, and when it does, it very well may take the American economy down with it.

BW Online | July 29, 2004 | The Unbearable Costs of Empire

The Unbearable Costs of Empire
Establishment types are trumpeting America's role as global police force. Too bad the U.S. just can't afford the job

Since September 11, 2001, the phrases "American empire" and "America as an imperial power" are being heard a lot more. But in contrast to the 1960s and 1970s, when such terms were brandished by an angry domestic anti-war movement or by developing nations in U.N. debates, the concept they represent has now at least partially entered the mainstream. However much it has incurred hostility throughout most of the world, including European and other countries usually allied with the U.S., the "new imperialism" has gained ground among the Establishment here.
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The post-9/11 rationale is that America has terrorist enemies and rogue states that will do it serious harm -- maybe even with weapons of mass destruction -- if it doesn't police the world to stop them. "Being an imperial power is more than being the most powerful nation," writes Michael Ingatieff at Harvard's Kennedy Center. "It means enforcing such order as there is in the world and doing so in the American interest."

But what most analysts have missed –- whether or not they support the idea of an American empire -- is that the U.S. simply can't afford the role of global cop.

THE REAL DEBT. First, the U.S. is entering this new age of empire with a gross federal debt that is the highest in more than 50 years as a percentage of gross domestic product. For fiscal 2005, which begins in October, the U.S. gross federal debt is projected to be $8.1 trillion, or 67.5% of GDP. By the time 100,000 U.S. troops were in Vietnam in 1965, it was 46.9% and falling.

One technical point that's vitally important here: It's the gross federal debt and deficits that matter, not the smaller "debt held by the public" and "unified budget deficit" that are generally cited in the press. For example, the most commonly reported estimate of the annual federal budget deficit is $478 billion for 2004. But this number is misleading, because it doesn't include borrowing from federal trust funds -- mostly Social Security and Medicare.

But the money the government is borrowing from Social Security and other trust funds will, with nearly 100% certainty, be paid back -- just like the money it borrows when it sells bonds to Bill Gates or the Chinese government. The annual federal budget deficit is, therefore, $639 billion, according to the numbers from the Congressional Budget Office. This is 5.6% of GDP, a near-record level for the post-World War II era.

BORROWING FROM ABROAD. America can –- just barely -- afford this deficit right now, but that's about to change. First, the interest burden on the debt is currently manageable because of extremely low interest rates. But the Fed is expected to raise short-term rates to 2% by yearend. More important, long-term rates will almost certainly rise even more because inflation has accelerated to 4.9% over the last six months -- a big jump from 2003's 1.9%.

If Kerry wins and takes back the tax cut for households earning more than $200,000 a year, as promised, that won't even reduce the deficit by 1% of GDP. And if he keeps his spending promises, then the monies realized by repealing the tax cut would be canceled out. The Bush budget, which the conservative CATO Institute's Chairman Bill Niskanen recently described as "a fraud" put together by "borrow and spend Republicans," would make the deficit and debt problem even worse.

Then there's the problem of the U.S. –- both the government and the private sector –- borrowing from foreign countries. Most government borrowing is now being financed from overseas -- especially the central banks of China, Japan, and other countries. These institutions are deliberately buying dollars in order to keep their currencies from rising against the greenback. But they won't keep doing this indefinitely. The U.S. is borrowing more than $600 billion a year from the rest of the world, and it can't go on much longer.

THE BIG BANG. Sometime within a decade, and most likely in the next couple of years, foreign investors will see that a steep decline of the dollar is unavoidable and will begin to unload them and U.S. Treasury securities. As with any bubble, it will be better if this one bursts sooner rather than later, when it would be even bigger. But adjustment and pain will still occur, including higher interest rates and consequently slower growth.

Slower growth will also mean larger federal budget deficits. And one event that will certainly slow growth and increase federal government borrowing well beyond current projections is the bursting of the housing bubble. Housing prices have seen an unprecedented run-up since 1995 of more than 35 percentage points above the rate of inflation. That has created more than $3 trillion in paper wealth that –- just like the illusory wealth of the stock-market bubble -- is programmed to disappear. This, too, is almost certain to happen in the next few years.

The economic impact will be at least equivalent to that of equities popping in 2000-02, which caused the last recession. Another slump is, therefore, likely in the near future, and with it a further ballooning of the federal budget deficit, as tax revenues fall and automatic countercyclical spending rises.

CHINA RISING. The combination of unsustainable public debt and foreign debt is a deadly and explosive mix by itself. Rising real interest rates and a looming housing bubble bursting make it all the more dangerous. Financial markets will exert the necessary discipline if politicians refuse to do so, but either way the U.S. can't afford even the $486 billion a year that it's currently spending annually on the military and homeland security.

And even these spending levels are a lot less than would be necessary to maintain America's power in the world. Over the next decade or so, the Chinese economy will actually surpass the U.S. in size. America has 100,000 troops in East Asia. If the U.S. were to try to maintain its current dominance of the region -- something that will probably prove impossible -- it would boost our military spending even further.

The bottom line is that the American empire just isn't affordable. Within a decade or so, the U.S. will be forced to be much less preemptive and outward-looking and to engage in scaled-back foreign policy -- even if the foreign-policy Establishment never changes its views or ambitions.

REALITY CHECK. In the meantime, the segment of American society that would like to see advances in health care, education, poverty alleviation, or any other positive economic or social goals will get bad news. The foreseeable future is a lot different from most of the post-World War II era, during which the U.S. added such programs as Medicare and Medicaid while spending literally trillions of dollars on cold and hot wars.

This time, little or no federal money will be available for any of these things until U.S. foreign policy changes. The most likely scenario is that most areas of nonmilitary discretionary spending will be squeezed relentlessly before anything gives in the realm of superpower ambitions.

The post-9/11 age of American empire will close not with a bang but a whimper, suffocated by the laws of arithmetic, the constraints of public financing, and the limits of foreign borrowing. What remains to be determined is how much the U.S. will pay -- in lost and ruined lives, as well as bills for future generations -- and how many enemies it will make throughout the world, before coming to grips with reality.

Refinancing Bubble Bursting ? Fannie Mae shares drop 13 percent in three days

WASHINGTON (AP) - Shares of Fannie Mae fell again on Friday, capping a three-day slide of more than 13 percent, as investor concerns widened after a government regulator accused top executives of the mortgage giant of mismanagement and serious accounting misdeeds.

While the impact so far has been limited to shareholders, the fallout could eventually reach millions of Americans if they have to pay higher rates for new mortgages for home purchases or refinancings, analysts say. That could be one of the consequences if Fannie Mae is forced to pay higher rates on its nearly $1 trillion in debt.



Fannie Mae and another government-sponsored mortgage financer, Freddie Mac, purchase billions of dollars of mortgages each year from banks and other mortgage lenders, then package them into bonds that are resold to investors. While they are not directly guaranteed by the government, they have special privileges - notably the ability to borrow directly from the U.S. Treasury, which makes their borrowing rates lower than competing firms.

The two companies, whose stock and debt is widely held by investors in the United States and throughout the world, have long contended that home buyers - especially low-income borrowers - have benefited from lower mortgage rates because of their ability to provide a standard way for the loans to be bundled and resold to investors.

But now that both of the firms have become embroiled in accounting scandals within 15 months of each other, their days of low-rate borrowing could be in danger. The Standard & Poor's rating agency said on Thursday that it is considering downgrading some of Fannie Mae's debt. Investors typically demand higher rates from companies with reduced credit ratings as compensation for the increased risk they assume.

Fannie Mae's shares fell $1.64, or 2.4 percent, to a 52-week low of $65.51 in trading Friday on the New York Stock Exchange. The shares closed roughly $10 higher on Tuesday before word of the regulatory findings."

On the road to perdition

If Iraq is 'the crucible in which the future of global terrorism is decided', that is because the actions of Bush and Blair have made it so. The question is what the Prime Minister plans to do now, beyond praying that elections work. Will he stand by the President if Mr Bush goes for Shock and Awe Mark Two or will he be bold enough to step aside?

For now, it seems probable that more innocents will beg on grainy videos for help from politicians rendered powerless not only by the monstrosity of others, but through their own folly. Onlookers will stare again in sorrow and unease at the pain of strangers. Human impulses prompted good people of all faiths to yearn for Ken Bigley's freedom, but so did the awareness that we are all part of his story.

As international affairs analyst Fred Halliday has said, universalism is dying. The US, post 9/11, has put hardline survivalism first and last. Islamic extremists move further towards medieval savagery. As the world converges on the edge of the abyss, the fate of individuals shows what may lie ahead if politicians cannot heed the warning signs. Kenneth Bigley, never a figure of little consequence, is the unwitting signalman on the road to hell."

Men, Women More Different Than Thought

CHICAGO - Beyond the tired cliches and sperm-and-egg basics taught in grade school science class, researchers are discovering that men and women are even more different than anyone realized.

It turns out that major illnesses like heart disease and lung cancer are influenced by gender and that perhaps treatments for women ought to be slightly different from the approach used for men.

These discoveries are part of a quiet but revolutionary change infiltrating U.S. medicine as a growing number of scientists realize there's more to women's health than just the anatomy that makes them female, and that the same diseases often affect men and women in different ways.

'Women are different than men, not only psychologically (but) physiologically, and I think we need to understand those differences,' says Dr. Catherine DeAngelis, editor of the Journal of the American Medical Association (news - web sites).

DeAngelis, who became the journal's first female editor in 1999, says she has made it a mission to publish only research in which data are broken down by sex unless it involves a disease that affects just men or women."

Catastrophic success

"Bush also acknowledged in the interview that the administration did not anticipate the nature of the resistance in Iraq, and he said that was his greatest mistake in office. 'Had we had to do it over again,' he said, 'we would look at the consequences of catastrophic success, being so successful so fast that an enemy that should have surrendered or been done in escaped and lived to fight another day.'

Democrats tried Sunday to exploit that acknowledgment. 'The president is now describing his Iraq policy as a catastrophic success,' Democratic vice presidential nominee John Edwards said in Washington. 'I, like most Americans, have no idea what that means, but it is long past time for this president to accept personal responsibility for his failures and for his performance.' Edwards said the Iraq war 'has clearly been a failure.'"

Cheney Protester Assaulted in Eugene

Free speech in a headlock again...

A chilling aspect of the 6:00 news report on Cheney's Eugene bund rally yesterday was the completely tolerated violent group assault on a protester. A man in a white t-shirt with "Pro-Jesus, Bring the Troops Home" written on it began shouting during Cheney's speech. A 66 year old man, Art Briga of Springfield, in a red-orange jacket, lunged at the protester and put him in a wrestling headlock -- with a hand clamped over the protester's mouth. Another man shoved the protester backwards as others began pulling the protester from behind. The protester's female companion (similar t-shirt) seemed to be appealling to them to stop the assualt. The TV report then showed the man (Art Briga) who committed the initial assault outside after the rally, saying that protesters are "snakes in the grass" and need to be stamped down.

This is certainly similar to the hand-over-mouth assault on Kendra in Beaverton during the Bush bund rally, and a pictured hair-pulling attack on another protester inside another Republican rally recently. The double standard is obvious -- imagine if a protester did such a thing -- we would be doing time. But apparently for Bu$h/Cheney supporters it is open season on protesters, with impunity. The violent attack in Eugene was so obvious that Cheney himself had to mention it: "Treat him with kindness, now."