Worst Housing Market Since Great Depression

Let’s look back a moment. How many times have we “hit bottom”, according to the financial cheerleaders on TV, over the last year? How many predictions of a “soft landing”? How many people have suggested the subprime meltdown would be “contained”?

Well, even the lenders themselves are now seeing reality:

COUNTRYWIDE Financial, America’s largest mortgage lender, says more borrowers with good credit are falling behind on repayments and that the housing market may not begin recovering until 2009 because of a fall in house prices that goes beyond anything experienced in decades.

The news from Countrywide, widely seen as a bellwether for the mortgage market, set off a sell-off in the sharemarket, which is at its most volatile in more than a year.

The S&P 500 Index fell 30.53 points, or 2 per cent, to 1511.04, its biggest one-day drop in nearly five months. The US dollar dropped to a new low against the euro, edging closer to $US1.40.

The housing slump has become the biggest worry for the sharemarket — which just four days ago set records — because of its potential impact on the broader economy.

Countrywide’s stark assessment signalled a critical change in the substance and tenor of how housing executives are publicly describing the market.

Two months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine, with the exception of those made to borrowers with weak credit who were stretched too far.

Executives at Countrywide had for some time been more sceptical than others, but the bluntness of their comments yesterday surprised many on Wall Street. Countrywide chairman and chief executive Angelo Mozilo said home prices were falling “almost like never before, with the exception of the Great Depression”.

It’s pretty simple. The run-up of easy credit in advance of the Great Depression caused asset bubbles, which generated enormous social upheaval as they burst. The exact same thing is occurring right now underneath our very noses, and as much as the financial cheerleaders try to deny it, the result is likely to be the same.

When I hear news like this, I really worry about what will happen if Ron Paul actually won. The next American president is going to face a fiscal crisis at least as severe as the “malaise days” of Jimmy Carter. Given that Ron Paul’s policies will be hated by both parties in Congress, it’s unlikely he can take positive steps to avoid a financial crisis, and if he’s in office when it comes, he might take the blame for it. I’d almost rather that we have a Democrat in the White House simply to discredit whatever lame-brained attempt they make to solve the problem.

We’re headed for rocky times, financially. Our entitlement spending is hopelessly underfunded out into the future. Our job picture is good, but it has been fueled largely by a credit expansion that is now deflating. Government, rather than letting business alone, enacts ever more intrusive regulations in order to “save” businesses, pushing work overseas in the process. There are only three ways to solve this problem: increase taxes, reduce spending, or inflate. Two of those are painful politically, and politicians don’t like pain. I expect a combination of increased taxes and inflation (along with a healthy dose of over-regulation and trade protectionism), so we’re likely headed back to the days of stagflation. And if we see a run away from the dollar as the world’s reserve currency– now a viable option– we’re looking at the Second Great Depression.

We’re headed for a fiscal “perfect storm”. Ron Paul is an excellent weatherman, forecasting the problem, but I’m not sure he will be able to herd the cats in Congress in order to solve it. I wish I could claim that anyone in politics will solve this, but we’re more likely to see a collapse than a solution. Keep hoping for someone like Ron Paul, but I’d highly suggest you prepare for the worst in the meantime.

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  • Joe Mellon

    Interesting notion, but I would gladly take my chances with Ron Paul in the White House than another puppet. Among numerous other issues, Dr. Paul will bring to light the Fed scam and work to bring back real money. Besides, if Dr. Paul was elected, that means America has finally woken up, and will demand the same responsible mindset from its representatives and senators.

  • http://philwelch.net Philip L. Welch

    I don’t buy it. The Great Depression was caused by a cascade of situations and mistakes, most of which we know better than to repeat—and if a major recession does hit, we know how to not worsen it. We’re not going to see another Hawley-Smoot Tariff, for instance.

  • http://liberal-venezolano.net/blog/ Larry

    Austrian Business Cycle Theory predicts that the less government intervention there is to try to avoid the consequences of the credit bubble, the quicker will the malinvestments be cleared and order restored to the market. In the event of a credit collapse, a Paul administration would presumably keep the Federal Reserve from re-inflating the bubble (if that’s possible under the current legal situation), would try to curb federal spending (how?) and try to lower taxes (or at least prevent further tax increases. These three things are the standar Keynesian recipe for “curing” an economic depresion. Paul would presumably do exactly the opposite. Under that assumption the recovery would be much faster and stronger and healthier than under any other policy prescription. A total non-interventionist is precisely what you would need in that situation. I hope you shall get it!

  • http://www.belowthebeltway.com Doug Mataconis


    I agree that there are danger signs out there, but I don’t think that things are as perilious as you might suggest.

    And, if there’s one part of what Ron Paul says that I don’t agree with at all it’s his rantings about the Fed and the monetary system and imminent economic collapse. I’ve been hearing the same doom-and-gloom stuff since the mid 80’s and none of it has come to pass.

  • Quincy

    Brad –

    The one thing I think you’re overlooking is the power the MSM still has over the majority of the American people. Were a Democrat in power when the depression hit, every interventionist move would be credited with saving the economy by pointing out how much worse things would be with a Republican president. Certainly not the truth, but it’ll convince the majority of Americans that the Dems are doing the right thing.

    I’d much rather go through this with someone like Ron Paul in the White House who could stop at least some of the damage the Dems would do in response to a depression.

  • Buckwheat

    Mataconis does not disappoint! He really stuck it to that long-shot second tier nutjob Ron Paul.

    Mataconis for Secretary of the Treasury!

  • Buckwheat

    So come on, Mataconis, we’ve put up with this long enough to deserve an explanation: what is it about Ron Paul that pisses you off so much? Are you a hooked-in neocon with government largesse to lose in a Paul administration? Am I close?

    There has to be something — the “I like Ron Paul, but…” routine was old a week ago and now it just reeks.

  • Scott McDonnell

    Doug is a Fred Thompson Supporter. He has other blogs, you can find them rather easily.


    For some odd reason, there is a group of people calling themselves libertarian or anarcho-capitalists but cozying up to the neocons.

    But of course, he’ll say “No, I’m a Ron Paul supporter, but…”

    Find me one article he has written positively about Ron Paul. If I were conspiracy-minded, I would bet he is actually on someone’s payroll, somehow. ;)

  • mike

    Just some personal anecdotes:

    My friend is a real estate appraiser. I remember talking to him back in 2003 about how much housing prices were going up. He wanted to cash in as well and ended up buying a house.

    Many people around this time were also convinced it would be a good idea to refinance, or sell and move into something even classier. A ton of credit was hitting the market — by way of fraudulent lenders and borrowers, sub-prime lending, builders’ loans, etc.

    I tried to warn him as many did that there was going to be an end to this time, now he is always telling me how right I was. Houses that were being appraised 10 months ago at $700,000 are now only $600,000.. builders are desperate to sell and recoup their costs.. foreclosures up everywhere. Its just a bad time for us.

    From what I have studied there has been a substantial amount of inflation that has occurred over the past several years. There’s always been inflation but at this point we are hitting a point where the graph spikes pretty sharply..

    First there was the dot com boom and bust.. after that went we started artificially inflating housing prices. This is the problem with allowing cheap credit out on the market, even if the people borrowing aren’t good for the money.. that credit will still hit the money supply and push the prices of things up (or the value of the currency down).

    A lot of this inflation though has been due to widespread borrowing by the government from the Fed. Once the Fed issues the fresh new currency to the US Govt, they end up channeling the money into the private sector, who ends up depositing into a private bank, who in turn lends out 90% to
    the consumer. Through the magic of fractional reserve banking they get to inflate the money supply with money that they don’t have.

    This is all well good in a properly expanding economy under a fiat system. But if people exploit these mechanisms then it ends up in wealth displacement.

    You can obviously see the inflation if you look at gas prices. In 1998 I remember going to the gas pump at the new Wawa in town at .75c a gallon. Now I’m paying close to $3 a gallon. If you look at these prices as adjusted for inflation, you will see that gas prices have actually been relatively stable.. (its only in maybe the past year or so has the demand for oil gone up because of diminishing supply).

    So if gas prices have gone up, food and housing, is there anything that hasn’t gone up??

    Yea there is, wages.

    And its also obvious that even with the minimum wage increase, the percentages of increase is not going to keep up with the inflation that has gone on. I recently listened to Bernacke on C-Span radio say that he was worried that a response to inflation through wages would just end up driving the prices of gas and food up! That’s why they’ve now separated out a separate “core inflation” statistic just for that.

    What really gets me is that the Fed had to have known what they were doing, and I will also allege they knew what they were doing in the run-up to the Great Depression. This kind of reckless cash and credit liquidity only ends up benefiting the issuers of the currency and credit. Now all the banks get to have a heyday grabbing up all kinds of assets people can’t afford anymore.. I think some people are calling it the return to serfdom.. haha.

    This is just how they do things, they scam you with Enron’s and joke internet bubbles, housing scams, and ROB you. And if they don’t rob you directly — they rob the purchasing power of your dollar and rob your whole class.

    [[ Another note: I am a pizza delivery driver. Overnight in response to the minimum wage increase pizza places all over have increased their deliver y charges to $1.50. This extra .50c more often than not will come out of my tip, meanwhile the heads of corporate will make sure they’re getting what they expect for their royalties.]]

  • Buckwheat

    Thanks, Scott.

    So Mataconis, why are you cozying up to the neocons if you’re supposedly a libertarian? Are you a mole? What’s your game, Doug?

  • http://www.thelibertypapers.org Doug Mataconis


    I am not a Fred Thompson supporter, though I do find him a more interesting candidate than any of the other frontrunners.


    Last time I checked, I still lived in a country where I was allowed to disagree with people. I think Ron Paul is right on many things, but wrong on monetary theory.

    Pick up Milton Friedman someday and you’ll figure out why.

  • TanGeng

    Well history repeats itself for those not inclined to learn its lessons. Certainly quite a few mistakes were made after the initial shock of the Great Depression. Those mistakes made the Great Depression worse than it otherwise would have been.

    But the greatest feature leading up to the Great Depression was run away credit that promoted runaway investment. Those runaway investments popped and wiped out millions of dollars of savings. – This was back when a million dollars actually was worth something.

    Today that runaway credit exists again. It is not only true in the United States but also true in Japan, China, and Europe. We’re setting the table for prolonged stagflation or another massive shock like the Great Depression.

  • TanGeng


    Well Milton Friedman had one set of theories surrounding the monetary policy and the way to soft land the Great Depression.

    But the normal mode of operation for his central bank would be monetary creation at a steady rate that matches long term economic growth. Under Friedman’s system, there would be little or no inflation.

    That is not how the Fed operates right now or how it has operated in the past 60 years.

  • Amy


    It’s real alright.

    This could be another S&L disaster. This time there will not be enough money for the government to bail out.

    Freddie Mae and Freddie Mac have been allowed to carry far too much debt and in recent years acquired historical sub-prime paper.


    Fannie Mae and Freddie Mac both assessed fines for improper accounting methods is a sgnificant piece of the puzzle that is being down played. The brother and sister act are two of the largest financial institutions in the world!! A fine example of why government should stay out of the free-markets.


  • http://www.thelibertypapers.org/2007/05/07/reparations-for-guam-insanity-squared/ Doug Mataconis

    Scott and Mike,

    If you read what I’ve written about Fred Thompson, you’ll see that I’m more interested, as a political junkie, in his impact on the GOP field.

    And, admittedly, he is a far more interesting person to watch than RudyMcRomney.

  • Michael

    “Pick up Milton Friedman someday and you’ll figure out why.”

    Ah, Milton. The perfect example of Rothbard’s Law.

  • mike

    I skimmed through the blog and couldn’t come across anything about Fred Thompson’s position on monetary policy. What’s his deal?

  • TanGeng

    Most politicians have no clue about monetary policy. How many really understand economics at all?

  • mike


    TanGeng wrote:

    “Well Milton Friedman had one set of theories surrounding the monetary policy and the way to soft land the Great Depression.

    But the normal mode of operation for his central bank would be monetary creation at a steady rate that matches long term economic growth. Under Friedman’s system, there would be little or no inflation.

    That is not how the Fed operates right now or how it has operated in the past 60 years.”


    In the research that I’ve done, the only economic system I’ve heard of that’s come close to this is Colonial Script. It sounded basically like an IOU system where future goods and services were being bartered around through contracts. After the British banned Colonial Script, the colonies returned to a fiat-based currency in the run-up to the Constitution. But they ended up inflating their new currency so much that they decided to go with gold and silver coin.

    In the DVD “The Money Masters”, the author proposes a similar system (as Friedman) and warns of a possible return to a gold standard citing the fact that the IMF and other world organizations now have large control over gold. If they have such a large control they could definitely wreak havoc with the markets if they wanted to.

    If we had a system that was not susceptible to corruption, than I think that a fiat inflation-free currency could be the most ideal solution. The most modern example I can see of that is LETS (Local Exchange Trading System) as well as the number of other local currencies that have sprung up here and there. But is it really possible to create a fiat currency that is free from inflation and deflation? It sounds like a pretty daunting task and would require a very just and moral society.

    I think this is where gold/silver/asset based economists end up drawing their conclusion eventually. In the end, the currency is supposed to facilitate trade in a fair manner. With an asset based currency at least you will know that you are trading your goods for something that has value on the market. Whereas with a fiat currency the currency is not a real storage mechanism of value.

    This is where our problem with rampant credit and negative savings begins and is also why people project a collapse in the future. The system as it is now perpetuates itself indefinitely. It is debt-based. The government issues bonds, sells them to the Federal Reserve, who prints out the fresh currency. To pay off these debts (on the bonds) more money must be issued and borrowed to pay off yesterday’s liabilities, meanwhile we are simply incurring more liability for the future.

    Slowly the actual wealth (hard assets) gets displaced to the top and the purchasing power of the currency wanes away. But at the same time, in order to maintain wealth it’s necessary to participate in the system. (For instance you must lend your money to the bank by way of a savings account to have any chance of competing with inflation.)

    Will it eventually collapse? I think it’s pretty certain that at some point, the wealth could become so displaced that it would affect people’s abilities to make their loan payments, buy gas, food, etc. Is that what would constitute a collapse?

    It has yet to get to that point yet, I do know that the service industry has been hit pretty hard by all of this. The owner of the store I work at is selling his two franchises to another guy in town. Our sales are down tremendously and the owner can’t even break even at this point. I’m not too optimistic and I see this as a trend that’s going to continue going on in the coming years.

  • TanGeng

    Well, that’s not really true Mike. Colonial Script is definitely fiat currency – pieces of paper that take the place of silver coins – , but it has one specific characteristic in that the local governments issued it in response to the needs of the public. Colonial Scripts were not issued for private interests or by private interests. The local governments presided over a small enough group to be accountable to the people.

    For the specie (gold/silver) starved colonies, banning the issuance of fiat money was the bane of the economy, and its effect was similar to a instantaneous shrinking of the money supply.

    The reluctance to issue fiat money came about because of the Revolutionary War because the government issued excessive numbers of Continentals that in the end became worthless. Lots of farmers were dispossessed because of the loss in value of the Continental.

    Fiat currency is not inherently bad. But there is a danger to fiat currency, when extraordinary circumstances or private interests take control over the issuance of money.

  • TanGeng

    But it is that fundamental susceptibility to corruption that makes me wary about fiat currencies in principle.

    But there are certainly problems with gold/silver standards as well. That issue was heavily politicized at the turn of the century over a hundred years ago by Williams Jennings Bryan. The farmers that he represented were paying interest on their loans and suffering from deflation since the monetary supply was restricted.

    Despite what bankers might fear about deflation, it’s not as a bad a beast as central banks would have you believe. The quality of life in America improved by a remarkable pace in the 50 years between the Civil War and 1913 and the economy was suffering from deflation. The only reason the boom was uninterrupted was because many banks misbehaved, lent out too much money, and caused bank panics.

  • Dennis

    About the only thing interesting about Thompson is his choice in women. Here’s a proposal, when judging a political candidate, use a rubric, a standardized measure and see how they stack up. If you have no idea on how to construct a rubic, start with the U.S. constitution and add other pieces such as the bill of rights etc.. Oh, guess what, other people have already did it for you so all you have to do is google it.

  • Max

    Brad, your comment is only partially correct. While the collapsing housing market is indeed a big bogeyman to deal with, there are others. Three that come to mind are the US trade deficit, the cost of energy and the mountain of debt out there. There are several others as well, and all these bogeymen in combination with each other is far too much for the financial system to deal with. It will ultimately fail. Its now just a question of when and how.

  • tom gorman

    Ron Paul is about a million to one to win the Whitehouse. So talking about what he will do is fictional.
    The Fed is a bunch of unnamed super wealthy stockholders in the big banks. The Fed is not a government agency and answers to no one really. We are at their mercy. It’s been that way since the Federal Reserve Act of 1913.
    Check what the Fed was doing before the 1st Great Depression. Check out Aaron Russo’s film online ‘From Freedom To Fascism’.
    On the economic political front, there’s talk or chatter about another 911 being planned by the same people who pulled off the first 911. That will be interesting for the economy along with the collapse of the finance industry.
    Also, it looks like Big Money behind the scenes may want Hillary in the Whitehouse. She’ll go after Iran to corner the remaining Middle East oil reserves. So would Obama.
    Remember that Bin Laden and Hussein conspired to pull off the first 911 in the International Al Queda Terrorist Conspiracy. The International Bin Laden/Hussein Al Queda Terrorist conspiracy has moved into Afganistan and Pakistan and maybe even the country where ‘Borat’ is from.
    We know our military will of course be helpless against the next 911 as we were in the first 911 which was comandeered from a cave by Bin Laden with co-conspirator Hussein in Iraq with no electronic communication. Whoever did the first 911 is apparently planning a dirty bomb attack in a large U.S. city and of course or intelligence agencies will have no information or will be unaware of the coming attack and it will of course be unpreventable. We’ll need a police state after the next 911 because the world will be too dangerous without drastic measures being taken by several Executive Orders in place.
    Welcome to the New World of endless war, depression, and attacks that the U.S. of course will be helpless to stop even with the unlimited availability of trillions of dollars of Fed printed currency.
    So all this stuff that can’t be prevented or regulated will head the world down the Hard Road no doubt.