Negativity Eases as the Bubble Pops

By John Hines
Economist

financial bubbleAs financial bubbles pop negativity eases. The negative feed back loop in economics goes like this: Negative feedback begets negative feedback and the economy worsens. When people think things are bad they reinforce the idea that the economy is bad and then spend less, scrimp and save and the economy worsens.

This is especially true in an economy like ours that depends on 70% of it through consumerism. There are only 1,200,000 manufacturing jobs left in the U.S., according to the U.S. Census Bureau and that number may even be lower since 2008 when the number was tabulated with increasing job losses. We have exported or outsourced jobs leaving our own people who are losing jobs to be retrained in order to survive in the new economy.

You really have to wonder what President Barack Obama’s cabinet has in mind to stop the negative feed back loop before it destroys the national economy. Could it be forcing the banks and mortgage companies that caused the financial crisis with their newfangled financial instruments to come clean with the American public and force them to modify mortgages?

As the bubble pops negativity eases. An increasing number of mortgages are being modified for owner occupants if they qualify under strict guidelines. To change additional mortgages for troubled borrowers the bankers tell us investors would sue. So what else is new? This overly litigious society can handle a few more lawsuits before the judges get the guts to throw the book at the thieves.

Investors made fortunes on Wall Street derivatives buying everything they could get in the form of mortgage-backed securities until the music stopped. Some of these investors were raking in returns of 60% a month off their investments. With returns like that they knew they were dealing with funny money and they should pay the ultimate price — not that that will ever happen.

We’re so far into the foreclosure epidemic now that a barrage of lawsuits seems to be the only alternative left in the new president’s arsenal to deal with the economy. Does Obama’s chief financial czar see it? Larry Summers has the wisdom to see economics in its true light. But does he see the true picture on Main Street? Does he really comprehend the idea of the millions of people being thrown out of their homes due to foreclosure?

Summers like every other economist knows that bubbles don’t pop half way– Whether it’s the real estate bubble, high-tech bubble or any other sort of bubble. Every financial bubble in history has dropped to at least its starting point. In real estate the best example of bubbles that historically get out of hand is California. The housing bubbles in California always drop below where they started as prices get hammered.

Other bubbles to consider include the Nikkei bubble in 1983, which is still popping today, the NASDAQ bubble that dropped for five years starting in 1999 and the current housing bubble, which has a long way to go before deflating.

As bubbles pop negativity eases. Retail sales showed a slight 1.2% improvement in April, not much albeit but a step in the right direction in the prolonged recovery process.

Lawmakers continue to grapple with the foreclosure epidemic. The Senate approved a bill that would expand an existing $300 billion program that encourages lenders to reduce mortgages and exchange troubled homeowners’ mortgages for new fixed-rate 30 year loans. The problem with the bill is mortgage holders would still have to qualify under strict terms. That won’t help millions in jeopardy. The House still has to vote on the measure. The bubble is deflating.

John Hines is an Economist who writes about real estate for Housing Predictor.

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